Spin-Off Affects Kimball International Earnings
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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowJasper-based Kimball International Inc. (Nasdaq: KBALB) is reporting a fiscal first quarter profit of $8 million, compared to $9.2 million during the same period a year earlier. Some expenses from the recently-complete spin-off of the company's electronic manufacturing services segment were offset by the performance of its furniture segment. November 6, 2014
News Release
JASPER, Ind. – Kimball International, Inc. (NASDAQ: KBAL) today announced net sales of $348.2 million and net income of $8.0 million, or $0.21 per Class B diluted share, for the first quarter of fiscal year 2015 which ended September 30, 2014. Excluding incremental after-tax costs related to the spin-off of the Company's EMS segment of $1.5 million ($0.04 per Class B diluted share), the adjusted net income for the first quarter of fiscal year 2015 was $9.5 million, or $0.25 per Class B diluted share.
Consolidated Overview
Consolidated net sales in the first quarter of fiscal year 2015 increased 10% from the prior year first quarter on increased net sales in both the Furniture segment and the Electronic Manufacturing Services (“EMS”) segment.
First quarter gross profit as a percent of net sales increased 1.5 percentage points from the prior year first quarter on improved margins in both the Furniture segment and the EMS segment.
Consolidated selling and administrative expenses in the first quarter of fiscal year 2015 increased 9% in absolute dollars compared to the prior year partially due to higher profit-based incentive compensation costs, higher salaries and benefits, increased investments in sales and marketing activities, and $1.6 million of incremental pre-tax costs related to the spin-off of the Company's EMS segment. Partially offsetting these higher first quarter of fiscal year 2015 costs was a favorable year over year variance driven by a $1.2 million pre-tax impairment charge ($0.7 million after-tax impact) recognized in the first quarter of the prior year, related to the decision to downsize the plane fleet from three jets to two and the resulting reclassification as held for sale. In addition, the Company recorded $0.3 million of income in the first quarter of fiscal year 2015 related to the normal revaluation to fair value of its Supplemental Employee Retirement Plan (“SERP”) liability compared to $1.1 million of expense in the first quarter of the prior fiscal year. The revaluation of the SERP liability is offset by a corresponding revaluation of the SERP investment which was recorded in Other Income/Expense, and thus there was no effect on net income.
No Other General Income was recorded during the first quarter of fiscal year 2015. Other General Income in the first quarter of fiscal year 2014 included $5.0 million of pre-tax income resulting from settlement proceeds related to two antitrust class action lawsuits of which the Company was a class member. The class actions alleged that certain EMS segment suppliers illegally conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to purchasers of those components several years ago.
Other Income/Expense was expense of $0.8 million for the first quarter of fiscal year 2015 compared to income of $1.0 million for the first quarter of the prior year. The variance was primarily related to the revaluation to fair value of the Company's Supplemental Employee Retirement Plan, which as discussed above is offset in the selling and administrative expenses.
The Company's effective tax rate for the first quarter of fiscal year 2015 of 37.9% was higher than the prior year first quarter effective tax rate of 28.0%. Primary reasons for the higher rate were the current year negative effect of non-deductible spin-off related costs (driving a 3.2% tax rate increase) and the prior year favorable adjustment of a foreign jurisdiction deferred tax asset valuation allowance (driving a 4.1% tax rate increase).
Operating cash flow for the first quarter of fiscal year 2015 was a cash outflow of $6.7 million compared to a cash inflow $16.0 million in the first quarter of the prior year. The current quarter cash outflow was primarily driven by the payment of accrued profit-based incentive compensation.
The Company's cash and cash equivalents declined to $113.2 million at September 30, 2014, compared to $136.6 million at June 30, 2014. During the first quarter of fiscal year 2015 we reinvested $11.2 million into capital investments for the future with the largest investments being made for manufacturing equipment in the EMS segment. The Company had no short-term borrowings outstanding at September 30, 2014 or June 30, 2014. Long-term debt including current maturities was less than $300,000 at September 30, 2014.
Robert F. Schneider, Chief Executive Officer, stated, “Our first quarter of fiscal year 2015 delivered sales and earnings improvement within both segments resulting in a 47% increase in adjusted EPS over last year first quarter, excluding the impact of spin-off expenses, settlement proceeds from lawsuits, and restructuring charges. Within the Furniture segment, sales grew in several key vertical markets including our largest market which provides furniture for commercial business and professional services customers. Orders received during the quarter were very strong in all furniture verticals, including hospitality, which had the third best order quarter in the history of the Company. I am very encouraged by the 33% increase in Furniture segment operating income over the first quarter of last year, along with improving operating income as a percent of sales to 4.4% during the quarter. The EMS segment produced record sales during the first quarter of fiscal year 2015, showing double-digit growth in all of the segment's vertical markets. EMS adjusted operating income, excluding the prior year impact of lawsuit income and restructuring, improved a substantial 72% compared to the prior year as we were able to leverage increased volume.”
Mr. Schneider concluded, “In October, we achieved a significant milestone with the completion of the spin-off of our Kimball Electronics subsidiary, creating a new independent publicly traded company. At the same time we continued to maintain strong positive momentum, focusing on our customers' needs, sustaining our culture, and delivering Share Owner value. Both companies are well positioned for future success, with sound business models and strong balance sheets. We look forward to the increased focus that the spin-off allows, enabling both companies to execute specific strategies that are most effective within their particular markets.”
Furniture Segment
Fiscal year 2015 first quarter net sales in the Furniture segment increased 2% compared to the prior year. Increased net sales in the other commercial, finance, and government vertical markets were partially offset by declines in the education, hospitality, and healthcare vertical markets.
Orders received during the fiscal year 2015 first quarter increased 2% over the prior year. Increased orders in other commercial, healthcare and government verticals were primarily offset by lower orders in the hospitality vertical. Orders in the hospitality vertical declined compared to the prior year due to a large order received in the prior year; however, despite the decline, hospitality orders received during the quarter represented the third best in the history of the Company. Without the impact of the large prior year hospitality order ($10.2 million), fiscal year 2015 first quarter orders received increased 9% over the prior year first quarter, and excluding the entire hospitality vertical, orders increased 10% over the prior year first quarter.
Furniture segment gross profit as a percent of net sales increased 2.8 percentage points in the first quarter of fiscal year 2015 when compared to the prior year. The Furniture segment i