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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
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 | 35-2047713
(State or other jurisdiction of | (I.R.S. Employer Identification No.)
incorporation or organization) |
1205 Kimball Boulevard, Jasper, Indiana | 47546
(Address of principal executive offices) | (Zip Code)

(812) 634-4000

Registrant’s telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last report

Securities registered pursuant to Section 12(b) of the Act:
Title of each Class | Trading Symbol | Name of each exchange on which registered
Common Stock, no par value | KE | The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☐ | Accelerated filer | ☒ | Emerging growth company | ☐
Non-accelerated filer | ☐ | 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 ☐ No ☒
The number of shares outstanding of the Registrant’s common stock as of October 22, 2021 was 25,100,911 shares.

KIMBALL ELECTRONICS, INC.
FORM 10-Q
INDEX

| Page No. |
PART I FINANCIAL INFORMATION |
| Item 1. Financial Statements |  |
| Condensed Consolidated Balance Sheets - September 30, 2021 (Unaudited) and June 30, 2021 | 3 |
| Condensed Consolidated Statements of Income (Unaudited) - Three Months Ended September 30, 2021 and 2020 | 4 |
| Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended September 30, 2021 and 2020 | 5 |
| Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended September 30, 2021 and 2020 | 6 |
| Condensed Consolidated Statement of Share Owners’ Equity (Unaudited) - Three Months Ended September 30, 2021 and 2020 | 7 |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | 8 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 30 |
| Item 4. Controls and Procedures | 30 |
PART II OTHER INFORMATION |
| Item 1. Legal Proceedings | 31 |
| Item 1A. Risk Factors | 31 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 31 |
| Item 6. Exhibits | 32 |
SIGNATURES | 33 |

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share Data)

| (Unaudited) |  |
| September 30, 2021 |  | June 30, 2021
ASSETS |  |  |
Current Assets: |  |  |
Cash and cash equivalents | $ | 89,324 |  |  | $ | 106,442 |
Receivables, net of allowances of $181 and $177, respectively | 176,881 |  |  | 203,382 |
Contract assets | 46,080 |  |  | 45,863 |
Inventories | 262,125 |  |  | 200,386 |
Prepaid expenses and other current assets | 27,773 |  |  | 27,320 |
Total current assets | 602,183 |  |  | 583,393 |
Property and Equipment, net of accumulated depreciation of $269,008 and $264,907, respectively | 166,085 |  |  | 163,251 |
Goodwill | 12,011 |  |  | 12,011 |
Other Intangible Assets, net of accumulated amortization of $36,651 and $35,813, respectively | 16,606 |  |  | 17,008 |
Other Assets | 41,381 |  |  | 38,398 |
Total Assets | $ | 838,266 |  |  | $ | 814,061 |
LIABILITIES AND SHARE OWNERS’ EQUITY |  |  |
Current Liabilities: |  |  |
Current portion of borrowings under credit facilities | $ | 32,636 |  |  | $ | 26,214 |
Accounts payable | 247,175 |  |  | 216,544 |
Accrued expenses | 46,772 |  |  | 58,016 |
Total current liabilities | 326,583 |  |  | 300,774 |
Other Liabilities: |  |  |
Long-term debt under credit facilities, less current portion | 40,000 |  |  | 40,000 |
Long-term income taxes payable | 7,812 |  |  | 8,854 |
Other long-term liabilities | 24,057 |  |  | 22,461 |
Total other liabilities | 71,869 |  |  | 71,315 |
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 | 306,086 |  |  | 308,123 |
Retained earnings | 211,533 |  |  | 208,969 |
Accumulated other comprehensive loss | (9,149) |  |  | (4,883) |
Treasury stock, at cost: |  |  |
Shares: 4,329,000 and 4,473,000, respectively | (68,656) |  |  | (70,237) |
Total Share Owners’ Equity | 439,814 |  |  | 441,972 |
Total Liabilities and Share Owners’ Equity | $ | 838,266 |  |  | $ | 814,061 |

See Notes to Condensed Consolidated Financial Statements.
3

KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)

| Three Months Ended |  |
| September 30 |  |
(Unaudited) | 2021 |  | 2020 |  |  |  |
Net Sales | $ | 292,717 |  |  | $ | 331,749 |  |  |  |  |
Cost of Sales | 277,117 |  |  | 301,166 |  |  |  |  |
Gross Profit | 15,600 |  |  | 30,583 |  |  |  |  |
Selling and Administrative Expenses | 12,204 |  |  | 13,117 |  |  |  |  |
Other General Income | (1,384) |  |  | (341) |  |  |  |  |
Operating Income | 4,780 |  |  | 17,807 |  |  |  |  |
Other Income (Expense): |  |  |  |  |  |  |
Interest income | 24 |  |  | 7 |  |  |  |  |
Interest expense | (395) |  |  | (823) |  |  |  |  |
Non-operating income (expense), net | (878) |  |  | 2,951 |  |  |  |  |
Other income (expense), net | (1,249) |  |  | 2,135 |  |  |  |  |
Income Before Taxes on Income | 3,531 |  |  | 19,942 |  |  |  |  |
Provision for Income Taxes | 967 |  |  | 3,131 |  |  |  |  |
Net Income | $ | 2,564 |  |  | $ | 16,811 |  |  |  |  |
Earnings Per Share of Common Stock: |  |  |  |  |  |  |
Basic | $ | 0.10 |  |  | $ | 0.67 |  |  |  |  |
Diluted | $ | 0.10 |  |  | $ | 0.66 |  |  |  |  |
Average Number of Shares Outstanding: |  |  |  |  |  |  |
Basic | 25,145 |  |  | 25,153 |  |  |  |  |
Diluted | 25,301 |  |  | 25,270 |  |  |  |  |

See Notes to Condensed Consolidated Financial Statements.
4

KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)

| Three Months Ended |  | Three Months Ended
| September 30, 2021 |  | September 30, 2020
(Unaudited) | Pre-tax |  | Tax |  | Net of Tax |  | Pre-tax |  | Tax |  | Net of Tax
Net income |  |  |  |  | $ | 2,564 |  |  |  |  |  |  | $ | 16,811 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments | $ | (2,953) |  |  | $ | — |  |  | $ | (2,953) |  |  | $ | 4,412 |  |  | $ | — |  |  | $ | 4,412 |
Postemployment actuarial change | 37 |  |  | (15) |  |  | 22 |  |  | (5) |  |  | 4 |  |  | (1) |
Derivative gain (loss) | (1,561) |  |  | 317 |  |  | (1,244) |  |  | (625) |  |  | 82 |  |  | (543) |
Reclassification to (earnings) loss: |  |  |  |  |  |  |  |  |  |  |
Derivatives | (101) |  |  | 59 |  |  | (42) |  |  | 738 |  |  | (148) |  |  | 590 |
Amortization of actuarial change | (64) |  |  | 15 |  |  | (49) |  |  | (97) |  |  | 23 |  |  | (74) |
Other comprehensive income (loss) | $ | (4,642) |  |  | $ | 376 |  |  | $ | (4,266) |  |  | $ | 4,423 |  |  | $ | (39) |  |  | $ | 4,384 |
Total comprehensive income (loss) |  |  |  |  | $ | (1,702) |  |  |  |  |  |  | $ | 21,195 |

See Notes to Condensed Consolidated Financial Statements.
5

KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)

| Three Months Ended
| September 30
(Unaudited) | 2021 |  | 2020
Cash Flows From Operating Activities: |  |  |
Net income | $ | 2,564 |  |  | $ | 16,811 |
Adjustments to reconcile net income to net cash (used for) provided by operating activities: |  |
Depreciation and amortization | 8,908 |  |  | 8,314 |
Loss on sales of assets | 10 |  |  | 20 |
Deferred income taxes | 820 |  |  | (3,149) |
Stock-based compensation | 1,128 |  |  | 937 |
Other, net | (695) |  |  | 1,553 |
Change in operating assets and liabilities: |  |  |
Receivables | 25,718 |  |  | (15,124) |
Contract assets | (217) |  |  | 162 |
Inventories | (62,840) |  |  | 18,727 |
Prepaid expenses and other assets | (2,368) |  |  | (712) |
Accounts payable | 32,335 |  |  | (9,885) |
Accrued expenses and taxes payable | (13,550) |  |  | 3,047 |
Net cash (used for) provided by operating activities | (8,187) |  |  | 20,701 |
Cash Flows From Investing Activities: |  |  |
Capital expenditures | (12,541) |  |  | (8,142) |
Proceeds from sales of assets | 36 |  |  | 201 |
Purchases of capitalized software | (182) |  |  | (396) |
Other, net | (181) |  |  | 15 |
Net cash used for investing activities | (12,868) |  |  | (8,322) |
Cash Flows From Financing Activities: |  |  |
Net change in revolving credit facilities | 6,536 |  |  | (7,973) |
Settlements on previous year acquisition | — |  |  | 2,957 |
Payments related to tax withholding for stock-based compensation | (1,571) |  |  | (771) |
Net cash provided by (used for) financing activities | 4,965 |  |  | (5,787) |
Effect of Exchange Rate Change on Cash and Cash Equivalents | (1,028) |  |  | 1,793 |
Net (Decrease) Increase in Cash and Cash Equivalents | (17,118) |  |  | 8,385 |
Cash and Cash Equivalents at Beginning of Period | 106,442 |  |  | 64,990 |
Cash and Cash Equivalents at End of Period | $ | 89,324 |  |  | $ | 73,375 |
Supplemental Disclosure of Cash Flow Information |  |  |
Cash paid during the period for: |  |  |
Income taxes | $ | 5,509 |  |  | $ | 1,969 |
Interest expense | $ | 349 |  |  | $ | 1,046 |
Non-cash investing activity: |  |  |
Unpaid purchases of property and equipment at the end of the period | $ | 2,606 |  |  | $ | 1,012 |

See Notes to Condensed Consolidated Financial Statements.
6

KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHARE OWNERS’ EQUITY
(Amounts in Thousands, Except for Share Data)

|  |  |  |  | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) |  | Treasury Stock |  | Total Share Owners’ Equity
(Unaudited) |  |  | Additional Paid-In Capital |
Amounts at June 30, 2021 |  |  | $ | 308,123 |  |  | $ | 208,969 |  |  | $ | (4,883) |  |  | $ | (70,237) |  |  | $ | 441,972 |
Net income |  |  |  |  | 2,564 |  |  |  |  |  |  | 2,564 |
Other comprehensive income (loss) |  |  |  |  |  |  | (4,266) |  |  |  |  | (4,266) |
Compensation expense related to stock compensation plans |  |  | 1,116 |  |  |  |  |  |  |  |  | 1,116 |
Performance share issuance (144,000 shares) |  |  | (3,153) |  |  |  |  |  |  | 1,581 |  |  | (1,572) |
Amounts at September 30, 2021 |  |  | $ | 306,086 |  |  | $ | 211,533 |  |  | $ | (9,149) |  |  | $ | (68,656) |  |  | $ | 439,814 |
Amounts at June 30, 2020 |  |  | $ | 306,808 |  |  | $ | 152,178 |  |  | $ | (10,551) |  |  | $ | (69,070) |  |  | $ | 379,365 |
Net income |  |  |  |  | 16,811 |  |  |  |  |  |  | 16,811 |
Other comprehensive income (loss) |  |  |  |  |  |  | 4,384 |  |  |  |  | 4,384 |
Compensation expense related to stock compensation plans |  |  | 923 |  |  |  |  |  |  |  |  | 923 |
Performance share issuance (156,000 shares) |  |  | (2,524) |  |  |  |  |  |  | 1,753 |  |  | (771) |
Amounts at September 30, 2020 |  |  | $ | 305,207 |  |  | $ | 168,989 |  |  | $ | (6,167) |  |  | $ | (67,317) |  |  | $ | 400,712 |

See Notes to Condensed Consolidated Financial Statements.
7

KIMBALL ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Business Description and Summary of Significant Accounting Policies
Business Description:
Kimball Electronics, Inc. (also referred to herein as “Kimball Electronics,” the “Company,” “we,” “us,” or “our”) is a global, multifaceted manufacturing solutions provider. We provide contract electronics manufacturing services (“EMS”) and diversified manufacturing services, including engineering and supply chain support, to customers in the automotive, medical, industrial, and public safety end markets. We offer a package of value that begins with our core competency of producing durable electronics and includes our set of robust processes and procedures that help us ensure that we deliver the highest levels of quality, reliability, and service throughout the entire life cycle of our customers’ products. We further offer diversified contract manufacturing services for non-electronic components, medical devices, medical disposables, precision molded plastics, and production automation, test, and inspection equipment. We are consistently recognized by customers and industry trade publications for our excellent quality, reliability, and innovative service.
Basis of Presentation:
The Condensed Consolidated Financial Statements presented herein reflect the consolidated financial position as of September 30, 2021 and June 30, 2021, results of operations for the three months ended September 30, 2021 and 2020, cash flows for the three months ended September 30, 2021 and 2020, and share owners’ equity for the three months ended September 30, 2021 and 2020. The financial data presented herein is unaudited and should be read in conjunction with the annual Consolidated Financial Statements as of and for the year ended June 30, 2021 and related notes thereto included in our Annual Report on Form 10-K. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. Intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year.
Certain prior period amounts have been reclassified to conform to current period presentation in the Condensed Consolidated Statements of Cash Flow within the Cash Flows from Operating Activities section. Deferred tax valuation allowance is now included with Deferred income taxes while the other deferred charges have been reclassified to Other, net.
Revenue Recognition:
Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, components, medical disposables, precision molded plastics, and automation, test, and inspection equipment built to customer’s specifications. Our customer agreements are generally not for a definitive term but continue for the relevant product’s life cycle. Typically, our customer agreements do not commit the customer to purchase our services until a purchase order is provided, which is generally short term in nature. Customer purchase orders primarily have a single performance obligation. Generally, the prices stated in the customer purchase orders are agreed upon prices for the manufactured product and do not vary over the term of the order, and therefore, the majority of our contracts do not contain variable consideration. In limited circumstances, we may enter into a contract which contains minimum quantity thresholds to cover our capital costs, and we may offer our customer a rebate for specific volume thresholds or other incentives; in these cases, the rebates or incentives are accounted for as variable consideration.
The majority of our revenue is recognized over time as manufacturing services are performed as we manufacture a product to customer specifications with no alternative use and we have an enforceable right to payment for performance completed to date. The remaining revenue for manufacturing services is recognized when the customer obtains control of the product, typically either upon shipment or delivery of the product dependent on the terms of the contract, and the customer is able to direct the use of and obtain substantially all of the remaining benefits from the asset. We generally recognize revenue over time using costs based input methods, in which judgment is required to evaluate assumptions including anticipated margins to estimate the corresponding amount of revenue to recognize. Costs used as a basis for estimating anticipated margins include material, direct and indirect labor, and appropriate applied overheads. Anticipated margins are determined based on historical or quoted customer pricing. Costs based input methods are considered a faithful depiction of our efforts and progress toward satisfying our performance obligations for manufacturing services and for which we believe we are entitled to payment for performance completed to date. The cumulative effect of revisions to estimates related to net contract revenues or costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.
8

We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated services and products. Accordingly, we record customer payments of shipping and handling costs as a component of net sales and classify such costs as a component of cost of sales. We recognize sales net of applicable sales or value add taxes. Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time revenue is recognized, resulting in a reduction of net revenue.
Direct incremental costs to obtain and fulfill a contract are capitalized as a contract asset only if they are material, expected to be recovered, and are not accounted for in accordance with other guidance. Incidental items that are immaterial in the context of the contract are recognized as expense in the period incurred.
Trade Accounts Receivable:
The Company’s trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. Our policy for estimating the allowance for credit losses on trade accounts 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 estimate expected credit losses. Management believes that historical loss information generally provides a basis for its assessment of expected credit losses. Trade accounts receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Adjustments to the allowance for credit losses are recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income.
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 utilize factoring arrangements for certain of our accounts receivables with third-party financial institutions in order to extend terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables. In the three months ended September 30, 2021 and 2020, we sold, without recourse, $62.1 million and $91.1 million of accounts receivable, respectively. Factoring fees were less than $0.2 million and $0.4 million for the three months ended September 30, 2021 and 2020, respectively. Factoring fees are recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income.
One of our China operations, in limited circumstances, may receive banker’s acceptance drafts from customers as payment on account. 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 less than $0.1 million at September 30, 2021 and June 30, 2021, are reflected in Receivables on the Condensed Consolidated Balance Sheets until the banker’s drafts are sold at a discount, transferred in settlement of current accounts payable, or cash is received at maturity. Banker’s acceptance drafts sold at a discount or transferred in settlement of current accounts payable during the three months ended September 30, 2021 and 2020 were less than $0.1 million and $1.1 million, respectively.
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, goodwill is tested at the reporting unit level. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is written down to its estimated fair value. Other Intangible Assets consist of capitalized software, customer relationships, technology, and trade name, and are reviewed for impairment, and their remaining useful lives evaluated for revision, when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. As of September 30, 2021, the Company determined there have been no indicators of impairment for goodwill and other intangible assets. See Note 12 - Goodwill and Other Intangible Assets of Notes to Condensed Consolidated Financial statements for more information on Goodwill and Other Intangible Assets.
Leases:
The Company leases certain office, manufacturing, and warehouse facilities under operating leases, in addition to land on which certain office and manufacturing facilities resides. Operating lease costs and cash payments for operating leases are immaterial to the Condensed Consolidated Statements of Income and our Condensed Consolidated Statements of Cash Flows. Lease right-of-use assets and lease liabilities each totaled $3.4 million at September 30, 2021 and $1.6 million at June 30, 2021. Lease right-of-use assets are included in Other Assets and lease liabilities are included in Accrued expenses and Other long-term liabilities on the Condensed Consolidated Balance Sheets.
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Other General Income:
Other General Income in the three months ended September 30, 2021 and September 30, 2020 included $1.4 million and $0.3 million, respectively, of pre-tax income resulting from payments received related to class action lawsuits in which Kimball Electronics was a class member. These lawsuits 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.
Non-operating Income (Expense), net:
Non-operating income (expense), net includes the impact of such items as foreign currency rate movements and related derivative gain or loss, fair value adjustments on supplemental employee retirement plan (“SERP”) investments, amortization of actuarial gains (losses), and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain (loss) on SERP investments is offset by a change in the SERP liability that is recognized in Selling and Administrative Expenses.
Components of Non-operating income (expense), net:

| Three Months Ended |  |
| September 30 |  |
(Amounts in Thousands) | 2021 |  | 2020 |  |  |  |
Foreign currency/derivative gain (loss) | $ | (572) |  |  | $ | 2,422 |  |  |  |  |
Gain (loss) on SERP investments | (87) |  |  | 550 |  |  |  |  |
Other | (219) |  |  | (21) |  |  |  |  |
Non-operating income (expense), net | $ | (878) |  |  | $ | 2,951 |  |  |  |  |

Income Taxes:
In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.
Deferred income tax assets and liabilities, recorded in Other Assets and Other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheets, are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex uncertain tax positions, which may require an extended period of time to resolve. A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We maintain a liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions. As tax positions are effectively settled, the tax liability is adjusted accordingly. We recognize interest and penalties related to unrecognized tax benefits in Provision for Income Taxes on the Condensed Consolidated Statements of Income.
The U.S. Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law on December 22, 2017, making broad and complex changes to the U.S. tax code, for which complete guidance may have not yet been issued. Tax Reform, in addition to other changes, required a one-time transition tax on certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period. As of September 30, 2021 and June 30, 2021, the remaining provision recorded for the one-time deemed repatriation tax was $8.9 million and $9.8 million, respectively, payable through fiscal year 2026, with the long-term portion recorded in Long-term income taxes payable on the Condensed Consolidated Balance Sheets. As of September 30, 2021, $1.1 million of the remaining deemed repatriation tax is short term and is recorded in Accrued expenses on the Condensed Consolidated Balance Sheet.
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New Accounting Standards:
Adopted in fiscal year 2022:
In December 2019, the FASB issued guidance on Simplifying the Accounting for Income Taxes, intended to simplify various aspects related to the accounting for income taxes. We adopted this standard effective July 1, 2021, the beginning of our first quarter of fiscal year 2022, and the adoption did not have a material effect on our condensed consolidated financial statements.
Note 2. Revenue from Contracts with Customers
Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, electronic and non-electronic components, medical devices, medical disposables, precision molded plastics, and automation, test, and inspection equipment in automotive, medical, industrial, and public safety applications, to the specifications and designs of our customers.
The following table disaggregates our revenue by end market vertical for the three months ended September 30, 2021 and 2020.

| Three Months Ended |  |
| September 30 |  |
(Amounts in Millions) | 2021 |  | 2020 |  |  |  |
Vertical Markets: |  |  |  |  |  |  |
Automotive | $ | 129.4 |  |  | $ | 118.3 |  |  |  |  |
Medical | 85.0 |  |  | 127.1 |  |  |  |  |
Industrial | 63.9 |  |  | 70.0 |  |  |  |  |
Public Safety | 11.1 |  |  | 13.3 |  |  |  |  |
Other | 3.3 |  |  | 3.0 |  |  |  |  |
Total net sales | $ | 292.7 |  |  | $ | 331.7 |  |  |  |  |

For the three months ended September 30, 2021 and 2020, approximately 95% and 88% of our net sales, respectively, were recognized over time as manufacturing services were performed under a customer contract on a product with no alternative use and we have an enforceable right to payment for performance completed to date. The remaining sales revenues were recognized at a point in time when the customer obtained control of the products.
The timing differences of revenue recognition, billings to our customers, and cash collections from our customers result in billed accounts receivable and unbilled accounts receivable. Contract assets on the Condensed Consolidated Balance Sheets relate to unbilled accounts receivable and occur when revenue is recognized over time as manufacturing services are provided and the billing to the customer has not yet occurred as of the balance sheet date, which are generally transferred to receivables in the next fiscal quarter due to the short-term nature of the manufacturing cycle. Contract assets were $46.1 million and $45.9 million as of September 30, 2021 and June 30, 2021, respectively.
In limited circumstances, the Company may receive payments from customers in advance of the satisfaction of performance obligations primarily for tooling or other miscellaneous services or costs. These advance payments are recognized as contract liabilities until the performance obligations are completed and are included in Accrued expenses on the Condensed Consolidated Balance Sheets, which amounted to $10.7 million and $7.6 million as of September 30, 2021 and June 30, 2021, respectively. Our performance obligations are short term in nature and therefore our contract liabilities are all expected to be settled within twelve months.
Note 3. Inventories
Inventories were valued using the lower of first-in, first-out (“FIFO”) cost and net realizable value. Inventory components were as follows:

(Amounts in Thousands) | September 30, 2021 |  | June 30, 2021
Finished products | $ | 816 |  |  | $ | 769 |
Work-in-process | 4,638 |  |  | 5,149 |
Raw materials | 256,671 |  |  | 194,468 |
Total inventory | $ | 262,125 |  |  | $ | 200,386 |

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Note 4. Accumulated Other Comprehensive Income (Loss)
During the three months ended September 30, 2021 and 2020, the changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows:

Accumulated Other Comprehensive Income (Loss) |  |  |  |  |  |  |  |
(Amounts in Thousands) | Foreign Currency Translation Adjustments |  | Derivative Gain (Loss) |  |  |  | Post Employment Benefits Net Actuarial Gain (Loss) |  | Accumulated Other Comprehensive Income (Loss)
Balance at June 30, 2021 | $ | (2,223) |  |  | $ | (2,427) |  |  |  |  | $ | (233) |  |  | $ | (4,883) |
Other comprehensive income (loss) before reclassifications | (2,953) |  |  | (1,244) |  |  |  |  | 22 |  |  | (4,175) |
Reclassification to (earnings) loss | — |  |  | (42) |  |  |  |  | (49) |  |  | (91) |
Net current-period other comprehensive income (loss) | (2,953) |  |  | (1,286) |  |  |  |  | (27) |  |  | (4,266) |
Balance at September 30, 2021 | $ | (5,176) |  |  | $ | (3,713) |  |  |  |  | $ | (260) |  |  | $ | (9,149) |
Balance at June 30, 2020 | $ | (7,894) |  |  | $ | (3,254) |  |  |  |  | $ | 597 |  |  | $ | (10,551) |
Other comprehensive income (loss) before reclassifications | 4,412 |  |  | (543) |  |  |  |  | (1) |  |  | 3,868 |
Reclassification to (earnings) loss | — |  |  | 590 |  |  |  |  | (74) |  |  | 516 |
Net current-period other comprehensive income (loss) | 4,412 |  |  | 47 |  |  |  |  | (75) |  |  | 4,384 |
Balance at September 30, 2020 | $ | (3,482) |  |  | $ | (3,207) |  |  |  |  | $ | 522 |  |  | $ | (6,167) |

The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Condensed Consolidated Statements of Income:

Reclassifications from Accumulated Other Comprehensive Income (Loss) |  | Three Months Ended |  |  |  | Affected Line Item in the Condensed Consolidated Statements of Income
| September 30 |  |  |
(Amounts in Thousands) |  | 2021 |  | 2020 |  |  |  |  |
Derivative gain (loss) (1) |  | $ | 101 |  |  | $ | (738) |  |  |  |  |  |  | Cost of Sales
|  | (59) |  |  | 148 |  |  |  |  |  |  | Benefit (Provision) for Income Taxes
|  | $ | 42 |  |  | $ | (590) |  |  |  |  |  |  | Net of Tax
Postemployment Benefits: |  |  |  |  |  |  |  |  |  |
Amortization of actuarial gain (2) |  | 64 |  |  | 97 |  |  |  |  |  |  | Non-operating income (expense), net
|  | (15) |  |  | (23) |  |  |  |  |  |  | Benefit (Provision) for Income Taxes
|  | $ | 49 |  |  | $ | 74 |  |  |  |  |  |  | Net of Tax
Total reclassifications for the period |  | $ | 91 |  |  | $ | (516) |  |  |  |  |  |  | Net of Tax

Amounts in parentheses indicate reductions to income.
(1) See Note 8 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information on derivative instruments.
(2) See Note 10 - Employee Benefit Plans of Notes to Condensed Consolidated Financial Statements for further information on postemployment benefit plans.
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Note 5. Commitments and Contingent Liabilities
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. Product warranty liability is recorded in Accrued expenses and Other long-term liabilities on the Condensed Consolidated Balance Sheets.
Changes in the product warranty liability for the three months ended September 30, 2021 and 2020 were as follows:

| Three Months Ended
| September 30
(Amounts in Thousands) | 2021 |  | 2020
Product warranty liability at the beginning of the period | $ | 610 |  |  | $ | 647 |
Additions to warranty accrual (including changes in estimates) | (34) |  |  | 249 |
Settlements made (in cash or in kind) | — |  |  | (2) |
Product warranty liability at the end of the period | $ | 576 |  |  | $ | 894 |

Note 6. Credit Facilities
Credit facilities consisted of the following:

| Unused Borrowings at |  | Borrowings Outstanding at |  | Borrowings Outstanding at
(Amounts in Millions, in U.S Dollar Equivalents) | September 30, 2021 |  | September 30, 2021 |  | June 30, 2021
Primary credit facility (1) | $ | 81.6 |  |  | $ | 68.0 |  |  | $ | 62.7 |
Thailand overdraft credit facility | 0.1 |  |  | — |  |  | — |
Netherlands revolving credit facility | 6.0 |  |  | 4.6 |  |  | 3.5 |
Poland revolving credit facility | 5.8 |  |  | — |  |  | — |
Total credit facilities | $ | 93.5 |  |  | $ | 72.6 |  |  | $ | 66.2 |
Less: current portion |  |  | $ | (32.6) |  |  | $ | (26.2) |
Long-term debt under credit facilities, less current portion (2) |  |  | $ | 40.0 |  |  | $ | 40.0 |

(1) The Company maintains a U.S. primary credit facility (the “primary facility”) 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, scheduled to mature July 27, 2023. The primary facility provides for $150 million in borrowings, with an option to increase the amount available for borrowing to $225 million upon request, subject to the consent of each lender participating in such increase. This facility is maintained for working capital and general corporate purposes of the Company including capital expenditures and potential acquisitions. A commitment fee is payable on the unused portion of the credit facility at a rate that ranges from 20.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA, as defined in the primary facility. Types of borrowings available on the primary facility include revolving loans, multi-currency term loans, and swingline loans.
13

The interest rate on borrowings is dependent on the type of borrowings and will be one of the following two options:
•the London Interbank Offered Rate (“LIBOR”) in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Eurocurrency Loans spread which can range from 125.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or
•the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of
a.JPMorgan’s prime rate;
b.1% per annum above the Adjusted LIBO Rate (as defined under the primary credit facility); or
c.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility);
plus the ABR Loans spread which can range from 25.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
The Company’s financial covenants under the primary credit facility require:
•a ratio of consolidated total indebtedness minus unencumbered U.S. cash on hand in the United States in excess of $15 million to adjusted consolidated EBITDA, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.0 to 1.0, and
•a fixed charge coverage ratio, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be less than 1.1 to 1.0.
The Company had $0.4 million in letters of credit contingently committed against the credit facility at both September 30, 2021 and June 30, 2021.
(2) The amount of Long-term debt under credit facilities, less current maturities reflects the borrowings on the primary facility that the Company intends, and has the ability, to refinance for a period longer than twelve months. The primary credit facility matures on July 27, 2023.
The weighted-average interest rate on borrowings outstanding under the credit facilities at September 30, 2021 and June 30, 2021 was 2.1% and 2.0%, respectively.
Note 7. Fair Value
The Company categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
•Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
There were no changes in the inputs or valuation techniques used to measure fair values during the three months ended September 30, 2021. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2021.
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Recurring Fair Value Measurements:
As of September 30, 2021 and June 30, 2021, 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:

| September 30, 2021
(Amounts in Thousands) | Level 1 |  | Level 2 |  |  |  | Total
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 1,540 |  |  | $ | — |  |  |  |  | $ | 1,540 |
Derivatives: foreign exchange contracts | — |  |  | 1,359 |  |  |  |  | 1,359 |
Trading securities: mutual funds held in nonqualified SERP | 12,596 |  |  | — |  |  |  |  | 12,596 |
Total assets at fair value | $ | 14,136 |  |  | $ | 1,359 |  |  |  |  | $ | 15,495 |
Liabilities |  |  |  |  |  |  |
Derivatives: foreign exchange contracts | $ | — |  |  | $ | 3,048 |  |  |  |  | $ | 3,048 |
Total liabilities at fair value | $ | — |  |  | $ | 3,048 |  |  |  |  | $ | 3,048 |
| June 30, 2021
(Amounts in Thousands) | Level 1 |  | Level 2 |  |  |  | Total
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 1,540 |  |  | $ | — |  |  |  |  | $ | 1,540 |
Derivatives: foreign exchange contracts | — |  |  | 1,468 |  |  |  |  | 1,468 |
Trading securities: mutual funds held in nonqualified SERP | 12,644 |  |  | — |  |  |  |  | 12,644 |
Total assets at fair value | $ | 14,184 |  |  | $ | 1,468 |  |  |  |  | $ | 15,652 |
Liabilities |  |  |  |  |  |  |
Derivatives: foreign exchange contracts | $ | — |  |  | $ | 1,702 |  |  |  |  | $ | 1,702 |
Total liabilities at fair value | $ | — |  |  | $ | 1,702 |  |  |  |  | $ | 1,702 |

We had no level 3 assets or liabilities at September 30, 2021 and June 30, 2021.
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 9 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.
Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include notes receivable and borrowings under credit facilities. There were no changes to the inputs and valuation techniques used to assess the fair value of these financial instruments during the three months ended September 30, 2021. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2021.
The carrying values of our cash deposit accounts, trade accounts receivable, and trade accounts payable approximate fair value due to the relatively short maturity and immaterial non-performance risk.
15

Note 8. Derivative Instruments
Foreign Exchange Contracts:
We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of business. Our primary means of managing this exposure is to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques do not fully offset currency risk, we use derivative instruments with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure is committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments are only utilized for risk management purposes and are not used for speculative or trading purposes.
We use forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency. Foreign exchange contracts are also used to hedge against foreign currency exchange rate risks related to intercompany balances denominated in currencies other than the functional currencies. As of September 30, 2021, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $46.0 million and to hedge currencies against the Euro in the aggregate notional amount of 49.2 million Euro. The notional amounts are indicators of the volume of derivative activities but may not be indicators of the potential gain or loss on the derivatives.
In limited cases due to unexpected changes in forecasted transactions, cash flow hedges may cease to meet the criteria to be designated as cash flow hedges. Depending on the type of exposure hedged, we may either purchase a derivative contract in the opposite position of the undesignated hedge or may retain the hedge until it matures if the hedge continues to provide an adequate offset in earnings against the currency revaluation impact of foreign currency denominated liabilities.
The fair value of outstanding derivative instruments is recognized on the balance sheet as a derivative asset or liability. When derivatives are settled with the counterparty, the derivative asset or liability is relieved and cash flow is impacted for the net settlement. For derivative instruments that meet the criteria of hedging instruments under FASB guidance, the gain or loss on the derivative instrument is initially recorded net of related tax effect in Accumulated Other Comprehensive Income (Loss), a component of Share Owners’ Equity, and is subsequently reclassified into earnings in the period or periods during which the hedged transaction is recognized in earnings. The gain or loss associated with derivative instruments that are not designated as hedging instruments or that cease to meet the criteria for hedging under FASB guidance is reported immediately in Non-operating income (expense), net on the Condensed Consolidated Statements of Income.
Based on fair values as of September 30, 2021, we estimate that approximately $2.4 million of pre-tax derivative loss deferred in Accumulated Other Comprehensive Loss will be reclassified into earnings, along with the earnings effects of related forecasted transactions, within the next 12 months. 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 September 30, 2021 and June 30, 2021.
See Note 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and Note 4 - Accumulated Other Comprehensive Income (Loss) of Notes to Condensed Consolidated Financial Statements for the changes in deferred derivative gains and losses.
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Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets and derivative gains and losses in the Condensed Consolidated Statements of Income are presented below.
Fair Value of Derivative Instruments on the Condensed Consolidated Balance Sheets

| Asset Derivatives |  | Liability Derivatives
|  |  | Fair Value As of |  |  |  | Fair Value As of
(Amounts in Thousands) | Balance Sheet Location |  | September 30, 2021 |  | June 30, 2021 |  | Balance Sheet Location |  | September 30, 2021 |  | June 30, 2021
Derivatives Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Prepaid expenses and other current assets |  | $ | 504 |  |  | $ | 1,158 |  |  | Accrued expenses |  | $ | 2,660 |  |  | $ | 1,549 |
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |
Foreign exchange contracts | Prepaid expenses and other current assets |  | 855 |  |  | 310 |  |  | Accrued expenses |  | 388 |  |  | 153 |
Total derivatives |  |  | $ | 1,359 |  |  | $ | 1,468 |  |  |  |  | $ | 3,048 |  |  | $ | 1,702 |

The Effect of Derivative Instruments on Other Comprehensive Income (Loss)

|  |  |  | Three Months Ended |  |
|  |  |  | September 30 |  |
(Amounts in Thousands) |  |  |  | 2021 |  | 2020 |  |  |  |
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives: |  |  |  |  |  |  |  |
Foreign exchange contracts |  |  |  | $ | (1,561) |  |  | $ | (625) |  |  |  |  |

The Effect of Derivative Instruments on Condensed Consolidated Statements of Income

|  |  |  | Three Months Ended |  |
(Amounts in Thousands) |  |  |  | September 30 |  |
Derivatives in Cash Flow Hedging Relationships |  | Location of Gain or (Loss) |  | 2021 |  | 2020 |  |  |  |
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income: |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Cost of Sales |  | $ | 101 |  |  | $ | (738) |  |  |  |  |
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) |  | $ | 73 |  |  | $ | (921) |  |  |  |  |
Total Derivative Pre-Tax Gain (Loss) Recognized in Income |  | $ | 174 |  |  | $ | (1,659) |  |  |  |  |

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Note 9. Investments
The Company maintains a self-directed supplemental employee retirement plan (“SERP”) for executive and other key employees. The Company SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. The Company recognizes SERP investment assets on the balance sheet at current fair value. A SERP liability of the same amount is recorded on the balance sheet representing an obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in the Other Income (Expense) category on our Condensed Consolidated Statements of Income. 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 for the three months ended September 30, 2021 and 2020 was approximately $(0.1) million and $0.2 million, respectively.
SERP asset and liability balances applicable to Kimball Electronics participants were as follows:

(Amounts in Thousands) | September 30, 2021 |  | June 30, 2021
SERP investments - current asset | $ | 3,054 |  |  | $ | 3,095 |
SERP investments - other long-term asset | 9,542 |  |  | 9,549 |
Total SERP investments | $ | 12,596 |  |  | $ | 12,644 |
SERP obligation - current liability | $ | 3,054 |  |  | $ | 3,095 |
SERP obligation - other long-term liability | 9,542 |  |  | 9,549 |
Total SERP obligation | $ | 12,596 |  |  | $ | 12,644 |

Note 10. Employee Benefit 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 Company established and maintains severance plans for all domestic employees and other postemployment plans for certain foreign subsidiaries. There are no statutory requirements for us to contribute to the plans, nor do employees contribute to the plans. The plans hold no assets. Benefits are paid using available cash on hand when eligible employees meet plan qualifications for payment. Net periodic benefit costs were not material for the three months ended September 30, 2021 and 2020.

Note 11. 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 granted 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.
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. For more information on the Plan and the Deferral Plan, refer to our Annual Report on Form 10-K for the year ended June 30, 2021.
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During the first three months of fiscal year 2022, the following stock compensation was granted under the Plan.

Stock Compensation Granted |  | Quarter Granted |  | Shares/Units |  | Grant Date Fair Value (2)
Long-Term Performance Shares (1) |  | 1st Quarter |  | 287,312 |  |  | $23.41 |

(1) Long-term performance share awards were granted to officers and other key employees. These annual performance share awards were approved by the Compensation and Governance Committee of the Board. Beginning with awards granted in fiscal year 2022 that will vest in fiscal year 2025, awards cliff vest at the third anniversary of the award date. To avoid a gap in the vesting of awards due to the transition from grants that vested annually in three equal installments to ones that vest after three years, two smaller bridge awards were also granted for fiscal year 2022 and fiscal year 2022-2023 performance periods. The bridge award for the fiscal year 2022 performance period cliff vests at the first anniversary of the grant. The bridge award for the fiscal year 2022-2023 performance period cliff vests at the second anniversary of the grant. The award for the fiscal year 2022-2024 performance period, and future performance share awards, cliff vest at the third anniversary of the grant.
Under these awards, a number of shares will be issued to each participant based upon a combination of a profitability attainment component, based on the Company’s operating income plan, and a growth attainment component, based on the Company’s growth in sales revenue, comparing its three-year compounded annual growth rate (“CAGR”) with the Electronics Manufacturing Services Industry’s three-year CAGR. The number of shares issued will be less than the targeted shares issuable if the Company does not reach 100% of one or both of the above-mentioned performance metrics, and could be zero if the Company does not reach the required minimum thresholds of either metric. The number of shares issued will exceed the number of targeted shares issuable (up to a maximum of 125%) if the Company exceeds 100% of one or both of the above-mentioned incentive metrics.
(2) The grant date fair value is based on the stock price at the date of the grant.
Note 12. Goodwill and Other Intangible Assets
A summary of goodwill is as follows:

(Amounts in Thousands) | September 30, 2021 |  | June 30, 2021
Goodwill | $ | 32,762 |  |  | $ | 32,762 |
Accumulated impairment | (20,751) |  |  | (20,751) |
Goodwill, net | $ | 12,011 |  |  | $ | 12,011 |

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

| September 30, 2021 |  | June 30, 2021
(Amounts in Thousands) | Cost |  | Accumulated Amortization |  | Net Value |  | Cost |  | Accumulated Amortization |  | Net Value
Capitalized Software | $ | 33,210 |  |  | $ | 29,050 |  |  | $ | 4,160 |  |  | $ | 32,774 |  |  | $ | 28,751 |  |  | $ | 4,023 |
Customer Relationships | 8,618 |  |  | 2,646 |  |  | 5,972 |  |  | 8,618 |  |  | 2,520 |  |  | 6,098 |
Technology | 5,060 |  |  | 3,044 |  |  | 2,016 |  |  | 5,060 |  |  | 2,790 |  |  | 2,270 |
Trade Name | 6,369 |  |  | 1,911 |  |  | 4,458 |  |  | 6,369 |  |  | 1,752 |  |  | 4,617 |
Other Intangible Assets | $ | 53,257 |  |  | $ | 36,651 |  |  | $ | 16,606 |  |  | $ | 52,821 |  |  | $ | 35,813 |  |  | $ | 17,008 |

During the three months ended September 30, 2021 and 2020, amortization expense of other intangible assets was $0.9 million and $0.8 million, respectively.
The estimated useful life of internal-use software ranges from 3 years to 10 years. The amortization period for the customer relationships, technology, and trade name intangible assets is 15 years, 5 years, and 10 years, respectively. We have no intangible assets with indefinite useful lives which are not subject to amortization.
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Note 13. Share Owners’ Equity
The Company has a Board-authorized stock repurchase plan (the “Plan”) allowing the repurchase of up to $100 million of our common stock. Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations. The Plan has no expiration date but may be suspended or discontinued at any time.
During the three months ended September 30, 2021, the Company had no share repurchases under the Plan. Since the inception of the Plan, the Company has repurchased $79.7 million of common stock at an average cost of $14.95 per share.
Note 14. Earnings Per Share
Basic and diluted earnings per share were calculated as follows under the two-class method:

| Three Months Ended |  |
| September 30 |  |
(Amounts in thousands, except per share data) | 2021 |  | 2020 |  |  |  |
Basic and Diluted Earnings Per Share: |  |  |  |  |  |  |
Net Income | $ | 2,564 |  |  | $ | 16,811 |  |  |  |  |
Less: Net Income allocated to participating securities | 4 |  |  | 22 |  |  |  |  |
Net Income allocated to common Share Owners | $ | 2,560 |  |  | $ | 16,789 |  |  |  |  |
Basic weighted average common shares outstanding | 25,145 |  |  | 25,153 |  |  |  |  |
Dilutive effect of average outstanding stock compensation awards | 156 |  |  | 117 |  |  |  |  |
Dilutive weighted average shares outstanding | 25,301 |  |  | 25,270 |  |  |  |  |
Earnings Per Share of Common Stock: |  |  |  |  |  |  |
Basic | $ | 0.10 |  |  | $ | 0.67 |  |  |  |  |
Diluted | $ | 0.10 |  |  | $ | 0.66 |  |  |  |  |

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “likely,” “future,” “may,” “should,” “would,” “could,” “will,” “potentially,” and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, global economic conditions, geopolitical environment, global health emergencies including the COVID-19 pandemic, availability or cost of raw materials and components, foreign exchange fluctuations, and our ability to convert new business opportunities into customers and revenue. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of Kimball Electronics are contained in our Annual Report on Form 10-K for the year ended June 30, 2021.
Business Overview
We are a global, multifaceted manufacturing solutions provider. We provide contract electronics manufacturing services (“EMS”) and diversified manufacturing services, including engineering and supply chain support, to customers in the automotive, medical, industrial, and public safety end markets. Our core competency is producing durable electronics, and we further offer diversified contract manufacturing services for non-electronic components, medical devices, medical disposables, drug delivery devices and solutions, precision molded plastics, and production automation, test, and inspection equipment. Our manufacturing services, including engineering and supply chain support, utilize common production and support capabilities globally. We are well recognized by our customers and the industry for our excellent quality, reliability, and innovative service. For the third time in four years, we were recognized in 2021 for achieving the Highest Overall Customer Rating in CIRCUITS ASSEMBLY’s 2021 Service Excellence Awards. CIRCUITS ASSEMBLY is a leading brand and technical publication for electronics manufacturers worldwide.
The contract manufacturing services industry is very competitive. As a mid-sized player, we can expect to be challenged by the agility and flexibility of the smaller, regional players, and we can expect to be challenged by the scale and price competitiveness of the larger, global players. We enjoy a unique market position between these extremes which allows us to compete with the larger scale players for high-volume projects, but also maintain our competitive position in the generally lower volume durable electronics market space. We expect to continue to effectively operate in this market space; however, one significant challenge will be maintaining our profit margins while we continue our revenue growth. 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.
The Worldwide Manufacturing Services Market - 2021 Edition, a comprehensive study on the worldwide EMS market published by New Venture Research (“NVR”), provided worldwide forecast trends through 2025. NVR projects the worldwide assembly market for electronics products to grow at a compound annual growth rate (“CAGR”) of 3.4% over the next five years, with the EMS industry projected to grow at a CAGR of 7.1%. We have a long-term compound annual growth rate target of 8%.
We continue to monitor the current economic and industry conditions for uncertainties that may pose a threat to our future growth or cause disruption in business strategy, execution, and timing in the markets in which we compete. The COVID-19 pandemic continues to impact the global economy, and we are actively monitoring its impact on all our operations. The well-being and safety of our employees remains our number one priority, and we are following guidelines suggested by applicable authorities, including utilizing protective shields, face masks, body temperature scanning, social distancing, and proper hygiene as appropriate for our operations. Our response to each positive case in our facilities follows our procedures for communication to our employees, contact tracing, self-quarantining, testing, and sanitization of the affected work areas. Because of the variety of critical medical device assemblies we manufacture around the world, our facilities were classified as “essential businesses” or otherwise permitted to operate under shelter in place orders or other similar orders during government-mandated COVID-19 shutdowns, but all have been affected to varying degrees by COVID-19. We continue to maintain close contact and communication with our customers and our supply chain to ensure safety measures follow appropriate guidelines for the health and safety of all parties and to minimize disruption of operations. While the availability of vaccines is encouraging, significant uncertainties and risks still exist related to the effectiveness and uptake of the various vaccines and the severity and duration of the impact of COVID-19 on our end markets, the supply chain, the health and availability of our workforce, and global macroeconomic conditions; therefore, its financial impact on our future results cannot be reasonably estimated but could be material.
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The EMS industry continues to experience component shortages, component allocations, and shipping delays, particularly with semiconductors, which were especially challenging in the current quarter. Component shortages or allocations could continue to increase component costs and potentially interrupt our operations and negatively impact our ability to meet commitments to customers. We have taken various actions to mitigate the risk and minimize the impact to our customers as well as the adverse effect component shortages, component allocations, or shipping delays could have on our results; however, the duration or severity of the component shortages is unknown, and its financial impact on our future results cannot be reasonably estimated but could continue to be material.
Sales to customers in the automotive market for the current fiscal year quarter improved by 9% when compared to the first quarter of fiscal year 2021; however, sales to customers in the automotive market experienced a 9% sequential decrease compared to the fourth quarter of fiscal year 2021, largely driven by the current shortage of semiconductors and its continuing impact on global automobile production. We anticipate demand from customers in the automotive market to remain strong during fiscal year 2022, but we expect a stronger second half of fiscal year 2022 than the first half as we expect the supply to catch up with the demand. In the medical market, sales were lower in the current fiscal year quarter when compared to the first quarter of fiscal year 2021, which experienced a record sales quarter due to the significant increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products, as a direct result of COVID-19. Sales in the medical market have since returned to the pre-COVID-19 levels. In the industrial market, we had lower sales in the current fiscal year quarter in large part due to lower demand for smart metering products and lower end market demand for climate control products. Sales to customers in the public safety market were lower in the current fiscal year quarter compared to the first quarter of fiscal year 2021 primarily due to material availability issues and reduced demand driven by the COVID-19 pandemic.
We have a strong focus on cost control balanced with managing the future growth prospects of our business and growing backlog of orders due to the global component shortage and logistical challenges. We expect to make investments that will strengthen or add new capabilities to our package of value as a multifaceted manufacturing solutions company, including through our recently announced capacity expansions. 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.
We continue to maintain a strong balance sheet, which included a current ratio of 1.8, a debt-to-equity ratio of 0.2, and Share Owners’ equity of $440 million at September 30, 2021. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facilities, some of which are uncommitted, totaled $183 million at September 30, 2021.
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:
•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.
•Due to the contract and project nature of the contract manufacturing industry, fluctuation in the demand for our products and variation in the gross margin on those programs 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 margin dilution early in the life of a program, which is generally recovered as the program becomes established and matures.
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•Risk factors within our business include, but are not limited to, general economic and market conditions, component availability, customer order delays, globalization, global health emergencies including the COVID-19 pandemic, impact related to tariffs and other trade barriers, foreign currency exchange rate fluctuations, rapid technological changes, 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 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 awards 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 the “Risk Factors” section of our Annual Report on Form 10-K for the year ended June 30, 2021.

|  |  |  | Three Months Ended
|  |  |  | September 30
Customer Service Years |  |  |  |  |  | 2021 |  | 2020
More than 10 Years |  |  |  |  |  |  |  |
% of Net Sales |  |  |  |  |  | 78 | % |  | 79 | %
# of Customers |  |  |  |  |  | 34 |  |  | 30 |
5 to 10 Years |  |  |  |  |  |  |  |
% of Net Sales |  |  |  |  |  | 18 | % |  | 11 | %
# of Customers |  |  |  |  |  | 22 |  |  | 19 |
Less than 5 Years |  |  |  |  |  |  |  |
% of Net Sales |  |  |  |  |  | 4 | % |  | 10 | %
# of Customers |  |  |  |  |  | 15 |  |  | 21 |
Total |  |  |  |  |  |  |  |
% of Net Sales |  |  |  |  |  | 100 | % |  | 100 | %
# of Customers |  |  |  |  |  | 71 |  |  | 70 |

Financial Overview

| At or for the |  |
| Three Months Ended |  |
| September 30 |  |
(Amounts in Millions, Except for Per Share Data) | 2021 |  | as a % of Net Sales |  | 2020 |  | as a % of Net Sales |  | % Change
Net Sales | $ | 292.7 |  |  |  |  | $ | 331.7 |  |  |  |  | (12) | %
Gross Profit | $ | 15.6 |  |  | 5.3 | % |  | $ | 30.6 |  |  | 9.2 | % |  | (49) | %
Selling and Administrative Expenses | 12.2 |  |  | 4.2 | % |  | 13.1 |  |  | 3.9 | % |  | (7) | %
Other General Income | 1.4 |  |  |  |  | 0.3 |  |  |  |  |
Operating Income | 4.8 |  |  | 1.6 | % |  | 17.8 |  |  | 5.4 | % |  | (73) | %
Other Income (Expense) | (1.2) |  |  |  |  | 2.1 |  |  |  |  |
Provision for Income Taxes | 1.0 |  |  |  |  | 3.1 |  |  |  |  |
Net Income | $ | 2.6 |  |  |  |  | $ | 16.8 |  |  |  |  | (85) | %
Diluted Earnings per Share | $ | 0.10 |  |  |  |  | $ | 0.66 |  |  |  |  | (85) | %
Open Orders | $ | 749.3 |  |  |  |  | $ | 349.8 |  |  |  |  | 114 | %

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Net Sales by Vertical Market | Three Months Ended |  |  |  |  |  |
| September 30 |  |  |  |  |  |
(Amounts in Millions) | 2021 |  | 2020 |  | % Change |  |  |  |  |  |
Automotive | $ | 129.4 |  |  | $ | 118.3 |  |  | 9 | % |  |  |  |  |  |
Medical | 85.0 |  |  | 127.1 |  |  | (33) | % |  |  |  |  |  |
Industrial | 63.9 |  |  | 70.0 |  |  | (9) | % |  |  |  |  |  |
Public Safety | 11.1 |  |  | 13.3 |  |  | (16) | % |  |  |  |  |  |
Other | 3.3 |  |  | 3.0 |  |  | 7 | % |  |  |  |  |  |
Total Net Sales | $ | 292.7 |  |  | $ | 331.7 |  |  | (12) | % |  |  |  |  |  |

First quarter fiscal year 2022 consolidated net sales decreased compared to the first quarter fiscal year 2021. Foreign currency fluctuations had a favorable impact of 1% on net sales in the current quarter compared to the first quarter of fiscal year 2021. All end market verticals have been unfavorably impacted by the component shortages. By end market vertical, our market verticals fluctuated as follows:
•Sales to customers in the automotive market during the first quarter of fiscal year 2022 increased 9% compared to the first quarter of fiscal year 2021. This increase is largely due to the ramp-up of certain programs, including programs for fully electric vehicles, which was partially offset by the unfavorable impact of component shortages.
•Sales to customers in the medical market declined in the first quarter of fiscal year 2022 when compared to the first quarter of fiscal year 2021 as first quarter fiscal year 2021 sales benefited from the temporary increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products as a direct result of the COVID-19 pandemic and related global shortage of respiratory equipment. Partially offsetting this decrease is an increase in demand for non-critical medical products.
•Sales to customers in the industrial market decreased in the first quarter of fiscal year 2022 when compared to the first quarter of fiscal year 2021, primarily due to lower demand from smart metering products and lower end market demand for climate control products, which were partially offset by the ramp-up of certain products.
•Sales to customers in the public safety market declined in the first quarter of fiscal year 2022 compared to the first quarter of fiscal year 2021 due to material availability issues and reduced demand driven by the COVID-19 pandemic.
A significant amount of sales to Nexteer Automotive and Philips accounted for the following portions of our net sales:

| Three Months Ended |  |
| September 30 |  |
| 2021 |  | 2020 |  |  |  |
Nexteer Automotive | 17% |  | 15% |  |  |  |
Philips | 14% |  | 23% |  |  |  |

Open orders were up 114% as of September 30, 2021 compared to September 30, 2020, primarily from an increase in the automotive and medical verticals. The increase in open orders in both the automotive market and the medical market is driven by the component shortages, which has limited our ability to fulfill customer orders. Open orders are the aggregate sales price of production pursuant to unfulfilled customer orders, which may be delayed or canceled by the customer subject to contractual termination provisions. Substantially all of the open orders as of September 30, 2021 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. Additionally, COVID-19 and the component shortages could impact the timing and certainty of fulfillment of open orders.
Gross profit as a percent of net sales in the first quarter of fiscal year 2022 declined when compared to the first quarter of fiscal year 2021 primarily due to lower volume, increased freight cost driven by the component shortages, wage inflation, and higher labor costs as a percent of sales as we are retaining our workforce to be well-positioned for the anticipated growth this fiscal year. The factors were partially offset by lower profit-sharing incentive bonus expense.
Selling and administrative expenses increased as a percent of net sales but decreased in absolute dollars in the first quarter of fiscal year 2022 when compared to the first quarter of fiscal year 2021. The selling and administrative expenses decreased in absolute dollars primarily from lower profit-sharing incentive bonus expense and the decrease in the fair value of the liability for the supplemental employee retirement plan (“SERP”). The lower net sales and higher salary and related payroll costs were the primary drivers for the increase as a percent of net sales in the current fiscal year first quarter.
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Other General Income in the three months ended September 30, 2021 and 2020 included $1.4 million and $0.3 million, respectively, of pre-tax income resulting from payments received related to the class action lawsuits in which Kimball Electronics was a class member. These lawsuits 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.
Other Income (Expense) consisted of the following:

|  | Three Months Ended |  |
|  | September 30 |  |
(Amounts in Thousands) |  | 2021 |  | 2020 |  |  |  |
Interest income |  | $ | 24 |  |  | $ | 7 |  |  |  |  |
Interest expense |  | (395) |  |  | (823) |  |  |  |  |
Foreign currency/derivative gain (loss) |  | (572) |  |  | 2,422 |  |  |  |  |
Gain (loss) on SERP investments |  | (87) |  |  | 550 |  |  |  |  |
Other |  | (219) |  |  | (21) |  |  |  |  |
Other income (expense), net |  | $ | (1,249) |  |  | $ | 2,135 |  |  |  |  |

Interest expense has decreased in the three months ended September 30, 2021 compared to the three months ended September 30, 2020 due to lower interest rates and lower borrowings on credit facilities. The foreign currency/derivative gain (loss) resulted from net foreign currency exchange rate movements during the period. The revaluation to fair value of the SERP investments recorded in Other Income (Expense) is offset by the revaluation of the SERP liability recorded in Selling and Administrative Expenses, and thus there is no effect on net income.

Our provision for income taxes for the first three months ended September 30, 2021 and September 30, 2020 was $1.0 million, or 27.4% of income before taxes on income, and $3.1 million, or 15.7% of income before taxes on income, respectively. The increase in the effective tax rate was driven by the lower rate in the prior fiscal year first quarter, which was favorably impacted by a discrete income tax adjustment related to the reduction in our state tax valuation allowance for research and development credit carryforwards and a favorable mix of earnings in jurisdictions with rates lower than the U.S. statutory rate of 21.0%.
Comparing the balance sheet as of September 30, 2021 to June 30, 2021, Receivables decreased $26.5 million largely due to lower sales volumes. Our inventory balance increased $61.7 million primarily due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received. Accounts payable increased $30.6 million due to the increased inventory purchases. Accrued expenses decreased $11.2 million primarily from a significant portion of accrued incentive compensation payments occurring during the first quarter.
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Liquidity and Capital Resources
Working capital at September 30, 2021 was $275.6 million compared to working capital of $282.6 million at June 30, 2021. The current ratio was 1.8 at September 30, 2021 and 1.9 at June 30, 2021. The debt-to-equity ratio was 0.2 at September 30, 2021 and 0.1 at June 30, 2021. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facilities, some of which are uncommitted, totaled $182.8 million at September 30, 2021 and $206.7 million at June 30, 2021.
Cash Conversion Days (“CCD”) are calculated as the sum of Days Sales Outstanding (“DSO”) plus Contract Asset Days (“CAD”) plus Production Days Supply on Hand (“PDSOH”) less Accounts Payable Days (“APD”). CCD, or a similar metric, is used in our industry and by our management to measure the efficiency of managing working capital. The following table summarizes our CCD for the quarterly periods indicated.

|  | Three Months Ended
|  | September 30, 2021 |  | June 30, 2021 |  |  |  |  |  | September 30, 2020
DSO |  | 57 |  | 53 |  |  |  |  |  | 51
CAD |  | 14 |  | 14 |  |  |  |  |  | 19
PDSOH |  | 77 |  | 61 |  |  |  |  |  | 64
APD |  | 75 |  | 64 |  |  |  |  |  | 58
CCD |  | 73 |  | 64 |  |  |  |  |  | 76

We define DSO as the average of monthly trade accounts and notes receivable divided by an average day’s net sales, CAD as the average monthly contract assets 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.
Cash Flows
The following table reflects the major categories of cash flows for the first three months of fiscal years 2022 and 2021.

|  | Three Months Ended
|  | September 30
(Amounts in Millions) |  | 2021 |  | 2020
Net cash (used for) provided by operating activities |  | $ | (8.2) |  |  | $ | 20.7 |
Net cash used for investing activities |  | $ | (12.9) |  |  | $ | (8.3) |
Net cash provided by (used for) financing activities |  | $ | 5.0 |  |  | $ | (5.8) |

Cash Flows from Operating Activities
Net cash used for operating activities for the first three months of fiscal year 2022 was driven by changes in operating assets and liabilities. Net cash provided by operating activities in the first three months of the prior year was largely driven by net income adjusted for non-cash items. Changes in operating assets and liabilities used $20.9 million of cash in the first three months of fiscal year 2022 compared to $3.8 million of cash used in the first three months of the prior year.
The cash used of $20.9 million from changes in operating assets and liabilities in the first three months of fiscal year 2022 is largely due to an increase in inventory, which used cash of $62.8 million primarily due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, and the decrease in accrued expenses and taxes payable, which used cash of $13.6 million from a significant portion of accrued incentive compensation payments occurring during the first quarter. Partially offsetting cash used by inventory and accrued expenses was an increase in accounts payable, which provided cash of $32.3 million largely resulting from increased inventory purchases, and a decrease in accounts receivable, which provided cash of $25.7 million primarily resulting from decreased sales volumes.
The cash used of $3.8 million from changes in operating assets and liabilities in the first three months of fiscal year 2021 was largely due to an increase in accounts receivable, which used cash of $15.1 million primarily resulting from increased sales volumes, and a decrease in accounts payable, which used cash of $9.9 million primarily from the payments on the higher inventory purchases at the end of the prior fiscal year to support increased production volumes. Partially offsetting cash used by accounts receivable and accounts payable was a decrease in inventories, which provided cash of $18.7 million primarily from the consumption of the higher inventory level at the end of the prior fiscal year to support the increased demand for medical assemblies and changes customers’ forecasts as a result of COVID-19.
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Cash Flows from Investing Activities
For the first three months of fiscal years 2022 and 2021, net cash used for investing activities was $12.9 million and $8.3 million, respectively. During the first three months of fiscal year 2022, we invested $12.7 million into capital expenditures for expansions at our Thailand and Mexico facilities, capacity purposes, and to support new business awards. During the first three months of fiscal year 2021, we invested $8.5 million into capital expenditures primarily for machinery and equipment for capacity purposes and to support new business awards.
Cash Flows from Financing Activities
For the first three months of fiscal year 2022, net cash provided by financing activities of $5.0 million resulted largely from net borrowings on our credit facilities of $6.5 million, partially offset by remittance of tax withholdings on share-based payments. For the first three months of fiscal year 2021, net cash used by financing activities of $5.8 million resulted largely from net payments on our credit facilities of $8.0 million and the remittance of tax withholdings on share-based payments, which were partially offset by the receipt of $3.0 million for the final net working capital adjustment from the GES acquisition.
Credit Facilities
The Company maintains a U.S. primary credit facility (the “primary credit facility”) 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, scheduled to mature July 27, 2023. The primary credit facility provides 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.
The proceeds of the loans on the primary credit facility are to be used for working capital and general corporate purposes of the Company including capital expenditures and potential acquisitions. A portion of the credit facility, not to exceed $15 million of the principal amount, will be available for the issuance of letters of credit. A commitment fee on the unused portion of the 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.
The interest rate on borrowings is dependent on the type of borrowings and will be one of following two options:
•the London Interbank Offered Rate (“LIBOR”) in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Eurocurrency Loans spread which can range from 125.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or
•the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of
a.JPMorgan’s prime rate;
b.1% per annum above the Adjusted LIBO Rate (as defined under the primary credit facility); or
c.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility);
plus the ABR Loans spread which can range from 25.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
At September 30, 2021, we had $68.0 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $40.0 million of the borrowings were classified as long-term as the Company intends, and has the ability, to refinance for a period longer than twelve months. At June 30, 2021, we had $62.7 million in borrowings under the primary facility and $0.4 million in letters of credit against the primary facility, and $40.0 million were classified as long-term.
The Company’s financial covenants under the primary credit facility require:
•a ratio of consolidated total indebtedness minus unencumbered U.S. cash on hand in the United States in excess of $15 million to adjusted consolidated EBITDA, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.0 to 1.0, and
•a fixed charge coverage ratio, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be less than 1.1 to 1.0.
We were in compliance with the financial covenants during the first quarter ended September 30, 2021.
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Kimball Electronics has foreign credit facilities available to satisfy short-term cash needs at specific foreign locations rather than funding from intercompany sources. These foreign credit facilities can be canceled at any time by either the bank or us. As of September 30, 2021, we maintained the following foreign credit facilities:
•A Thailand overdraft credit facility which allows for borrowings up to 2.4 million Thai Baht (approximately $0.1 million at September 30, 2021 exchange rates). We had no borrowings under this foreign credit facility as of September 30, 2021 or June 30, 2021.
•An uncommitted revolving credit facility for our Netherlands subsidiary, which allows for borrowings of up to 9.2 million Euro (approximately $10.6 million at September 30, 2021 exchange rates) that can be drawn in Euro, U.S. dollars, or another optional currency. We had $4.6 million in borrowings outstanding under this Netherlands revolving credit facility as of September 30, 2021 and $3.5 million as of June 30, 2021.
•An uncommitted revolving credit facility for our Poland operation, which allows for borrowings of up to 5 million Euro (approximately $5.8 million at September 30, 2021 exchange rates) that can be drawn in Euro, U.S. dollars, or Polish Zloty. We had no borrowings under this foreign credit facility as of September 30, 2021 or June 30, 2021.
Factoring Arrangements
The Company utilizes factoring arrangements for certain of our accounts receivables with third-party financial institutions in order to extend terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables. In the three months ended September 30, 2021 and 2020, we sold, without recourse, $62.1 million and $91.1 million of accounts receivable, respectively. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for more information regarding the factoring arrangements.
Future Liquidity
We believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our credit facilities, will be sufficient to meet our working capital and other operating needs for at least the next 12 months. The unused borrowings in USD equivalent under all of our credit facilities totaled $93.5 million at September 30, 2021. We expect to continue to prudently invest in capital expenditures, including for capacity expansions and potential acquisitions, that would help us continue our growth and development as a multifaceted manufacturing solutions company. In fiscal year 2021, we approved capacity expansions at our Thailand and Mexico facilities. We anticipate our Thailand facility expansion will be complete in the second half of fiscal year 2022 and the Mexico facility expansion will be complete in the beginning of fiscal year 2023. We are in a solid financial position to be able to weather the continuing impact of COVID-19; however, significant uncertainties and risks exist related to the severity and duration of the impact to certain markets, the supply chain, and to global macroeconomic conditions.
At September 30, 2021, our capital expenditure commitments were approximately $30 million, consisting primarily of commitments for the expansion of our Mexico and Thailand facilities, capital related to new program wins, and capacity purposes. We anticipate our available liquidity will be sufficient to fund these capital expenditures.
We have purchase obligations that arise in the normal course of business for items such as raw materials, services, and software acquisitions/license commitments. 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 to help mitigate the potential impact related to component shortages, which require longer lead times. In turn, our material authorization agreements with customers cover a portion of the exposure for material which is purchased prior to having a firm order.
At September 30, 2021, our foreign entities held cash totaling $87.7 million. Most of these accumulated unremitted foreign earnings have been invested in active non-U.S. business operations, and we expect we may only repatriate a minor amount of these earnings to the United States in a tax-efficient manner. Our intent is to permanently reinvest the remaining funds outside of the United States, and our current plans do not demonstrate a need to repatriate these funds to our U.S. operations. However, if such funds were repatriated, a portion of the funds remitted may be subject to applicable non-U.S. income and withholding taxes.
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The Company has a Board-authorized stock repurchase plan (the “Plan”) allowing the repurchase of up to $100 million of our common stock. Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations. The Plan has no expiration date but may be suspended or discontinued at any time. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the Company’s management team. The Company expects to finance the purchases with existing liquidity. The Company has repurchased $79.7 million of common stock under the Plan through September 30, 2021.
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, global health emergencies such as the COVID-19 pandemic, the duration and severity of the COVID-19 pandemic and the related uncertainties around the financial impact, 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. Additional cautionary statements regarding our risk factors are contained in our Annual Report on Form 10-K for the year ended June 30, 2021.
Fair Value
During the first quarter of fiscal year 2022, 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 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.
Off-Balance Sheet Arrangements
As of September 30, 2021, we do not have any material off-balance sheet arrangements.
Critical Accounting Policies
Kimball Electronics’ Condensed 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 Condensed 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.
There have been no material changes to our critical accounting policies since our Annual Report on Form 10-K for the year ended June 30, 2021. For further information regarding our critical accounting policies, refer to “Note 1 - Business Description and Summary of Significant Accounting Policies” of Notes to Consolidated Financial Statements and “Critical Accounting Policies” in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2021.
New Accounting Standards
See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for information regarding New Accounting Standards.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our exposure to market risks for changes in foreign currency exchange rates and interest rates as compared to the fiscal year ended June 30, 2021. The interest rate on certain borrowings under our credit facilities, including our primary credit facility, are based on LIBOR. The United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer persuade or compel panel banks to submit the rates required to calculate LIBOR. In March 2021, the administrator of LIBOR, the ICE Benchmark Administration, announced that it will cease publication of (i) the overnight and 1, 3, 6, and 12 months U.S. dollar LIBOR settings after June 30, 2023 and (ii) all other LIBOR settings, including the 1 week and 2 months U.S. dollar LIBOR settings, after December 31, 2021. If LIBOR is discontinued and we transition to a new rate, interest rates on our current or future indebtedness may be adversely affected. The Company is monitoring these developments.
Comprehensive disclosures of quantitative and qualitative market risk can be found in our Annual Report on Form 10-K for the year ended June 30, 2021.
Item 4. 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 management, including the 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 the disclosure controls and procedures were effective as of September 30, 2021.
(b)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 September 30, 2021 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. 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 and claims, individually and in the aggregate, is not expected to have a material adverse impact on our business or financial condition.
Item 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. A comprehensive disclosure of risk factors related to Kimball Electronics can be found in our Annual Report on Form 10-K for the year ended June 30, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On October 21, 2015, our Board of Directors (the “Board”) approved an 18-month stock repurchase plan (the “Plan”), authorizing the repurchase of up to $20 million worth of our common stock. Then, separately on each of September 29, 2016, August 23, 2017, November 8, 2018, and November 10, 2020, the Board extended and increased the Plan to allow the repurchase of up to an additional $20 million worth of common stock with no expiration date, which brought the total authorized stock repurchases under the Plan to $100 million.
During the three months ended September 30, 2021, the Company did not purchase any common stock. The Company’s maximum value of remaining shares that may be purchased under the Plan was $20.3 million at September 30, 2021.
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Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K)

|  |  | Incorporated by Reference
Exhibit No. |  | Description | Form | Period Ending | Exhibit | Filing Date
3.1 |  | Amended and Restated Articles of Incorporation of the Company | 8-K |  | 3.1 | 2/18/2021
3.2 |  | Amended and Restated By-Laws of the Company | 8-K |  | 3.2 | 2/18/2021
31.1 |  | 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 | Filed Herewith |  |  |
31.2 |  | 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 | Filed Herewith |  |  |
32.1(a) |  | 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 | Furnished Herewith |  |  |
32.2(a) |  | 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 | Furnished Herewith |  |  |
101.INS |  | Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document | Filed Herewith |  |  |
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document | Filed Herewith |  |  |
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed Herewith |  |  |
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed Herewith |  |  |
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed Herewith |  |  |
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed Herewith |  |  |
104 |  | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | Filed Herewith |  |  |
(a) 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.

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SIGNATURES
Pursuant to the requirements 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.

|  | KIMBALL ELECTRONICS, INC.
| By: | /s/ DONALD D. CHARRON
|  | Donald D. Charron Chairman of the Board, Chief Executive Officer
|  | November 4, 2021
| By: | /s/ JANA T. CROOM
|  | Jana T. Croom Vice President, Chief Financial Officer
|  | November 4, 2021

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