Jasper-based Kimball International Inc. (Nasdaq: KBAL) is reporting fiscal third quarter net income of $4.9 million, compared to $7.2 million during the same period the previous year. The company recently spun off its electronics business and it says income from continuing operations checked in at $4.9 million, compared to a loss of $37,000 a year ago. Chief Executive Officer Bob Schneider says he is encouraged by the results in what is traditionally the company's “seasonally low” quarter.
May 5, 2015
Jasper, Ind. — Kimball International, Inc. (NASDAQ: KBAL) today announced third quarter fiscal year 2015 net sales of $145.9 million and income from continuing operations of $4.9 million, or $0.13 per Class B diluted share. Adjusted income from continuing operations for the third quarter of fiscal year 2015 was $5.3 million, or $0.14 per share, excluding charges related to a previously announced restructuring plan and the spin-off of the Company's Electronic Manufacturing Services segment.
Bob Schneider, Chairman and CEO, stated, “Our third quarter of fiscal year 2015 showed improvements in many areas. Normally the third quarter is our seasonally low quarter, but $145.9 million of sales this quarter was on par with sales in the first and second quarters of fiscal year 2015. Sales were up a strong 17% compared to the prior year third quarter, on increases within five of our six vertical markets. It is great to see broad-based improvement. Equally encouraging is our order backlog as of the end of the current year third quarter which is up 22% when compared to the order backlog last year at this time, and positions us well for top-line performance in the fourth quarter of fiscal year 2015. We are making nice progress in our journey to 8% operating income.”
On October 31, 2014, Kimball International spun off its Electronic Manufacturing Services segment. The following discussion excludes the results of the Electronic Manufacturing Services segment for all periods presented, except where indicated. All earnings per share figures represent Class B diluted earnings per share from continuing operations.
Net sales in the third quarter of fiscal year 2015 increased 17% from the prior year third quarter, primarily driven by increases in the hospitality and other commercial vertical markets. Net sales for the hospitality vertical increased 36% over the prior year, fueled by strong sales of non-custom hospitality furniture, both on hotel renovations and new hotel construction. The other commercial vertical, which is the largest portion of our business focused on a broad variety of customers, increased 21% over the prior year third quarter on strong day-to-day and project business aided by new product and marketing initiatives.
Orders received during the fiscal year 2015 third quarter increased 15% over the prior year third quarter. The other commercial, education, and healthcare vertical markets are experiencing increased demand in part driven by new products and marketing initiatives. Partially offsetting these increases was a decline in orders received in the finance vertical market.
Third quarter gross profit as a percent of net sales increased 0.9 of a percentage point from the prior year third quarter. The increase was driven by price increases net of discounting, operational improvements, and strong cost controls which have enabled us to increase margins as sales volumes increase.
Selling and administrative expenses in the third quarter of fiscal year 2015 declined as a percent of sales by 3.8 percentage points on leverage from higher sales volumes, but increased 2% in absolute dollars compared to the prior year. Higher commission expense related to the increased sales volumes and higher costs related to new product launches were partially offset by lower employee benefit expenses. Included in fiscal year 2015 third quarter selling and administrative expenses are $0.2 million of pre-tax costs related to the spin-off of Kimball Electronics, as compared to $0.4 million pre-tax spin-off costs in the prior year third quarter.
Pre-tax restructuring costs in the third quarter of fiscal year 2015 totaled $0.4 million and were related to the Company's previously announced restructuring plan to consolidate its metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and to sell a Company plane that was used primarily for management travel. Included in pre-tax restructuring costs this quarter was a $0.2 million pre-tax gain from the sale of the Company plane, which partially offsets impairment recognized earlier in fiscal year 2015.
The Company's 10.5% effective tax rate for the third quarter of fiscal year 2015 was lower than the prior year third quarter effective tax rate of 96.4%. The current year third quarter effective tax rate was favorably impacted by $1.5 million ($0.04 per share) of releases of income tax reserves upon the expiration of statutes of limitation and tax accrual adjustments. The prior year third quarter included favorable tax adjustments of $0.4 million ($0.01 per share).
Operating cash flow for the third quarter of fiscal year 2015 was a positive cash flow of $10.3 million compared to a positive cash flow of $19.8 million in the third quarter of the prior year. The prior year figures include Kimball Electronics' operating cash flows, as cash management was centralized prior to the spin-off.
The Company's cash and cash equivalents declined to $50.0 million at March 31, 2015, compared to June 30, 2014 cash and cash equivalents of $136.6 million (inclusive of Kimball Electronics). The decline was primarily due to the transfer of $63.0 million of cash to the Kimball Electronics subsidiary as of the October 31, 2014 spin-off date, at which time Kimball Electronics began operation as an independent company.
The Company recently began to repurchase its shares pursuant to a previously announced stock repurchase program which allows for the repurchase of up to two million shares. During the third quarter, the Company acquired 316,000 shares of common stock at an aggregate purchase price of $3.1 million. Additionally the Company has paid $5.7 million of dividends to shareholders during fiscal year 2015, for a total year-to-date capital return to shareholders of $8.8 million.
Since the spin-off of the Electronics Manufacturing Services segment on October 31, 2014, the Company has taken significant steps to grow shareholder value as a furniture-focused company, including an announced restructuring resulting in the eventual closing of its Post Falls, Idaho manufacturing facility, following a transition of work to Company-owned facilities in southern Indiana, as well as the sale of a corporate jet focused on management usage. The sale of the corporate jet was completed during the Company's third quarter.
The consolidation of the Idaho manufacturing facility into other operations in southern Indiana is progressing according to plan with completion of the plan anticipated by September 2016. Estimated savings resulting from the consolidation activities are expected to be approximately $5 million annually thereafter. When the restructuring is complete and the savings are fully realized beginning in the quarter ending December 31, 2016, the Company expects operating income as a percent of net sales to be in the range of 7% to 8% for that quarter. Net sales in that quarter are expected to be in the range of $170 million to $180 million; operating income is expected in the range of $12 million to $14 million; the effective tax rate is expected to range from 35% to 38%; and earnings per diluted share are expected to range from $0.20 to $0.24. At 8% operating income, return on capital would approach 20%, which is among the best in the office furniture industry.
Mr. Schneider concluded, “In our continuing effort