GOING BEYOND
2018 ANNUAL REPORT
LASTING RELATIONSHIPS. GLOBAL SUCCESS.
LASTING RELATIONSHIPS. GLOBAL SUCCESS.
North America
Jasper, Indiana
Europe
Poznan, Poland
Asia
Nanjing, China
(1 Manufacturing Facility, World Headquarters)
Timisoara, Romania
Laem Chabang, Thailand
Indianapolis, Indiana
(2 Manufacturing Facilities)
Tampa, Florida
Reynosa, Mexico
OUR GLOBAL PRESENCE
Our global footprint supports our customers’ specialized manufacturing
needs. Whether the requirement is in-region support for an end market,
access to a lower cost market, or proximity to a customer team, Kimball
Electronics has a solution.
WHO WE ARE
Kimball Electronics is a leading contract manufacturer of durable goods electronics serving a variety of industries
on a global scale. Kimball Electronics continues to make the customer the focus of everything we do. Our touch is
felt throughout daily life via the markets we serve: Automotive, Industrial, Medical, and Public Safety. Recognized
for a reputation of excellence, Kimball Electronics is committed to a high-performance culture that values personal
and organizational commitment to quality, reliability, value, speed, and ethical behavior. Our employees know they
are part of a company culture that builds lasting relationships and global success for customers while enabling
employees to share in the Company’s success through personal, professional, and financial growth.
WHAT WE DO
Kimball Electronics is a preeminent Electronics Manufacturing Services (EMS) provider serving customers around the
world. Our contract electronics manufacturing services teams provide manufacturing services, including engineering
and supply chain support, design and testing, as well as regulatory support, which utilize common production and
support capabilities for a variety of industries globally.
FINANCIAL HIGHLIGHTS
(Amounts in thousands, except per share data)
Net Sales
Operating Income, as reported (GAAP)
Settlement Proceeds from Lawsuit
Adjusted Operating Income (non-GAAP)
Net Income, as reported (GAAP)
Provisional Tax Adjustments Resulting from Tax Reform
After-tax Settlement Proceeds from Lawsuit
Bargain Purchase Gain
Adjusted Net Income (non-GAAP)
2018 FINANCIAL HIGHLIGHTS
FISCAL YEAR ENDED JUNE 30,
2018
2017
% Change
$ 1,072,061
$ 930,914
$
42,348
$
43,057
—
(4,005)
$
42,348
$
39,052
$
16,752
$
34,179
17,859
—
—
—
(2,499)
(925)
$
34,611
$
30,755
15%
(2)%
8%
(51)%
13%
(50)%
14%
(1)%
(14)%
(23)%
4%
Diluted Earnings per Share, as reported (GAAP)
$
0.62
$
1.24
Provisional Tax Adjustments Resulting from Tax Reform
After-tax Settlement Proceeds from Lawsuit
Bargain Purchase Gain
0.66
—
—
—
(0.09)
(0.03)
Adjusted Diluted Earnings per Share (non-GAAP)
$
1.28
$
1.12
Return on Invested Capital
Cash Flow from Operations
Capital Expenditures
Share Owners’ Equity
10.3%
$
$
40,200
26,519
10.4%
46,754
34,272
$
$
$ 355,527
$ 342,272
DIVERSIFIED PORTFOLIO OF END MARKETS AND MARKET SERVICES
44%
AUTOMOTIVE
20%
INDUSTRIAL
Anti-Lock Braking, Stability Controls,
Electronic Power Steering, Sensors,
Telematics, Video Camera Systems, Compass
and Navigation Systems, High Efficiency
Electronic Ignition Systems, Electronic
Window Lifts, Occupant Safety Systems
29%
MEDICAL
Diagnostic Imaging, Urinalysis Equipment,
Hematology Equipment, Surgical Instruments,
Defibrillators, Vital Signs Monitoring,
Laboratory Measurement, Physical Therapy,
Glucose Monitoring, Respiration Monitors,
Home Health Care, Sleep Therapy Device,
Drug Delivery Devices
HVAC Controls, Flow Metering
Controls, Power Metering Controls,
Analytical Instrumentation, Motor
Controllers, Semiconductor
Manufacturing Equipment, Marine
and Agricultural Electronic Controls
6%
Emergency Personnel
Communications, Material
Identification Systems, Night Vision
Systems, X-ray Systems, Surveillance
Equipment, Fire Protection
Equipment, Commercial Security
Systems, Power Filters
1%
PUBLIC SAFETY
OTHER
KIMBALL ELECTRONICS 2018 ANNUAL REPORT | 1
LETTER TO SHARE OWNERS
LETTER TO SHARE OWNERS
LETTER TO SHAREOWNERS
WE ARE CONFIDENT THAT THE
SPIRIT OF COMMITMENT BY KIMBALL
ELECTRONICS EMPLOYEES WILL
ENSURE FUTURE SUCCESS.
TO OUR SHARE OWNERS
Fiscal year 2018 was another record-breaking year for
our company as we reached a new high in net sales. We
achieved double-digit sales growth for the third time in
the past four years.
New business from both existing and new customers
helped us exceed our publicly stated goal of $1 billion in
annual sales in fiscal year 2018. This achievement was very
gratifying for our entire global team, especially given that
the goal was set more than three years ago just shortly after
becoming a stand-alone public company. Knowing that we
reached this important milestone through teamwork and
dedication inspires us even more to remain focused on
achieving our long-term target for return on invested capital
and creating greater value for you as a Share Owner.
We continued to execute on our strategies to drive profitable
growth and value creation. Our strong company culture
continues to serve as the cornerstone of our strategic plan.
Formed and shaped by our Guiding Principles, our company
culture and core values derive from our basic, but very
important beliefs:
• Our customer is our business.
• Our people are the company.
• The environment is our home.
• Profits are the ultimate measure.
again recognized by CIRCUITS ASSEMBLY, based upon an
independent survey of many of our customers, as being the
best in our industry in customer satisfaction in 2017, another
indication of our continued progress in service excellence.
During our fourth year as a stand-alone public company, we
continued to make investments that will increase customer
engagement and drive future growth in sales and profits. We
deployed capital to support our new business awards, added
production lines in our new facility in Romania, and expanded
our plastic injection molding capabilities. We announced
signing an agreement to acquire Global Equipment Services.
The anticipated closing of this agreement will be the first
significant step taken in our new platform strategy.
We engaged with a talent solutions consultant to build
our people strategy as we look to implement a new talent
management framework that will further develop our
people, ensuring we have the vitality in our talent pipeline
to successfully execute our strategic plans. We also made a
significant investment in our Board of Directors by engaging
all Directors, along with our Secretary and Chief Financial
Officer, in the director professionalism educational program
of the National Association of Corporate Directors (NACD).
The initiative resulted in each individual becoming an
NACD Board Leadership Fellow®, considered to be The Gold
Standard Director Credential®, as recognized by the director
community, investors, and regulators.
Living our Guiding Principles gives us a strong sense of
purpose to build success for our stakeholders and to always
do the right thing. Progress in this area can be seen in both
the high employee satisfaction scores from our Guiding
Principles survey and in our customer loyalty metrics. Once
again, we increased the sales from customers we have
been doing business with for over 10 years from 56% of our
total sales in fiscal year 2017 to 61% in fiscal year 2018.
We received several customer recognition awards this
year based upon our service. Most significantly, we were
OUR RESULTS
Consolidated net sales for fiscal year 2018 were
$1,072,061,000, a 15% increase when compared to net
sales last fiscal year. Sales in our Automotive end market
vertical, benefitting from strong growth in multiple regions,
were up 24%. Sales in our Medical end market vertical,
boosted by the ramp-up of several new programs, were up
22%. After double-digit growth in fiscal year 2017, sales in
our Industrial end market vertical were up a solid 6% in fiscal
year 2018. Sales in our Public Safety end market vertical
GOING BEYOND
Kimball Electronics’ core competencies–our hallmark
qualities and principles–provide strong foundational
support for “going beyond” to meet tomorrow’s market
challenges. This report highlights the many ways
we’re poised to help our customers successfully tackle
cutting-edge trends in technology through a balanced
approach of traditional service excellence and
mission-critical assemblies.
STRONG FOUNDATIONAL
SUPPORT TO MEET TOMORROW’S MARKET
CHALLENGES
were down 13% when compared to fiscal year 2017 as we
work through the wind-down of our International Traffic in
Arms Regulations (ITAR) compliance program and turn our
focus toward growth in our non-defense-related business.
Improving our operating margins was a priority of focus for us
in fiscal year 2018. Partially as a result of the continued effect
of the start-up costs associated with our greenfield expansion
in Romania and the significant number of new program
launches, our adjusted operating income decreased from
4.2% in fiscal year 2017 to 4.0% in fiscal year 2018, which
was below our goal of 4.5%. While we were disappointed
to finish the year below our goal, we were pleased with our
progress in Romania where we achieved our ramp-up plan by
more than doubling our fourth quarter fiscal year 2017 sales
in the fourth quarter of fiscal year 2018 and approached our
operating income breakeven point. Consolidated adjusted net
income increased from $30.8 million, or $1.12 per diluted
share, in fiscal year 2017 to $34.6 million, or $1.28 per
diluted share, in fiscal year 2018. Return on invested capital
was 10.3% in fiscal year 2018, down slightly from 10.4%
in fiscal year 2017 and below our long-term goal of 12.5%.
Margin improvement and capital efficiency will continue to
be priorities of focus for us in fiscal year 2019.
Operating cash flow remained strong. After generating
$46.8 million in operating cash flow in fiscal year 2017, we
generated $40.2 million in operating cash flow in fiscal year
2018. During the year, we invested $26.5 million in capital
expenditures and we returned another $9.4 million to our
Share Owners through the stock repurchase program. Even
with these significant capital outlays, we still ended fiscal year
2018 with a net cash position of $38.1 million.
GOING BEYOND ONE BILLION DOLLARS IN ANNUAL SALES
Because of our core competency, long history of
manufacturing durable electronics, and our total package
of value, our core Electronics Manufacturing Services (EMS)
business is uniquely positioned and qualified to take full
advantage of the strong secular growth opportunities in
the Automotive, Medical, Industrial, and Public Safety end
markets. We are proven experts and leaders when it comes
to the design, manufacturing, and testing of electronic
assemblies that require the highest level of quality and
reliability. Our global footprint and capabilities are precisely
aligned with the preferences and requirements of our
customers. We are positioned to support their growth
initiatives, when they need us and where they need us. Within
our growing Diversified Contract Manufacturing Services
(DCMS) capabilities, we are establishing strategic inroads by
developing innovative plastic injection molding solutions for
our medical customers. In our new platform strategy, we are
making investments in automation, test, and measurement
that are increasing customer engagement and preparing
us to expand beyond EMS and DCMS to a multifaceted
manufacturing solutions company.
As we move forward, we continue to be proud of the global
team of Kimball Electronics employees, each of whom
embrace and execute these strategies and are making
them happen. They remain true to our time-proven Guiding
Principles and core values which have made Kimball
Electronics successful. We are confident that their spirit of
commitment will ensure future success.
We invite you to stay informed by visiting our website at
www.kimballelectronics.com as we continue “going beyond”.
For more detailed insights into the past year, we encourage
you to read the following Form 10-K.
Donald D. Charron
Chairman and Chief Executive Officer
2 | GOING BEYOND
KIMBALL ELECTRONICS 2018 ANNUAL REPORT | 3
OUR PEOPLE
OUR PEOPLE
A TRADITION OF DOING
THE RIGHT THING FOCUSES
The Kimball Electronics CODE OF CONDUCT affirms the high value we place on
ethical standards related to the treatment of our people, the belief in and provision
of safe and healthy working conditions, the treatment of our environment, and our
overall business ethics.
Kimball Electronics strives to adhere to the highest standards of legal and ethical
conduct in all of our locations around the world. At the core of our Code of Conduct
are our Guiding Principles, which serve as our moral compass. They guide us to
make the right decisions as a company, enabling us to maintain our recognized
standing as a model global citizen.
IT’S SIMPLE: WE DO THE RIGHT THING.
57 YEARS
IN THE EMS INDUSTRY
OUR GUIDING PRINCIPLES
OUR CUSTOMER IS OUR
BUSINESS
OUR PEOPLE ARE THE
COMPANY
THE ENVIRONMENT IS
OUR HOME
PROFITS ARE THE
ULTIMATE MEASURE
37,822
TOTAL YEARS OF EMPLOYEE SERVICE
5,700+
EMPLOYEES WORLDWIDE
TALENT TO ACHIEVE OUR
BUSINESS GOALS
5 PRIORITIES OF OUR PEOPLE STRATEGY
01
02
03
SUCCESSION MANAGEMENT
We are aligning how we assess and
identify talent and readiness to take
on different roles at our organization.
We are taking a data-driven approach
to draft developmental insights to
increase the quality of our career
conversations between our managers
and our employees.
LEADERSHIP DEVELOPMENT
We are working to execute our strategy
and to update mindsets about the
changing nature of work. We are
building a structured, high-impact,
leadership development experience
to leverage the individual needs and
expectations, and to meet enterprise
business goals.
WORKFORCE PLANNING
We are improving our data-driven
approach for strategic workforce
planning to make sure we have the
right skills, in the right place, at the
right time. We are continually assessing
what capabilities our people will need
in the future to utilize machine-learning,
automation, artificial intelligence,
and Industry 4.0.
04
CULTURE
We recognize our culture is an asset
and keep it at the core of our talent
development and governance. Our
culture is a key differentiator for
our customer service, employee
engagement, and relationship building
in the marketplace.
05
DIVERSITY AND INCLUSION
We believe diversity is a critical
business strategy. We know that being
diverse is not enough; inclusion is what
drives value resulting in creativity,
responsiveness, and innovation to
meet our customers’ needs.
We are building strength in our talent pipeline to
make sure we have the capabilities to execute our
business strategy in order to continue to develop
our people, earn Economic Profit, and increase
our customer scorecards.
4 | GOING BEYOND
KIMBALL ELECTRONICS 2018 ANNUAL REPORT | 5
OUR COMMITMENT TO COMMUNITY
OUR COMMITMENT TO COMMUNITY
FURTHER COMMITMENT TO
CITIZENSHIP SUSTAINS
We think broader than the cities, towns, and provinces in which we operate.
We know what’s good for our facilities can also be good for our planet. Kimball
Electronics is proud of our compliance to country-specific, national, federal, state,
and local regulations as they relate to the environment, safety practices, and the
workplace. Each of our manufacturing locations has been recognized for leadership
in these areas. From reducing water and energy usage, to increasing recycling
efforts, we are proud of our record of action.
OUR SUSTAINABILITY STRATEGY IS AN INTEGRAL COMPONENT
OF OUR OVERALL CORPORATE SOCIAL RESPONSIBILITY EFFORTS.
We have developed metrics within our sustainability strategy that impact each of
our manufacturing locations by measuring and tracking the following environmental
areas: Greenhouse Gases (GHG), Hazardous Waste Generation, Landfill Waste,
Volatile Organic Compounds Emissions, and Water Usage.
FROM CALENDAR YEARS 2008–2017 OUR NORMALIZED
VALUES SHOW THAT WE ACHIEVED:
FROM CALENDAR YEARS 2008–
2017 OUR ABSOLUTE VALUES
SHOW THAT WE ACHIEVED:
88%
REDUCTION IN WASTE
GENERATION
(pounds per unit produced)
64%
REDUCTION IN AIR
EMISSIONS
(VOCs tons per unit produced)
41%
REDUCTION IN
WATER USAGE
(gallons per unit produced)
71%
REDUCTION IN
GREENHOUSE GAS
(pounds per unit produced)
21%
REDUCTION IN
HAZARDOUS WASTE
(pounds per hazardous waste)
THE REDUCTIONS ARE EVEN MORE
AMAZING WHEN WE NOTE THAT WE
ADDED 3 NEW FACILITIES
TO OUR COMPANY SINCE 2016.
OUR TRADITION OF DOING
THE RIGHT THING
Kimball Electronics is dedicated to continued excellence, leadership and
stewardship in protecting the environment, as well as the health and safety of
our employees and the members of the communities in which we work and live.
In order to support our continued reduction goals, we research and adopt new
technologies such as energy-management systems, packaging-reduction projects,
and energy-efficient air compressors, ovens, lighting, and occupant sensors.
We also increase recycling efforts and implement other efficiency gains to further
the cause.
ISO
14001-
2015
Significant Environmental Aspect programs are created within our ISO 14001
Management System to address and reduce the environmental impacts at all
of our locations. It should be noted that all of our electronic manufacturing
facilities are registered in ISO 14001-2015.
Kimball Electronics is committed to meeting the requirements of: RoHS, WEEE,
ELV, Conflict Minerals & REACH.
GIVING BACK IN
OUR COMMUNITIES
Our manufacturing locations throughout the world
are encouraged to help make their communities
better places to live. Our employees generously give
donations and their time to support local, regional,
and global community support initiatives. As a global
company, our people are diverse, yet all embrace
our universal values.
6 | GOING BEYOND
KIMBALL ELECTRONICS 2018 ANNUAL REPORT | 7
MEDICAL MARKET
MEDICAL MARKET
AN INNOVATIVE
SPIRIT FUELS
The MEDICAL end market fosters innovation, uniquely positioning us to provide
the experience, knowledge, and capabilities to effectively support cutting-edge
Medical customers. We provide expertise in cold chain management, drug delivery
device production, sterilization, disposable device production, scientific injection
molding, clean room device assembly, PCBA’s, and complete full-system assembly.
Our agility and responsiveness ensure quick time-to-market, enabling Kimball
Electronics to keep pace with an ever-evolving market.
21 MILLION+ MEDICAL ASSEMBLIES SHIPPED IN FY18
GROWTH IN NET
SALES IN OUR MEDICAL
END MARKET
$313.3M
FY18
THE MEDICAL MARKET
REPRESENTS 29% OF
KIMBALL ELECTRONICS’
TOTAL REVENUE
22%
$256.5M
FY17
10 MILLION+
DCMS ASSEMBLIES SHIPPED
(Surgical, Disposable, Drug
Delivery Devices)
SUPPORTING THE CONTINUUM OF CARE
Kimball Electronics supports global medical device manufacturers in the development and manufacture of
devices for early diagnostics through imaging, therapy, monitoring, and home healthcare with high quality DCMS
and EMS solutions.
EARLY DIAGNOSTICS
(Imaging, Disposable
Test Strips)
HOSPITAL CARE
(Surgery, Monitoring,
AED’s, Ventilation)
THERAPY
(Drug Delivery and Efficacy)
HOME HEALTHCARE
(Drug Delivery, Respiratory Care,
Remote Monitoring)
8 | GOING BEYOND
GROWING OUR
OFFERINGS AND
CAPABILITIES
EMERGING TECHNOLOGIES
IN CONNECTED HEALTH
Non-traditional EMS will continue to provide exciting growth opportunities, especially
in the areas of connectivity and optionality. The aging population and growing number
of people in the world with healthcare are significant growth drivers for the medical
market. Investments in technologies such as “connected health” are expected to
improve patient outcomes and will be an important part of that story in the future.
CONNECTIVITY
Remote monitoring technology. Passive remote monitoring solutions enable patients
to be monitored from home. In-home wireless sensors can automatically gather and
collect critical data and track activities of daily living, monitor health conditions, and
deliver actionable insights to medical personnel.
Wearables. Once the exclusive domain of recreational fitness warriors, it is predicted
that wearable technology will be adopted by a broader swath of the population to
detect emerging health issues. In the future we may no longer need to feel physical
illness to prompt seeking medical attention. Wearables will have the ability to detect,
and therefore treat, illness at an earlier stage.
Digital health personalization. Using data from digital devices, patients and
caregivers are looking to personalize care for improved methods of managing or
preventing chronic diseases. In the future, pairing technology with one-on-one
personal services will allow for better support of patients who are living longer,
often with multiple chronic conditions.
OPTIONALITY
New trends in medical will spur fusion between the pharmaceutical and the medical
technology industries, two industries that traditionally operated within their own
borders. Medical technology companies will leverage the expertise of pharmaceutical
companies to compete in the lucrative drug delivery-device product market.
We have embarked on initiatives that are aimed at optimizing
and strengthening our core Medical EMS and expanding
Diversified Contract Manufacturing Services (DCMS). DCMS
may/may not include products which contain electronic
assemblies. Our expanded capabilities in scientific injection
molding and clean room molding allow us to support our
customers with all their medical device needs.
KIMBALL ELECTRONICS 2018 ANNUAL REPORT | 9
AUTOMOTIVE MARKET
AUTOMOTIVE MARKET
SAFETY-CRITICAL
ASSEMBLIES ACCELERATE
The robust growth in AUTOMOTIVE end market electronics is rooted in
consumer demand for safer and more functional vehicles. Consequently, the
need for highly reliable electronic assemblies, capable of meeting the tightest
industry standards, has never been greater. Kimball Electronics, long a leader in
the automotive market, remains committed to advancing creative EMS solutions
to accommodate ever-evolving technologies and consumer preferences.
ADVANCED DRIVER ASSISTANCE SYSTEMS
CONTINUE TO EXCEED EXPECTATIONS
As a pioneer in producing braking and steering electronics, Kimball Electronics
has acquired unique market experience and knowledge, positioning it as a
premiere EMS player for the exacting demands of ADAS.
GROWTH IN NET SALES
IN OUR AUTOMOTIVE
END MARKET
$469.3M
FY18
24%
$378.7M
FY17
THE AUTOMOTIVE MARKET REPRESENTS 44%
OF KIMBALL ELECTRONICS’ TOTAL REVENUE
40 MILLION+
AUTOMOTIVE ASSEMBLIES PRODUCED
IN FY18
66%
OF THE KIMBALL
ELECTRONICS AUTOMOTIVE
ASSEMBLIES PRODUCED ARE
FOR STEERING AND BRAKING
FUNCTIONALITY
ADVANCEMENTS IN
AUTONOMOUS DRIVING
SAFETY COMES FIRST
Safety has long been a key differentiator for automotive manufacturers,
and the latest focus is on helping prevent driving incidents from ever occurring
through proactive technologies.
The top 3 advanced vehicle technologies most valuable to consumers
are the abilities to:
· Recognize the presence of objects on the road and avoid collisions
· Inform the driver of dangerous driving situations
· Automatically block the driver from dangerous driving situations
CAMERAS AND RADARS provide the inputs from which sophisticated software
algorithms translate into speed and direction requirements.
BRAKING, SUSPENSION, AND STEERING SYSTEMS control the vehicle dynamics
and respond to the safety-critical speed and direction requirements.
Autonomous vehicles have the potential to revolutionize automotive safety.
As ADVANCED DRIVER ASSISTANCE SYSTEMS (ADAS) become more widely
adopted and consumer trust continues to increase, Kimball Electronics is
poised to continue its position as the Automotive market leader.
GROWING OUR
OFFERINGS AND
CAPABILITIES
To expand our services and capabilities in the
Automotive end market, Kimball Electronics —
Fabrication provides solutions for supplier
consolidation of plastics, metals, and integrated
assemblies for our Automotive customers that
prefer a one-stop solution.
10 | GOING BEYOND
KIMBALL ELECTRONICS 2018 ANNUAL REPORT | 11
PUBLIC SAFETY MARKET
PUBLIC SAFETY MARKET
MISSION-CRITICAL
ELECTRONICS BOLSTER
Our PUBLIC SAFETY end market includes products that support homeland
security and safeguard people, property, and infrastructure. We produce
assemblies for fire safety, infrared cameras, access control, mine safety equipment,
and electronic airport security. Our customers include companies servicing the
needs of nearly every public safety threat detection and threat avoidance market.
SMART
SECURITY:
ELECTRONICS
ACCESS AND
MONITORING
Kimball Electronics supports
top customers in the access
control and security market.
Built-in Bluetooth® enables
electronic wireless locks to
connect directly to smart
phones and tablets with
no need for a proprietary
handheld device for set-up and
configuration. And with built-
in Wi-Fi, locks can connect
directly to an existing Wi-Fi
network enabling automatic
updates to lock configuration
and user access.
SUPPORTING OUR OEM CUSTOMERS that value high reliability and
durable electronics in North America, South America, Europe, and Asia
Kimball Electronics public safety
customers utilize our time-to-market
accelerators including:
RAPID PROTOTYPING
DESIGN SERVICES
DESIGN FOR EXCELLENCE
(DfX)
SUPPLY CHAIN
READINESS
DESIGN/PRODUCTION
2
MILLION+
PUBLIC SAFETY PRODUCTS
MANUFACTURED IN FY18
THE PUBLIC SAFETY MARKET
REPRESENTS 6%
OF KIMBALL
ELECTRONICS’ TOTAL REVENUE
SECURITY OF PEOPLE AND
PUBLIC INFRASTRUCTURE
The Public Safety market focuses on the welfare and safety of the general public
through prevention and protection from dangers such as crime and natural
disasters. With the rise in issues that compromise safety, there is greater
emphasis on adopting preventative safety and security measures in the market,
driven mostly by threat detection and threat avoidance initiatives.
Natural disasters will likely continue to affect cities and communities across the
globe with threats such as wildfires, hurricanes, and flooding. Kimball Electronics
has been a leading manufacturer of assemblies for EARLY WARNING DETECTION
SYSTEMS and expects to help customers pioneer new technologies to keep our
communities safer.
The emergence of INTERNET OF THINGS (IoT) as a significant factor in the public
safety market will continue to generate an increased reliance on connectivity
between first responders, security personnel and their devices. Our experience in
assembling highly durable and reliable electronics for these connected products
positions us well in the market.
GROWING OUR
OFFERINGS AND
CAPABILITIES
Kimball Electronics continues to expand our
experience and expertise in the area of camera
and sensor driven assemblies for Public Safety.
We produce assemblies for use in body cameras
used by law enforcement to capture critical evidence,
traffic cameras used to control signaling and
transportation efficiency, and security cameras
that safeguard people and property.
12 | GOING BEYOND
KIMBALL ELECTRONICS 2018 ANNUAL REPORT | 13
INDUSTRIAL MARKET
INDUSTRIAL MARKET
INNOVATION AND
EXPERTISE HELP MAKE
In the dynamic and evolving INDUSTRIAL end market, we collaborate with
our customers to help mold the rapidly changing landscape of products that
support smart cities, energy efficiency, transactional efficiency, motor controls,
and interoperability of industrial devices. Our commitment to exceeding customer
expectations of early stage involvement and durable and high reliability assemblies
is what separates Kimball Electronics from its competition.
ADVANCEMENTS IN MOTOR CONTROLS LEAD THE WAY TO ENERGY EFFICIENCY IN HVAC, REFRIGERATION, AND
TEMPERATURE CONTROL UNITS. At the forefront of technology to support energy efficiency, Kimball Electronics
supports top customers in the advanced motor control market.
ENGINEERING, DESIGN MANAGEMENT, AND MANUFACTURING OF SOME OF THE MOST
COMPLEX ASSEMBLIES SUPPORTING NEW ADVANCEMENTS IN:
ROBOTICS
MOTOR
CONTROLS
TEST &
MEASUREMENT
SMART
METERS
CLEAN
ENERGY
CHARGING
SYSTEMS
GROWTH IN NET SALES
IN OUR INDUSTRIAL
END MARKET
$217.0M
FY18
THE INDUSTRIAL MARKET
REPRESENTS 20% OF
KIMBALL ELECTRONICS’
TOTAL REVENUE
6%
$205.6M
FY17
9
MILLION+
INDUSTRIAL ASSEMBLIES
MANUFACTURED IN FY18
FACTORY 4.0 A REALITY
More than ever, industrial clients have the potential to integrate data collection,
data analysis, and machine learning into their operations and become more
competitive by gaining predictive insights.
CONNECTIVITY
Whether one is tracking vibration, temperature, run-time hours, sound variation,
or simply wants to know if equipment in the next room—or halfway around the
world—needs maintenance, that information is in the palm of your hand.
Faster-than-ever connected devices are now designed to support industrial
applications that reduce data-collection time, route data to needed users,
and provide better analytics.
OPTIONALITY
With the increase in demand for more real-time data in industrial sub-markets
such as manufacturing, building automation, and energy infrastructure, the
options for industrial wireless applications have grown exponentially. Options are
being developed for many new devices including low-power consumption sensors,
industrial wireless connectivity devices and gateways, and fully integrated
solutions. Kimball Electronics’ experience in producing highly durable and reliable
industrial assemblies positions us as a leading manufacturer for customers in
these markets.
GROWING OUR
OFFERINGS AND
CAPABILITIES
To expand our services and capabilities in the
Industrial end market, Kimball Electronics —
Fabrication provides solutions for low temperature
over-molding and high temperature molding of
plastics. Our fabrication facility also provides precision
machining, metal fabrication, and integrated assembly
for leading customers around the world.
14 | GOING BEYOND
KIMBALL ELECTRONICS 2018 ANNUAL REPORT | 15
OUR FUTURE GROWTH
LEADERSHIP & CORPORATE INFORMATION
A STRONG FINANCIAL FOUNDATION
TO EXPLORE NEW GROWTH PLATFORMS
Rooted in a strong financial foundation, Kimball
Electronics is taking steps to explore new growth
platforms that build on our expertise in contract
manufacturing. The new platforms are targeted for the
areas of process automation, test, and measurement
with ties to industry and factory 4.0 applications.
NEW PLATFORM STRATEGIES SUPPORTING CRITICAL AREAS OF CORE BUSINESS
OPERATIONS FOR CUSTOMERS:
DESIGN
ENGINEERING
MANUFACTURING
TEST &
MEASUREMENT
ROBOTICS &
AUTOMATION
FIELD SERVICE
ENGINEERING
TRAINING &
SUPPORT
NEW ACQUISITION
In a first step toward a multi-divisional organizational structure, Kimball
Electronics announced an agreement to acquire Global Equipment Services (GES).
The acquisition is a significant step in our new platform strategy and our plans
to continue our development beyond EMS to a multifaceted manufacturing
solutions company.
GES, headquartered in San Jose, California, specializes in production processing
and test equipment design, volume manufacturing, and global services for the
semiconductor and electronics product manufacturing industry. GES has business
operations in China, India, Japan, the United States, and Vietnam.
16 | GOING BEYOND
CORPORATE INFORMATION
Form 10-K Report
A copy of the Company’s annual
report to the Securities and Exchange
Commission on Form 10-K is available,
without charge, upon written request
directed to Michael K. Sergesketter,
VP, Chief Financial Officer, at our world
headquarters and is available on our
website at: www.kimballelectronics.com
Transfer Agent and Registrar of the
Common Stock
Share Owners with questions concerning
address changes, registration changes,
lost share certificates, or transferring
shares may contact:
Mail
Computershare
P.O. BOX 30170
College Station, TX 77842-3170
US/Toll Free: 1-877-373-6374
Non-US: 1-781-575-2879
Investor CentreTM website
www.computershare.com/investor
World Headquarters
Kimball Electronics, Inc.
1205 Kimball Blvd.
Jasper, IN 47546
BOARD OF DIRECTORS
Donald D. Charron
Chairman of the Board
Gregory J. Lampert
Director
Colleen C. Repplier
Director
Geoffrey L. Stringer
Director
Gregory A. Thaxton
Director
Thomas J. Tischhauser
Director
Christine M. Vujovich
Director
LEADERSHIP TEAM
Donald D. Charron
Chief Executive Officer
Desiree L. Castillejos
VP, Corporate Development and M&A,
and Chief Strategy Officer
Roger Chang (Chang Shang Yu)
VP, Asian Operations
Jessica L. DeLorenzo
VP, Human Resources
John H. Kahle
VP, General Counsel, Chief
Compliance Officer, and Secretary
Janusz F. Kasprzyk
VP, European Operations
Steven T. Korn
VP, North American Operations
Michael K. Sergesketter
VP, Chief Financial Officer
Sandy A. Smith
VP, Information Technology
Kathy R. Thomson
VP, Global Business Development
and Design Services
Christopher J. Thyen
VP, New Platforms
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018
OR
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
KIMBALL ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Indiana
(State or other jurisdiction of
incorporation or organization)
1205 Kimball Boulevard, Jasper, Indiana
(Address of principal executive offices)
35-2047713
(I.R.S. Employer Identification No.)
47546
(Zip Code)
(812) 634-4000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Common Stock, no par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
No
No
No
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted 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 and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
Non-accelerated filer
(Do not check if a smaller reporting company)
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Accelerated filer
Smaller reporting company
Emerging growth company
No
No
The aggregate market value of the common stock held by non-affiliates, as of December 29, 2017 (the last business day of the Registrant’s most recently
completed second fiscal quarter), was $473.5 million based on 96.3% of common stock held by non-affiliates.
The number of shares outstanding of the Registrant’s common stock as of August 15, 2018 was 26,381,318 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Share Owners to be held on November 8, 2018, are incorporated by reference into Part III.
KIMBALL ELECTRONICS, INC.
FORM 10-K INDEX
PART I
Page No.
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A.
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B.
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Item 4.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Share Owner Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Share Owner Matters . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15.
Exhibits, Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. . . Form 10-K Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
8
18
18
18
18
19
20
22
23
35
36
70
70
70
71
71
71
72
72
73
73
76
2
Item 1 - Business
General
PART I
As used herein, the terms “Company,” “Kimball Electronics,” “we,” “us,” or “our” refer to Kimball Electronics, Inc., the
Registrant, and its subsidiaries. Reference to a year relates to a fiscal year, ended June 30 of the year indicated, rather than a
calendar year unless the context indicates otherwise. Additionally, references to the first, second, third, and fourth quarters
refer to those respective quarters of the fiscal year indicated.
Forward-Looking Statements
This document contains certain forward-looking statements. These are statements made by management, using their best
business judgment based upon facts known at the time of the statements or reasonable estimates, about future results, plans, or
future performance and business of the Company. Such statements involve risk and uncertainty, and their ultimate validity is
affected by a number of factors, both specific and general. They should not be construed as a guarantee that such results or
events will, in fact, occur or be realized as actual results may differ materially from those expressed in these forward-looking
statements. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,”
“plans,” “projects,” “estimates,” “forecasts,” “seeks,” “likely,” “future,” “may,” “might,” “should,” “would,” “will,” and similar
expressions. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or
historical results. We make no commitment to update these factors or to revise any forward-looking statements for events or
circumstances occurring after the statement is issued, except as required by law.
The risk factors discussed in Item 1A - Risk Factors of this report could cause our results to differ materially from those
expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time
or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our results to
differ materially from those expressed in forward-looking statements.
At any time when we make forward-looking statements, we desire to take advantage of the “safe harbor” which is afforded
such statements under the Private Securities Litigation Reform Act of 1995 where factors could cause actual results to differ
materially from forward-looking statements.
Overview
Kimball Electronics was founded in 1961 and was incorporated in 1998. We are a global provider of contract electronic
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 have expanded into diversified contract manufacturing services for non-electronic components, medical
disposables, plastics, and metal fabrication. This package of value 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 believe our customers appreciate our body of knowledge as it relates to the design and manufacture of their
products that require durability, reliability, the highest levels of quality control, and regulatory compliance. We deliver award-
winning service from our highly integrated global footprint which is enabled by a largely common operating system, a
standardization strategy, global procedures, and teamwork. Our Customer Relationship Management (“CRM”) model is key to
providing our customers convenient access to our global footprint and all of our services throughout the entire product life
cycle, making us easy to do business with. Because our customers are in businesses where engineering changes must be tightly
controlled and long product life cycles are common, our track record of quality, financial stability, social responsibility, and
commitment to long-term relationships is important to them.
We have been producing safety critical electronic assemblies for our automotive customers for over 30 years. During this time,
we have built up a body of knowledge that has not only proven to be valuable to our automotive customers, but to our medical,
industrial, and public safety customers as well. We have been successful in growing and diversifying our business by
leveraging our automotive experience and know-how in the areas of design and process validation, traceability, process and
change control, and lean manufacturing to create valuable and innovative solutions for new customers in the medical,
industrial, and public safety end market verticals. These solutions include diversified contract manufacturing services as we
now offer our customers design engineering and manufacturing expertise in precision metals and plastics. We have harmonized
our quality systems to be compliant with various important industry certifications and regulatory requirements. This allows us
to take advantage of other strategic points of leverage in the supply chain and within our operations so we can cost-effectively
manufacture electronic and non-electronic products in the same production facility for customers from all four of our end
market verticals.
3
Many of our customers are multinational companies that sell their products in multiple regions of the world. For these
customers, it is important for them to be able to leverage their investment in their supply partner relationships such that the
same partner provides them with engineering, manufacturing, and supply chain support in multiple regions of the world. It is
common for us to manufacture the same product for the same customer in multiple locations. Our strategy for expanding our
global footprint has aligned us with the preferences of the customers in our four end market verticals and has positioned us well
to support their global growth initiatives. Our global systems, procedures, processes, and teamwork combined with our CRM
model have allowed us to accomplish this goal for many of our largest customers.
Our global processes and central functions that support component sourcing, procurement, quoting, and customer pricing
provide commonality and consistency among the various regions in which we operate. We have a central, global sourcing
organization that utilizes procurement processes and practices to help secure sources from around the world and to ensure
sufficient availability of components and a uniform approach to pricing while leveraging the purchase volume of the entire
organization. Customer pricing for all of the products we produce is managed centrally utilizing a standardized quoting model
regardless of where our customers request their products to be produced.
Our CRM model combines members of our team from within our manufacturing facilities and members of our business
development team who reside remotely and nearer to our customers around the world. We also have cross functional teams in
the areas of quality, operational excellence, quoting, and design engineering with representatives from our various locations
that provide support to our teams on a global basis. The skill sets of these team members and the clarity in their roles and
responsibilities help provide our customers with a strong conduit that is critical to execution and forming a strong relationship.
We have institutionalized a customer scorecard process that provides all levels of our company with valuable feedback that
helps us drive the actions for continuous improvement. Our customer scorecard process has helped us deliver award-winning
service and build loyalty with our customers.
Our corporate headquarters is located at 1205 Kimball Boulevard, Jasper, Indiana. Production occurs in our facilities located in
the United States, China, Mexico, Poland, Romania, and Thailand.
Our services are sold globally on a contract basis, and we produce products to our customers’ specifications. Our
manufacturing services primarily include:
• Design services and support;
•
Supply chain services and support;
• Rapid prototyping and new product introduction support;
•
•
Product design and process validation and qualification;
Industrialization and automation of manufacturing processes;
• Reliability testing (testing of products under a series of extreme environmental conditions);
•
Production and testing of printed circuit board assemblies (PCBAs);
• Assembly, production, and packaging of medical disposables and other non-electronic products;
• Design engineering and production of precision plastics and metal fabrication; and
• Complete product life cycle management.
We pride ourselves on the fact that we pay close attention to the evolving needs and preferences of our customers. As we have
done in the past, we will continue to look for opportunities to grow and diversify our business by expanding our package of
value and our global footprint.
Spin-Off
Kimball Electronics, Inc. was a wholly owned subsidiary of Kimball International, Inc. (“former Parent” or “Kimball
International”) and on October 31, 2014 became a stand-alone public company upon the completion of a spin-off from former
Parent. In conjunction with the spin-off, on October 31, 2014, Kimball International distributed 29.1 million shares of Kimball
Electronics common stock to Kimball International Share Owners. Holders of Kimball International common stock received
three shares of Kimball Electronics common stock for every four shares of Kimball International common stock held on
October 22, 2014. Kimball International structured the distribution to be tax free to its U.S. Share Owners for U.S. federal
income tax purposes.
4
Reporting Segment
Operating segments are defined as components of an enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and
in assessing performance. Each of our business units qualifies as an operating segment with its results regularly reviewed by
our chief operating decision maker. Our chief operating decision maker is our Chief Executive Officer. Our business units
meet the aggregation criteria under the current accounting guidance for segment reporting. As of June 30, 2018, all of our
business units operate in the electronic manufacturing services industry that provide electronic assemblies and/or components
primarily in automotive, medical, industrial, and public safety applications, all to the specifications and designs of our
customers. The nature of the products, the production process, the type of customers, and the methods used to distribute the
products, all have similar characteristics. Each of our business units service customers in multiple markets and many of our
customers’ programs are manufactured and serviced by multiple business units. Our global processes such as component
procurement and customer pricing provide commonality and consistency among the various regions in which we operate. All
of our business units have similar long-term economic characteristics. As such, our business units have been aggregated into
one reportable segment. See Item 6 - Selected Financial Data for more information regarding the Company’s financial results.
Our Business Strategy
We intend to achieve sustained, profitable growth in the markets we serve by supporting the global growth initiatives of our
customers, and we will continue our development beyond the electronic manufacturing services (“EMS”) market to become a
multifaceted manufacturing solutions company. Key elements of executing our strategy include:
• Leveraging Our Global Footprint – continue our strategy of utilizing our presence in key global regions, including
new potential country locations and/or facility expansion as our customer demands dictate;
• Expanding Our Package of Value – enhance our core strengths and expand upon our package of value through
diversified contract manufacturing services in areas such as complex system assembly, specialized processes,
precision metals, and plastics; and
• Expanding Our Markets - explore opportunities that will establish new markets, platforms, and technologies
beyond the EMS market such as the automation, test, and measurement systems market.
To expand our markets and implement our new platform strategy, we expect to make investments that will help us develop
beyond the EMS market, including through acquisitions. As part of this strategy, we entered into an agreement on May 11,
2018 with GES Holdings, Inc., Global Equipment Services and Manufacturing, Inc., and its subsidiaries (collectively referred
to as “GES”) to acquire substantially all of the assets and assume certain liabilities of GES. We will pay a cash purchase price
of approximately $50 million plus the assumed liabilities, and the transaction price is subject to certain post-closing working
capital adjustments. The GES acquisition is expected to close in the first quarter of our fiscal year 2019, subject to customary
closing conditions, including regulatory requirements and governmental approvals. The GES acquisition supports our new
platform strategy as GES specializes in production processing and test equipment design, volume manufacturing, and global
services for the semiconductor and electronics product manufacturing industry. See Item 1A - Risk Factors for risks associated
with this acquisition and Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information on this
pending acquisition.
Our Business Offerings
We offer contract electronic manufacturing services, including engineering and supply chain support, to customers in the
automotive, medical, industrial, and public safety end market verticals. We also offer diversified contract manufacturing
services for non-electronic components, medical disposables, plastics, and metal fabrication. Our services support the complete
product life cycle of our customers’ products, and our processes and capabilities cover a range of products from high volume-
low mix to high mix-low volume. We collaborate with third-party design services companies to bring innovative, complete
design solutions to our customers. We offer Design for Excellence input to our customers as a part of our standard package of
value. We use sophisticated software tools to integrate the supply chain in a way that provides our customers with the
flexibility their business requires. Our robust new product introduction process and our extensive manufacturing capabilities
give us the ability to execute to the quality and reliability expectations in the electronics manufacturing industry.
We value our customers and their unique needs and expectations. Our customer focus and dedication to unparalleled
excellence in engineering and manufacturing has resulted in proven success in the contract manufacturing industry. Personal
relationships are important to us. We strive to build long-term global partnerships. Our commitment to support our customers
is backed by our history and demonstrated performance over the past 50 years.
5
Marketing Channels
Manufacturing services, including engineering and supply chain support, are marketed by our business development team. We
use a CRM model to provide our customers with convenient access to our global footprint and all of our services throughout
the entire product life cycle.
Major Competitive Factors
Key competitive factors in the EMS market include competitive pricing, quality and reliability, engineering design services,
production flexibility, on-time delivery, customer lead time, test capability, and global presence. Growth in the EMS industry is
created through the proliferation of electronic components in today’s advanced products and the continuing trend of original
equipment manufacturers in the electronics industry subcontracting the assembly process to companies with a core competency
in this area. The nature of the EMS industry is such that the start-up of new customers and new programs to replace expiring
programs occurs frequently. New customer and program start-ups generally cause losses early in the life of a program, which
are generally recovered as the program becomes established and matures. We continue to experience margin pressures related
to an overall excess capacity position in the electronics subcontracting services market and from our customers’ own capacity
and capabilities to in-source production. Our continuing success depends upon our ability to replace expiring customers/
programs with new customers/programs.
We do not believe that we, or the industry in general, have any special practices or special conditions affecting working capital
items that are significant for understanding our EMS business other than fluctuating inventory levels which may increase in
conjunction with transfers of production among facilities and start-up of new programs.
Our Competitive Strengths
Our competitive strengths derive from our experience of producing safety critical electronic assemblies for automotive
customers for over 30 years and leveraging this experience to create valuable and innovative solutions for customers in
different industries. Our core strengths include:
• Our core competency of producing durable electronics;
• Our body of knowledge as it relates to the design and manufacture of products that require high levels of quality
control, reliability, and durability;
• Our highly integrated, global footprint;
• Our capability to provide our customers diversified contract manufacturing services for non-electronic
components, medical disposables, plastics, and metal fabrication;
• Our CRM model and our customer scorecard process;
• Our ability to provide our customers with valuable input regarding designs for improved manufacturability,
reliability, and cost;
• Our quality systems, industry certifications, and regulatory compliance;
• Our integrated supply chain solutions and competitive bid process resulting in competitive raw material pricing;
and
• Complete product life cycle management.
Competitors
The EMS industry is very competitive as numerous manufacturers compete for business from existing and potential customers.
Our competition includes EMS companies such as Benchmark Electronics, Inc., Jabil Inc., and Plexus Corp. We do not have a
significant share of the EMS market and were ranked the 19th largest global EMS provider for calendar year 2017 by
Manufacturing Market Insider in the March 2018 edition published by New Venture Research.
Locations
As of June 30, 2018, we have nine manufacturing facilities with three located in Indiana and one located in each of Florida,
China, Mexico, Poland, Romania, and Thailand. We continually assess our capacity needs and evaluate our operations to
optimize our service levels for supporting our customers’ needs around the globe. During fiscal year 2016, the construction of
our greenfield facility in Romania was completed. We recently acquired certain assets and assumed certain liabilities of two
contract manufacturing companies located in Indiana, one during fiscal year 2017 and one during fiscal year 2016. See Item
1A - Risk Factors for information regarding financial and operational risks related to our international operations, acquisitions,
and start-up operations. Financial information by geographic area for each of the three years in the period ended June 30, 2018
is included in Note 15 - Geographic Information of Notes to Consolidated Financial Statements.
6
Seasonality
Sales revenue of our EMS business is generally not affected by seasonality.
Customers
While the total electronic assemblies market has broad applications, our customers are concentrated in the automotive, medical,
industrial, and public safety industries.
Sales by industry as a percent of net sales for each of the three years in the period ended June 30, 2018 were as follows:
Automotive. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended June 30
2017
41%
28%
22%
7%
2%
100%
2016
39%
30%
22%
7%
2%
100%
2018
44%
29%
20%
6%
1%
100%
See Note 15 - Geographic Information of Notes to Consolidated Financial Statements for financial information reported by
geographic area.
Included in our sales were a significant amount to ZF, Philips, and Nexteer Automotive, which accounted for the following
portions of net sales:
ZF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nexteer Automotive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* amount is less than 10% of total
Year Ended June 30
2017
12%
14%
12%
2018
15%
13%
13%
2016
11%
15%
*
The nature of the contract business is such that start-up of new customers to replace expiring customers occurs frequently. Our
agreements with customers are often not for a definitive term and are amended and extended, but generally continue for the
relevant product’s life cycle, which can be difficult to predict at the beginning of a program. Typically, our customer
agreements do not commit the customer to purchase our services until a purchase order is provided, which are generally short-
term in nature. Our customers generally have the right to cancel a particular program subject to contractual provisions
governing termination, the final product runs, excess or obsolete inventory, and end-of-life pricing, which reduces the
additional costs that we incur when a manufacturing services agreement is terminated.
Backlog
The aggregate sales price of production pursuant to worldwide open orders, which in certain cases may be canceled by the
customer subject to contractual termination provisions, was $293.1 million and $214.3 million as of June 30, 2018 and 2017,
respectively. Substantially all of the open orders as of June 30, 2018 are expected to be filled within the next fiscal year. Open
orders may not be indicative of future sales trends.
Raw Materials
Raw materials utilized in the manufacture of contract electronic products are generally readily available from both domestic
and foreign sources, although from time to time the industry experiences shortages of certain components due to supply and
demand forces, combined with rapid product life cycles of certain components. In addition, unforeseen events such as natural
disasters can and have disrupted portions of the supply chain. We believe that maintaining close communication with suppliers
helps minimize potential disruption in our supply chain.
Raw materials are normally acquired for specific customer orders and may or may not be interchangeable among products.
Inherent risks associated with rapid technological changes within this contract industry are mitigated by procuring raw
materials, for the most part, based on firm orders. In certain instances, such as when lead times dictate, we enter into
contractual agreements for material in excess of the levels required to fulfill customer orders. In turn, material authorization
agreements with customers cover a portion of the exposure for material which is purchased prior to having a firm order. We
may also purchase additional inventory to support new product introductions and transfers of production between
manufacturing facilities.
7
Research and Development
Research and development activities include the development of manufacturing processes, engineering and testing procedures,
major process improvements, and information technology initiatives.
Research and development costs were approximately:
(Amounts in Millions)
Research and Development Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intellectual Property
Year Ended June 30
2017
2018
2016
$11
$10
$9
Our primary intellectual property is our proprietary manufacturing technology and processes which allow us to provide very
competitive electronic manufacturing services to our customers. As such, this intellectual property is complex and normally
contained within our facilities. The nature of this know-how does not lend itself well to traditional patent protection. In
addition, we feel the best protection strategy involves maintaining our intellectual property as trade secrets because there is no
disclosure of the information to outside parties, and there is no expiration on the length of protection. For these reasons, we do
not own any patents that we consider significant to our business, and our only registered trademark is the “Kimball” name as
registered in certain categories relating to our electronics manufacturing and design services, which were assigned to us by
former Parent.
Environment and Energy Matters
Our operations are subject to various foreign, federal, state, and local laws and regulations with respect to environmental
matters. We believe that we are in substantial compliance with present laws and regulations and that there are no material
liabilities related to such items.
We are dedicated to excellence, leadership, and stewardship in protecting the environment and communities in which we have
operations. We believe that continued compliance with foreign, federal, state, and local laws and regulations which have been
enacted relating to the protection of the environment will not have a material effect on our capital expenditures, earnings, or
competitive position. Management believes capital expenditures for environmental control equipment during the two fiscal
years ending June 30, 2020 will not represent a material portion of total capital expenditures during those years.
Our operations require significant amounts of energy, including natural gas and electricity. Federal, foreign, and state
regulations may control the allocation of fuels available to us, but to date we have experienced no interruption of production
due to such regulations.
Employees
As of June 30, 2018, Kimball Electronics employed approximately 5,700 people worldwide, with approximately 1,100 located
in the United States and approximately 4,600 located in foreign countries. Our U.S. operations are not subject to collective
bargaining arrangements. Most of our foreign operations are subject to collective bargaining arrangements, many mandated by
government regulation or customs of the particular countries. We believe that our employee relations are good.
Available Information
The Company makes available free of charge through its website, http://investors.kimballelectronics.com, its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those
reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and
Exchange Commission (“SEC”). All reports the Company files with the SEC are also available via the SEC website, http://
www.sec.gov, or may be read and copied at the SEC Public Reference Room located at 100 F Street, N.E., Washington, D.C.
20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
The Company’s website and the information contained therein, or incorporated therein, are not intended to be incorporated into
this Annual Report on Form 10-K.
Item 1A - Risk Factors
The following important risk factors, among others, could affect future results and events, causing results and events to differ
materially from those expressed or implied in forward-looking statements made in this report and presented elsewhere by
management from time to time. Such factors, among others, may have a material adverse effect on our business, financial
8
condition, and results of operations and should be carefully considered. Additional risks and uncertainties that we do not
currently know about, we currently believe are immaterial, or we have not predicted may also affect our business, financial
condition, or results of operations. Because of these and other factors, past performance should not be considered an indication
of future performance.
Risks Relating to Our Business
Uncertain macroeconomic and industry conditions could adversely impact demand for our products and services and
adversely affect operating results.
Market demand for our products and services, which impacts revenues and gross profit, is influenced by a variety of economic
and industry factors such as:
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instability of the global financial markets;
uncertainty of worldwide economic conditions;
volatile energy costs;
erosion of global consumer confidence;
general corporate profitability of our end markets;
credit availability to our customers and our customers’ end markets;
demand fluctuations in the industries we currently serve, including automotive, medical, industrial, and public safety;
demand for end-user products which include electronic assembly components produced by us;
excess capacity in the industries in which we compete; and
changes in customer order patterns, including changes in product quantities, delays in orders, or cancellation of orders.
We must make decisions based on order volumes in order to achieve efficiency in manufacturing capacities. These decisions
include determining what level of additional business to accept, production schedules, component procurement commitments,
and personnel requirements, among various other considerations. We must constantly monitor the changing economic
landscape and may modify our strategic direction based upon the changing business environment. If we do not react quickly
enough to the changes in market or economic conditions, it could result in lost customers, decreased market share, and
increased operating costs.
Many countries, including certain of those in North America, Europe, and Asia in which we operate, have in the recent past
experienced economic uncertainty, slow economic growth, or recession. The economic recovery of recent years may slow and
recessionary conditions may return, which could result in our customers or potential customers reducing or delaying orders as
well as a number of other negative effects on our business, such as increased pricing pressures, the insolvency of suppliers,
which could cause production delays, the inability of customers to obtain credit, or the insolvency of customers. In addition,
the uncertainties of the market and economic conditions, both in Europe and worldwide, caused by the United Kingdom’s
pending exit from the European Union could also have an adverse effect on our business and results of operations.
We are exposed to the credit risk of our customers.
The instability of market conditions drives an elevated risk of potential bankruptcy of customers resulting in a greater risk of
uncollectible outstanding accounts receivable. Accordingly, we intensely monitor our receivables and related credit risks. The
realization of these risks could have a negative impact on our profitability.
Reduction of purchases by or the loss of one or more key customers could reduce revenues and profitability.
Losses of key contract customers within specific industries or significant volume reductions from key contract customers are
both risks. If one of our current customers merges with or is acquired by a party that currently is aligned with a competitor, or
the combination creates excess capacity, we could lose future revenues. Our continuing success is dependent upon replacing
expiring contract customers/programs with new customers/programs. See “Customers” in Item 1 - Business for disclosure of
the net sales as a percentage of consolidated net sales for each of our significant customers during fiscal years 2018, 2017, and
2016. Regardless of whether our agreements with our customers, including our significant customers, have a definite term, our
customers typically do not have an obligation to purchase a minimum quantity of products or services as individual purchase
orders or other product or project specific documentation are typically entered into from time to time. Our customers generally
have the right to cancel a particular product, subject to contractual provisions governing the final product runs, excess or
obsolete inventory, and end-of-life pricing. As such, our ability to continue the relationships with such customers is uncertain.
9
Significant declines in the level of purchases by key customers or the loss of a significant number of customers could have a
material adverse effect on our business. In addition, the nature of the contract electronics manufacturing industry is such that
the start-up of new customers and new programs to replace expiring programs occurs frequently, and new customer and
program start-ups generally cause losses early in the life of a program. We can provide no assurance that we will be able to
fully replace any lost sales, which could have an adverse effect on our financial position, results of operations, or cash flows.
We operate in a highly competitive environment and may not be able to compete successfully.
Numerous manufacturers within the EMS industry compete globally for business from existing and potential customers. Some
of our competitors have greater resources and more geographically diversified international operations than we do. We also
face competition from the manufacturing operations of our customers, who are continually evaluating the merits of
manufacturing products internally against the advantages of outsourcing to EMS providers. In the past, some of our customers
have decided to in-source a portion of their electronics manufacturing from us in order to utilize their excess internal
manufacturing capacity. The competition may further intensify as more companies enter the markets in which we operate, as
existing competitors expand capacity and as the industry consolidates.
In relation to customer pricing pressures, if we cannot achieve the proportionate reductions in costs, profit margins may suffer.
The high level of competition in the industry impacts our ability to implement price increases or, in some cases, even maintain
prices, which also could lower profit margins. In addition, as end markets dictate, we are continually assessing excess capacity
and developing plans to better utilize manufacturing operations, including consolidating and shifting manufacturing capacity to
lower cost venues as necessary.
As of June 30, 2018, we are no longer an “emerging growth company” and are therefore subject to the auditor attestation
requirement in the assessment of our internal control over financial reporting and certain other increased disclosure and
governance requirements.
Because our total annual gross revenues exceed $1.07 billion as of June 30, 2018, we are no longer an “emerging growth
company,” as defined in the JOBS Act. Therefore, we are now subject to certain requirements that apply to other public
companies but did not previously apply to us due to our status as an emerging growth company. These requirements include:
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compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting
pursuant to Section 404 of the Sarbanes-Oxley Act;
compliance with any new rules that may be adopted by the Public Company Accounting Oversight Board;
compliance with any new or revised financial accounting standards applicable to public companies without an
extended transition period;
full disclosure regarding executive compensation required of larger public companies; and
compliance with the requirement of holding a nonbinding advisory vote on executive compensation and obtaining
Share Owner approval of any golden parachute payments not previously approved.
Failure to comply with these requirements could subject us to enforcement actions by the SEC, divert management’s attention,
damage our reputation, and adversely affect our business, results of operations, or financial condition. In particular, if our
independent registered public accounting firm is not able to render the required attestation, it could result in lost investor
confidence in the accuracy, reliability, and completeness of our financial reports. We expect that the loss of “emerging growth
company” status and compliance with these increased requirements will require management to expend additional time while
also condensing the time frame available to comply with certain requirements, which may further increase our legal and
financial compliance costs.
We may be unable to purchase a sufficient amount of materials, parts, and components for use in our products at
competitive prices, in a timely manner, or at all.
We depend on suppliers globally to provide timely delivery of materials, parts, and components for use in our products. The
financial stability of suppliers is monitored by us when feasible as the loss of a significant supplier could have an adverse
impact on our operations. Suppliers adjust their capacity as demand fluctuates, and component shortages and/or component
allocations could occur. Certain components purchased by us are primarily manufactured in select regions of the world and
issues in those regions could cause manufacturing delays. Maintaining strong relationships with key suppliers of components
critical to the manufacturing process is essential. Price increases of commodity components could have an adverse impact on
our profitability if we cannot offset such increases with other cost reductions or by price increases to customers. Materials
utilized in our manufacturing process are generally available, but future availability is unknown and could impact our ability to
meet customer order requirements. If suppliers fail to meet commitments to us in terms of price, delivery, or quality, it could
interrupt our operations and negatively impact our ability to meet commitments to customers.
10
Our operating results could be adversely affected by increases in the cost of fuel and other energy sources.
The cost of energy is a critical component of freight expense and the cost of operating manufacturing facilities. Increases in the
cost of energy could reduce our profitability.
We are subject to manufacturing inefficiencies due to start-up of new programs, transfer of production, and other factors.
At times, we may experience labor or other manufacturing inefficiencies due to factors such as start-up of new programs,
transfers of production among our manufacturing facilities, a sudden decline in sales, a new operating system, or turnover in
personnel. Manufacturing inefficiencies could have an adverse impact on our financial position, results of operations, or cash
flows.
A change in our sales mix among various products could have a negative impact on our gross profit margin.
Changes in product sales mix could negatively impact our gross margin as margins of different products vary. We strive to
improve the margins of all products, but certain products have lower margins in order to price the product competitively or in
connection with the start-up of a new program. An increase in the proportion of sales of products with lower margins could
have an adverse impact on our financial position, results of operations, or cash flows.
We may implement future restructuring efforts and those efforts may not be successful.
We continually evaluate our manufacturing capabilities and capacities in relation to current and anticipated market conditions.
We may implement restructuring plans in the future, and the successful execution of those restructuring initiatives will be
dependent on various factors and may not be accomplished as quickly or effectively as anticipated.
We will face risks commonly encountered with growth through acquisitions.
Our sales growth plans may occur through both organic growth and acquisitions. Acquisitions involve many risks, including:
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difficulties in identifying suitable acquisition candidates and in negotiating and consummating acquisitions on terms
attractive to us;
difficulties in the assimilation of the operations of the acquired company;
the diversion of resources, including diverting management’s attention from our current operations;
risks of entering new geographic or product markets in which we have limited or no direct prior experience;
the potential loss of key customers of the acquired company;
the potential loss of key employees of the acquired company;
the potential incurrence of indebtedness to fund the acquisition;
the potential issuance of common stock for some or all of the purchase price, which could dilute ownership interests of
our current Share Owners;
the acquired business not achieving anticipated revenues, earnings, cash flow, or market share;
excess capacity;
the assumption of undisclosed liabilities;
potential adverse tax effects; and
dilution of earnings.
We may not be successful in launching start-up operations.
We are committed to growing our business, and therefore from time to time, we may determine that it would be in our best
interest to start up a new operation. Start-up operations involve a number of risks and uncertainties, such as funding the capital
expenditures related to the start-up operation, developing a management team for the new operation, diversion of management
focus away from current operations, and creation of excess capacity. Any of these risks could have a material adverse effect on
our financial position, results of operations, or cash flows.
11
If efforts to start-up new programs are not successful, this could limit sales growth or cause sales to decline.
As we depend on industries that utilize technologically advanced electronic components which often have short life cycles, we
must continue to invest in advanced equipment and product development to remain competitive in this area. The start-up of
new programs requires the coordination of the design and manufacturing processes. The design and engineering required for
certain new programs can take an extended period of time, and further time may be required to achieve customer acceptance.
Accordingly, the launch of any particular program may be delayed, less successful than we originally anticipated, or not
successful at all. Difficulties or delays in starting up new programs or lack of customer acceptance of such programs could
limit sales growth or cause sales to decline and adversely impact our operating results.
Our international operations involve financial and operational risks.
We have operations outside the United States, primarily in China, Mexico, Poland, Romania, and Thailand. Our international
operations are subject to a number of risks, which may include the following:
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economic and political instability, including the uncertainties caused by the United Kingdom’s pending exit from the
European Union;
• warfare, riots, terrorism, and other forms of violence or geopolitical disruption;
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compliance with laws, such as the Foreign Corrupt Practices Act, applicable to U.S. companies doing business outside
the United States;
changes in U.S. or foreign policies, regulatory requirements, and laws;
tariffs and other trade barriers, including tariffs recently imposed by the United States as well as responsive tariffs
imposed by China and the European Union;
potentially adverse tax consequences, including changes in tax rates and the manner in which multinational companies
are taxed in the United States and other countries; and
foreign labor practices.
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These risks could have an adverse effect on our financial position, results of operations, or cash flows. In addition, fluctuations
in exchange rates could impact our operating results. Our risk management strategy includes the use of derivative financial
instruments to hedge certain foreign currency exposures. Any hedging techniques we implement contain risks and may not be
entirely effective. Exchange rate fluctuations could also make our products more expensive than competitors’ products not
subject to these fluctuations, which could adversely affect our revenues and profitability in international markets.
Certain foreign jurisdictions restrict the amount of cash that can be transferred to the United States or impose taxes and
penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed
by, our operations in the United States, we may incur significant penalties and/or taxes to repatriate these funds.
If customers do not perceive our engineering and manufacturing services to be innovative and of high quality, our
reputation could suffer.
We believe that establishing and maintaining a good reputation is critical to our business. Promotion and enhancement of our
name will depend on the effectiveness of marketing and advertising efforts and on successfully providing innovative and high
quality electronic engineering and manufacturing services. If customers do not perceive our services to be innovative and of
high quality, our reputation could suffer, which could have a material adverse effect on our business.
Failure to effectively manage working capital may adversely affect our cash flow from operations.
We closely monitor inventory and receivable efficiencies and continuously strive to improve these measures of working capital,
but customer financial difficulties, cancellation or delay of customer orders, shifts in customer payment practices, transfers of
production among our manufacturing facilities, or manufacturing delays could adversely affect our cash flow from operations.
We may not be able to achieve maximum utilization of our manufacturing capacity.
Most of our customers do not commit to long-term production schedules, and we are unable to forecast the level of customer
orders with certainty over a given period of time. As a result, at times it can be difficult for us to schedule production and
maximize utilization of our manufacturing capacity. Fluctuations and deferrals of customer orders may have a material adverse
effect on our ability to utilize our fixed capacity and thus negatively impact our operating margins.
12
We could incur losses due to asset impairment.
As business conditions change, we must continually evaluate and work toward the optimum asset base. It is possible that
certain assets such as, but not limited to, facilities, equipment, intangible assets, or goodwill could be impaired at some point in
the future depending on changing business conditions. Such impairment could have an adverse impact on our financial
position and results of operations.
Fluctuations in our effective tax rate could have a significant impact on our financial position, results of operations, or cash
flows.
Our effective tax rate is highly dependent upon the geographic mix of earnings across the jurisdictions where we operate.
Changes in tax laws or tax rates in those jurisdictions could have a material impact on our operating results. Judgment is
required in determining the worldwide provision for income taxes, other tax liabilities, interest, and penalties. We base our tax
position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various
countries in which we have assets or conduct activities. Our tax position, however, is subject to review and possible challenge
by taxing authorities and to possible changes in law (including adverse changes to the manner in which the United States and
other countries tax multinational companies or interpret their tax laws). We cannot determine in advance the extent to which
some jurisdictions may assess additional tax or interest and penalties on such additional taxes. In addition, our effective tax
rate may be increased by changes in the valuation of deferred tax assets and liabilities, changes in our cash management
strategies, changes in local tax rates, or countries adopting more aggressive interpretations of tax laws.
Several countries where we operate provide tax incentives to attract and retain business. We have obtained incentives where
available and practicable. Our taxes could increase if: certain incentives were retracted, they were not renewed upon
expiration, we no longer qualify for such programs, or tax rates applicable to us in such jurisdictions were otherwise increased.
In addition, further acquisitions may cause our effective tax rate to increase. Given the scope of our international operations
and our international tax arrangements, changes in tax rates and the manner in which multinational companies are taxed in the
United States and other countries could have a material impact on our financial results and competitiveness. For example, on
December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (“Tax Reform”), which includes a number of
significant changes to previous U.S. tax laws that impact us, including provisions for a one-time transition tax on deemed
repatriation of undistributed foreign earnings and a reduction in the corporate tax rate from 35% to 21%, among other changes.
Tax Reform also transitions U.S. international taxation from a worldwide system to a modified territorial system and includes
base erosion prevention measures on non-U.S. earnings.
Certain of our subsidiaries provide financing, products, and services to, and may undertake certain significant transactions with,
other subsidiaries in different jurisdictions. Moreover, several jurisdictions in which we operate have tax laws with detailed
transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing
principles and that contemporaneous documentation must exist to support such pricing. Due to inconsistencies among
jurisdictions in the application of the arm’s length standard, our transfer pricing methods may be challenged and, if not upheld,
could increase our income tax expense. Risks associated with transfer pricing adjustments are further highlighted by the global
initiative from the Organization for Economic Cooperation and Development (“OECD”) known as the Base Erosion and Profit
Shifting (“BEPS”) project. The BEPS project is challenging longstanding international tax norms regarding the taxation of
profits from cross-border business. Given the scope of our international operations and the fluid and uncertain nature of how
the BEPS project might ultimately lead to future legislation, it is difficult to assess how any changes in tax laws would impact
our income tax expense.
A failure to comply with the financial covenants under our primary credit facility could adversely impact us.
Our primary credit facility requires us to comply with certain financial covenants. We believe the most significant covenants
under this credit facility are the ratio of consolidated indebtedness minus unencumbered U.S. cash on hand in the United States
in excess of $15 million to adjusted consolidated EBITDA, as defined in the credit facility, and the fixed charge coverage ratio.
More detail on these financial covenants is discussed in Item 7 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations. As of June 30, 2018, we had $6.0 million in short-term borrowings under this credit facility and had
total cash and cash equivalents of $46.4 million. In the future, a default on the financial covenants under our credit facility
could cause an increase in the borrowing rates or make it more difficult for us to secure future financing, which could adversely
affect our financial condition.
13
Our business may be harmed due to failure to successfully implement information technology solutions or a lack of
reasonable safeguards to maintain data security, including adherence to data privacy laws and physical security measures.
The operation of our business depends on effective information technology systems, which are subject to the risk of security
breach or cybersecurity threat, including misappropriation of assets or other sensitive information, such as confidential business
information and personally identifiable data relating to employees, customers, and other business partners, or data corruption
which could cause operational disruption. As we could be the target of cyber and other security threats, we must continuously
monitor and develop our information technology networks and infrastructure to prevent, detect, address, and mitigate the risk
of unauthorized access, misuse, computer viruses, and other events that could have a security impact. Information systems
require an ongoing commitment of significant resources to maintain and enhance existing systems and to develop new systems
in order to keep pace with changes in information processing technology and evolving industry standards as well as to protect
against cyber risks and security breaches. While we provide employee awareness training around phishing, malware, and other
cyber threats to help protect against these cyber and security risks, we cannot ensure the success of such training.
Implementation delays, poor execution, or a breach of information technology systems could disrupt our operations, damage
our reputation, or increase costs related to the mitigation of, response to, or litigation arising from any such issue. Similar risks
exist with our third-party vendors. Any problems caused by these third parties, including those resulting from disruption in
communications services, cyber attacks, or security breaches, have the potential to hinder our ability to conduct business. In
addition, new data privacy laws and regulations, including the new European Union General Data Protection Regulation
(“GDPR”), effective May 25, 2018, pose increasingly complex compliance challenges and potentially elevate costs, and any
failure to comply with these laws and regulations could result in significant penalties.
Failure to protect our intellectual property could undermine our competitive position.
Competing effectively depends, to a significant extent, on maintaining the proprietary nature of our intellectual property. We
attempt to protect our intellectual property rights worldwide through a combination of trademark, copyright, and trade secret
laws, as well as licensing agreements and third-party non-disclosure and assignment agreements. Because of the differences in
foreign laws concerning proprietary rights, our intellectual property rights do not generally receive the same degree of
protection in foreign countries as they do in the United States, and therefore in some parts of the world, we have limited
protections, if any, for our intellectual property. If we are unable to adequately protect our intellectual property embodied in
our solutions, designs, processes, and products, the competitive advantages of our proprietary technology could be reduced or
eliminated, which would harm our business and could have a material adverse effect on our results of operations and financial
position.
We may be sued by third parties for alleged infringement of their intellectual property rights and incur substantial litigation
or other costs.
We may be sued by third parties who allege that our products or services infringe their intellectual property rights. Such
claims, regardless of their merits, could result in substantial costs and diversion of resources in the defense or settlement of
such claims. In the event of a claim upheld against us, we may be required to spend a significant amount of money and effort
to develop non-infringing alternatives or obtain and maintain licenses. We may not be successful in developing such
alternatives or obtaining or maintaining such licenses on reasonable terms or at all, which could have a material adverse effect
on our results of operations, financial position, and cash flows.
Our insurance may not adequately protect us from liabilities related to product defects.
We maintain product liability and other insurance coverage that we believe to be generally in accordance with industry
practices. However, our insurance coverage may not be adequate to protect us fully against substantial claims and costs that
may arise from liabilities related to product defects, particularly if we have a large number of defective products or if the root
cause is disputed.
Our failure to maintain Food and Drug Administration (FDA) registration of one or more of our registered manufacturing
facilities could negatively impact our ability to produce products for our customers in the medical industry.
To maintain FDA registration, Kimball Electronics is subject to FDA audits of the manufacturing process. FDA audit failure
could result in a partial or total suspension of production, fines, or criminal prosecution. Failure or noncompliance could have
an adverse effect on our reputation in addition to an adverse impact on our financial position, results of operations, or cash
flows.
14
We are subject to extensive environmental regulation and significant potential environmental liabilities.
The past and present operation and ownership by Kimball Electronics of manufacturing plants and real property are subject to
extensive and changing federal, state, local, and foreign environmental laws and regulations, including those relating to
discharges in air, water, and land, the handling and disposal of solid and hazardous waste, the use of certain hazardous materials
in the production of select products, and the remediation of contamination associated with releases of hazardous substances. In
addition, the increased prevalence of global climate change concerns may result in new regulations that may negatively impact
us. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws
or regulations will be administered or interpreted, or what environmental conditions may be found to exist. Compliance with
more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures, some of
which could be material. In addition, any investigations or remedial efforts relating to environmental matters could involve
material costs or otherwise result in material liabilities.
Our failure to retain the existing management team, maintain our engineering, technical, and manufacturing process
expertise, or continue to attract qualified personnel could adversely affect our business.
We depend significantly on our executive officers and other key personnel. The unexpected loss of the services of any one of
these executive officers or other key personnel may have an adverse effect on us.
Our success also depends on keeping pace with technological advancements and adapting services to provide manufacturing
capabilities which meet customers’ changing needs. Therefore, we must retain our qualified engineering and technical
personnel and successfully anticipate and respond to technological changes in a cost effective and timely manner. Our culture
and guiding principles focus on continuous training, motivating, and development of employees, and we strive to attract,
motivate, and retain qualified personnel. Failure to retain and attract qualified personnel could adversely affect our business.
Availability of manufacturing labor and turnover in personnel could cause manufacturing inefficiencies and increase
operating costs.
The demand for manufacturing labor and the low unemployment rate in certain geographic areas in which we operate makes
recruiting new production employees and retaining experienced production employees difficult. Shortage of production
workers could adversely impact our ability to complete our customers’ orders on a timely basis, which could adversely affect
our relations with customers, potentially resulting in reduction in orders from customers or loss of customers. Turnover in
personnel could result in additional training and inefficiencies that could adversely impact our operating results.
Natural disasters or other catastrophic events may impact our production schedules and, in turn, negatively impact
profitability.
Natural disasters or other catastrophic events, including severe weather, terrorist attacks, power interruptions, and fires, could
disrupt operations and likewise our ability to produce or deliver products. Our manufacturing operations require significant
amounts of energy, including natural gas and oil, and governmental regulations may control the allocation of such fuels to
Kimball Electronics. Employees are an integral part of our business, and events such as a pandemic could reduce the
availability of employees reporting for work. In the event we experience a temporary or permanent interruption in our ability
to produce or deliver product, revenues could be reduced, and business could be materially adversely affected. In addition,
catastrophic events, or the threat thereof, can adversely affect U.S. and world economies, and could result in delayed or lost
revenue for our services. In addition, any continuing disruption in our computer systems could adversely affect the ability to
receive and process customer orders, manufacture products, and ship products on a timely basis, and could adversely affect
relations with customers, potentially resulting in reduction in orders from customers or loss of customers. We maintain
insurance to help protect us from costs relating to some of these matters, but such may not be sufficient or paid in a timely
manner to us in the event of such an interruption.
Imposition of government regulations may significantly increase our operating costs in the United States and abroad.
Legislative and regulatory reforms by the U.S. federal and foreign governments could significantly impact the profitability of
Kimball Electronics by burdening us with forced cost choices that cannot be recovered by increased pricing or, if we increase
our pricing, this could negatively impact demand for our products. For example:
•
•
International Traffic in Arms Regulations (ITAR) must be followed when producing defense related products for the
U.S. government. A breach of these regulations could have an adverse impact on our financial condition, results of
operations, or cash flows.
Foreign regulations are increasing in many areas such as data privacy, hazardous waste disposal, labor relations, and
employment practices.
15
• Changes in policies by the U.S. or other governments could negatively affect our operating results due to changes in
duties, tariffs or taxes, or limitations on currency or fund transfers, as well as government-imposed restrictions on
producing certain products in, or shipping them to, specific countries. For example, our facility in Mexico operates
under the Mexican Maquiladora (“IMMEX”) program. This program provides for reduced tariffs and eased import
regulations. We could be adversely affected by changes in the IMMEX program or our failure to comply with its
requirements. As another example, the U.S. government has recently imposed tariffs on certain products imported
from China as well as steel and aluminum imported from the European Union, Mexico, and Canada. China and the
European Union have imposed tariffs on U.S. products in retaliation. These tariffs could force our customers or us to
consider various strategic options including, but not limited to, looking for different suppliers, shifting production to
facilities in different geographic regions, absorbing the additional costs, or passing the cost on to customers.
Ultimately, these tariffs could adversely affect the competitiveness of our domestic operations, which could lead to the
reduction or exit of certain U.S. manufacturing capacity. The U.S. government has also indicated its intent to
renegotiate certain existing trade agreements and impose additional tariffs on automotive imports. Depending on the
types of changes made, demand for our foreign manufacturing facilities could be reduced, or operating costs in our
U.S. manufacturing facilities could be increased, which could negatively impact our financial performance. Moreover,
any retaliatory actions by other countries where we operate could also negatively impact our financial performance.
SEC “Conflict Minerals” regulation may increase our costs and reduce our sales levels.
As a result of the Dodd-Frank Act, the SEC adopted rules establishing due diligence, disclosure, and reporting requirements for
public companies which manufacture products that include components containing certain minerals referred to as “conflict
minerals.” Since certain products we manufacture for our customers contain such minerals, we are required to determine,
disclose, and report whether or not such minerals in our products originate from the Democratic Republic of Congo (“DRC”)
and adjoining countries. Such regulations could decrease the availability and increase the prices of components used in our
products, particularly if we choose (or are required by our customers) to source such components from different suppliers. In
addition, as our supply chain is complex and the process to comply with the SEC rules is cumbersome, the ongoing compliance
process is both time-consuming and costly. We may face reduced sales if we are unable to timely verify the origins of minerals
contained in the components included in our products, or supply disruptions if our due diligence process reveals that materials
we source contain minerals that originated in the DRC or adjoining countries.
Risks Relating to the Spin-Off
If the distribution pursuant to the spin-off does not qualify as a tax-free transaction, tax could be imposed on the Share
Owners and former Parent, and we may be required to indemnify former Parent for its tax.
In connection with the spin-off, former Parent received (i) a ruling from the Internal Revenue Service (the “IRS”) that the
Parent stock unification will not cause Parent to recognize income or gain as a result of the distribution; and (ii) an opinion of
Squire Patton Boggs (US) LLP to the effect that the distribution satisfies the requirements to qualify as a tax-free transaction
for U.S. federal income tax purposes under Section 355 of the Code. However, the validity of both the IRS ruling and the tax
opinion is subject to the accuracy of factual representations and assumptions provided by former Parent and us in connection
with obtaining the IRS ruling and the tax opinion, including with respect to post-spin-off operations and conduct of the parties.
Neither former Parent nor we are aware of any facts or circumstances that would cause these statements or representations to be
incomplete or untrue or cause the facts on which the opinion is based to be materially different from the facts at the time of the
spin-off. However, if these representations and assumptions are inaccurate or incomplete in any material respect, including
those relating to the past and future conduct of the business, then we will not be able to rely on the IRS ruling or the tax
opinion.
Furthermore, the tax opinion is not binding on the Internal Revenue Service or the courts. Accordingly, the IRS or the courts
may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion. If,
notwithstanding our receipt of the tax opinion, the spin-off is determined to be taxable, then (i) former Parent would be subject
to tax as if it sold the Kimball Electronics common stock in a taxable sale for its fair market value; and (ii) each Share Owner
who received Kimball Electronics common stock would be treated as receiving a distribution of property in an amount equal to
the fair market value of the Kimball Electronics common stock that would generally result in varied tax liabilities for each
Share Owner depending on the facts and circumstances.
Pursuant to the Tax Matters Agreement entered into in connection with the spin-off, (i) we agreed (a) not to enter into any
transaction that could cause any portion of the spin-off to be taxable to former Parent, including under Section 355(e) of the
Code; and (b) to indemnify former Parent for any tax liabilities resulting from such transactions; and (ii) former Parent agreed
to indemnify us for any tax liabilities resulting from such transactions entered into by former Parent. In addition, under U.S.
Treasury regulations, each member of former Parent’s consolidated group at the time of the spin-off (including us and our
16
subsidiaries) is jointly and severally liable for the resulting U.S. federal income tax liability if all or a portion of the spin-off
does not qualify as a tax-free transaction, and we have agreed to indemnify former Parent for a portion of certain tax liabilities
incurred in connection with the spin-off under certain circumstances. These obligations may discourage, delay, or prevent a
change of control of our company.
We currently share directors with former Parent, which means the overlap may give rise to conflicts.
Certain members of our Board of Directors serve as directors of former Parent, but the overlapping directors do not constitute a
majority of our Board members. These directors may have actual or apparent conflicts of interest with respect to matters
involving or affecting us or former Parent. For example, there could be the potential for a conflict of interest when we or
former Parent look at acquisitions and other corporate opportunities that may be suitable for both companies. Also, conflicts
may arise if there are issues or disputes under the commercial arrangements that may exist between former Parent and us. Our
Board of Directors and the Board of Directors of former Parent will review and address any potential conflict of interests that
may arise between former Parent and us. Although no specific measures to resolve such conflicts of interest have been
formulated, our Board of Directors and the Board of Directors of former Parent have a fiduciary obligation to deal fairly and in
good faith. Our Board of Directors exercises reasonable judgment and takes such steps as they deem necessary under all of the
circumstances in resolving any specific conflict of interest which may occur and will determine what, if any, specific measures,
such as retention of an independent advisor, independent counsel, or special committee, may be necessary or appropriate. Any
such conflict could have a material adverse effect on our business.
Risks Relating to Our Common Stock
Our stock price may fluctuate significantly.
The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our
control, including:
actual or anticipated fluctuations in our operating results due to factors related to our business;
•
• wins and losses on contract competitions and new business pursuits;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
success or failure of our business strategy;
our quarterly or annual earnings, or those of other companies in our industry;
our ability to obtain financing as needed;
announcements by us or our competitors of significant acquisitions or dispositions;
changes in accounting standards, policies, guidance, interpretations or principles;
the failure of securities analysts to cover our common stock;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of other comparable companies;
the changes in customer requirements for our products and services;
natural or environmental disasters that investors believe may affect us;
overall market fluctuations;
results from any material litigation or government investigation;
changes in laws and regulations affecting our business; and
general economic conditions and other external factors.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular
company. These broad market fluctuations, coupled with changes in results of operations and general economic, political, and
market conditions, could adversely affect the trading price of our common stock.
Anti-takeover provisions in our organizational documents, the Tax Matters Agreement, and Indiana law could delay or
prevent a change in control.
We have adopted the Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws. Certain
provisions of the Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws may delay or prevent
a merger or acquisition that a Share Owner may consider favorable. For example, the Amended and Restated Articles of
Incorporation authorizes our Board of Directors to issue one or more series of preferred stock, prevents Share Owners from
acting by written consent, and requires a supermajority Share Owner approval for certain business combinations with related
persons. These provisions may discourage acquisition proposals or delay or prevent a change in control, which could harm our
stock price. Indiana law also imposes some restrictions on potential acquirers.
17
Under the Tax Matters Agreement entered into in connection with the spin-off, we have agreed not to enter into any transaction
involving an acquisition (including issuance) of our common stock or any other transaction (or, to the extent we have the right
to prohibit it, to permit any such transaction) that could cause the distribution pursuant to the spin-off to be taxable to former
Parent. We have also agreed to indemnify former Parent for any tax resulting from any such transactions. Generally, former
Parent will recognize taxable gain on the distribution if there are one or more acquisitions (including issuances) of our capital
stock, directly or indirectly, representing 50% or more, measured by vote or value, of our then-outstanding capital stock, and
the acquisitions or issuances are deemed to be part of a plan or series of related transactions that include the distribution. As a
result, our obligations may limit our ability to pursue strategic transactions or engage in new business or other transactions that
may maximize our business and might discourage, delay, or prevent a change of control of our company.
We cannot assure you that we will pay dividends on our stock in the future.
We have not paid any dividends on our common stock since the spin-off. The timing, declaration, amount, and payment of
future dividends to our Share Owners will fall within the discretion of our Board of Directors and will depend on many factors,
including our financial condition, results of operations and capital requirements, industry practice, and other business
considerations that our Board of Directors considers relevant from time to time. In addition, our ability to declare or the
amount of any future dividends may be restricted by the provisions of Indiana law and covenants in our primary credit facility.
We do not have a plan to pay future dividends at this time. There can be no assurance that we will pay a dividend in the future
or continue to pay any dividend if we do commence the payment of dividends. To the extent that expectations by market
participants regarding the potential payment, or amount, of any dividend prove to be incorrect, the price of our common stock
may be materially and negatively affected, and investors that bought shares of our common stock based on those expectations
may suffer a loss on their investment.
Item 1B - Unresolved Staff Comments
None.
Item 2 - Properties
As of June 30, 2018, we had nine manufacturing facilities with three located in Indiana and one located in each of Florida,
China, Mexico, Poland, Romania, and Thailand. These facilities occupy approximately 1,221,000 square feet in aggregate, all
of which are owned. In addition, we own two administration facilities in Indiana occupying approximately 48,000 square feet,
which include our headquarters located in Jasper, Indiana. See Note 15 - Geographic Information of Notes to Consolidated
Financial Statements for additional information.
Generally, our manufacturing facilities are utilized at normal capacity levels on a multiple shift basis. At times, certain
facilities utilize reduced shifts. Due to demand and sales fluctuations, not all facilities were utilized at normal capacity during
fiscal year 2018. We continually assess our capacity needs and evaluate our operations to optimize our service levels by
geographic region. See Item 1A - Risk Factors for information regarding financial and operational risks related to our
international operations.
Significant loss of income resulting from a facility catastrophe would be partially offset by business interruption insurance
coverage.
The Company holds land leases for our facilities in China and Thailand and a warehouse facility lease in Indiana, with these
leases expiring from fiscal year 2021 to 2056. See Note 5 - Commitments and Contingent Liabilities of Notes to Consolidated
Financial Statements for additional information concerning leases. In addition, we own approximately 97 acres of land which
includes land where our facilities reside.
Item 3 - Legal Proceedings
We and our subsidiaries are not parties to any pending legal proceedings, other than ordinary routine litigation incidental to the
business. The outcome of current routine pending litigation, individually and in the aggregate, is not expected to have a
material adverse impact on our business or financial condition.
Item 4 - Mine Safety Disclosures
Not applicable.
18
Executive Officers of the Registrant
Our executive officers as of August 28, 2018 are as follows:
(Age as of August 28, 2018)
Name
Donald D. Charron . . . . . . . . . . . . .
Age
54
Michael K. Sergesketter . . . . . . . . .
John H. Kahle . . . . . . . . . . . . . . . . .
Christopher J. Thyen . . . . . . . . . . . .
Jessica L. DeLorenzo. . . . . . . . . . . .
Sandy A. Smith . . . . . . . . . . . . . . . .
Janusz F. Kasprzyk . . . . . . . . . . . . .
Steven T. Korn. . . . . . . . . . . . . . . . .
Roger Chang (Chang Shang Yu) . . .
Desiree L. Castillejos. . . . . . . . . . . .
Kathy R. Thomson. . . . . . . . . . . . . .
58
61
55
33
55
58
54
61
47
49
Office and Area of Responsibility
Chairman of the Board and Chief Executive Officer
Vice President, Chief Financial Officer
Vice President, General Counsel, Chief Compliance Officer, and Secretary
Vice President, New Platforms
Vice President, Human Resources
Vice President, Information Technology
Vice President, European Operations
Vice President, North American Operations
Vice President, Asian Operations
Vice President, Corporate Development and M&A, and Chief Strategy Officer
Vice President, Global Business Development and Design Services
Executive officers are appointed annually by the Board of Directors. The following is a brief description of the business
experience during the past five or more years of each of our executive officers.
Mr. Charron is our Chairman of the Board and Chief Executive Officer. Prior to the spin-off, he served as an Executive Vice
President of former Parent, a member of the Board of Directors of former Parent, and the President of the Kimball Electronics
Group that now comprises Kimball Electronics following the spin-off. Mr. Charron had led the EMS segment of former Parent
since joining former Parent in 1999. Mr. Charron’s extensive contract electronics industry experience prior to joining former
Parent, as well as his intimate knowledge of former Parent’s EMS operations, provides valuable operational, strategic, and
global market insights.
Mr. Sergesketter is our Vice President, Chief Financial Officer. Prior to the spin-off, he served as Vice President, Chief
Financial Officer for Kimball Electronics Group that now comprises Kimball Electronics following the spin-off. Mr.
Sergesketter had served in this role with former Parent since 1996.
Mr. Kahle is our Vice President, General Counsel, Chief Compliance Officer, and Secretary. Mr. Kahle was appointed Chief
Compliance Officer in April 2016 in addition to his Vice President, General Counsel, and Secretary role. Prior to the spin-off,
he served as Executive Vice President, General Counsel and Secretary of former Parent and had served in this role with former
Parent since 2001.
Mr. Thyen was appointed our Vice President, New Platforms, in August 2018. Prior to this, he served as Vice President,
Business Development since 2008.
Ms. DeLorenzo was appointed Vice President, Human Resources, effective June 29, 2018. Ms. DeLorenzo joined Kimball
Electronics in 2015 in the position of Director, Organizational Development. Before joining Kimball Electronics, she held the
position of Director, Student Services at Vincennes University since 2011.
Ms. Smith is our Vice President, Information Technology and has served in this role since 2004.
Mr. Kasprzyk is our Vice President, European Operations and has served in this role since 2008.
Mr. Korn is our Vice President, North American Operations and has served in this role since 2007.
Mr. Chang is our Vice President, Asian Operations and has served in this role since 2004.
Ms. Castillejos was appointed Vice President, Corporate Development and M&A, and Chief Strategy Officer effective August
13, 2018. Prior to joining Kimball Electronics, she held the position of Vice President, Corporate Development for Nokia
Technology since 2016. Prior to Nokia Technology, she served as the Vice President, Corporate Development for Persistent
Systems since 2010.
Ms. Thomson was appointed Vice President, Global Business Development and Design Services effective August 20, 2018.
Previously Ms. Thomson held the position of Vice President of Business Development for Creation Technologies since 2012.
19
PART II
Item 5 - Market for Registrant’s Common Equity, Related Share Owner Matters and Issuer Purchases of Equity Securities
Market Prices
The Company’s common stock trades on the NASDAQ Global Select Market of The NASDAQ Stock Market LLC
(“NASDAQ”) under the symbol: KE. High and low sales prices by quarter for the last two fiscal years, as quoted by the
NASDAQ system, were as follows:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
High
22.05
22.45
19.70
19.70
Low
17.46
18.14
15.75
15.80
$
$
$
$
High
14.28
19.00
18.45
18.90
$
$
$
$
Low
11.54
13.38
15.05
15.90
$
$
$
$
The last reported sales price of our common stock on August 15, 2018, as reported by NASDAQ, was $19.95.
Dividends
We have not paid any dividends on our common stock since the spin-off. We do not have a plan to pay future dividends at this
time.
Share Owners
On August 15, 2018, the Company’s common stock was owned by approximately 1,294 Share Owners of record.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item concerning securities authorized for issuance under equity compensation plans is
incorporated by reference to Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Share
Owner Matters of Part III.
Issuer Purchases of Equity Securities
On October 21, 2015, our Board of Directors (the “Board”) approved an 18-month stock repurchase plan, authorizing the
repurchase of up to $20 million worth of our common stock. On September 26, 2016, the Board extended the stock repurchase
plan authorizing the repurchase of up to an additional $20 million worth of common stock with no expiration date. On August
23, 2017, the Board increased the Plan to allow the repurchase of up to an additional $20 million worth of common stock with
no expiration date. This latest increase brings the total authorized stock repurchases under the Plan to $60 million. At June 30,
2018, $15.5 million remained available under the repurchase program.
During fiscal year 2018, the Company has repurchased $9.4 million of common stock under the Plan. The following table
contains information about our purchases of equity securities during the three months ended June 30, 2018.
Period
April 1, 2018 - April 30, 2018 . . . . . . . . . . .
May 1, 2018 - May 31, 2018 . . . . . . . . . . . .
June 1, 2018 - June 30, 2018 . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
—
52,177
110,794
162,971
$
$
$
$
—
18.61
19.15
18.98
—
52,177
110,794
162,971
Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plan
$
$
$
18,608,701
17,637,743
15,516,025
20
Performance Graph
The following performance graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to
Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act and will not be deemed
to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent the Company
specifically incorporates it by reference into such a filing.
The graph below compares the cumulative total return to Share Owners of the Company’s common stock from November 3,
2014, the first day of trading in the Company’s common stock, through June 30, 2018, the last business day of the fiscal year, to
the cumulative total return of the NASDAQ Stock Market (U.S.) and a peer group index for the same period of time. The peer
group index is comprised of publicly traded companies in the EMS industry and includes: Benchmark Electronics, Inc., Flex
Ltd., Jabil Inc., Plexus Corp., and Sanmina Corporation. The public companies included in the peer group each have a larger
revenue base than we do.
The graph assumes $100 is invested in the Company’s stock and each of the two indexes at the closing market quotations on
November 3, 2014, the first day of trading in Kimball Electronics common stock, and that dividends, if any, are reinvested.
The performances shown on the graph are not necessarily indicative of future price performance.
Kimball Electronics, Inc. . . . . . . . . . . . . . $
NASDAQ Stock Market (U.S.). . . . . . . . . $
Peer Group Index . . . . . . . . . . . . . . . . . . . $
100.00 $
100.00 $
100.00 $
202.08 $
108.38 $
99.49 $
172.44 $
106.56 $
101.36 $
250.00 $
136.71 $
145.47 $
253.46
168.97
131.37
11/03/2014
06/30/2015
06/30/2016
06/30/2017
06/30/2018
21
Item 6 - Selected Financial Data
This information should be read in conjunction with Item 8 - Financial Statements and Supplementary Data and Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Consolidated Financial
Statements for periods prior to the spin-off, which occurred on October 31, 2014, were derived from the accounting records of
former Parent as if we operated on a stand-alone basis. Our historical results of operations, financial position, or cash flows
presented in the Consolidated Financial Statements for periods prior to the spin-off may not be indicative of what they would
have been had the Company operated as a stand-alone public company for the entirety of the periods presented.
(Amounts in Thousands, Except for Per Share Data)
Consolidated Statements of Income Data:
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,072,061
Net Income (1). . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,752
Earnings Per Share: (2)
2018
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.63
0.62
Year Ended June 30
2016
2017
2015
2014
$
$
$
$
930,914
34,179
1.25
1.24
$
$
$
$
842,060
22,287
0.77
0.76
$
$
$
$
819,350
26,205
0.90
0.89
$
$
$
$
741,530
24,613
0.84
0.84
(Amounts in Thousands)
Consolidated Balance Sheet Data:
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-Term Debt, Less Current Maturities. . . . . $
2018
2017
2016
2015
2014
As of June 30
608,758
$
554,944
$
510,565
$
483,257
$
408,730
— $
— $
— $
— $
—
(1) Fiscal year 2018 net income included income tax expense of $17.9 million ($0.66 per diluted share) due to the U.S. Tax
Cuts and Jobs Act (“Tax Reform”) that was enacted into law in December 2017 and relates to the deemed repatriation of
unremitted foreign earnings and the revaluation of net deferred tax assets.
Fiscal year 2017 net income included $2.5 million ($0.09 per diluted share) of after-tax income resulting from settlements
received related to an antitrust class action lawsuit in which the Company was a member and $0.9 million ($0.03 per diluted
share) of after-tax income resulting from the bargain purchase gain recognized in the acquisition of Aircom Manufacturing,
Inc. See Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information regarding the
acquisition and bargain purchase gain.
Fiscal year 2016 net income included a foreign income tax benefit of $1.8 million ($0.06 per diluted share) as a result of a
favorable tax ruling related to the fiscal year 2015 capitalization of the Company’s Romania subsidiary and $0.1 million
($0.01 per diluted share) of after-tax expense related to the spin-off.
Fiscal year 2015 net income included $2.4 million ($0.08 per diluted share) of after-tax expense related to the spin-off.
Fiscal year 2014 net income included $0.3 million ($0.01 per diluted share) of after-tax restructuring expenses, $3.5 million
($0.12 per diluted share) of after-tax income resulting from settlements received related to two antitrust class action lawsuits
in which the Company was a member, and $2.2 million ($0.08 per diluted share) of after-tax expense related to the spin-off.
(2) Basic and diluted earnings per share for the period ended prior to the spin-off on October 31, 2014 were retrospectively
restated adjusting the number of Kimball Electronics shares outstanding for the stock split effective on October 16, 2014 to
29.1 million shares.
22
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
We are a global contract electronic manufacturing services (“EMS”) company that specializes in producing durable electronics
for the automotive, medical, industrial, and public safety markets. We also offer diversified contract manufacturing services for
non-electronic components, medical disposables, plastics, and metal fabrication. Our manufacturing services, including
engineering and supply chain support, utilize common production and support capabilities globally. We are well recognized by
our customers and the EMS industry for our excellent quality, reliability, and innovative service, and we were named the 2016
EMS Company of the Year by CIRCUITS ASSEMBLY, a leading brand and technical publication for electronics manufacturers
worldwide. In 2018, we were recognized for achieving the Highest Overall Customer Rating in CIRCUITS ASSEMBLY’s
2018 Service Excellence Awards.
The EMS industry is very competitive. As a mid-sized player in the EMS market, we can expect to be challenged by the agility
and flexibility of the smaller, regional players, and we can expect to be challenged by the scale and price competitiveness of the
larger, global players. We enjoy a unique market position between these extremes which allows us to compete with the larger
scale players for high-volume projects, but also maintain our competitive position in the generally lower volume durable
electronics market space. We expect to continue to effectively operate in this market space; however, one significant challenge
will be maintaining our profit margins while we continue our revenue growth. Price increases are uncommon in the market as
production efficiencies and material pricing advantages for most projects drive costs and prices down over the life of the
projects. This characteristic of the contract electronics marketplace is expected to continue.
Key economic indicators currently point toward continued strengthening in the overall economy. However, uncertainties still
exist and may pose a threat to our future growth as they have the tendency to cause disruption in business strategy, execution,
and timing in many of the markets in which we compete. One such trend that the EMS industry is beginning to experience is
component shortages and component allocations. Component shortages or allocations could increase component costs and
potentially interrupt our operations and negatively impact our ability to meet commitments to customers. We are taking various
actions to mitigate the risk and minimize the adverse effect the component shortages or allocations could have on our results
and the impact to our customers. In addition, the impact from the recently imposed and additional proposed tariffs on
components we utilize in our domestic manufacturing process, of which many currently can only be sourced via China, may
adversely affect the competitiveness of our domestic operations.
The March 2018 edition of the Manufacturing Market Insider published by New Venture Research indicated the group of
leading EMS companies that comprise its annual list of the 50 largest EMS providers for 2017, of which we are a member,
experienced revenue growth of 11.4% in calendar year 2017. Excluding the two largest EMS providers, there was revenue
growth of 8.0% in calendar year 2017. During calendar year 2017, we experienced growth of approximately 11%.
Our overall expectation for the EMS market is moderate growth with mixed demand. Our focus is on the four key vertical
markets of automotive, medical, industrial, and public safety. Our current goal is to grow at an 8% annual organic growth rate.
The automotive end market has improved from both new product introductions and increased demand on existing products, and
it continues to benefit from the trend of increasing electronic content that is placed in automobiles. The industrial market is
showing improvement with increased end market demand for smart metering and climate control products. Overall in the
public safety market, we have experienced mixed demand and may continue to see demand fluctuations as we wind down our
International Traffic in Arms Regulations (ITAR) compliance programs and turn our focus to growth in our non-defense related
business. Sales in the current fiscal year in the public safety market declined compared to the prior fiscal year resulting from
programs reaching end of life, which more than offset increased volumes from new product introductions. In the medical
market, growth was driven largely from new program launches in addition to an overall strengthening of the market. We
continue to monitor the current economic environment and its potential impact on our customers.
We invest in capital expenditures prudently for projects in support of both organic growth and potential acquisitions that would
enhance our capabilities and diversification while providing an opportunity for growth and improved profitability. For
example, the acquisitions of Medivative Technologies, LLC (“Medivative”) and Aircom Manufacturing, Inc. (“Aircom”) within
the last several fiscal years provide capabilities that will enhance our medical end market as well as support our mechanical
assembly needs in all four key vertical markets by offering our customers design engineering and manufacturing expertise in
precision metals and plastics. We have a strong focus on cost control and closely monitor market changes and our liquidity in
order to proactively adjust our operating costs and discretionary capital spending as needed. Managing working capital in
conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of our profit sharing
incentive bonus plan is that it is linked to our financial performance which results in varying amounts of compensation expense
as profits change.
23
As discussed in Item 1 - Business, we entered into an agreement on May 11, 2018 with GES Holdings, Inc., Global Equipment
Services and Manufacturing, Inc., and its subsidiaries (collectively referred to as “GES”) to acquire substantially all of the
assets and assume certain liabilities of GES. The pending GES acquisition supports our new platform strategy as GES
specializes in production processing and test equipment design, volume manufacturing, and global services for the
semiconductor and electronics product manufacturing industry. See Item 1A - Risk Factors for risks associated with this
acquisition and Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information on this pending
acquisition.
We continue to maintain a strong balance sheet as of the end of fiscal year 2018, which included no long-term debt and Share
Owners’ equity of $356 million. Our short-term liquidity available, represented as cash and cash equivalents plus the unused
amount of our credit facilities, totaled $108.7 million at June 30, 2018.
In addition to the above discussion related to the current market conditions, management currently considers the following
events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
• Due to the contract and project nature of the EMS industry, fluctuation in the demand for our products and variation in
the gross margin on those projects is inherent to our business. Effective management of manufacturing capacity is,
and will continue to be, critical to our success.
• The nature of the EMS industry is such that the start-up of new customers and new programs to replace expiring
programs occurs frequently. While our agreements with customers generally do not have a definitive term and thus
could be canceled at any time with little or no notice, we generally realize relatively few cancellations prior to the end
of the product’s life cycle. We attribute this to our focus on long-term customer relationships, meeting customer
expectations, required capital investment, and product qualification cycle times. As such, our ability to continue
contractual relationships with our customers, including our principal customers, is not certain. New customers and
program start-ups generally cause losses early in the life of a program, which are generally recovered as the program
becomes established and matures. Risk factors within our business include, but are not limited to, general economic
and market conditions, customer order delays, globalization, impact related to tariffs and other trade barriers, foreign
currency exchange rate fluctuations, rapid technological changes, component availability, supplier and customer
financial stability, the contract nature of this industry, the concentration of sales to large customers, and the potential
for customers to choose a dual sourcing strategy or to in-source a greater portion of their electronics manufacturing.
The continuing success of our business is dependent upon our ability to replace expiring customers/programs with
new customers/programs. We monitor our success in this area by tracking the number of customers and the
percentage of our net sales generated from them by years of service as depicted in the table below. While variation in
the size of program award makes it difficult to directly correlate this data to our sales trends, we believe it does
provide useful information regarding our customer loyalty and new business growth. Additional risk factors that could
have an effect on our performance are located within Item 1A - Risk Factors.
Customer Service Years
More than 10 Years
% of Net Sales . . . . . . . . . . . . . . . . . .
# of Customers. . . . . . . . . . . . . . . . . .
5 to 10 Years
% of Net Sales . . . . . . . . . . . . . . . . . .
# of Customers. . . . . . . . . . . . . . . . . .
Less than 5 Years
% of Net Sales . . . . . . . . . . . . . . . . . .
# of Customers. . . . . . . . . . . . . . . . . .
Total
% of Net Sales . . . . . . . . . . . . . . . . . .
# of Customers . . . . . . . . . . . . . . . . .
2018
Year End
2017
2016
61%
28
28%
18
11%
30
100%
76
56%
28
36%
22
8%
32
100%
82
56%
25
38%
29
6%
32
100%
86
• Globalization continues to be a factor not only in the industries in which we operate but also for our key customers,
suppliers, and competitors.
• Employees throughout our business operations are an integral part of our ability to compete successfully, and the
stability of the management team is critical to long-term Share Owner value. Our talent management and succession
planning processes help to maintain stability in management.
Certain preceding statements could be considered forward-looking statements under the Private Securities Litigation Reform
Act of 1995 and are subject to certain risks and uncertainties including, but not limited to, successful integration of acquisitions
and new operations, adverse changes in the global economic conditions, the geopolitical environment, loss of key customers or
suppliers, or similar unforeseen events. Additional risk factors that could have an effect on our performance are located within
Item 1A - Risk Factors.
24
Results of Operations - Fiscal Year 2018 Compared with Fiscal Year 2017
2018
(Amounts in Millions, Except for Per Share Data)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,072.1
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . $
86.2
Selling and Administrative Expenses . . . . . $
Other General Income . . . . . . . . . . . . . . . . . $
Operating Income . . . . . . . . . . . . . . . . . . . . $
Provision for Income Taxes. . . . . . . . . . . . . $
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted Earnings per Share . . . . . . . . . . . . . $
Open Orders. . . . . . . . . . . . . . . . . . . . . . . . . $
293.1
0.62
16.8
42.3
43.9
28.0
—
At or For the Year Ended
June 30
as a % of
Net Sales
2017
$
930.9
8.0% $
4.0% $
$
4.0% $
$
$
$
$
75.6
36.5
4.0
43.1
10.1
34.2
1.24
214.3
as a % of
Net Sales % Change
8.1%
3.9%
4.6%
15%
14%
20%
(2)%
178%
(51)%
37%
Net Sales by Vertical Market
For the Year Ended
June 30
2018
(Amounts in Millions)
Automotive . . . . . . . . . . . . . . . . . . . . . . . . . $
Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public Safety . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.2
Total Net Sales. . . . . . . . . . . . . . . . . . . . . . . $ 1,072.1
313.3
469.3
217.0
61.3
2017
% Change
$
378.7
256.5
205.6
70.1
20.0
$
930.9
24%
22%
6%
(13)%
(44)%
15%
Net sales in fiscal year 2018 increased 15% compared to net sales in fiscal year 2017 primarily due to the ramp-up of new
product introductions, an overall increase in demand, and the favorable effect of foreign exchange fluctuations on sales. By
end market vertical, the increase in net sales was driven by double-digit sales growth to customers in the automotive and
medical end markets, in addition to an increase in sales to customers in the industrial market vertical. Sales to customers in the
automotive and the industrial markets both experienced record sales in the current fiscal year.
Sales to customers in the automotive market improved as demand in all of the Company’s geographic markets increased
compared to the prior fiscal year, which included the ramp-up of new product introductions and increased demand for existing
programs. Sales to customers in the medical market increased due to new program launches and stronger demand on existing
products. Sales to customers in the industrial market improved largely due to new product launches related to smart metering
and increased end market demand for climate control products, which more than offset decreases from the exit of certain
programs. Sales to customers in the public safety market declined due to lower overall demand and certain programs reaching
end of life.
A significant amount of sales to ZF, Philips, and Nexteer Automotive accounted for the following portions of our net sales:
ZF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philips . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nexteer Automotive. . . . . . . . . . . . . . . . . . .
Year Ended June 30
2018
15%
13%
13%
2017
12%
14%
12%
Open orders were up 37% as of June 30, 2018 compared to June 30, 2017 primarily as a result of a large increase of orders in
the automotive market, which was in part due to new product introductions. Open orders are the aggregate sales price of
production pursuant to unfulfilled customer orders, which may be canceled by the customer subject to contractual termination
provisions. Substantially all of the open orders as of June 30, 2018 are expected to be filled within the next twelve months.
Open orders at a point in time may not be indicative of future sales trends due to the contract nature of our business.
25
Gross profit as a percent of net sales declined slightly to 8.0% in fiscal year 2018 from 8.1% in fiscal year 2017 primarily due
to an unfavorable impact on yields and higher costs associated with the support of new product introductions in addition to
unfavorable product mix, which were partially offset by the positive impact from leverage gained on higher revenue.
For fiscal year 2018, selling and administrative expenses increased slightly as a percent of net sales and increased in absolute
dollars compared to fiscal year 2017. The current fiscal year selling and administrative expenses increased in absolute dollars
from the prior fiscal year primarily due to higher salary and related payroll costs, which were largely due to an increase in the
number of employees, higher incentive-based compensation, and higher factoring fees from our accounts receivable factoring
arrangements. In addition, during fiscal year 2018, we incurred $0.9 million of incremental costs directly related to the pending
acquisition of GES, which were expensed as incurred. This increase was partially offset by the lower expense from the
supplemental employee retirement plan (“SERP”) in the current year. The SERP expense is a result of the revaluation of the
SERP liability and is offset by the revaluation to fair value of the SERP investments recorded in Other Income (Expense).
Other General Income in fiscal year 2017 of $4.0 million resulted from a payment received related to the settlement of a class
action lawsuit in which Kimball Electronics was a class member. The lawsuit alleged that certain suppliers to the EMS
industry conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to
purchasers of those components. No Other General Income was recorded during fiscal year 2018.
Other Income (Expense) consisted of the following:
Other Income (Expense)
(Amounts in Thousands)
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Currency/Derivative Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on Supplemental Employee Retirement Plan Investment . . . . . . . . . . . . . . . . .
Bargain Purchase Gain on Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Income (Expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended
June 30
2018
2017
73
(527)
2,358
712
—
(189)
2,427
$
$
64
(271)
(453)
1,006
925
(73)
1,198
The revaluation to fair value of the SERP investments recorded in Other Income (Expense) is offset by the revaluation of the
SERP liability recorded in Selling and Administrative Expenses, and thus there was no effect on net income. The Foreign
Currency/Derivative Gain (Loss) resulted from net foreign currency exchange rate movements. The Bargain Purchase Gain on
Acquisition for fiscal year 2017 resulted from the Aircom acquisition as the consideration paid for Aircom was less than the
estimated fair values of the assets acquired and liabilities assumed. See Note 2 - Acquisitions of Notes to Consolidated
Financial Statements for more information regarding the Aircom acquisition.
Our income before income taxes and effective tax rate were comprised of the following U.S. and foreign components:
Year Ended June 30, 2018
Year Ended June 30, 2017
(Amounts in Thousands)
United States . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income Before
Taxes
Effective Tax
Rate
Income Before
Taxes
Effective Tax
Rate
5,609
39,166
44,775
329.2%
24.4%
62.6%
$
$
$
10,051
34,204
44,255
25.6%
21.9%
22.8%
In December 2017, the United States enacted the Tax Cuts and Jobs Act (“Tax Reform”), which lowered the U.S. corporate
statutory tax rate from 35% to 21%. For fiscal year companies with a June 30 year end, the blended federal statutory tax rate
for the current fiscal year ending June 30, 2018 is 28.1%. Due to the enactment of Tax Reform, we revalued our net deferred
tax assets at the new applicable rates as of December 31, 2017, with measurement period adjustments subsequently recorded
during the six-month period ended June 30, 2018, and we estimated and recorded tax on the one-time deemed repatriation on
our accumulated unremitted foreign earnings during fiscal year 2018. While we expect the lower U.S. corporate statutory tax
rate will lower our consolidated effective tax rate and have a favorable impact on our net income in the future, Tax Reform did
have a significant unfavorable impact to our effective tax rate and our net income for fiscal year 2018 as the total provisional
tax adjustments resulting from Tax Reform were $17.9 million, or $0.66 per diluted share.
26
The consolidated effective tax rate for fiscal year 2018 of 62.6% and the domestic effective tax rate were unfavorably impacted
by Tax Reform, primarily driven by income tax expense of approximately $13.4 million for the deemed repatriation tax and
approximately $4.4 million for the revaluation of our net deferred tax assets, which were both treated as provisional tax
adjustments and recognized in Provision for Income Taxes on the Consolidated Statements of Income for fiscal year 2018. The
Company considers these provisional recorded amounts to be reasonable estimates as of June 30, 2018. As a result, these
amounts could be adjusted during the measurement period ending December 2018. Items partially offsetting the unfavorable
impact from Tax Reform on the effective tax rate included the income tax adjustment related to the excess tax benefit on stock-
based compensation granted during fiscal year 2018, which was recognized in accordance with the new accounting standard for
share-based payment transactions, the high mix of earnings in foreign jurisdictions that have generally lower statutory rates
than the United States, and the U.S. research and development tax credit.
When compared to the statutory rate, the effective tax rate for fiscal year 2017 of 22.8% was favorably impacted by a high mix
of earnings in foreign jurisdictions, which have lower statutory rates than the United States, foreign exchange rates on foreign
income taxes, and domestic tax credits. Also favorably impacting the effective tax rate for fiscal year 2017 was the $0.9
million bargain purchase gain from the Aircom acquisition, which is not taxable.
Our overall effective tax rate will fluctuate depending on the geographic distribution of our worldwide earnings. See Note 9 -
Income Taxes of Notes to Consolidated Financial Statements for more information, including additional information on Tax
Reform. See Note 1 - Business Description and Summary of Significant Accounting Policies for information related to the
excess tax benefit recognized in accordance with the new accounting standard for share-based payment transactions.
We recorded net income of $16.8 million in fiscal year 2018, or $0.62 per diluted share, a decrease of 51% from fiscal year
2017 net income of $34.2 million, or $1.24 per diluted share, due to the reasons previously discussed.
Comparing the balance sheet as of June 30, 2018 to June 30, 2017, our inventory balance increased $57.0 million primarily to
support increased open orders and production volumes, the implementation of an inventory management program for one of
our largest customers in the medical market, and additional purchases to help mitigate the potential impact from component
shortages. Prepaid expenses and other current assets declined by $13.8 million primarily due to the new accounting standard
that was prospectively adopted in the fourth quarter of our fiscal year 2018 which requires all deferred tax assets and liabilities
to be classified as noncurrent on our balance sheet; this adoption reclassified $8.3 million from Prepaid expenses and other
current assets to Other Assets as of June 30, 2018. Accounts payable increased $33.2 million largely from the increased
inventory purchases to support increased production volumes. Long-term income taxes payable has a balance of $12.4 million
at June 30, 2018 for the long-term portion of the deemed repatriation tax that is allowed to be paid over an eight-year period.
Treasury stock, at cost increased $7.4 million due to stock repurchases under an authorized stock repurchase plan. See Note 1 -
Business Description and Summary of Significant Accounting Policies for information related to the new accounting standard
on the classification of deferred tax assets and liabilities.
Results of Operations - Fiscal Year 2017 Compared with Fiscal Year 2016
(Amounts in Millions, Except for Per Share Data)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . $
Selling and Administrative Expenses . . . . . $
Other General Income . . . . . . . . . . . . . . . . . $
Operating Income . . . . . . . . . . . . . . . . . . . . $
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted Earnings per Share . . . . . . . . . . . . . $
Open Orders. . . . . . . . . . . . . . . . . . . . . . . . . $
2017
930.9
75.6
36.5
4.0
43.1
34.2
1.24
214.3
At or For the Year Ended
June 30
as a % of
Net Sales
2016
$
842.1
8.1% $
3.9% $
$
4.6% $
$
$
$
64.5
34.8
—
29.7
22.3
0.76
171.0
as a % of
Net Sales % Change
7.7%
4.2%
3.5%
11%
17%
5%
45%
53%
25%
27
Net Sales by Vertical Market
For the Year Ended
June 30
(Amounts in Millions)
Automotive . . . . . . . . . . . . . . . . . . . . . . . . . $
Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public Safety . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Net Sales. . . . . . . . . . . . . . . . . . . . . . . $
2017
2016
% Change
378.7
$
256.5
205.6
70.1
20.0
326.7
249.2
186.6
61.1
18.5
930.9
$
842.1
16%
3%
10%
15%
8%
11%
Net sales in fiscal year 2017 increased 11% compared to net sales in fiscal year 2016 primarily due to increased sales from new
product awards and overall increased demand. The fiscal year 2017 increase in net sales over fiscal year 2016 was driven by
sales growth to customers in all four of our end market verticals, with the sales to customers in the automotive market,
industrial market, and public safety market experiencing double-digit growth.
Sales to customers in the automotive market improved as demand in all markets increased compared to fiscal year 2016,
although we did experience a slow-down in the China market within the second half of fiscal year 2017. The increase in the
automotive market demand over fiscal year 2016 was driven by the ramp-up of new product introductions and increased
demand from existing customers. Sales to customers in the medical market increased as the sales from the recent acquisitions
and new product introductions more than offset declines from existing products. Sales to customers in the industrial market
improved largely due to increased end market demand for climate control products as well as new product launches related to
smart metering. Sales to customers in the public safety market increased primarily due to new product awards and increased
demand for existing products.
A significant amount of sales to Philips, ZF, and Nexteer Automotive accounted for the following portions of our net sales:
Philips . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ZF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nexteer Automotive. . . . . . . . . . . . . . . . . . .
* amount is less than 10% of total
Year Ended June 30
2017
14%
12%
12%
2016
15%
11%
*
Open orders were up 25% as of June 30, 2017 compared to June 30, 2016 as open orders in each of the four vertical markets
increased. Open orders at a point in time may not be indicative of future sales trends due to the contract nature of our business.
Gross profit as a percent of net sales improved to 8.1% in fiscal year 2017 from 7.7% in fiscal year 2016 primarily due to the
positive impact from leverage gained on higher revenue, cost productivity, and favorable product mix, which were partially
offset by the costs related to the ramp-up of the Romania operation and new product introductions.
For fiscal year 2017, selling and administrative expenses decreased as a percent of net sales and increased in absolute dollars
compared to fiscal year 2016. Selling and administrative expenses benefited in fiscal year 2017 from not having the
incremental start-up costs related to our Romania operation, which was partially offset by higher expense from the
supplemental employee retirement plan (“SERP”) in fiscal year 2017. The SERP expense is a result of the revaluation of the
SERP liability and is offset by the revaluation to fair value of the SERP investments recorded in Other Income (Expense).
Other General Income in fiscal year 2017 of $4.0 million resulted from a payment received related to the settlement of a class
action lawsuit in which Kimball Electronics was a class member. The lawsuit alleged that certain suppliers to the EMS
industry conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to
purchasers of those components. No Other General Income was recorded during fiscal year 2016.
28
Other Income (Expense) consisted of the following:
Other Income (Expense)
(Amounts in Thousands)
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Currency/Derivative Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (Loss) on Supplemental Employee Retirement Plan Investment. . . . . . . . . . . .
Bargain Purchase Gain on Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Income (Expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended
June 30
2017
2016
64
(271)
(453)
1,006
925
(73)
1,198
$
79
(80)
(1,292)
(67)
—
(386)
$ (1,746)
The revaluation to fair value of the SERP investments recorded in Other Income (Expense) is offset by the revaluation of the
SERP liability recorded in Selling and Administrative Expenses, and thus there was no effect on net income. The Foreign
Currency/Derivative Loss resulted from net foreign currency exchange rate movements. The Bargain Purchase Gain on
Acquisition for fiscal year 2017 resulted from the Aircom acquisition as the consideration paid for Aircom was less than the
estimated fair values of the assets acquired and liabilities assumed. See Note 2 - Acquisitions of Notes to Consolidated
Financial Statements for more information regarding the Aircom acquisition.
Our income before income taxes and effective tax rate were comprised of the following U.S. and foreign components:
Year Ended June 30, 2017
Year Ended June 30, 2016
(Amounts in Thousands)
United States . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income Before
Taxes
Effective Tax
Rate
Income Before
Taxes
Effective Tax
Rate
10,051
34,204
44,255
25.6%
21.9%
22.8%
$
$
$
1,919
26,057
27,976
17.8%
20.5%
20.3%
When compared to the statutory rate, the effective tax rate for fiscal year 2017 of 22.8% was favorably impacted by a high mix
of earnings in foreign jurisdictions, which have lower statutory rates than the United States, foreign exchange rates on foreign
income taxes, and domestic tax credits. Also favorably impacting the effective tax rate for fiscal year 2017 was the $0.9
million bargain purchase gain from the Aircom acquisition, which is not taxable. The effective tax rate for fiscal year 2016 of
20.3% was favorably impacted by a high mix of earnings in foreign jurisdictions, which have lower statutory rates than the
United States, a foreign income tax benefit of $1.8 million recognized as a result of a favorable tax ruling related to the fiscal
year 2015 capitalization of the Company’s Romania subsidiary, and adjustments for domestic tax credits.
We recorded net income of $34.2 million in fiscal year 2017, or $1.24 per diluted share, an increase of 53% from fiscal year
2016 net income of $22.3 million, or $0.76 per diluted share, due to the reasons previously discussed.
29
Liquidity and Capital Resources
Working capital at June 30, 2018 was $208.4 million compared to working capital of $188.9 million at June 30, 2017. The
current ratio was 1.9 at both June 30, 2018 and June 30, 2017. Our short-term liquidity available, represented as cash and cash
equivalents plus the unused amount of our credit facilities, totaled $108.7 million at June 30, 2018 and $104.8 million at
June 30, 2017.
Cash Conversion Days (“CCD”) are calculated as the sum of Days Sales Outstanding (“DSO”) plus Production Days Supply on
Hand (“PDSOH”) less Accounts Payable Days (“APD”). CCD is a metric used to measure the efficiency of managing working
capital. CCD for the quarter ended June 30, 2018 was 63 days, which increased slightly from 60 days for the quarter ended
June 30, 2017. The following table summarizes our CCD for the quarterly periods indicated.
Three Months Ended
DSO . . . . . . . . . . . . . . .
PDSOH . . . . . . . . . . . .
APD . . . . . . . . . . . . . . .
CCD. . . . . . . . . . . . . . .
June 30,
2018
57
72
66
63
March 31,
2018
58
66
62
62
December 31,
2017
62
66
68
60
September 30,
2017
60
61
62
59
June 30,
2017
62
59
61
60
We define DSO as the average of monthly trade accounts and notes receivable divided by an average day’s net sales, PDSOH
as the average of monthly gross inventory divided by an average day’s cost of sales, and APD as the average of monthly
accounts payable divided by an average day’s cost of sales. Our PDSOH trend has increased during fiscal year 2018 as a result
of the higher inventory balance to support increased open orders and production volumes, the implementation of an inventory
management program for one of our largest customers in the medical market, and additional purchases to help mitigate the
potential impact from component shortages. The higher PDSOH trend was partially offset by improvement in both our DSO
and APD trend during the current fiscal year.
Cash Flows
The following table reflects the major categories of cash flows for the fiscal years ended June 30, 2018, 2017, and 2016.
(Amounts in Millions)
Net cash provided by operating activities . . . . . . . . . . . . . . .
Net cash used for investing activities. . . . . . . . . . . . . . . . . . .
Net cash used for financing activities . . . . . . . . . . . . . . . . . .
$
$
$
Cash Flows from Operating Activities
2018
Year Ended June 30
2017
2016
40.2
(26.2)
(12.6)
$
$
$
46.8
(35.7)
(22.0)
$
$
$
36.8
(42.6)
(4.3)
Net cash provided by operating activities for the fiscal years ended June 30, 2018, 2017, and 2016 was primarily driven by net
income adjusted for non-cash items. Cash provided by operating activities for the fiscal year ended June 30, 2018 included the
adjustment for income tax expense resulting from Tax Reform reflected in Deferred income tax and other deferred charges and
Accrued expenses and taxes payable. Cash provided by operating activities for fiscal year ended June 30, 2017 included $4.0
million of cash proceeds related to the settlement of a class action lawsuit. Changes in working capital used $9.3 million, $14.1
million, and $10.0 million of cash for the fiscal years ended June 30, 2018, 2017, and 2016, respectively.
The $9.3 million usage of cash from changes in working capital balances in fiscal year 2018 was largely due to an increase in
inventory, which used cash of $55.8 million primarily to support increased open orders and production volumes, the
implementation of an inventory management program for one of our largest customers in the medical market, and additional
purchases to help mitigate the potential impact from component shortages. Partially offsetting these usages was an increase in
accounts payable which provided cash of $33.3 million, largely resulting from the increased inventory purchases. In addition,
an increase in accrued expenses and taxes payable provided cash of $11.0 million primarily from the increase in income taxes
payable related to the deemed repatriation tax net of income taxes paid, which was partially offset by a reduction in other
accrued expenses.
30
The $14.1 million usage of cash from changes in working capital balances in fiscal year 2017 was primarily due to fluctuations
in our accounts receivable and inventory. An increase in accounts receivable used cash of $19.3 million which resulted
primarily from increased sales volumes. An increase in inventory used cash of $8.5 million primarily to support increased open
orders and production volumes. Partially offsetting these usages was an increase in accounts payable which provided cash of
$9.5 million largely resulting from inventory purchases to support higher volumes and an increase in accrued expenses which
provided cash of $8.2 million primarily related to taxes payable and accrued compensation.
The $10.0 million usage of cash from changes in working capital balances in fiscal year 2016 was primarily due to fluctuations
in our accounts receivable, inventory, and prepaid expenses and other current assets. An increase in accounts receivable used
cash of $9.2 million which resulted primarily from increased sales volumes. An increase in inventory used cash of $3.5 million
primarily to support increased production volumes. An increase in certain prepaid expenses and other current assets used cash
of $3.7 million primarily due to an increase in taxes refundable. Partially offsetting these usages was an increase in accounts
payable which provided cash of $8.3 million primarily related to the increased inventory purchases.
Cash Flows from Investing Activities
For each period shown in the previous table, net cash used for investing activities primarily represents cash used for capital
investments. During fiscal years 2018, 2017, and 2016, we reinvested $26.5 million, $34.3 million, and $34.6 million,
respectively, into capital investments for the future with the largest expenditures in each period being for manufacturing
equipment.
During fiscal year 2018, the capital expenditures were primarily for capacity purposes and to support new business awards.
During fiscal year 2017, a large amount of our capital expenditures were to support new business awards, capacity purposes,
and for the purchase of the previously leased facility that housed the former Medivative operation. Also during fiscal year
2017, we invested $2.1 million for the Aircom acquisition. During fiscal year 2016, a large amount of our expenditures
included equipment to support new business awards and our greenfield start-up facility in Romania. Also during fiscal year
2016, we invested $8.3 million for the Medivative acquisition. See Note 2 - Acquisitions of Notes to Consolidated Financial
Statements for more information on the acquisitions.
Cash Flows from Financing Activities
Net cash used for financing activities for the fiscal year ended June 30, 2018 resulted from repurchases of our common stock
under an authorized stock repurchase plan, net payments on our revolving credit facilities, and the remittance of tax
withholdings on share-based payments. Net cash used for financing activities for the fiscal year ended June 30, 2017 resulted
from repurchases of our common stock under an authorized stock repurchase plan, payments on our primary credit facility
borrowings, and the remittance of tax withholdings on share-based payments, partially offset by the borrowings on our primary
credit facility for domestic cash needs. During fiscal year 2016, net cash used for financing activities resulted primarily from
repurchases of our common stock under an authorized stock repurchase plan, which was partially offset by net borrowings on
our credit facilities.
Credit Facilities
At June 30, 2018, the Company maintained a U.S. primary credit facility (the “primary facility”), dated as of October 31, 2014
and amended on October 3, 2016, with JPMorgan Chase Bank National Association, as administrative agent, and other lenders
party thereto. The credit facility was scheduled to mature on October 31, 2019 and allowed for $50 million in borrowings, with
an option to increase the amount available for borrowing to $75 million at the Company’s request, subject to participating
banks’ consent.
The proceeds of the revolving credit loans were to be used for general corporate purposes of the Company including potential
acquisitions and stock repurchases. A portion of the credit facility, not to exceed $15 million of the principal amount, was
available for the issuance of letters of credit. A commitment fee on the unused portion of the principal amount of the credit
facility was payable at a rate that ranged from 20.0 to 25.0 basis points per annum as determined by the Company’s ratio of
consolidated total indebtedness to adjusted consolidated EBITDA, as defined in the primary facility. The interest rate on
borrowings was dependent on the type of borrowings.
At June 30, 2018, we had $6.0 million in short-term borrowings under the primary facility and $0.4 million in letters of credit
against the primary credit facility. At June 30, 2017, we had $10.0 million in short-term borrowings under the primary facility
and $0.4 million in letters of credit against the primary credit facility. The short-term borrowings under the primary facility
were used for domestic cash needs, including stock repurchases.
31
The Company’s financial covenants under the primary credit facility required:
•
•
a ratio of consolidated total indebtedness minus unencumbered U.S. cash on hand in the United States in excess of $15
million to adjusted consolidated EBITDA, determined as of the end of each of its fiscal quarters for the then most
recently ended four fiscal quarters, to not be greater than 3.0 to 1.0, and
a fixed charge coverage ratio, determined as of the end of each of its fiscal quarters for the then most recently ended
four fiscal quarters, to not be less than 1.10 to 1.00.
We were in compliance with the financial covenants during the fiscal year ended June 30, 2018. Subsequent to June 30, 2018,
we amended and restated the primary facility. See section titled “Future Liquidity” below for more information on this
amended and restated primary credit facility.
Kimball Electronics utilizes foreign credit facilities to satisfy short-term cash needs at specific foreign locations rather than
funding from intercompany sources. As of June 30, 2018, we maintained a Thailand overdraft credit facility which allows for
borrowings up to 90 million Thai Baht (approximately $2.7 million at June 30, 2018 exchange rates). We had no borrowings
outstanding under this foreign credit facility as of June 30, 2018 or June 30, 2017. As of June 30, 2018, we also maintained a
credit facility for our China operation, which allows for borrowings up to $7.5 million that can be drawn in either U.S. dollars
or China Renminbi. We had no borrowings outstanding under this foreign credit facility as of June 30, 2018 or June 30, 2017.
During fiscal year 2017, we established an uncommitted revolving credit facility for our Netherlands subsidiary, which allows
for borrowings of up to 9.2 million Euro (approximately $10.8 million at June 30, 2018 exchange rates) that can be drawn in
Euro, U.S. dollars, or other optional currency. At June 30, 2018, we had $2.3 million in borrowings under this Netherlands
revolving credit facility, and we had no borrowings outstanding under this foreign credit facility as of June 30, 2017. These
foreign credit facilities can be canceled at any time by either the bank or us.
Factoring Arrangements
The Company may utilize accounts receivable factoring arrangements with third-party financial institutions in order to extend
terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse
provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they
are transferred beyond the reach 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. During the fiscal years ended June 30, 2018 and
2017, we sold, without recourse, $181.5 million and $145.3 million of accounts receivable, respectively. See Note 1 - Business
Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for more
information regarding the factoring arrangements.
Future Liquidity
On July 27, 2018, we amended and restated our existing primary credit facility. The amended and restated primary credit
facility has a maturity date of June 27, 2023; allows for $150 million in borrowings (up from $50 million), with an option to
increase to $225 million (up from $75 million) at the Company’s request, subject to the consent of each lender participating in
such increase; allows a portion of the credit facility (not to exceed $15 million of the principal amount) to be available for the
issuance of letters of credit; offers borrowings in the form of revolving credit loans or swingline loans; and is to be used for
working capital and general corporate purposes including capital expenditures and acquisitions. As with the primary credit
facility entered into on October 31, 2014, under the amended and restated primary credit facility, the interest rate on the
borrowings is dependent on the type of borrowings, we are subject to financial covenants, and a commitment fee is payable on
the unused portion of the principal amount. See Note 19 - Subsequent Events of Notes to Consolidated Financial Statements
for more detail on the amended and restated primary facility.
The availability to borrow under all of our existing credit facilities in USD equivalent as of June 30, 2018 totaled $62.3 million.
We believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability
of borrowing under our credit facilities, including the increased borrowing limit on the amended and restated primary credit
facility, will be sufficient to meet our working capital and other operating needs for at least the next 12 months. We expect to
continue to invest in capital expenditures prudently and make investments that will help us develop beyond the EMS market,
including through acquisitions such as the pending GES acquisition. We intend to fund the pending GES acquisition with
proceeds from the amended and restated primary credit facility, and on August 1, 2018, we borrowed $20.2 million on the
amended and restated primary credit facility to fund a portion of the pending GES acquisition to be held in escrow until
closing. See Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information regarding the pending
GES acquisition.
We are growing our business in Europe through the expansion of our manufacturing capabilities in the region. We completed
the construction of our greenfield facility in Romania in fiscal year 2016 and have begun operations. Capacity at this facility
will continue to ramp up during fiscal year 2019.
32
At June 30, 2018, our capital expenditure commitments were approximately $6 million, consisting primarily of commitments
for capacity purposes in anticipation of future growth, including new program wins, replacement of older machinery and
equipment, and improvements to our facilities. We anticipate our funds on hand and funds provided by operations will be
sufficient to fund these capital expenditures.
At June 30, 2018, our foreign operations held cash totaling $45.3 million. Tax Reform imposed a one-time deemed repatriation
tax on accumulated unremitted foreign earnings of 15.5% for the accumulated unremitted foreign earnings held in foreign cash
and other liquid assets and 8.0% of the residual accumulated unremitted foreign earnings. The Company estimated and
recorded approximately $13.4 million for the deemed repatriation tax, of which approximately $1.0 million of the tax payable
will be paid in the next 12 months with the remaining balance to be paid over an eight-year period. The Company expects to
pay this tax payable with available liquidity. Most of these accumulated unremitted foreign earnings have been invested in
active non-U.S. business operations, and it is not anticipated such earnings will be remitted to the United States. Our intent is
to permanently reinvest these funds outside of the United States. However, if such funds were repatriated, a portion of the
funds remitted may be subject to applicable non-U.S. income and withholding taxes. See Note 9 - Income Taxes of Notes to
Consolidated Financial Statements for additional information on the deemed repatriation tax and Tax Reform.
On October 21, 2015, the Company’s Board of Directors approved a resolution to authorize an 18-month stock repurchase plan
(the “Plan”) to allow the repurchase of up to $20 million of common stock. Then on September 29, 2016, the Board extended
the Plan to allow the repurchase of up to an additional $20 million worth of common stock with no expiration date. On August
23, 2017, the Board increased the Plan to allow the repurchase of up to an additional $20 million worth of common stock with
no expiration date. This latest increase brings the total authorized stock repurchases under the Plan to $60 million. The Plan
may be suspended or discontinued at any time. The extent to which the Company repurchases its shares, and the timing of such
repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate
considerations, as determined by the Company’s management team. The Company expects to finance the purchases with
existing liquidity. The Company has repurchased $44.5 million of common stock under the Plan through June 30, 2018.
Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by
factors such as general economic and market conditions, lack of availability of raw material components in the supply chain, a
decline in demand for our services, loss of key contract customers, unsuccessful integration of acquisitions and new operations,
the ability of Kimball Electronics to generate profits, and other unforeseen circumstances. In particular, should demand for our
customers’ products and, in turn, our services decrease significantly over the next 12 months, the available cash provided by
operations could be adversely impacted.
The preceding statements include forward-looking statements under the Private Securities Litigation Reform Act of 1995.
Certain factors could cause actual results to differ materially from forward-looking statements.
Fair Value
During fiscal year 2018, no level 1 or level 2 financial instruments were affected by a lack of market liquidity. For level 1
financial assets, readily available market pricing was used to value the financial instruments. Our foreign currency derivative
assets and liabilities, which were classified as level 2, were independently valued using observable market inputs such as
forward interest rate yield curves, current spot rates, and time value calculations. To verify the reasonableness of the
independently determined fair values, these derivative fair values were compared to fair values calculated by the counterparty
banks. Our own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency
derivatives. See Note 11 - Fair Value of Notes to Consolidated Financial Statements for more information.
33
Contractual Obligations
The following table summarizes the Company’s contractual obligations as of June 30, 2018.
Payments Due During Fiscal Years Ending June 30
Total
2019
2020-2021
2022-2023 Thereafter
(Amounts in Millions)
Recorded Contractual Obligations: (a)
Long-Term Debt Obligations (b) . . . . . . . . . . . . . . . . . . . . . . . $
Long-Term Income Taxes Payable (c). . . . . . . . . . . . . . . . . . .
Other Long-Term Liabilities Reflected on the Balance
Sheet (d) (e) (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecorded Contractual Obligations:
Operating Leases (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase Obligations (g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
521.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 557.4
8.4
$
13.4
13.0
1.5
8.4
1.0
0.9
0.3
495.1
$ —
$ —
$ —
2.1
2.8
0.4
24.3
2.1
1.2
0.2
1.7
5.2
8.2
8.1
0.6
—
$ 16.9
$ 505.7
$ 29.6
$
(a) As of June 30, 2018, we had no Capital Lease Obligations.
(b) Amounts outstanding on our credit facilities and the accrued interest for these amounts are included on the Long-Term
Debt Obligations line. Refer to Note 6 - Credit Facilities of Notes to Consolidated Financial Statements for more
information regarding our credit facilities. The fiscal year 2019 amount was recorded as a current liability.
(c) U.S. federal income taxes payable for the one-time deemed repatriation tax on certain unremitted earnings of foreign
subsidiaries. The fiscal year 2019 amount includes $1.0 million for short-term income taxes payable on the deemed
repatriation tax recorded as a current liability. Refer to Note 9 - Income Taxes of Notes to Consolidated Financial
Statements for more information regarding the deemed repatriation tax.
(d)
The timing of payments of certain items included on the Other Long-Term Liabilities Reflected on the Balance Sheet
line above is estimated based on the following assumptions:
• The timing of SERP payments is estimated based on an assumed retirement age of 62 with payout based on the
prior distribution elections of participants. The fiscal year 2019 amount includes $0.3 million for SERP payments
recorded as current liabilities.
• The timing of severance plan payments is estimated based on the average remaining service life of employees.
The fiscal year 2019 amount includes $0.4 million for severance payments recorded as a current liability.
• The timing of warranty payments is estimated based on historical data. The fiscal year 2019 amount includes
$0.2 million for short-term warranty payments recorded as a current liability.
(e)
(f)
(g)
Excludes $0.2 million of deferred tax liabilities and long-term unrecognized tax benefits which are not tied to a
contractual obligation and for which we cannot make a reasonably reliable estimate of the period of future payments.
Refer to Note 5 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for more
information regarding Operating Leases and certain Other Long-Term Liabilities.
Purchase Obligations are defined as agreements to purchase goods or services that are enforceable and legally binding
and that specify all significant terms. The amounts listed above for purchase obligations include contractual
commitments for items such as raw materials, supplies, capital expenditures, services, and software acquisitions/license
commitments. Cancellable purchase obligations that we intend to fulfill are also included in the purchase obligations
amount listed. In certain instances, such as when lead times dictate, we enter into contractual agreements for material in
excess of the levels required to fulfill customer orders. Purchase obligations as of June 30, 2018 include the placement
of orders to help mitigate the potential impact related to component shortages, which requires longer lead times. In turn,
material authorization agreements with customers cover a portion of the exposure for material which is purchased prior
to having a firm order.
Off-Balance Sheet Arrangements
In limited circumstances, we receive banker’s acceptance drafts from customers in our China operation. In turn, we may
transfer the acceptance drafts to a supplier 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, and if exercised, the draft would revert
back to our China operation and we would be required to satisfy the obligation with the transferee. At June 30, 2018, the drafts
transferred and outstanding totaled $2.0 million. No transferee has exercised their recourse rights against us.
34
We also have standby letters of credit and operating leases entered into in the normal course of business. These arrangements
do not have a material current effect and are not reasonably likely to have a material future effect on our financial condition,
results of operations, liquidity, capital expenditures, or capital resources.
See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial
Statements for more information on the banker’s acceptance drafts and Note 5 - Commitments and Contingent Liabilities of
Notes to Consolidated Financial Statements for more information on standby letters of credit. We do not have material
exposures to trading activities of non-exchange traded contracts.
Critical Accounting Policies
Kimball Electronics’ Consolidated Financial Statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts
reported and disclosed in the Consolidated Financial Statements and related notes. Actual results could differ from these
estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are
based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable.
Management believes the following critical accounting policies reflect the more significant judgments and estimates used in
preparation of our Consolidated Financial Statements and are the policies that are most critical in the portrayal of our financial
position and results of operations. Management has discussed these critical accounting policies and estimates with the Audit
Committee of the Company’s Board of Directors and with the Company’s independent registered public accounting firm.
Revenue recognition - Kimball Electronics recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have
occurred until the title and the risk of loss passes to the customer according to the terms of the contract. Title and risk of loss
are transferred upon shipment to or receipt at our customers’ locations, or in limited circumstances, as determined by other
specific sales terms of the transaction. Shipping and handling fees billed to customers are recorded as sales while the related
shipping and handling costs are included in cost of sales. We recognize sales net of applicable sales tax.
Taxes - Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which the temporary differences are expected to reverse. In connection with Tax Reform, we remeasured our net deferred tax
assets and recorded provisional adjustments using the new U.S. corporate statutory tax rate of 21% for fiscal years beyond
2018. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future taxable
income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not
likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions
and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment.
Tax Reform required a one-time transition tax, or deemed repatriation tax, on certain unremitted earnings of foreign
subsidiaries. The deemed repatriation tax is based on 15.5% of the accumulated unremitted foreign earnings held in foreign
cash and other liquid assets and 8.0% of the residual accumulated foreign earnings, less a portion of foreign taxes paid which
are creditable for U.S. federal income tax purposes. We have recorded a provisional tax expense for deemed repatriation on our
unremitted foreign earnings. The Company considers the provisional adjustments related to Tax Reform to be reasonable
estimates as of June 30, 2018, and these amounts could be affected by additional information and further analysis. As a result,
these amounts could be adjusted during the measurement period ending December 2018.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve
complex issues, which may require an extended period of time to resolve. However, we believe we have made adequate
provision for income and other taxes for all years that are subject to audit. As tax positions are effectively settled, the tax
provision will be adjusted accordingly. The liability for uncertain income tax and other tax positions, including accrued interest
and penalties on those positions, was $0.2 million at both June 30, 2018 and June 30, 2017.
New Accounting Standards
See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial
Statements for information regarding New Accounting Standards.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Rate Risk: Kimball Electronics operates internationally and thus is subject to potentially adverse movements
in foreign currency rate changes. Our risk management strategy includes the use of derivative financial instruments to hedge
certain foreign currency exposures. Derivatives are used only to manage underlying exposures and are not used in a
speculative manner. Further information on derivative financial instruments is provided in Note 12 - Derivative Instruments of
Notes to Consolidated Financial Statements. We estimate that a hypothetical 10% adverse change in foreign currency exchange
rates from levels at June 30, 2018 and 2017 relative to non-functional currency balances of monetary instruments, to the extent
not hedged by derivative instruments, would not have a material impact on profitability in an annual period.
35
Item 8 - Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of June 30, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for Each of the Three Years in the Period Ended June 30, 2018 . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for Each of the Three Years in the Period Ended June 30, 2018
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended June 30, 2018 . . . . . . . . . .
Consolidated Statements of Share Owners’ Equity for Each of the Three Years in the Period Ended June 30, 2018 . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page No.
37
38
40
41
42
43
44
45
36
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Kimball Electronics, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting and for the preparation and integrity of the accompanying financial statements and other related information
in this report. The consolidated financial statements of the Company and its subsidiaries, including the footnotes, were
prepared in accordance with accounting principles generally accepted in the United States of America and include judgments
and estimates, which in the opinion of management are applied on an appropriately conservative basis. We maintain a system
of internal and disclosure controls intended to provide reasonable assurance that assets are safeguarded from loss or material
misuse, transactions are authorized and recorded properly, and that the accounting records may be relied upon for the
preparation of the financial statements. This system is tested and evaluated regularly for adherence and effectiveness by
employees who work within the internal control processes and by our staff of internal auditors.
The Audit Committee of the Board of Directors, which is comprised of directors who are not employees of the Company, meets
regularly with management, our internal auditors, and the independent registered public accounting firm to review our financial
policies and procedures, our internal control structure, the objectivity of our financial reporting, and the independence of the
independent registered public accounting firm. The internal auditors and the independent registered public accounting firm
have free and direct access to the Audit Committee, and they meet periodically, without management present, to discuss
appropriate matters.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements
and even when determined to be effective, can only provide reasonable assurance with respect to financial statement
preparation and presentation.
These consolidated financial statements are subject to an evaluation of internal control over financial reporting conducted under
the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer.
Based on that evaluation, conducted under the criteria established in Internal Control — Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission, management concluded that our internal control
over financial reporting was effective as of June 30, 2018.
/s/ DONALD D. CHARRON
Donald D. Charron
Chairman of the Board,
Chief Executive Officer
August 28, 2018
/s/ MICHAEL K. SERGESKETTER
Michael K. Sergesketter
Vice President,
Chief Financial Officer
August 28, 2018
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Share Owners of
Kimball Electronics, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kimball Electronics, Inc. and subsidiaries (the “Company”)
as of June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, share owners’ equity, and
cash flows for each of the three years in the period ended June 30, 2018 and the related notes and the schedules listed in the
Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control
over financial reporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America. Also,
in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June
30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion
on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
38
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
August 28, 2018
We have served as the Company’s auditor since 2014.
39
KIMBALL ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share Data)
June 30,
2018
June 30,
2017
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Receivables, net of allowances of $482 and $284, respectively. . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and Equipment, net of accumulated depreciation of $198,672 and $180,028,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Intangible Assets, net of accumulated amortization of $27,276 and $26,392,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
LIABILITIES AND SHARE OWNERS’ EQUITY
Current Liabilities:
Borrowings under credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Liabilities:
Long-term income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
46,428
173,559
201,596
15,405
436,988
137,210
6,191
4,375
23,994
608,758
8,337
187,788
32,446
228,571
12,361
12,299
24,660
44,555
169,785
144,606
29,219
388,165
137,549
6,191
4,581
18,458
554,944
10,000
154,619
34,630
199,249
—
13,423
13,423
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost:
Shares: 2,898,000 and 2,592,000, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Share Owners’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Share Owners’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
304,215
99,374
(6,899)
(41,163)
355,527
608,758
$
—
302,483
82,671
(9,084)
(33,798)
342,272
554,944
See Notes to Consolidated Financial Statements
40
KIMBALL ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling and Administrative Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other General Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Taxes on Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
1,072,061
985,859
86,202
43,854
—
42,348
73
(527)
3,337
(456)
2,427
44,775
28,023
16,752
Year Ended June 30
2017
$
$
$
$
$
930,914
855,319
75,595
36,543
(4,005)
43,057
64
(271)
2,319
(914)
1,198
44,255
10,076
34,179
1.25
1.24
$
$
$
2016
842,060
777,522
64,538
34,816
—
29,722
79
(80)
166
(1,911)
(1,746)
27,976
5,689
22,287
0.77
0.76
Earnings Per Share of Common Stock:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.63
0.62
Average Number of Shares Outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,745
27,007
27,413
27,530
28,916
29,176
See Notes to Consolidated Financial Statements
41
KIMBALL ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Comprehensive Income (Loss):
Year Ended June 30, 2018
Year Ended June 30, 2017
Year Ended June 30, 2016
Pre-tax
Tax
Net of
Tax
$ 16,752
Pre-tax
Tax
Net of
Tax
$ 34,179
Pre-tax
Tax
Net of
Tax
$ 22,287
Foreign currency translation adjustments . . . . $
2,519
$
— $
2,519
$
2,777
$
— $
2,777
$
(540) $
— $
(540)
Postemployment severance actuarial change .
533
Derivative gain (loss) . . . . . . . . . . . . . . . . . . .
(2,669)
(188)
704
345
(1,965)
Reclassification to (earnings) loss:
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . .
1,668
(213)
1,455
Amortization of prior service costs . . . . . . .
Amortization of actuarial change . . . . . . . . .
—
(358)
Other Comprehensive Income (Loss). . . . . . . . . $
1,693
$
—
140
443
—
(218)
285
779
(13)
—
(317)
(107)
(256)
(161)
—
119
178
523
(174)
—
(198)
507
(2,869)
(195)
937
312
(1,932)
3,537
(1,185)
2,352
28
(254)
(10)
101
18
(153)
$
2,136
$
3,511
$
(405) $
3,106
$
409
$
(352) $
57
Total Comprehensive Income. . . . . . . . . . . . . . .
$ 18,888
$ 37,285
$ 22,344
See Notes to Consolidated Financial Statements
42
KIMBALL ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Year Ended June 30
2018
2017
2016
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,752
$
34,179
$
22,287
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,376
23,904
19,869
Gain on sales of assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax and other deferred charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7)
1,213
(638)
5,299
—
—
487
(2,876)
(55,769)
5,092
33,272
10,999
40,200
(33)
(115)
—
3,484
—
(925)
359
(19,267)
(8,549)
(3,976)
9,486
8,207
46,754
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,876)
(33,254)
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for acquisitions, net of cash acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of capitalized software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
261
—
(643)
44
490
(2,138)
(1,018)
211
(145)
1,449
—
3,406
(203)
—
137
(9,192)
(3,513)
(3,713)
8,270
(1,820)
36,832
(33,664)
209
(8,267)
(968)
100
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26,214)
(35,709)
(42,590)
Cash Flows From Financing Activities:
Proceeds from credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on credit facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in revolving credit facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments related to tax withholding for stock-based compensation . . . . . . . . . . . . . . . .
Net cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of Exchange Rate Change on Cash and Cash Equivalents. . . . . . . . . . . . . . . . . . . .
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
(1,542)
—
(9,553)
(1,508)
(12,603)
490
1,873
44,555
4,000
(13,000)
10,000
—
(22,325)
(709)
(22,034)
806
(10,183)
54,738
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
46,428
$
44,555
$
See Notes to Consolidated Financial Statements
12,000
(3,000)
—
203
(12,606)
(897)
(4,300)
(384)
(10,442)
65,180
54,738
43
KIMBALL ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHARE OWNERS’ EQUITY
(Amounts in Thousands, Except for Share Data)
Additional
Paid-In
Capital
Amounts at June 30, 2015 . . . . . . . . . . . . . . . . . $ 298,491
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . .
Issuance of non-restricted stock
(47,000 shares) . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense related to stock
compensation plans . . . . . . . . . . . . . . . . . . . . .
Performance share issuance (258,000 shares).
Repurchase of employee shares for tax
withholding (78,000 shares) . . . . . . . . . . . . . .
Repurchase of Common Stock
(1,179,000 shares) . . . . . . . . . . . . . . . . . . . . . .
(28)
2,915
203
Amounts at June 30, 2016 . . . . . . . . . . . . . . . . . $ 301,581
$
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . .
Issuance of non-restricted stock
(10,000 shares) . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense related to stock
compensation plans . . . . . . . . . . . . . . . . . . . . .
Performance share issuance (136,000 shares).
Repurchase of Common Stock
(1,528,000 shares) . . . . . . . . . . . . . . . . . . . . . .
46
3,246
(2,390)
Amounts at June 30, 2017 . . . . . . . . . . . . . . . . . $ 302,483
$
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . .
Tax Reform impact . . . . . . . . . . . . . . . . . . . . .
Issuance of non-restricted stock
(8,000 shares) . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense related to stock
compensation plans . . . . . . . . . . . . . . . . . . . . .
Performance share issuance (174,000 shares).
Repurchase of Common Stock
(488,000 shares) . . . . . . . . . . . . . . . . . . . . . . .
65
5,138
(3,471)
Retained
Earnings
26,205
$
22,287
Accumulated
Other
Comprehensive
Income (Loss)
$
(12,247)
57
Treasury
Stock
Total Share
Owners’
Equity
$
— $
545
312,449
22,287
57
517
2,915
203
(897)
(897)
$
(12,190)
(13,162)
$ (13,514) $
48,492
34,179
3,106
119
1,502
$
82,671
16,752
(49)
(21,905)
$ (33,798) $
(9,084)
2,136
49
(13,162)
324,369
34,179
3,106
165
3,246
(888)
(21,905)
342,272
16,752
2,136
—
90
155
1,963
5,138
(1,508)
(9,418)
$ (41,163) $
(9,418)
355,527
Amounts at June 30, 2018 . . . . . . . . . . . . . . . . . $ 304,215
$
99,374
$
(6,899)
See Notes to Consolidated Financial Statements
44
KIMBALL ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Business Description and Summary of Significant Accounting Policies
Business Description:
Kimball Electronics, Inc. (also referred to herein as “Kimball Electronics,” the “Company,” “we,” “us,” or “our”) is a global
contract electronic manufacturing services (“EMS”) company that specializes in producing durable electronics for the
automotive, medical, industrial, and public safety markets. We offer a package of value that begins with our core competency
of producing “durable electronics” and includes our set of robust processes and procedures that help us ensure that we deliver
the highest levels of quality, reliability, and service throughout the entire life cycle of our customers’ products. We have been
producing safety critical electronic assemblies for our automotive customers for over 30 years. We also offer diversified
contract manufacturing services for non-electronic components, medical disposables, plastics, and metal fabrication. We are
well recognized by customers and industry trade publications for our excellent quality, reliability, and innovative service.
Kimball Electronics was a wholly owned subsidiary of Kimball International, Inc. (“former Parent” or “Kimball International”)
and on October 31, 2014 became a stand-alone public company upon the completion of a spin-off from former Parent.
Principles of Consolidation:
The Consolidated Financial Statements include the accounts of all domestic and foreign subsidiaries. All significant
intercompany balances and transactions have been eliminated in the consolidation.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts included in
the Consolidated Financial Statements and related note disclosures. While efforts are made to assure estimates used are
reasonably accurate based on management’s knowledge of current events, actual results could differ from those estimates.
Segment Information:
Kimball Electronics has business units located in the United States, China, Mexico, Poland, Romania, and Thailand. Each of
our business units qualifies as an operating segment with its results regularly reviewed by our chief operating decision maker.
Our chief operating decision maker is our Chief Executive Officer. Our business units meet the aggregation criteria under the
current accounting guidance for segment reporting. As of June 30, 2018, all of our business units operated in the EMS industry
with engineering, manufacturing, and supply chain services that provide electronic assemblies and/or components primarily in
automotive, medical, industrial, and public safety applications, all to the specifications and designs of our customers. The
nature of the products, the production process, the type of customers, and the methods used to distribute the products have
similar characteristics. Each of our business units service customers in multiple markets, and many of our customers’ programs
are manufactured and serviced by multiple business units. Our global processes such as component procurement and customer
pricing provide commonality and consistency among the various regions in which we operate. All of our business units have
similar long-term economic characteristics. As such, our business units have been aggregated into one reportable segment.
Revenue Recognition:
Our net sales are principally from the manufacturing of electronic assemblies, medical disposables, and components all built to
customer specifications. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until
the title and the risk of loss passes to the customer according to the terms of the contract. Title and risk of loss are transferred
upon shipment to or receipt at our customers’ locations, or in limited circumstances, as determined by other specific sales terms
of the transaction. Shipping and handling fees billed to customers are recorded as sales while the related shipping and handling
costs are included in cost of sales. We recognize sales net of applicable sales tax. Based on estimated product returns and price
concessions, a reserve for returns and allowances is recorded at the time of the sale, resulting in a reduction of revenue.
Cash and Cash Equivalents:
Cash equivalents consist primarily of highly liquid investments with original maturities of three months or less at the time of
acquisition. Cash and cash equivalents consist of bank accounts and money market funds. Bank accounts are stated at cost,
which approximates fair value, and money market funds are stated at fair value.
45
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.
Our policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable includes analysis of
such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific
analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for
credit losses on the trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable are written
off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Our limited amount of notes receivable
allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual
basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses.
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. During the fiscal years ended June 30, 2018 and
2017, we sold, without recourse, $181.5 million and $145.3 million of accounts receivable, respectively. Factoring fees were
$1.1 million during fiscal year 2018 and were included Selling and Administrative Expense on the Consolidated Statements of
Income. Factoring fees were not material in fiscal years 2017 and 2016.
The Company’s China operation, in limited circumstances, may receive banker’s acceptance drafts from customers as payment
for their trade accounts receivable. The banker’s acceptance drafts are non-interest bearing and primarily mature within six
months from the origination date. The Company has the ability to sell the drafts at a discount or transfer the drafts in settlement
of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $3.8 million and $5.3 million at
June 30, 2018 and 2017, respectively, are reflected in Receivables on the 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 fiscal years 2018 and 2017
were $5.5 million and $8.1 million, respectively. See Note 5 - Commitments and Contingent Liabilities of Notes to
Consolidated Financial Statements for more information on banker’s acceptance drafts.
Inventories:
Inventories are stated at the lower of cost and net realizable value at June 30, 2018 and lower of cost or market value at June 30,
2017. See section entitled “New Accounting Standards” below for more information on the adoption of new accounting
guidance on simplifying the measurement of inventory. Cost includes material, labor, and applicable manufacturing overhead.
Costs associated with underutilization of capacity are expensed as incurred. Inventories are valued using the first-in, first-out
(“FIFO”) method. Inventories are adjusted for excess and obsolete inventory. Evaluation of excess inventory includes such
factors as anticipated usage, inventory turnover, inventory levels, and product demand levels. Factors considered when
evaluating obsolescence include the age of on-hand inventory and reduction in value due to damage, design changes, or
cessation of product lines.
Property, Equipment, and Depreciation:
Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful life
of the assets using the straight-line method for financial reporting purposes. Major maintenance activities and improvements
are capitalized; other maintenance and repairs are expensed. Depreciation and expenses for maintenance and repairs are
included in both Cost of Sales and Selling and Administrative Expense on the Consolidated Statements of Income.
Impairment of Long-Lived Assets:
We perform reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. Impairment is recognized when estimated future cash flows expected to result from
the use of the asset and its eventual disposition are less than its carrying amount. When an impairment is identified, the
carrying amount of the asset is reduced to its estimated fair value. Assets to be disposed of are recorded at the lower of net
book value or fair market value less cost to sell at the date management commits to a plan of disposal. Impairment of long-
lived assets was not material during fiscal years 2018, 2017, and 2016.
46
Goodwill and Other Intangible Assets:
Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair
values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, we may assess
qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount and if it is
necessary to perform the quantitative two-step goodwill impairment test. We also have the option to bypass the qualitative
assessment and proceed directly to performing the first step of the quantitative goodwill impairment test. If the first step is
determined to be necessary, we compare the carrying value of the reporting unit to an estimate of the reporting unit’s fair value
to identify potential impairment. If the estimated fair value of the reporting unit is less than the carrying value, a second step is
performed to determine the amount of potential goodwill impairment. If impaired, goodwill is written down to its estimated
implied fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. The fair value is established
primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The
calculation of the fair value of the reporting units considers current market conditions existing at the assessment date. During
fiscal years 2018, 2017, and 2016, no goodwill impairment was recognized. At both June 30, 2018 and 2017, gross goodwill
was $19.0 million, accumulated impairment was $12.8 million, and goodwill, net was $6.2 million.
In addition to performing the required annual testing, we will continue to monitor circumstances and events in future periods to
determine whether additional goodwill impairment testing is warranted on an interim basis.
Other Intangible Assets reported on the Consolidated Balance Sheets consist of capitalized software and customer relationships.
Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be
recoverable over the remaining lives of the assets.
A summary of other intangible assets subject to amortization is as follows:
June 30, 2018
June 30, 2017
(Amounts in Thousands)
Capitalized Software . . . . . . . . . . . . . $
Customer Relationships . . . . . . . . . . .
Other Intangible Assets . . . . . . . . . $
Cost
30,484
1,167
31,651
Accumulated
Amortization Net Value
4,330
$
45
4,375
26,154
1,122
27,276
$
$
$
Cost
29,806
1,167
30,973
$
$
Accumulated
Amortization Net Value
4,512
$
69
4,581
25,294
1,098
26,392
$
$
$
During fiscal years 2018, 2017, and 2016, amortization expense of other intangible assets was, in thousands, $899, $924, and
$883, respectively. Amortization expense in future periods is expected to be, in thousands, $831, $699, $640, $561, and $548
in the five years ending June 30, 2023, and $1,096 thereafter. The amortization period for the customer relationship intangible
asset is 15 years. The estimated useful life of internal-use software ranges from 3 to 10 years.
Internal-use software is stated at cost less accumulated amortization and is amortized using the straight-line method. During
the software application development stage, capitalized costs include external consulting costs, cost of software licenses, and
internal payroll and payroll-related costs for employees who are directly associated with a software project. Upgrades and
enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously
incapable of performing. Software maintenance, training, data conversion, and business process reengineering costs are
expensed in the period in which they are incurred.
Capitalized customer relationships are amortized on estimated attrition rate of customers. We have no intangible assets with
indefinite useful lives which are not subject to amortization.
Research and Development:
The costs of research and development are expensed as incurred. Research and development costs were approximately, in
millions, $11, $10, and $9 in fiscal years 2018, 2017, and 2016, respectively.
47
Insurance and Self-insurance:
We are self-insured up to certain limits for general liability, workers’ compensation, and certain employee health benefits
including medical, short-term disability, and dental, with the related liabilities included in the accompanying financial
statements. Our policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but
not reported claims, and other analyses, which are based on historical information along with certain assumptions about future
events. Approximately 20% of the workforce is covered under self-insured medical and short-term disability plans. At both
June 30, 2018 and 2017, accrued liabilities for self-insurance exposure were $1.4 million.
We carry external medical and disability insurance coverage for the remainder of our eligible workforce not covered by self-
insured plans. Insurance benefits are not provided to retired employees.
Income Taxes:
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the
temporary differences are expected to reverse. We evaluate the recoverability of 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 Consolidated Statements of Income.
The Company entered into a Tax Matters Agreement with former Parent that governs the Company’s rights and obligations
after the spin-off with respect to tax liabilities and benefits, tax attributes, tax contests, and other tax sharing regarding income
taxes, other tax matters, and related tax returns. The Company will continue to have joint and several liabilities with former
Parent with the IRS and certain U.S. state tax authorities for U.S. federal income and state taxes for the taxable periods in
which the Company was a part of former Parent’s consolidated group. The tax matters agreement specifies the portion, if any,
of this liability for which the Company bears responsibility, and former Parent has agreed to indemnify the Company against
any amounts for which the Company is not responsible. As of June 30, 2018 and 2017, the Company has a receivable from
Kimball International recorded for $0.5 million and $0.6 million, respectively. As of June 30, 2018 and 2017, $0.4 million and
$0.5 million, respectively, of the receivable from Kimball International is a long-term receivable and was recorded in Other
Assets on the Consolidated Balance Sheets, relating to benefits from domestic research and development tax credits.
Concentrations of Credit Risk:
We have business and credit risks concentrated in the automotive, medical, industrial, and public safety industries. The
Company monitors credit quality and associated risks of notes receivable on an individual basis based on criteria such as
financial stability of the party and collection experience in conjunction with general economic and market conditions. At
June 30, 2018 and 2017, amounts outstanding under notes receivables were $0.5 million and $0.7 million, respectively.
48
A summary of significant customers’ net sales and trade receivables as a percentage of consolidated net sales and consolidated
trade receivables is as follows:
At or For the Year Ended
June 30, 2018
At or For the Year Ended
June 30, 2017
Net Sales
15%
13%
13%
*
Trade
Receivables
17%
*
16%
11%
Net Sales
12%
14%
12%
*
Trade
Receivables
17%
*
13%
11%
ZF. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nexteer Automotive. . . . . . . . . . . . . . . . . . . . . . . . . .
Regal Beloit Corporation . . . . . . . . . . . . . . . . . . . . . .
* amount is less than 10% of total
Off-Balance Sheet Risk:
Off-balance sheet arrangements are limited to banker’s acceptance drafts transferred with recourse provisions at the Company’s
China operation, standby letters of credit, and operating leases entered into in the normal course of business as described in
Note 5 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements.
Other General Income:
Other General Income in fiscal year 2017 consisted of $4.0 million resulting from a payment received related to a class action
lawsuit in which Kimball Electronics was a class member. The lawsuit alleged that certain suppliers to the EMS industry
conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to purchasers of
those components. We recorded no Other General Income during fiscal years 2018 and 2016.
Non-operating Income and Expense:
Non-operating income and expense include 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, bank charges, bargain
purchase gain on acquisition, and other miscellaneous non-operating income and expense items that are not directly related to
operations. The gain or loss on SERP investments is offset by a change in the SERP liability that is recognized in Selling and
Administrative Expense.
Foreign Currency Translation:
The Company predominantly uses the U.S. dollar and Euro as its functional currencies. Foreign currency assets and liabilities
are remeasured into functional currencies at end-of-period exchange rates, except for nonmonetary assets and equity, which are
remeasured at historical exchange rates. Revenue and expenses are remeasured at the weighted average exchange rate during
the fiscal year, except for expenses related to nonmonetary assets, which are remeasured at historical exchange rates. Gains and
losses from foreign currency remeasurement are reported in Non-operating income or expense on the Consolidated Statements
of Income.
For business units whose functional currency is other than the U.S. dollar, the translation of functional currency statements to
U.S. dollar statements uses end-of-period exchange rates for assets and liabilities, weighted average exchange rates for revenue
and expenses, and historical rates for equity. The resulting currency translation adjustment is recorded in Accumulated Other
Comprehensive Income (Loss), as a component of Share Owners’ Equity.
Derivative Instruments and Hedging Activities:
Derivative financial instruments are recognized on the balance sheet as assets and liabilities and are measured at fair value.
Changes in the fair value of derivatives are recorded each period in earnings or Accumulated Other Comprehensive Income
(Loss), depending on whether a derivative is designated and effective as part of a hedge transaction, and if it is, the type of
hedge transaction. Hedge accounting is utilized when a derivative is expected to be highly effective upon execution and
continues to be highly effective over the duration of the hedge transaction. Hedge accounting permits gains and losses on
derivative instruments to be deferred in Accumulated Other Comprehensive Income (Loss) and subsequently included in
earnings in the periods in which earnings are affected by the hedged item, or when the derivative is determined to be
ineffective. We use derivatives primarily for forward purchases of foreign currency to manage exposure to the variability of
cash flows, primarily related to the foreign exchange rate risks inherent in forecasted transactions denominated in foreign
currency. Cash receipts and cash payments related to derivative instruments are recorded in the same category as the cash
flows from the items being hedged on the Consolidated Statements of Cash Flows. See Note 12 - Derivative Instruments of
Notes to Consolidated Financial Statements for more information on derivative instruments and hedging activities.
49
Stock-Based Compensation:
As described in Note 8 - Stock Compensation Plans of Notes to Consolidated Financial Statements, the Company maintains the
2014 Stock Option and Incentive Plan, which allows for the issuance of incentive stock options, stock appreciation rights,
restricted shares, unrestricted shares, restricted share units, or performance shares and performance units for grant to officers
and other key employees, and to members of the Board of Directors who are not employees. The Company established in fiscal
year 2017 the Kimball Electronics, Inc. Non-Employee Directors Stock Compensation Deferral Plan (the “Deferral Plan”),
which allows Non-Employee Directors to elect to defer all, or a portion of, their retainer fees in stock. We recognize the cost
resulting from share-based payment transactions using a fair-value-based method. The estimated fair value of outstanding
performance shares is based on the stock price at the date of the grant. Stock-based compensation expense is recognized for the
portion of the award that is ultimately expected to vest. The Company has elected to account for forfeitures by reversing the
compensation costs at the time a forfeiture occurs. See section entitled “New Accounting Standards” below for more
information on the adoption of new accounting guidance on accounting for share-based payment transactions.
New Accounting Standards:
Adopted in fiscal year 2018:
In November 2015, the Financial Accounting Standards Board (“FASB”) issued guidance on the balance sheet classification of
deferred taxes. Under the previous guidance, deferred tax assets and liabilities must be separated into current and noncurrent
amounts in a classified statement of financial position. The new guidance requires deferred tax assets and liabilities be
classified as noncurrent in a classified statement of financial position. The new guidance does not change the requirement that
deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount. We adopted
this standard on a prospective basis in the fourth quarter of fiscal year 2018 to all deferred tax assets and liabilities. The prior
periods were not retrospectively adjusted. The effect was a decrease in Prepaid expenses and other current assets and an
increase in Other Assets of $8.3 million on the Consolidated Balance Sheet as of June 30, 2018. There was no impact on our
consolidated financial position, results of operations, or cash flows.
In July 2015, the FASB issued guidance on Simplifying the Measurement of Inventory. The guidance amends the subsequent
measurement of inventory from the lower of cost or market to the lower of cost and net realizable value. Under the current
guidance, market value could be replacement cost, net realizable value, or net realizable value less an approximately normal
profit margin. Within the scope of the new guidance, an entity should measure inventory at the lower of cost and net realizable
value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs
of completion, disposal, and transportation. We adopted this standard on a prospective basis in the fourth quarter of fiscal year
2018. Prior periods were not retrospectively adjusted. The adoption of this standard did not have a material effect on our
consolidated financial statements.
In February 2018, the FASB issued guidance on accounting for the reclassification of certain tax effects from accumulated
other comprehensive income. The objective of this guidance is to allow a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (“Tax
Reform”) enacted into law on December 22, 2017. If a company elects to reclassify the stranded tax effects, the guidance
offers two acceptable adoption methods: (i) at the beginning of the period, annual or interim, of adoption; or (ii) retrospectively
to each period or periods in which the tax effects of Tax Reform related to items remaining in accumulated other
comprehensive income are recognized. The Company elected to adopt this guidance at the beginning of its third quarter of
fiscal year 2018 and reclassified its stranded tax effects from accumulated other comprehensive income to retained earnings as
of January 1, 2018. The components of the Company’s accumulated other comprehensive income that had stranded tax effects
as a result of the change in the federal corporate tax rate due to Tax Reform were derivative gain (loss) and postemployment
benefits net actuarial gain. Upon adoption of this guidance, a net cumulative-effect adjustment of, in thousands, $49 was
recorded to the Company’s retained earnings as of January 1, 2018. This cumulative-effect adjustment decreased Retained
earnings and decreased Accumulated other comprehensive loss on the Consolidated Balance Sheet. There was no impact to
results of operations or cash flows as a result of the adoption of this guidance.
In March 2016, the FASB issued guidance on accounting for share-based payment transactions. The objective of this guidance
is to simplify certain aspects of the accounting for share-based payment transactions, including the treatment of excess income
tax benefits and deficiencies, allowing an election to account for forfeitures as they occur, and classification of excess tax
benefits on the statement of cash flows. The Company adopted this guidance effective July 1, 2017. There was no impact on
the Company’s financial statements upon the initial adoption as there were no tax benefits that were not previously recognized
because the related tax deduction had not reduced taxes payable, and therefore no cumulative-effect adjustment to the
Company’s beginning retained earnings was required. The Company has elected to reverse the compensation cost of any
forfeited awards at the time they occur and will classify the cash flows related to excess tax benefits for share-based payment
arrangements as cash flows from operating activities on a prospective basis. The new guidance requires prospective application
of the tax effects of differences recognized on or after the effective date between the deduction for an award for tax purposes
50
and the compensation costs of that award recognized for financial reporting purposes. As a result, during fiscal year 2018, the
Company recorded an income tax adjustment related to the excess tax benefit on performance shares granted of $0.6 million in
Provision for Income Taxes on the Consolidated Statements of Income, or $0.02 per diluted share. Due to including the income
tax effects from excess tax benefits in the provision for income taxes, the effects of the excess tax benefits are no longer
included in the calculation of diluted shares outstanding, which generally will result in an increase in the number of diluted
shares outstanding. The Company adopted this change in the method of calculating diluted shares outstanding on a prospective
basis.
Not Yet Adopted:
In March 2017, the FASB issued guidance on improving the presentation of net periodic pension cost and net periodic
postretirement benefit cost. The new guidance changes how employers that sponsor defined benefit pension plans and other
postretirement plans present net periodic benefit costs in the income statement. An employer is required to report the service
cost component in the same line item as other compensation costs arising from services rendered by the affected employees
during the period. Other components of net benefit cost are required to be presented in the income statement separately from
the service cost component and outside of income from operations. The update also allows only the service cost component to
be eligible for capitalization, when applicable. The new guidance will be effective for us in our first quarter of fiscal year 2019.
The amendments in this guidance must be applied retrospectively for the presentation of the service cost component and the
other components of the net benefit cost in the income statement, and prospectively for the capitalization of the service cost
component in assets. We do not expect the adoption of this standard to have a material effect on our consolidated financial
position, results of operations, or cash flows.
In February 2016, the FASB issued guidance on leases. The new guidance requires lessees to recognize assets and liabilities on
the balance sheet for the rights and obligations created by those leases with terms of more than 12 months. Under the current
guidance, only capital leases are recognized on the balance sheet. The new guidance requires additional qualitative and
quantitative disclosures. The new guidance will be effective for our fiscal year 2020 interim and annual financial statements.
Early application is permitted. The guidance is to be adopted using a modified retrospective transition method, with the option
to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. We are
currently evaluating the optional transition method and the impact of the adoption of this guidance on our consolidated
financial statements.
In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The core principle of the
guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration which the company expects to receive in exchange for those goods or services. To
achieve this core principle, the guidance provides a five-step analysis of transactions to determine when and how revenue is
recognized. The guidance addresses several areas including transfer of control, contracts with multiple performance
obligations, and costs to obtain and fulfill contracts. The guidance also requires additional disclosure about the nature, amount,
timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and
changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The guidance is effective for us
as of July 1, 2018, the beginning of our first quarter of fiscal year 2019. Under the guidance there are two acceptable adoption
methods: (i) full retrospective adoption to each prior reporting period presented with the option to elect certain practical
expedients; or (ii) modified retrospective adoption with the cumulative effect of initially applying the guidance recognized at
the date of initial application and providing certain additional disclosures. The Company will adopt this new guidance utilizing
the modified retrospective approach. The Company has completed its preliminary assessment of the new guidance and
anticipates, for the majority of its contracts for manufacturing services, it will change from a point-in-time recognition method
upon transfer of title to recognize revenue earlier using an over-time model based on the progress of completing customer
orders. We expect the adoption of the guidance will have a material effect on the Company’s consolidated balance sheets
primarily from the recognition of contract assets for unbilled receivables and a corresponding reduction in inventories. Upon
adoption, the Company expects to recognize a contract asset for unbilled receivables of approximately $43 million, a reduction
in work-in-process and finished goods inventories of approximately $39 million, and an after-tax adjustment to the beginning
balance of retained earnings in fiscal year 2019 of approximately $3 million. The Company does not expect the new guidance
to materially impact its revenue or results of operations for the periods after adoption, however the Company continues to
assess the full impact of adopting the new guidance on its consolidated financial statements. The Company is also continuing
to modify its accounting policies, financial reporting processes, and relevant internal controls related to adoption of the new
revenue guidance.
51
Note 2 Acquisitions
Pending Acquisition:
On May 11, 2018, the Company entered into a definitive agreement to acquire substantially all of the assets and assume certain
liabilities of GES Holdings, Inc., Global Equipment Services and Manufacturing, Inc., and its subsidiaries (collectively referred
to as “GES”). The Company agreed to pay a total cash purchase price of approximately $50 million plus the assumed
liabilities. The transaction price is subject to certain post-closing working capital adjustments. The acquisition is anticipated to
be funded with the Company’s primary credit facility and is expected to close in early fiscal year 2019, subject to customary
closing conditions, including regulatory requirements and governmental approvals.
Conditions precedent to close include entering into local country purchase agreements for each of Vietnam, China, India, and
Japan, each in a form acceptable to both parties. The Asset Purchase Agreement contains representations, warranties,
indemnification provisions, termination provisions, and other clauses and provisions usual and customary for agreements of
this type.
This acquisition supports the Company’s new platform strategy and plans to continue its development beyond the electronic
manufacturing services (“EMS”) market. GES specializes in production processing and test equipment design, volume
manufacturing, and global services for the semiconductor and electronics product manufacturing industry.
Fiscal Year 2017 Acquisition:
On July 18, 2016, the Company acquired certain assets and assumed certain liabilities of Aircom Manufacturing, Inc.
(“Aircom”), located in Indianapolis, Indiana, for consideration of $3.5 million, which consisted of $2.5 million in cash
payments and the settlement of a $1.0 million receivable. The Aircom acquisition was accounted for as a business combination
and included assets acquired of $6.4 million and liabilities assumed of $1.4 million based on their estimated fair values as of
the acquisition date.
Consideration paid for Aircom was less than the estimated fair values of the assets acquired and liabilities assumed, which
resulted in a bargain purchase gain of $0.9 million and was recorded in Non-operating income on the Consolidated Statements
of Income. The bargain purchase gain resulted from the financial distress of Aircom as they were unable to secure sufficient
capital to continue operations and service their existing debt.
The Aircom acquisition added expertise in the manufacturing of precision metals and plastics to our package of value.
Operating results are included in the Company’s consolidated financial statements beginning from the date of acquisition and
had an immaterial effect on the Company’s consolidated financial results for the fiscal year ended June 30, 2017. Direct
transaction costs of the Aircom acquisition were not material and were expensed as incurred.
Fiscal Year 2016 Acquisition:
On May 2, 2016, the Company acquired certain assets and assumed certain liabilities of Medivative Technologies, LLC,
(“Medivative”) located in Indianapolis, Indiana, a wholly owned subsidiary of privately held Aircom Manufacturing, Inc. The
Medivative acquisition adds capabilities in mechanical design, precision plastics, combination devices, instruments, and
complex system assembly to our package of value. The Medivative acquisition positions us to better serve both existing and
new customers in the medical end market vertical.
The Medivative acquisition was accounted for as a business combination with a total purchase price of $7.3 million, which
included a cash payment of $8.3 million less a working capital adjustment of $1.0 million. Assets acquired were $11.6 million,
which included $3.6 million of tax deductible goodwill, and liabilities assumed were $4.3 million. The allocation of the
purchase price to the assets acquired and liabilities assumed was based on their estimated fair values as of the date of
acquisition. Operating results are included in the Company’s consolidated financial statements beginning from the date of
acquisition and had an immaterial effect on the Company’s consolidated financial results for the fiscal year ended June 30,
2016. Direct transaction costs of the acquisition were not material and were expensed as incurred.
52
Note 3 Inventories
Inventories were valued using the lower of first-in, first-out (“FIFO”) cost and net realizable value at June 30, 2018 and lower
of FIFO cost or market value at June 30, 2017. See Note 1 – Business Description and Summary of Significant Accounting
Policies for information on the adoption of new accounting guidance on simplifying the measurement of inventory. Following
are inventory components at June 30:
(Amounts in Thousands)
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
25,552
17,254
158,790
201,596
Note 4 Property and Equipment
Major classes of property and equipment consist of the following at June 30:
(Amounts in Thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
10,321
71,385
246,758
7,418
335,882
(198,672)
137,210
2017
18,916
15,480
110,210
144,606
2017
9,331
63,996
230,142
14,108
317,577
(180,028)
137,549
$
$
$
$
$
The useful lives used in computing depreciation are based on estimated service lives for classes of property, as follows:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lesser of Useful Life or Term of Lease
Years
3 to 40
3 to 11
Depreciation of property and equipment totaled, in millions, $25.5 for fiscal year 2018, $23.0 for fiscal year 2017, and $19.5
for fiscal year 2016.
53
Note 5 Commitments and Contingent Liabilities
Leases:
Operating leases for land on which certain office and manufacturing facilities reside, a warehouse facility, and certain
equipment, which expire from fiscal year 2020 to 2056, contain provisions under which minimum annual lease payments are,
in millions, $0.3, $0.3, $0.1, $0.1, and $0.1 for the five years ending June 30, 2023, respectively, and aggregate $0.6 million
from fiscal year 2024 to the expiration of the leases in fiscal year 2056. We are obligated under certain real estate leases to
maintain the properties and pay real estate taxes. Certain leases include renewal options and escalation clauses. Total rental
expense amounted to, in millions, $0.7, $0.7, and $0.5 in fiscal years 2018, 2017, and 2016, respectively.
As of June 30, 2018 and 2017, the Company had no capital leases.
Guarantees:
As of June 30, 2018 and 2017, we had no guarantees issued which were contingent on the future performance of another entity.
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 the beneficiary. We had a maximum financial exposure from unused
standby letters of credit totaling $0.4 million as of both June 30, 2018 and 2017. 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 consolidated financial statements.
Accordingly, no liability has been recorded as of June 30, 2018 and 2017 with respect to the standby letters of credit. We also
may enter into commercial letters of credit to facilitate payments to vendors and from customers.
Banker’s Acceptance Drafts:
The Company’s China operation, in limited circumstances, receives banker’s acceptance drafts from customers as settlement
for their trade accounts receivable. We in turn may transfer the acceptance drafts to a supplier of ours in settlement of current
accounts payable. These drafts contain certain recourse provisions afforded to the transferee under laws of The People’s
Republic of China. If a transferee were to exercise its available recourse rights, the draft would revert back to our China
operation and we would be required to satisfy the obligation with the transferee. At June 30, 2018 and 2017, the drafts
transferred and outstanding totaled $2.0 million and $2.1 million, respectively. 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 Consolidated Financial Statements.
Product Warranties:
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 during fiscal years 2018, 2017, and 2016 were as follows:
(Amounts in Thousands)
Product Warranty Liability at the beginning of the year . . . . . . . . . . . . . . . $
Additions to warranty accrual (including changes in estimates). . . . . . . . .
Settlements made (in cash or in kind) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product Warranty Liability at the end of the year . . . . . . . . . . . . . . . . . . . . $
2018
2017
2016
593
346
(283)
656
$
$
605
415
(427)
593
$
$
621
160
(176)
605
54
Note 6 Credit Facilities
Credit facilities consisted of the following:
(Amounts in Millions, in U.S Dollar Equivalents)
Primary credit facility (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Thailand overdraft credit facility (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China revolving credit facility (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Netherlands revolving credit facility (4) . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Availability to
Borrow at
June 30, 2018
43.6
2.7
7.5
8.5
62.3
Borrowings
Outstanding at
June 30, 2018
6.0
$
—
—
2.3
8.3
$
Borrowings
Outstanding at
June 30, 2017
10.0
$
—
—
—
10.0
$
(1) At June 30, 2018, the Company maintained a U.S. primary credit facility (the “primary facility”) dated as of October 31,
2014 and scheduled to mature in October 2019. The primary facility provided for $50 million in borrowings, with an
option to increase the amount available for borrowing to $75 million upon request, subject to participating banks’ consent.
This facility was maintained for acquisitions and general corporate purposes. A commitment fee was payable on the
unused portion of the credit facility which was immaterial to our operating results in fiscal years 2018, 2017, and 2016.
The commitment fee on the unused portion of principal amount of the credit facility was payable 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 included
revolving loans, multi-currency term loans, and swingline loans. The interest rate on borrowings was dependent on the
type of borrowings.
The Company’s financial covenants under the primary credit facility required:
•
•
a ratio of consolidated total indebtedness minus unencumbered U.S. cash on hand in the United States in excess of
$15 million to adjusted consolidated EBITDA, determined as of the end of each of its fiscal quarters for the then
most recently ended four fiscal quarters, to not be greater than 3.0 to 1.0, and
a fixed charge coverage ratio, determined as of the end of each of its fiscal quarters for the then most recently
ended four fiscal quarters, to not be less than 1.10 to 1.00.
The Company had $0.4 million in letters of credit contingently committed against the credit facility at June 30, 2018.
Subsequent to June 30, 2018, the Company amended and restated this primary facility. See Note 19 - Subsequent Events
of Notes to Consolidated Financial Statements for more detail on the amended and restated primary facility.
(2) The Company also maintains a foreign credit facility for its operation in Thailand which allows for borrowings of up to
90.0 million Thai Baht (approximately $2.7 million at June 30, 2018 exchange rates). This credit facility can be terminated
at any time by either the Company or the bank by giving prior written notice of at least 15 days to the other party. Interest
on borrowing under this facility is charged at a rate of interest determined by the bank in accordance with relevant laws and
regulations for charging interest on an overdraft facility.
(3) The Company also maintains a foreign revolving credit facility for its China operation. The China credit facility allows for
borrowings of up to $7.5 million, which borrowings can be made in either Chinese Renminbi (RMB) or U.S. dollars. The
availability of this uncommitted facility is at the sole discretion of the bank and is subject to the availability of funds and
other relevant conditions. The bank may, at its sole discretion, agree to provide the facility on such terms and conditions as
the bank deems appropriate. Further, the availability of the facility is also subject to the determination by the bank of the
borrower’s actual need for such facility. Proceeds from the facility are to be used for general working capital purposes.
Interest on borrowing under this facility is charged at a rate of interest determined by the bank and is dependent on the
denomination of the currency borrowed. The facility matures on May 31, 2019.
(4) The Company established an uncommitted revolving credit facility in fiscal year 2017 for our Netherlands subsidiary. The
Netherlands credit facility allows for borrowings of up to 9.2 million Euro (approximately $10.8 million at June 30, 2018
exchange rates), which borrowings can be made in Euro, U.S. dollars, or other optional currency. The availability of funds
under this facility is at the sole discretion of the bank. Proceeds from the facility are to be used for general corporate
purposes. Interest on borrowing under this facility is charged at a rate of interest dependent on the denomination of the
currency borrowed. The facility matures on June 21, 2019.
The weighted-average interest rate on short-term borrowings outstanding under the credit facilities at June 30, 2018 and
June 30, 2017 were 2.67% and 4.50%, respectively. Cash payments for interest on borrowings in fiscal years 2018, 2017, and
2016 were, in thousands, $410, $294, and $44, respectively. Capitalized interest expense was immaterial during fiscal years
2018, 2017, and 2016.
55
Note 7 Employee Benefit Plans
Retirement Plans:
The Company maintains a trusteed defined contribution retirement plan which is in effect for substantially all domestic
employees meeting the eligibility requirements. The Company also maintains a supplemental employee retirement plan
(“SERP”) for executives and other key employees which enables them to defer cash compensation on a pre-tax basis in excess
of IRS limitations. The SERP is structured as a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor
claims in the event of bankruptcy.
The discretionary employer contribution for domestic employees is determined annually by the Compensation and Governance
Committee of the Company’s Board of Directors. Total expense related to employer contributions to the domestic retirement
plans was, in millions, $2.0, $1.7, and $1.4 for fiscal years 2018, 2017, and 2016, respectively.
Employees of certain foreign subsidiaries are covered by local pension or retirement plans. Total expense related to these
foreign plans was, in millions, $0.4, $0.2, and $0.3 for fiscal years 2018, 2017, and 2016, respectively.
Severance Plans:
The Company established and maintains severance plans for all domestic employees. These plans provide severance benefits
to eligible employees meeting the plans’ qualifications, primarily involuntary termination without cause. There are no statutory
requirements for the Company to contribute to the plans, nor do employees contribute to the plans. The plans hold no assets.
Benefits are paid using available cash on hand when eligible employees meet plan qualifications for payment. Benefits are
based upon an employee’s years of service and accumulate up to certain limits specified in the plans and include both salary
and an allowance for medical benefits.
The components and changes in the Benefit Obligation, Accumulated Other Comprehensive Income (Loss), and Net Periodic
Benefit Cost, for the domestic severance plans, are as follows:
(Amounts in Thousands)
Changes and Components of Benefit Obligation:
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial gain for the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Balance in current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Balance in noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total benefit obligation recognized in the Consolidated Balance Sheets . . . . . . . . . . $
June 30
2018
2017
1,808
$
1,805
364
49
(533)
(30)
1,658
353
1,305
1,658
$
$
$
302
39
(285)
(53)
1,808
385
1,423
1,808
June 30
(Amounts in Thousands)
Changes and Components in Accumulated Other Comprehensive Income (Loss) (before tax):
2018
2017
Accumulated Other Comprehensive Income (Loss) at beginning of year . . . . . . . . . . . . . . $
Net change in unrecognized actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(929) $
(175)
Accumulated Other Comprehensive Income (Loss) at end of year. . . . . . . . . . . . . . . . . $ (1,104) $
(961)
32
(929)
56
(Amounts in Thousands)
Components of Net Periodic Benefit Cost (before tax):
Service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost recognized in the Consolidated Statements of Income . . . . . . $
Year Ended June 30
2018
2017
2016
364
$
302
$
49
—
(358)
55
$
39
—
(317)
24
$
328
50
28
(254)
152
The benefit cost in the above table includes only normal recurring levels of severance activity, as estimated using an actuarial
method. Unusual or non-recurring severance actions are not estimable using actuarial methods and are expensed in accordance
with other applicable U.S. GAAP.
Prior service cost was amortized on a straight-line basis over the average remaining service period of employees that were
active at the time of the plan initiation, and actuarial (gain) loss is amortized on a straight-line basis over the average remaining
service period of employees expected to receive benefits under the plan.
The estimated actuarial net (gain) loss for the severance plans that will be amortized from accumulated other comprehensive
income (loss) into net periodic benefit cost over the next fiscal year is $(400) thousand. No prior service cost remains to be
amortized for next fiscal year.
Assumptions used to determine fiscal year end benefit obligations for both fiscal year 2018 and 2017 included a discount rate
of 2.8% and a compensation growth rate of 3.0%. Weighted average assumptions used to determine fiscal year net periodic
benefit costs included a discount rate of 2.8%, 2.4%, and 2.7% for fiscal years 2018, 2017, 2016, respectively, and a
compensation growth rate of 3.0% for each of the fiscal years 2018, 2017, and 2016.
Note 8 Stock Compensation Plans
A stock compensation plan was created and adopted by the Company’s Board of Directors (the “Board”) on October 3, 2014.
The Kimball Electronics, Inc. 2014 Stock Option and Incentive Plan (the “Plan”) 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.
Prior to the spin-off, former Parent maintained stock compensation plans in which our executives and certain key employees
participated. All awards granted under the former Parent plans were based on former Parent’s Common Stock. Performance
share awards issued and outstanding to Kimball Electronics employees under the former Parent plans as of the spin-off date
were amended, in accordance with the terms of the plans, to provide an equitable adjustment as a result of the spin-off.
On October 20, 2016, the Board approved 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 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.
Pre-tax stock compensation charged against income in fiscal years 2018, 2017, and 2016 was $5.3 million, $3.5 million, and
$3.4 million, respectively. These costs are included in Selling and Administrative Expenses.
Performance Shares:
The Company awards performance shares to officers and other key employees. Under these awards granted prior to fiscal year
2016, a number of shares will be issued to each participant based upon the attainment of the applicable bonus percentage
calculated under the Company’s profit sharing incentive bonus plan as applied to a total potential share award made and
approved by the Compensation and Governance Committee of the Board. Under these awards granted in and subsequent to
fiscal year 2016, a number of shares will be issued to each participant based upon a combination of the bonus percentage
attainment component above, 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.
57
Performance shares are vested when shares of the Company’s Common Stock are issued shortly after the end of the fiscal year
in which the performance measurement period is complete. Certain outstanding performance shares are applicable to
performance measurement periods in future fiscal years and will be measured at fair value when the performance targets are
established in future fiscal years. The contractual life of performance shares ranges from one year to five years. If a participant
is not employed on the date shares are issued, the performance share award is forfeited, except in the case of death, retirement
at age 62 or older, total permanent disability, or certain other circumstances described in the Plan.
On December 2, 2014, Performance Share Awards issued and outstanding to Kimball Electronics employees under the former
Parent plans were amended, in accordance with the terms of the plans, to provide an equitable adjustment as a result of the
spin-off. The awards have been or will be granted in shares of the Company’s Common Stock, instead of Kimball
International, Inc. shares, under the Kimball Electronics Plan. The amended awards retained the same terms and conditions,
vesting schedule, issuance dates, and expiration dates of the original Kimball International awards.
A summary of the Company’s performance share activity during fiscal year 2018 is presented below:
Number
of Shares
Weighted Average
Grant Date
Fair Value
Performance shares outstanding at July 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance shares outstanding at June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
603,114
209,821
(255,757)
(750)
556,428
$
$
$
$
$
11.46
18.30
11.30
12.07
14.11
As of June 30, 2018, there was approximately $4.6 million of unrecognized compensation cost related to performance shares,
based on the latest estimated attainment of performance goals. That cost is expected to be recognized over annual performance
periods ending August 2018 through August 2020, with a weighted average vesting period of nine months. The fair value of
performance shares is based on the stock price at the date of grant. During fiscal years 2018, 2017, and 2016, respectively,
255,757, 194,624, and 279,923 performance shares vested at a fair value of $2.9 million, $2.0 million, and 2.7 million. The
performance shares vested represent the total number of shares vested prior to the reduction of shares withheld to satisfy tax
withholding obligations. The number of shares presented in the above table, the amounts of unrecognized compensation, and
the weighted average period include performance shares awarded that are applicable to future performance measurement
periods and will be measured at fair value when the performance targets are established in future fiscal years.
Unrestricted Share Grants:
Unrestricted shares may be granted to employees and members of the Board as consideration for services rendered.
Unrestricted share grants do not have vesting periods, holding periods, restrictions on sale, or other restrictions. The fair value
of unrestricted shares is based on the stock price at the date of the award. During fiscal years 2018, 2017, and 2016,
respectively, the Company granted a total of 7,694, 10,477, and 47,262 unrestricted shares at an average grant date fair value of
$20.15, $15.75, and $10.94 for a total fair value of $0.2 million, $0.2 million, and $0.5 million. Unrestricted shares were
awarded to non-employee members of the Board as compensation for director’s fees, including directors’ elections to receive
unrestricted shares in lieu of cash payment. Director’s fees are expensed over the period that directors earn the compensation.
Deferred Share Units:
Deferred share units may be granted to non-employee members of the Board under the Deferral Plan as compensation for the
portion of their annual retainer fees resulting from their election to receive deferred share units in lieu of cash payment or
unrestricted shares. Director’s fees are expensed over the period that directors earn the compensation. Deferred share units are
participating securities and are payable in common stock upon a director’s retirement or termination from the Board or death.
During fiscal years 2018 and 2017, respectively, 12,159 and 19,207 deferred share units were granted to non-employee
members of the Board at an average grant date fair value of $20.15 and $15.79 for a total fair value of $0.2 million and $0.3
million.
Note 9 Income Taxes
The U.S. Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law on December 22, 2017. Tax Reform makes broad and
complex changes to the U.S. tax code, for which complete guidance may have not yet been issued. Tax Reform affected our
fiscal year ended June 30, 2018, including, but not limited to, (i) reducing the U.S. corporate statutory tax rate, (ii) requiring a
58
one-time transition tax on certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period, (iii)
eliminating U.S. federal income taxes on dividends from foreign subsidiaries, and (iv) bonus depreciation that will allow for
full expensing of qualifying property. Tax Reform reduces the U.S. corporate statutory tax rate from 35% to 21%. For our
fiscal year ended June 30, 2018, we had a blended corporate tax rate of 28.1%, which was based on the applicable tax rates
before and after Tax Reform and the number of days in the fiscal year.
The Company made reasonable estimates of certain effects and, therefore, recorded provisional adjustments including the
revaluation of its net deferred tax assets at the new applicable rates and the one-time deemed repatriation tax on accumulated
unremitted foreign earnings. Approximately $4.4 million of additional tax expense was recorded for fiscal year 2018 for the
revaluation of the net deferred tax assets. The Company also recorded during fiscal year 2018 approximately $13.4 million of
tax expense for the deemed repatriation tax, of which $12.4 million of the tax payable was recorded in Long-term income taxes
payable on the Consolidated Balance Sheet. The one-time deemed repatriation tax is based on 15.5% of the accumulated
unremitted foreign earnings held in foreign cash and other liquid assets and 8.0% of the residual accumulated unremitted
foreign earnings, less a portion of foreign taxes paid which are creditable for U.S. federal income tax purposes. Both the
revaluation of the net deferred tax assets and the deemed repatriation tax were recognized in Provision for Income Taxes on the
Consolidated Statement of Income for fiscal year 2018. The Company considers these provisional recorded amounts to be
reasonable estimates as of June 30, 2018, and these amounts could be affected by additional information and further analysis
related to Tax Reform. As a result, these amounts could be adjusted during the measurement period ending December 2018.
Tax Reform also subjects U.S. corporations to tax on Global Intangible Low-Taxed Income (“GILTI”), which imposes tax on
foreign earnings in excess of a deemed return on tangible assets. Due to the complexity of the new GILTI tax rules, the
Company is continuing to evaluate this provision for which no provisional amounts have been recorded in the Company’s
Consolidated Financial Statements. An accounting policy election can be made to either record deferred taxes related to GILTI
or to record the related taxes in the period in which they occur. The Company has not yet elected an accounting policy related
to GILTI and will only do so after completion of further evaluation and analysis. The provisions related to GILTI are subject to
adjustment during the measurement period ending December 2018.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The components of the deferred tax assets and liabilities as of June 30, 2018 and 2017, were as follows:
(Amounts in Thousands)
Deferred Tax Assets:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net foreign currency losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred Tax Liabilities:
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net foreign currency gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
158
$
1,153
194
6,496
830
1,251
655
2,376
—
—
2,394
(638)
14,869
565
12
300
877
$
$
$
$
$
112
1,792
190
8,226
727
749
1,421
1,597
75
1,774
1,387
—
18,050
—
—
1,962
1,962
16,088
Net Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
13,992
59
Income tax benefits associated with the net operating loss carryforwards expire from fiscal year 2023 to 2038. Income tax
benefits associated with tax credit carryforwards primarily expire from fiscal year 2020 to 2027. A valuation allowance was
provided as of June 30, 2018 for deferred tax assets related to certain state credits of, in thousands, $638 that we currently
believe are more likely than not to remain unrealized in the future.
The components of income before taxes on income are as follows:
(Amounts in Thousands)
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income before taxes on income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended June 30
2017
2018
2016
5,609
39,166
44,775
$
$
10,051
34,204
44,255
$
$
1,919
26,057
27,976
Tax Reform affected our fiscal year ended June 30, 2018, including, but not limited to, (i) requiring a one-time transition tax on
certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period, and (ii) eliminating U.S. federal
income taxes on dividends from foreign subsidiaries. The aggregate unremitted earnings of the Company’s foreign subsidiaries
was approximately $224 million as of June 30, 2018. Most of these accumulated unremitted foreign earnings have been
invested in active non-U.S. business operations, and it is not anticipated such earnings will be remitted to the United States.
Our intent is to permanently reinvest these funds outside of the United States. However, if such funds were repatriated, a
portion of the funds remitted may be subject to applicable non-U.S. income and withholding taxes.
The provision for income taxes is composed of the following items:
(Amounts in Thousands)
Current Taxes:
Year Ended June 30
2017
2018
2016
2,696
8,130
134
10,960
$
$
$
6
(631)
(259)
—
(884) $
$
10,076
280
5,848
50
6,178
153
(501)
(141)
—
(489)
5,689
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,132
11,982
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
459
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,573
Deferred Taxes:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance. . . . . . . . . . . . . . . . . . . . . . .
5,015
(2,427)
(776)
638
2,450
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total provision for income taxes. . . . . . . . . . . . $ 28,023
$
$
$
$
$
60
A reconciliation of the statutory U.S. income tax rate to the Company’s effective income tax rate follows:
2018
Year Ended June 30
2017
2016
(408)
(1,615)
Amount
(Amounts in Thousands)
Tax computed at U.S. federal statutory rate. . . . . . $ 12,582
State income taxes, net of federal income tax
benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax rate differential . . . . . . . . . . . . . . . . . .
Impact of foreign exchange rates on foreign
income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign subsidiary capitalization . . . . . . . . . . . . . .
Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . .
Research credit. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deemed repatriation. . . . . . . . . . . . . . . . . . . . . . . .
Revaluation of net deferred tax assets . . . . . . . . . .
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
180
—
638
(378)
13,436
4,357
(769)
Total provision for income taxes. . . . . . . . . . . . $ 28,023
%
Amount
28.1% $ 15,489
%
35.0% $
Amount
9,791
(0.9)
(3.6)
(81)
(3,832)
(0.2)
(8.7)
(613)
0.4
—
—
—
1.4
(348)
(0.8)
—
30.0
—
9.7
(1.7)
(539)
62.6% $ 10,076
(1.4)
—
—
(0.8)
—
—
(1.1)
22.8% $
(59)
(2,998)
1,026
(1,801)
—
(320)
—
—
50
5,689
%
35.0%
(0.2)
(10.7)
3.7
(6.4)
—
(1.2)
—
—
0.1
20.3%
During the year ended June 30, 2016, we recognized a foreign tax benefit, in thousands, of $1,801 as a result of a favorable tax
ruling related to the fiscal year 2015 capitalization of our Romania subsidiary.
Net cash payments for income taxes were, in thousands, $14,724, $5,896 and $8,975 in fiscal years 2018, 2017, and 2016,
respectively.
Changes in the unrecognized tax benefit, excluding accrued interest and penalties, during fiscal years 2018, 2017, and 2016
were as follows:
(Amounts in Thousands)
Beginning balance - July 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tax positions related to prior fiscal years:
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax positions related to current fiscal year:
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapses in statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance - June 30. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Portion that, if recognized, would reduce tax expense and effective tax rate . . . . . . . . . . $
2018
2017
2016
102
$
46
$
78
(20)
—
—
—
—
160
137
$
$
56
—
—
—
—
—
102
85
$
$
—
46
—
—
—
—
—
46
37
We do not expect the change in the amount of unrecognized tax benefits in the next 12 months to have a significant impact on
our results of operations or financial position. We recognize interest and penalties related to unrecognized tax benefits in
Provision for Income Taxes on the Consolidated Statements of Income.
Interest and penalties accrued for unrecognized tax benefits as of June 30, 2018, 2017, and 2016 and expenses related to
interest and penalties in fiscal years 2018, 2017, and 2016 were not material.
In connection with the spin-off, the Company entered into a Tax Matters Agreement with former Parent that governs the
Company’s rights and obligations after the spin-off with respect to tax liabilities and benefits, tax attributes, tax contests, and
other tax sharing regarding income taxes, other tax matters, and related tax returns. The Company will continue to have joint
and several liabilities with former Parent with the IRS and certain U.S. state tax authorities for U.S. federal income and state
taxes for the taxable periods in which the Company was a part of former Parent’s consolidated group. For additional
information, see Note 1 – Business Description and Summary of Significant Accounting Policies of Notes to Consolidated
Financial Statements. The Company, former Parent, or one of our wholly-owned subsidiaries files U.S. federal income tax
returns and income tax returns in various state, local, and foreign jurisdictions. Former Parent is no longer subject to any
significant U.S. federal tax examinations by tax authorities for years before fiscal year 2015. We or former Parent are subject
to various state and local income tax examinations by tax authorities for years after June 30, 2014 and various foreign
jurisdictions for years after June 30, 2013.
61
Note 10 Share Owners’ Equity
On October 21, 2015, the Company’s Board of Directors (the “Board”) authorized an 18-month stock repurchase plan (the
“Plan”) allowing a repurchase of up to $20 million worth of common stock. On September 29, 2016, the Board extended the
Plan to allow the repurchase of up to an additional $20 million worth of common stock with no expiration date. On August 23,
2017, the Board increased the Plan to allow the repurchase of up to an additional $20 million worth of common stock with no
expiration date. This latest increase brings the total authorized stock repurchases under the Plan to $60 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 Plan may be suspended
or discontinued at any time.
During fiscal year 2018, the Company repurchased $9.4 million of common stock under the Plan at an average price of $19.29
per share, which was recorded as Treasury stock, at cost in the Consolidated Balance Sheet. Since the inception of the Plan, the
Company has repurchased $44.5 million of common stock under that Plan at an average cost of $13.92 per share.
During fiscal year 2016, the Company acquired an additional 78,000 shares of its common stock, recorded as Treasury stock, at
cost. These shares were not acquired in open market purchases as part of the Plan but were acquired in connection with
automatically withholding shares from employees upon the vesting of performance share awards to satisfy minimum statutory
withholding tax obligations.
Note 11 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.
Our policy is to recognize transfers between these levels as of the end of each quarterly reporting period. There were no
transfers between these levels during fiscal years 2018 and 2017. There were also no changes in the inputs or valuation
techniques used to measure fair values during fiscal year 2018.
Financial Instruments Recognized at Fair Value:
The following methods and assumptions were used to measure fair value:
Financial Instrument
Cash Equivalents
Derivative Assets: Foreign exchange
contracts
Trading securities: Mutual funds held in
SERP
Derivative Liabilities: Foreign exchange
contracts
Level
1
Valuation Technique/Inputs Used
Market - Quoted market prices
2
1
2
Market - Based on observable market inputs using standard
calculations, such as time value, forward interest rate yield curves,
and current spot rates, considering counterparty credit risk
Market - Quoted market prices
Market - Based on observable market inputs using standard
calculations, such as time value, forward interest rate yield curves,
and current spot rates adjusted for Kimball Electronics’ non-
performance risk
62
Recurring Fair Value Measurements:
As of June 30, 2018 and 2017, 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:
(Amounts in Thousands)
Assets
June 30, 2018
Level 2
Total
Level 1
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Derivatives: foreign exchange contracts. . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities: mutual funds held in nonqualified SERP. . . . . . . . . .
Total assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,099
—
8,769
9,868
$
$
Liabilities
Derivatives: foreign exchange contracts. . . . . . . . . . . . . . . . . . . . . . . . . . $
Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
1,867
1,867
— $
1,713
—
1,713
1,099
1,713
8,769
11,581
1,867
1,867
$
$
$
(Amounts in Thousands)
Assets
June 30, 2017
Level 2
Total
Level 1
Cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Derivatives: foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities: mutual funds held in nonqualified SERP. . . . . . . . .
1,087
$
— $
—
7,607
1,810
—
Total assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,694
$
1,810
Liabilities
Derivatives: foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . $
Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
2,928
2,928
$
$
$
1,087
1,810
7,607
10,504
2,928
2,928
We had no Level 3 assets or liabilities during fiscal years 2018 and 2017.
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 13 - Investments of Notes to Consolidated Financial
Statements for further information regarding the SERP.
Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Consolidated Balance Sheets at fair value that have carrying amounts which
approximate fair value include the following:
Financial Instrument
Notes receivable
Borrowings under credit facilities
Level
2
Valuation Technique/Inputs Used
Market - Price approximated based on the assumed collection of
receivables in the normal course of business, taking into account
non-performance risk
2
Market - Based on observable market rates, taking into account
Kimball Electronics’ non-performance risk
The carrying values of our cash deposit accounts, trade accounts receivable, and trade accounts payable approximate fair value
due to their relatively short maturity and immaterial non-performance risk.
63
Note 12 Derivative Instruments
Foreign Exchange Contracts:
We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our
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 June 30, 2018, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate
notional amount of $29.9 million and to hedge currencies against the Euro in the aggregate notional amount of 75.6 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 effective
portions of the gain or loss on the derivative instrument are initially recorded net of related tax effect in Accumulated Other
Comprehensive Income (Loss), a component of Share Owners’ Equity, and are subsequently reclassified into earnings in the
period or periods during which the hedged transaction is recognized in earnings. The ineffective portion of the derivative gain
or loss is reported in Non-operating income or expense on the Consolidated Statements of Income immediately. 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 in Non-operating income or expense on the Consolidated Statements of Income
immediately.
Based on fair values as of June 30, 2018, we estimate that approximately $1.4 million of pre-tax derivative loss deferred in
Accumulated Other Comprehensive Income (Loss) will be reclassified into earnings, along with the earnings effects of related
forecasted transactions, within the fiscal year ending June 30, 2019. Losses on foreign exchange contracts are generally offset
by gains in operating costs 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 June 30, 2018 and June 30, 2017.
See Note 11 - Fair Value of Notes to Consolidated Financial Statements for further information regarding the fair value of
derivative assets and liabilities and Note 17 - Accumulated Other Comprehensive Income (Loss) of Notes to Consolidated
Financial Statements for the amount and changes in derivative gains and losses deferred in Accumulated Other Comprehensive
Income (Loss).
64
Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and
losses in the Consolidated Statements of Income are presented below.
Fair Values of Derivative Instruments on the Consolidated Balance Sheets
Asset Derivatives
Liability Derivatives
(Amounts in Thousands)
Balance Sheet Location
Derivatives Designated as Hedging Instruments:
Foreign exchange contracts. . .
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . . . . . . . . . . .
$
Fair Value As of
Fair Value As of
June 30
2018
June 30
2017
Balance Sheet
Location
June 30
2018
June 30
2017
758
$ 1,810 Accrued expenses . .
$
1,857
$ 2,009
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts. . .
Total derivatives . . . . . . . . . . . .
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . . . . . . . . . . .
955
— Accrued expenses . .
10
919
$
1,713
$ 1,810
$
1,867
$ 2,928
The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
(Amounts in Thousands)
2018
June 30
2017
2016
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives (Effective Portion):
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(2,669) $
779
$
(2,869)
The Effect of Derivative Instruments on Consolidated Statements of Income
(Amounts in Thousands)
Year Ended June 30
Derivatives in Cash Flow Hedging Relationships
Location of Gain or (Loss)
2018
2017
2016
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion):
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Sales . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-operating income (expense) . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(1,648) $
(11)
(1,659) $
18
(5)
13
$
$
(3,535)
(1)
(3,536)
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income (Ineffective Portion):
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-operating income (expense) . . . . . .
$
(9) $
— $
(1)
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) . . . . . .
Total Derivative Pre-Tax Gain (Loss) Recognized in Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
796
$
(42) $
381
(872) $
(29) $
(3,156)
65
Note 13 Investments
Supplemental Employee Retirement Plan 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. We recognize 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 change in net
unrealized holding gains (losses) for the fiscal years ended June 30, 2018, 2017, and 2016 was, in thousands, $552, $789, and
$(321), respectively.
SERP asset and liability balances applicable to Kimball Electronics participants were as follows:
(Amounts in Thousands)
SERP investments - current asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
SERP investments - other long-term asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total SERP investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
SERP obligation - current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
SERP obligation - other long-term liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total SERP obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Note 14 Accrued Expenses
Accrued expenses consisted of:
(Amounts in Thousands)
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
June 30
2018
2017
294
8,475
8,769
294
8,475
8,769
$
$
$
$
258
7,349
7,607
258
7,349
7,607
June 30
2018
2017
2,803
18,008
1,867
1,791
1,375
6,602
32,446
$
$
6,412
16,670
2,928
1,506
1,426
5,688
34,630
66
Note 15 Geographic Information
The following geographic area data includes net sales based on the destination of the product shipped and long-lived assets
based on physical location. Long-lived assets include property and equipment and other long-term assets such as software.
(Amounts in Thousands)
Net Sales:
At or For the Year Ended June 30
2017
2018
2016
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-Lived Assets:
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
448,785
160,175
117,327
345,774
1,072,061
66,660
33,629
14,546
19,394
7,311
141,540
$
$
$
$
403,830
152,817
94,726
279,541
930,914
67,817
32,315
17,106
16,468
8,355
142,061
$
$
$
$
383,678
150,080
76,499
231,803
842,060
53,596
34,588
15,922
12,249
8,839
125,194
Note 16 Earnings Per Share
Basic and diluted earnings per share were calculated as follows under the two-class method:
(Amounts in thousands, except per share data)
Year Ended June 30
2018
2017
2016
Basic and Diluted Earnings Per Share:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Net Income allocated to participating securities . . . . . . . . . . . . . . . . .
Net Income allocated to common Share Owners. . . . . . . . . . . . . . . . . . . . . $
16,752
9
16,743
$
$
34,179
15
34,164
$
$
22,287
—
22,287
Basic weighted average common shares outstanding. . . . . . . . . . . . . . . . . .
Dilutive effect of average outstanding performance shares . . . . . . . . . . . . .
Dilutive effect of average outstanding deferred stock units . . . . . . . . . . . . .
Dilutive weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . .
26,745
27,413
28,916
255
7
110
7
260
—
27,007
27,530
29,176
Earnings Per Share of Common Stock:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.63
0.62
$
$
1.25
1.24
$
$
0.77
0.76
67
Note 17 Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as
follows:
(Amounts in Thousands)
Balance at June 30, 2016 . . . . . . . . . . . . . . $
Other comprehensive income (loss)
before reclassifications . . . . . . . . . . . . . . .
Reclassification to (earnings) loss . . . . . . .
Net current-period other comprehensive
income (loss) . . . . . . . . . . . . . . . . . . . . . . . $
Balance at June 30, 2017 . . . . . . . . . . . . . . $
Other comprehensive income (loss)
before reclassifications . . . . . . . . . . . . . . .
Reclassification to (earnings) loss . . . . . . .
Net current-period other comprehensive
income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Tax Reform impact (1) . . . . . . . . . . . . . . . .
Balance at June 30, 2018 . . . . . . . . . . . . . . $
Foreign
Currency
Translation
Adjustments
Derivative Gain
(Loss)
Postemployment
Benefits
Net Actuarial
Gain (Loss)
Accumulated
Other
Comprehensive
Income (Loss)
(9,653) $
(3,137) $
600
$
(12,190)
2,777
—
523
(174)
2,777
$
(6,876) $
$
349
(2,788) $
2,519
—
2,519
—
(4,357) $
(1,965)
1,455
(510)
(81)
(3,379) $
178
(198)
(20) $
$
580
345
(218)
127
130
837
$
3,478
(372)
3,106
(9,084)
899
1,237
2,136
49
(6,899)
(1) During fiscal year 2018, the Company adopted a new accounting standard on accounting for the reclassification of certain tax effects from
accumulated other comprehensive income related to Tax Reform. See Note 1 – Business Description and Summary of Significant Accounting
Policies of Notes to Consolidated Financial Statements for further information on the adoption of new accounting standards and Tax Reform.
The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Consolidated
Statements of Income:
Reclassifications from Accumulated
Other Comprehensive Income (Loss)
(Amounts in Thousands)
Derivative Gain (Loss) (1)
Postemployment Benefits:
Amortization of Actuarial Gain (Loss) (2)
Total Reclassifications for the Period
Year Ended June 30
2018
2017
Affected Line Item in the
Consolidated Statements of Income
(1,648) $
(20)
213
(1,455) $
200
158
(140)
218
$
$
18 Cost of Sales
(5) Non-operating income (expense), net
161 Benefit (Provision) for Income Taxes
174 Net of Tax
181 Cost of Sales
136
Selling and Administrative Expenses
(119) Benefit (Provision) for Income Taxes
198 Net of Tax
(1,237) $
372 Net of Tax
$
$
$
$
$
Amounts in parentheses indicate reductions to income.
(1) See Note 12 - Derivative Instruments of Notes to Consolidated Financial Statements for further information on derivative instruments.
(2) See Note 7 - Employee Benefit Plans of Notes to Consolidated Financial Statements for further information on postemployment benefit
plans.
68
Note 18 Quarterly Financial Information (Unaudited)
(Amounts in Thousands, Except for Per Share Data)
Fiscal Year 2018:
September 30 December 31
March 31
June 30
Three Months Ended
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . $
Fiscal Year 2017:
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other General Income (2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . $
253,204
19,490
8,480
0.32
0.31
226,451
18,322
(4,005)
10,122
0.36
0.36
$
$
$
$
$
$
$
258,151
20,962
(8,347)
(0.31) $
(0.31) $
230,265
20,553
—
7,812
0.29
0.28
$
$
$
283,938
22,927
10,835
0.41
0.40
232,930
18,718
—
8,117
0.30
0.30
$
$
$
$
$
$
276,768
22,823
5,784
0.22
0.22
241,268
18,002
—
8,128
0.30
0.30
(1) Net income for the quarter ended December 31, 2017 included income tax expense of $16.6 million ($0.62 per diluted
share) due to the U.S. Tax Cuts and Jobs Act (“Tax Reform”) that was enacted into law in December 2017 and relates to the
deemed repatriation of unremitted foreign earnings and the revaluation of net deferred tax assets.
(2) Other General Income of $4.0 million resulted from a payment received related to a class action lawsuit in which Kimball
Electronics was a class member.
Note 19 Subsequent Events
On July 27, 2018, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) among the
Company, the lenders party thereto, and JPMorgan Chase Bank, National Association, as Administrative Agent, and Bank of
America, N.A., as Documentation Agent. The Credit Agreement amends and restates the Company’s primary credit facility,
which was scheduled to mature on October 31, 2019. The Credit Agreement has a maturity date of July 27, 2023 and allows for
$150 million in borrowings, with an option to increase the amount available for borrowing to $225 million at the Company’s
request, subject to the consent of each lender participating in such increase.
A commitment fee on the unused portion of principal amount of the credit facility is payable 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 Credit Agreement. The types of borrowings available, the interest rates on the borrowings, and the
financial covenants under the amended and restated credit agreement were unchanged. The proceeds of the loans are to be used
for working capital and general corporate purposes of the Company including capital expenditures and acquisitions. We intend
to fund the pending GES acquisition with proceeds from the Credit Agreement, and on August 1, 2018, we borrowed $20.2
million on the Credit Agreement to fund a portion of the pending GES acquisition to be held in escrow until closing.
69
Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A - Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Kimball Electronics maintains controls and procedures designed to ensure that information required to be disclosed in
the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Based upon their evaluation of those controls and procedures performed, the Chief Executive Officer and
Chief Financial Officer of the Company concluded that its disclosure controls and procedures were effective as of
June 30, 2018.
(b) Management’s report on internal control over financial reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted pursuant thereto, the
Company included a report of management’s assessment of the effectiveness of its internal control over financial
reporting as part of this report. The effectiveness of the Company’s internal control over financial reporting as of
June 30, 2018 has been audited by the Company’s independent registered public accounting firm. Management’s
report and the independent registered public accounting firm’s attestation report are included in the Company’s
Consolidated Financial Statements under the caption entitled “Management’s Report on Internal Control Over
Financial Reporting” and “Report of Independent Registered Public Accounting Firm” and are incorporated herein by
reference.
(c) Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended
June 30, 2018 that have materially affected, or that are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B - Other Information
None.
70
PART III
Item 10 - Directors, Executive Officers and Corporate Governance
Directors
The information required by this item with respect to Directors is incorporated by reference to the material contained in the
Company’s Proxy Statement for its annual meeting of Share Owners to be held November 8, 2018 under the caption “Election
of Directors.”
Committees
The information required by this item with respect to the Audit Committee and its financial expert and with respect to the
Compensation and Governance Committee’s responsibility for establishing procedures by which Share Owners may
recommend nominees to the Board of Directors is incorporated by reference to the material contained in the Company’s Proxy
Statement for its annual meeting of Share Owners to be held November 8, 2018 under the caption “Corporate Governance at
Kimball Electronics.”
Executive Officers of the Registrant
The information required by this item with respect to Executive Officers of the Registrant is included at the end of Part I of this
Annual Report on Form 10-K and is incorporated herein by reference.
Compliance with Section 16(a) of the Exchange Act
The information required by this item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners
to be held November 8, 2018 under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics
Kimball Electronics has a code of ethics that applies to all of its employees, including the Chief Executive Officer, the Chief
Financial Officer, and the Corporate Controller (functioning as Principal Accounting Officer). The code of ethics is posted on
the Company’s website at investors.kimballelectronics.com. It is our intention to disclose any amendments to the code of
ethics on this website. In addition, any waivers of the code of ethics for directors or executive officers of the Company will be
disclosed in a Current Report on Form 8-K.
Item 11 - Executive Compensation
The information required by this item for companies in their first year post emerging growth company status is incorporated by
reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held
November 8, 2018 under the captions “Corporate Governance at Kimball Electronics” and “Executive Compensation.”
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Share Owner Matters
Security Ownership
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement
for its annual meeting of Share Owners to be held November 8, 2018 under the caption “Share Ownership Information.”
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement
for its annual meeting of Share Owners to be held November 8, 2018 under the captions “Equity Compensation Plan
Information” and “Share Ownership Information.”
71
Item 13 - Certain Relationships and Related Transactions, and Director Independence
Relationships and Related Transactions
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement
for its annual meeting of Share Owners to be held November 8, 2018 under the caption “Review and Approval of Transactions
with Related Persons.”
Director Independence
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement
for its annual meeting of Share Owners to be held November 8, 2018 under the caption “Corporate Governance at Kimball
Electronics.”
Item 14 - Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement
for its annual meeting of Share Owners to be held November 8, 2018 under the caption “Selection of Independent Registered
Public Accounting Firm” and “Appendix A — Approval Process for Services Performed by the Independent Registered Public
Accounting Firm.”
72
PART IV
Item 15 - Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Financial Statements:
The following consolidated financial statements of the Company are found in Item 8 and incorporated herein.
Management’s Report on Internal Control Over Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . .
37
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
Consolidated Balance Sheets as of June 30, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
Consolidated Statements of Income for Each of the Three Years in the Period Ended June 30, 2018 . .
41
Consolidated Statements of Comprehensive Income for Each of the Three Years in the Period Ended
June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended June 30,
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Share Owners’ Equity for Each of the Three Years in the Period Ended
June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
43
44
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
(2) Financial Statement Schedules:
II. Valuation and Qualifying Accounts for Each of the Three Years in the Period Ended June 30,
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
Schedules other than those listed above are omitted because they are either not required or not applicable, or
the required information is presented in the Consolidated Financial Statements.
(3) Exhibits
See the Index of Exhibits which immediately precedes the Signatures page in this Annual Report on Form 10-K for a
list of the exhibits filed or incorporated herein as a part of this report.
Item 16 - Form 10-K Summary
None.
73
Exhibit No.
2.1
2.2(b)(d)(e)
3.1
3.2
10.1(a)(b)
10.2(a)
10.3(a)
10.4(a)
10.5(a)
10.6
10.7
10.8
10.9
10.10(a)
10.11(a)
10.12(a)
10.13(a)
10.14
10.15(a)
KIMBALL ELECTRONICS, INC.
INDEX OF EXHIBITS
Description
Separation and Distribution Agreement by and between Kimball International, Inc. and Kimball
Electronics, Inc. (Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed
November 3, 2014, File No. 001-36454)
Asset Purchase Agreement by and among Kimball Electronics Indiana, Inc., as Buyer; GES
Holdings, Inc., Global Equipment Services and Manufacturing Inc., GES Infotek Pvt. Ltd., GES
Japan KK, Global Equipment Services and Manufacturing (Suzhou) Co., Ltd., and Suzhou Global
Equipment Services and Trading Co., Ltd., as Sellers; and GES Holdings, Inc., as the Sellers’
Representative, dated as of May 11, 2018
Amended and Restated Articles of Incorporation of the Company (Incorporated by reference to
Exhibit 3.1 to the Company’s Form 8-K/A filed October 23, 2014, File No. 001-36454)
Amended and Restated By-laws of the Company (Incorporated by reference to Exhibit 3.2 to the
Company’s Form 8-K filed November 13, 2017, File No. 001-36454)
Summary of Director and Named Executive Officer Compensation
Form of Employment Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s Form
8-K filed June 30, 2017, File No. 001-36454)
Form of Annual and/or Long-Term Performance Share Award Amendment (Incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 3, 2014, File No.
001-36454)
2014 Stock Option and Incentive Plan (Incorporated by reference to Exhibit 4.3 to the Company’s
Form S-8 for the Company’s 2014 Stock Option and Incentive Plan filed on October 30, 2014, File
No. 333-199728)
Form of Long-Term Performance Share Award Agreement, to be used for Long-Term Performance
Share Awards granted prior to June 29, 2015 (Incorporated by reference to Exhibit 10.3 of
Amendment 3 to the Company’s Form 10 filed on September 4, 2014, File No. 001-36454)
Tax Matters Agreement by and among Kimball International, Inc. and Kimball Electronics, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed November 3, 2014,
File No. 001-36454)
Employee Matters Agreement by and between Kimball International, Inc. and Kimball Electronics,
Inc. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed November 3,
2014, File No. 001-36454)
Transition Services Agreement by and between Kimball International, Inc. and Kimball Electronics,
Inc. (Incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed November 3,
2014, File No. 001-36454)
Credit Agreement among Kimball Electronics, Inc., the Lenders Party Hereto, and JPMorgan Chase
Bank, National Association, as Administrative Agent (Incorporated by reference to Exhibit 10.4 to
the Company’s Form 8-K filed November 3, 2014, File No. 001-36454)
Form of Long-Term Performance Share Award Agreement, as amended June 29, 2015, to be used
for Long-Term Performance Share Awards granted on or subsequent to June 29, 2015 but prior to
June 29, 2016 (Incorporated by reference to Exhibit 10.11 to the Company’s Form 10-K filed on
August 28, 2015, File No. 001-36454)
Description of the Kimball Electronics, Inc. 2014 Profit Sharing Incentive Bonus Plan (Incorporated
by reference to Exhibit 10.10 of Amendment 4 to the Company’s Form 10 filed on September 30,
2014, File No. 001-36454)
Kimball Electronics, Inc. Supplemental Employee Retirement Plan (“SERP”) (Incorporated by
reference to Exhibit 10.8 of Amendment 3 to the Company’s Form 10 filed on September 4, 2014,
File No. 001-36454)
Form of Long-Term Performance Share Award Agreement, as amended June 29, 2016, to be used
for Long-Term Performance Share Awards granted on or subsequent to June 29, 2016 (Incorporated
by reference to Exhibit 10.1 to the Company’s Form 8-K filed June 27, 2016, File No. 001-36454)
First Amendment to Credit Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s
Form 8-K filed October 3, 2016, File No. 001-36454)
Kimball Electronics, Inc. Non-Employee Directors Stock Compensation Deferral Plan
(Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed October 25, 2016, File
No. 001-36454)
74
10.16(a)
10.17
21(b)
23(b)
24(b)
31.1(b)
31.2(b)
32.1(b)(c)
32.2(b)(c)
Form of Fee Deferral Election Agreement under the Kimball Electronics, Inc. Non-Employee
Directors Stock Compensation Deferral Plan (Incorporated by reference to Exhibit 10.2 to the
Company’s Form 8-K filed October 25, 2016, File No. 001-36454)
Amended and Restated Credit Agreement among Kimball Electronics, Inc., the lenders party
thereto, and JPMorgan Chase Bank, National Association, as Administrative Agent and Bank of
America, N.A., as Documentation Agent (Incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K filed August 1, 2018, File No. 001-36454)
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS(b)
101.SCH(b)
101.CAL(b)
101.DEF(b)
101.LAB(b)
101.PRE(b)
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
(a) Constitutes management contract or compensatory arrangement
(b) Filed herewith
(c) In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibit 32.1 and 32.2 will not be
deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated
by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
(d) Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant will
supplementally furnish any of the omitted schedules or exhibits to the Securities and Exchange Commission upon request.
(e) Confidential treatment has been requested as to certain portions of this Exhibit.
75
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
KIMBALL ELECTRONICS, INC.
By: /s/ MICHAEL K. SERGESKETTER
Michael K. Sergesketter
Vice President,
Chief Financial Officer
August 28, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ DONALD D. CHARRON
Donald D. Charron
Chairman of the Board,
Chief Executive Officer
August 28, 2018
/s/ MICHAEL K. SERGESKETTER
Michael K. Sergesketter
Vice President,
Chief Financial Officer
August 28, 2018
/s/ MARK D. HODELL
Mark D. Hodell
Corporate Controller,
(functioning as Principal Accounting Officer)
August 28, 2018
76
Signature
Signature
GREGORY J. LAMPERT *
Gregory J. Lampert
Director
GEOFFREY L. STRINGER *
Geoffrey L. Stringer
Director
THOMAS J. TISCHHAUSER *
Thomas J. Tischhauser
Director
COLLEEN C. REPPLIER *
Colleen C. Repplier
Director
GREGORY A. THAXTON *
Gregory A. Thaxton
Director
CHRISTINE M. VUJOVICH *
Christine M. Vujovich
Director
* The undersigned does hereby sign this document on my behalf pursuant to powers of attorney duly executed and filed
with the Securities and Exchange Commission, all in the capacities as indicated:
Date
August 28, 2018
/s/ DONALD D. CHARRON
Donald D. Charron
As Attorney-In-Fact
77
Schedule II. - Valuation and Qualifying Accounts
KIMBALL ELECTRONICS, INC.
Description
(Amounts in Thousands)
Year Ended June 30, 2018
Valuation Allowances:
Short-Term Receivables . . . . . . . .
Deferred Tax Asset . . . . . . . . . . . .
Year Ended June 30, 2017
Valuation Allowances:
Short-Term Receivables . . . . . . . .
Year Ended June 30, 2016
Valuation Allowances:
Short-Term Receivables . . . . . . . .
Balance at
Beginning
of Year
Additions
(Reductions)
to Expense
Adjustments
to Other
Accounts
Write-offs
and
Recoveries
Balance at
End of
Year
$
$
284
—
$
192
$
236
$
$
$
$
259
638
129
67
$
$
$
$
(51)
—
(37)
$
$
$
(10)
—
—
(96)
$
(15)
$
$
$
$
482
638
284
192
78
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald D. Charron, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Kimball Electronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: August 28, 2018
/s/ DONALD D. CHARRON
DONALD D. CHARRON
Chairman of the Board,
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael K. Sergesketter, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Kimball Electronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: August 28, 2018
/s/ MICHAEL K. SERGESKETTER
MICHAEL K. SERGESKETTER
Vice President,
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kimball Electronics, Inc. (the “Company”) on Form 10-K for the period ended
June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald D. Charron,
Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: August 28, 2018
/s/ DONALD D. CHARRON
DONALD D. CHARRON
Chairman of the Board,
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kimball Electronics, Inc. (the “Company”) on Form 10-K for the period ended
June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael K.
Sergesketter, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: August 28, 2018
/s/ MICHAEL K. SERGESKETTER
MICHAEL K. SERGESKETTER
Vice President,
Chief Financial Officer
World Headquarters
Kimball Electronics, Inc.
1205 Kimball Blvd.
Jasper, IN 47546
www.kimballelectronics.com