Document/ExhibitDescriptionPagesSize 1: 10-Q Kimball International, Inc. Form 10-Q HTML 1.35M
2: EX-31.1 Kimball International, Inc. EX-31.1 HTML 28K
3: EX-31.2 Kimball International, Inc. EX-31.2 HTML 28K
4: EX-32.1 Kimball International, Inc. EX-32.1 HTML 25K
5: EX-32.2 Kimball International, Inc. EX-32.2 HTML 25K
11: R1 Cover page HTML 80K
12: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 135K
13: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 41K
Parentheticals
14: R4 Condensed Consolidated Statements of Operations HTML 102K
(Unaudited)
15: R5 Condensed Consolidated Statements of Comprehensive HTML 90K
Income (Loss) (Unaudited)
16: R6 Condensed Consolidated Statements of Cash Flows HTML 116K
(Unaudited)
17: R7 Condensed Consolidated Statements of Cash Flows HTML 34K
(unaudited) - Cash Reconciliation
18: R8 Condensed Consolidated Statement of Shareowners' HTML 66K
Equity (unaudited) Statement
19: R9 Condensed Consolidated Statement of Shareowners' HTML 33K
Equity (unaudited) Parentheticals
20: R10 Basis of Presentation HTML 28K
21: R11 Recent Accounting Pronouncements and Supplemental HTML 89K
Information
22: R12 Restructuring HTML 51K
23: R13 Revenue HTML 38K
24: R14 Leases HTML 53K
25: R15 Earnings Per Share HTML 38K
26: R16 Income Taxes HTML 28K
27: R17 Inventories HTML 34K
28: R18 Accumulated Other Comprehensive Income HTML 71K
29: R19 Long-Term Debt and Revolving Credit Facility HTML 38K
30: R20 Commitments and Contingent Liabilities HTML 36K
31: R21 Fair Value HTML 87K
32: R22 Investments HTML 39K
33: R23 Derivative Instruments HTML 30K
34: R24 Stock Compensation HTML 37K
35: R25 Basis of Presentation (Policies) HTML 26K
36: R26 Recent Accounting Pronouncements and Supplemental HTML 96K
Information (Policies)
37: R27 Recent Accounting Pronouncements and Supplemental HTML 80K
Information (Tables)
38: R28 Restructuring (Tables) HTML 48K
39: R29 Revenue (Tables) HTML 33K
40: R30 Leases (Tables) HTML 54K
41: R31 Earnings Per Share (Tables) HTML 36K
42: R32 Inventories (Tables) HTML 34K
43: R33 Accumulated Other Comprehensive Income (Tables) HTML 73K
44: R34 Long-Term Debt and Revolving Credit Facility HTML 31K
(Tables)
45: R35 Commitments and Contingent Liabilities (Tables) HTML 33K
46: R36 Fair Value (Tables) HTML 84K
47: R37 Investments (Tables) HTML 35K
48: R38 Stock Compensation (Tables) HTML 37K
49: R39 Recent Accounting Pronouncements and Supplemental HTML 34K
Information - Narrative (Details)
50: R40 Recent Accounting Pronouncements and Supplemental HTML 59K
Information - Schedule of Finite-Lived Intangible
Assets (Details)
51: R41 Recent Accounting Pronouncements and Supplemental HTML 39K
Information - Amortization Expense and Future
Expected Expenses (Details)
52: R42 Recent Accounting Pronouncements and Supplemental HTML 30K
Information - Components of Non-operating income
(Expense), Net (Details)
53: R43 Restructuring - Narrative (Details) HTML 50K
54: R44 Restructuring - Charges related to Transformation HTML 45K
Restructuring Plan (Details)
55: R45 Restructuring - Current Period activity in accrued HTML 36K
restructuring related to Transformation
Restructuring Reserve (Details)
56: R46 Revenue - Disaggregation of Revenue (Details) HTML 35K
57: R47 Revenue - Narrative (Details) HTML 25K
58: R48 Leases - Narrative (Details) HTML 27K
59: R49 Leases - Components of Lease Expense (Details) HTML 30K
60: R50 Leases - Supplemental Cash Flow relating to Leases HTML 33K
(Details)
61: R51 Leases - Summary of Future Lease Payments HTML 56K
(Details)
62: R52 Earnings Per Share - Schedule of EPS Basic and HTML 56K
Diluted (Details)
63: R53 Earnings Per Share - Narrative (Details) HTML 29K
64: R54 Income Taxes (Details) HTML 25K
65: R55 Inventories - Inventory Components (Details) HTML 36K
66: R56 Inventories - Narrative (Details) HTML 28K
67: R57 Accumulated Other Comprehensive Income- Schedule HTML 46K
of Balances of Each Component (Details)
68: R58 Accumulated Other Comprehensive Income - HTML 51K
Reclassifications from Accumulated Other
Comprehensive Income (Details)
69: R59 Long-Term Debt and Revolving Credit Facility - HTML 37K
Schedule of Short-term and Long-term Debt
(Details)
70: R60 Long-Term Debt and Revolving Credit Facility - HTML 50K
Narrative (Details)
71: R61 Commitments and Contingent Liabilities - Narrative HTML 30K
(Details)
72: R62 Commitments and Contingent Liabilities - Product HTML 31K
Warranty (Details)
73: R63 Fair Value - Narrative (Details) HTML 39K
74: R64 Fair Value - Recurring Fair Value Measurements HTML 71K
(Details)
75: R65 Investments - Supplemental Employee Retirement HTML 26K
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76: R66 Investments - Supplemental Employee Retirement HTML 33K
Plan Investments (Details)
77: R67 Investments - Investments - Equity securities HTML 28K
without readily determinable fair value Textuals
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78: R68 Derivative Instruments (Details) HTML 57K
79: R69 Stock Compensation - Narrative (Details) HTML 28K
80: R70 Stock Compensation - Schedule of Awards (Details) HTML 44K
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(Exact name of registrant as specified in its charter)
iIndiana
i35-0514506
(State
or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
i1600 Royal Street, iJasper,
iIndiana
i47546-2256
(Address of principal executive offices)
(Zip
Code)
i(812)i482-1600
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(s)
Name of each exchange on which registered
iClass B Common Stock, par value
$0.05 per share
iKBAL
The iNASDAQ 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.
iYesx No o
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).
iYesx No o
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 oiAccelerated filerx
Non-accelerated filer o Smaller
reporting company i☐
Emerging growth company i☐
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).
Adjustments
to reconcile net income (loss) to net cash (used for) provided by operating activities:
Depreciation
i3,634
i3,562
Amortization
i2,195
i2,439
(Gain)
loss on sales of assets
(i4)
i4
Restructuring
and asset impairment charges
i314
i853
Deferred
income tax and other deferred charges
(i1,219)
i961
Stock-based
compensation
i1,168
i1,122
Change
in earn-out liability
(i3,160)
i4,610
Other,
net
(i418)
(i669)
Change
in operating assets and liabilities:
Receivables
i14,548
i4,834
Inventories
(i8,281)
(i4,943)
Prepaid
expenses and other current assets
i6,225
(i1,764)
Accounts
payable
(i667)
i7,804
Customer
deposits
i6,721
i2,731
Accrued
expenses
(i9,520)
(i4,590)
Net
cash provided by operating activities
i18,092
i11,905
Cash
Flows From Investing Activities:
Capital expenditures
(i4,202)
(i2,734)
Proceeds
from sales of assets
i311
i122
Purchases
of capitalized software
(i1,222)
(i1,101)
Other,
net
i167
i121
Net
cash used for investing activities
(i4,946)
(i3,592)
Cash
Flows From Financing Activities:
Proceeds from revolving credit facility
i40,000
i10,000
Payments
on revolving credit facility
(i43,000)
(i10,000)
Repayments
of long-term debt
(i79)
(i30)
Dividends
paid to shareholders
(i3,309)
(i3,308)
Repurchases
of Common Stock
(i1,011)
(i1,531)
Repurchase
of employee shares for tax withholding
i—
(i216)
Net
cash used for financing activities
(i7,399)
(i5,085)
Net
Increase in Cash, Cash Equivalents, and Restricted Cash (1)
i5,747
i3,228
Cash,
Cash Equivalents, and Restricted Cash at Beginning of Period (1)
i11,996
i25,727
Cash,
Cash Equivalents, and Restricted Cash at End of Period (1)
$
i17,743
$
i28,955
Supplemental
Disclosure of Cash Flow Information
Cash paid (refunded) during the period for:
Income taxes
$
(i974)
$
i98
Interest
expense
$
i639
$
i220
(1)
The following table reconciles cash and cash equivalents in the balance sheets to cash, cash equivalents, and restricted cash per the statements of cash flows. The restricted cash included in other assets on the balance sheet represents customer deposits held due to a foreign entity being classified as a restricted entity by a government agency subsequent to our receipt of the deposit and also cash held in escrow for repayment of the Payment Protection Program loan that Poppin, Inc. obtained prior to its acquisition. In addition, the restricted cash balance for periods June 30, 2022 and prior included amounts pledged as collateral for a long-term financing arrangement as contractually required by a lender and the restriction lapsed when the related debt was paid.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. iiBasis
of Presentation/
The accompanying unaudited Condensed Consolidated Financial Statements of Kimball International, Inc. (the “Company,”“Kimball International,”“we,”“us,” or “our”) have been prepared in accordance with the instructions to Form 10-Q. 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. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.
iPrior Period Reclassification:
We
combined the Long-term earn-out liability line with the Other long-term liabilities line on our June 30, 2022 balance sheet as the balance no longer requires separate presentation.
Note 2. iRecent Accounting Pronouncements and Supplemental Information
iRecently
Issued Accounting Pronouncements Not Yet Adopted:
In October 2021, the Financial Accounting Standards Board issued guidance on accounting for contract assets and contract liabilities, related to revenue contracts with customers, during a business combination by the acquiring business entity. The acquirer is to measure the contract asset and contract liability as of the acquisition date as if the acquirer had originated the contracts.
This is a departure from the current practice under U.S. GAAP of recognizing contract assets and contract liabilities at fair value as of the acquisition date. The guidance will be effective in our first quarter of fiscal year 2024, though early adoption is permitted. Management is unable to predict whether the adoption of this guidance will have a material impact on our financial statements.
i
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. Goodwill is assigned to and the fair value is tested at the reporting unit level. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test which compares the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. Under the quantitative assessment, if the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. The fair value is established primarily using a discounted
cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date and reporting unit specific scenarios weighted on probability of outcome.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, and determination of our weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results,
market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. While we have historically performed goodwill impairment testing annually during the second fiscal quarter, changes in circumstances may require interim assessments of the carrying amounts of our reporting units relative to their fair values.
As a result of revenue and earnings forecast declines within our Poppin reporting unit, we determined that a triggering event had occurred; therefore, we performed a quantitative assessment of the fair value of goodwill as of September 30, 2022. Based upon
8
our
quantitative impairment assessment, we determined the fair value exceeded the carrying amount of our Poppin reporting unit thus ino impairment was recorded. However, further changes to the assumptions regarding the future performance, an adverse change to macroeconomic conditions, or a change to other assumptions could result in additional impairment losses in the future, which could be significant. The goodwill within our Poppin reporting unit remains susceptible to future impairment charges due to narrow differences between fair value and carrying value resulting from the $i34.1 million
goodwill impairment charge recorded in fiscal year 2022 which was primarily driven by reductions in our long-term net sales and profitability projections. Our remaining goodwill within the Poppin reporting unit totals $i36.7 million.
iOther
Intangible Assets reported on the Condensed Consolidated Balance Sheets consist of capitalized software, customer relationships, trade names, acquired technology, patents and trademarks, and non-compete agreements. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets.iA summary of intangible assets subject to amortization is as follows:
A
summary of the useful lives of intangible assets subject to amortization is as follows:
Years
Capitalized Software
i3 to i13
Customer
Relationships
i10
Trade Names
i10
Acquired
Technology
i7
Patents
i14
Trademarks
i15
Non-Compete
Agreements
i5
i
Amortization
expense incurred and future expected expenses related to intangible assets were:
Three months ended
September 30
Remainder
Future Fiscal Years
(Amounts
in Thousands)
2022
2021
2023
2024
2025
2026
2027
Thereafter
Amortization Expense
$
i2,195
$
i2,439
$
i7,224
$
i9,240
$
i9,021
$
i8,638
$
i6,298
$
i13,223
/
iCapitalized
software is stated at cost less accumulated amortization and is amortized using the straight-line method. During the software application development stage, capitalized costs include external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process re-engineering costs are expensed in the period in which they are incurred.
9
Trade names, non-compete agreements, acquired technology, patents and trademarks are amortized on a straight-line
basis over their estimated useful lives. Customer relationships are amortized based on estimated attrition rates of customers. We have ino intangible assets with indefinite useful lives which are not subject to amortization.
i
Non-operating
Income (Expense), net:
Non-operating income and expense include the impact of such items as fair value adjustments on Supplemental Employee Retirement Plan (“SERP”) investments, amortization of actuarial income, foreign currency rate movements, bank charges, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain or loss on SERP investments is offset by a change in the SERP liability that is recognized in selling and administrative expenses.
i
Components
of the Non-operating income (expense), net line, were:
Three Months Ended
September 30
(Amounts in Thousands)
2022
2021
Loss
on SERP Investments
$
(i459)
$
(i93)
Other
(i31)
(i93)
Non-operating
income (expense), net
$
(i490)
$
(i186)
/
Note
3. iRestructuring
We recognized pre-tax restructuring expense of $i0.4 million in the three months ended September 30,
2022, and recognized $i1.5 million for the three months ended September 30, 2021.
iWe utilized available market
prices and management estimates to determine the fair value of impaired assets. Restructuring is included in the Restructuring Expense line item on our Condensed Consolidated Statements of Operations.
Transformation Restructuring Plan:
Current actions under our transformation restructuring plan are focused on activities such as the streamlining of manufacturing facilities, the consolidation of showrooms, and the closure of our manufacturing facility in Tijuana, Mexico which was completed during the first quarter of fiscal year 2023. This phase of the transformation restructuring plan began in the first quarter of our fiscal year 2021, and we expect a substantial majority of the restructuring actions to be completed by the end of fiscal year 2023.
In addition to the savings already generated from the first phase of the transformation
restructuring plan, the efforts of this second phase of the transformation restructuring plan are expected to generate annualized pre-tax savings of approximately $i19.0 million when it is fully implemented. We currently estimate this phase of the transformation restructuring plan will incur total pre-tax restructuring charges of approximately $i21.5
million to $i22.0 million, with approximately $i2.5 million expected to be recorded in remainder of fiscal
year 2023. The restructuring charges are expected to consist of approximately $i7.0 million for severance and other employee-related costs, $i6.3
million to $i6.5 million for facility costs, and $i8.2 million to $i8.5
million for lease and other asset impairment. Approximately i55% of the total cost estimate is expected to be cash expense.
10
iA
summary of the charges recorded in connection with the second phase of the transformation restructuring plan is as follows:
Three Months Ended
Charges Incurred to Date
September
30
(Amounts in Thousands)
2022
2021
Cash-related restructuring charges:
Severance and other employee related costs
$
i190
$
i146
$
i7,025
Facility
exit costs and other cash charges
i933
i456
i4,881
Total
cash-related restructuring charges
$
i1,123
$
i602
$
i11,906
Non-cash
charges:
(Gain) on sale, impairment of assets and accelerated depreciation
(i753)
i853
i7,778
Total
charges
$
i370
$
i1,455
$
i19,684
/
i
A
summary of the current period activity in accrued restructuring related to the second phase of the transformation restructuring plan is as follows:
The following table provides information
about revenue by operating segment:
Three Months Ended
September 30
(Amounts in Millions)
2022
2021
Workplace
& Health
$
i142.8
$
i116.3
Hospitality
i19.7
i25.0
eBusiness
i15.3
i15.3
Total
Net Sales
$
i177.8
$
i156.6
/
For
the three months ended September 30, 2021, the Workplace and Health categories have been combined based on our reassessment of disaggregation of revenue based on our current method of evaluating our business.
Receivables in the Condensed Consolidated Balance Sheets represent the amount of consideration to which we are entitled in exchange for the goods or services sold to our customers, net of allowances for doubtful accounts. Receivables are recorded when the right to consideration from the customer becomes unconditional, which is generally upon billing or upon satisfaction of a performance obligation, whichever is earlier.
We also receive deposits from certain customers before revenue
is recognized, resulting in the recognition of a contract liability reported as Customer Deposits in the Condensed Consolidated Balance Sheets. Customer deposits are typically utilized within a
11
year of the receipt of the deposit. The amount of revenue recognized during the three months ended September 30, 2022 that was included in the June 30, 2022 customer deposit balance was $i16.6
million.
Note 5. iLeases
Our operating lease portfolio is primarily comprised of showrooms, which expire at various dates through fiscal year 2030. We have ino
financing leases. Certain operating lease agreements include rental payments adjusted periodically for inflationary indices. Additionally, some leases include options to renew or terminate the leases which can be exercised at our discretion. Lease terms include the noncancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods.
iCertain leases have terms that are dependent upon the occurrence of events, activities, or circumstances in lease agreements and incur variable lease expense
driven by warehouse square footage utilized, property taxes assessed, and other non-lease component charges. Variable lease expense is presented as operating expense in our Condensed Consolidated Statements of Operations in the same line item as expense arising from fixed lease payments for operating leases.iFor all classes of assets, we do not separate non-lease components of a contract from the lease components to which they relate.iWe
do not recognize a right-of-use asset or lease liability for short-term leases that have a lease term of twelve months or less.
i
The components of our lease expenses are as follows:
Three
Months Ended
September 30
(Amounts in Millions)
2022
2021
Operating lease expense
$
i1.3
$
i1.2
Variable
lease expense
i1.7
i1.4
Total
lease expense
$
i3.0
$
i2.6
/
Right-of-use
assets for operating leases are tested for impairment in the same manner as long-lived assets used in operations as explained in Note 12 - Fair Value of Notes to Condensed Consolidated Financial Statements. During the first three months of fiscal year 2023 we had ino lease impairment, however for the first three months of fiscal year 2022 we recorded $i0.7
million of right-of-use asset and associated leasehold improvement impairments. The impairment charge is included in the Restructuring Expense line item on our Condensed Consolidated Statements of Operations. See Note 3 - Restructuringof Notes to Condensed Consolidated Financial Statements for more information on the impairment.
iSupplemental cash flow and other information
related to leases are as follows:
Non-cash
impact of obtaining new right-of-use assets
$
i1.5
$
i—
As
of
September 30
2022
2021
Other information:
Weighted-average remaining term (in years)
i4.6
i4.1
Weighted-average
discount rate
i4.5
%
i4.6
%
/
12
i
The
following table summarizes the future minimum lease payments as of September 30, 2022:
Fiscal Year Ended
(Amounts in Millions)
June 30 (1)
2023
$
i4.6
2024
i4.4
2025
i3.8
2026
i2.8
2027
i2.1
Thereafter
i2.1
Total
lease payments
$
i19.8
Less interest
i1.9
Present
value of lease liabilities
$
i17.9
(1) Lease payments include options to extend lease terms that are reasonably certain of being exercised. The payments exclude legally binding minimum lease payments for leases signed but not yet commenced. At September 30, 2022, we have additional operating leases that have not yet commenced for which we will record both right-of-use assets and lease liabilities of $ii9.9/ million.
Two of the leases are expected to commence in our second quarter of fiscal year 2023 with lease terms of approximately i3 years at a total of $i0.3 million.
A third lease is expected to commence in our third quarter of fiscal year 2023 with a lease term of approximately i10 years at $i5.7 million,
while a fourth lease is expected to commence in our fourth quarter of fiscal year 2023 with a lease term of approximately i12 years at $i3.9 million.
/
Note
6. iEarnings Per Share
Basic earnings per share are based on the weighted average number of shares outstanding during the period. Diluted earnings per share are based on the weighted average number of shares outstanding plus the assumed issuance of common shares for all potentially dilutive securities.
i
Three
Months Ended
September 30
(Amounts in Thousands, Except for Per Share Data)
2022
2021
Net Income (Loss)
$
i6,556
$
(i5,049)
Average
Shares Outstanding for Basic EPS Calculation
i36,754
i36,821
Dilutive
Effect of Average Outstanding Compensation Awards
i222
i—
Average
Shares Outstanding for Diluted EPS Calculation
i36,976
i36,821
Basic
Earnings (Loss) Per Share
$
i0.18
$
(i0.14)
Diluted
Earnings (Loss) Per Share
$
i0.18
$
(i0.14)
/
Stock
compensation awards were antidilutive as a result of the net loss for the quarter ended September 30, 2021, thus i790,000 average restricted stock units and i174,000
average relative total shareholder return awards were excluded from the dilutive calculation.
Note 7. iIncome Taxes
iIn
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. Our effective tax rate for the three months ended September 30, 2022 was i17.0%, which was lower than the combined federal and state statutory tax rate primarily
due to a sale of Mexican subsidiary stock and an earn-out valuation adjustment. Our effective tax rate for the three months ended September 30, 2021 was i33.2%, which was higher than the combined federal and state statutory tax rate primarily due to an earn-out valuation adjustment.
iFor
interim reporting, LIFO inventories are computed based on quantities as of the end of the quarter and interim changes in price levels. Changes in quantities and price levels are reflected in the interim financial statements in the period in which they occur, except in cases where LIFO inventory liquidations are expected to be reinstated by fiscal year end. LIFO expense including the effect of changes in quantities, price levels, and inventory liquidations during the three-month periods ended September 30, 2022 and September 30, 2021 were $i0.4 million
and $i2.4 million, respectively. The earnings impact of LIFO inventory liquidations during the three-month periods ended September 30, 2022 and September 30, 2021 were iiimmaterial/.
Note 9. iAccumulated Other Comprehensive Income
iDuring
the three months ended September 30, 2022 and 2021, the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:
Long-term debt under revolving credit facility due October 2024; i4.32%
variable interest rate at September 30, 2022
$
i65,000
$
i68,000
Other
debt matured August 2022; i9.25% fixed interest rate
i—
i79
Total
Debt
$
i65,000
$
i68,079
/
The
$i65.0 million of long-term debt matures in fiscal year 2025.
As of September 30, 2022 we had a $i125.0
million revolving credit facility with a maturity date of October 2024 that allowed for both issuances of letters of credit and cash borrowings. We also have an option to request an increase of the amount available for borrowing to $i200.0 million, subject to participating banks’ consent. The revolving loans under the Credit Agreement could consist of, at our election, advances in U.S. dollars or advances in any other currency that was agreed to by the lenders. The proceeds of the loans are to be used for general
corporate purposes including acquisitions. A portion of the revolving credit facility, not to exceed $i10.0 million of the principal amount, was available for the issuance of letters of credit. At September 30, 2022, we had $i1.8
million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. Total availability to borrow under the revolving credit facility was $i58.2 million at September 30, 2022. The commitment fee on the unused portion of principal amount of the revolving credit facility is payable at a rate that ranges from i20
to i30 basis points per annum as determined by our ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
We were in compliance with all debt covenants of the revolving credit facility during the three-month period ended September 30, 2022.
During the first quarter of fiscal year 2022, we entered into a Second Amendment to Credit Agreement which amended our credit agreement
by adding content to facilitate a transition to a base interest rate index other than the London Interbank Offered Rate and to define the provisions by which an overpayment or erroneous payment may be requested and returned to us.
We have an interest rate swap agreement with a bank with a notional value of $i40.0 million. The interest rate swap became effective in July 2021 and is accounted for using hedge accounting.
15
Note
11. iCommitments and Contingent Liabilities
Guarantees:
Standby letters of credit were issued to lessors and insurance institutions and can only be drawn upon in the event of our failure to pay our obligations to a beneficiary. As of September 30, 2022, we had a maximum financial exposure from unused standby letters of credit totaling $i1.8
million.
We are not aware of circumstances that would require us to perform under these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our Condensed Consolidated Financial Statements. Accordingly, ino liability has been recorded as of September 30, 2022 with respect to the standby letters of credit. We also enter into commercial letters of credit to
facilitate payments to vendors and from customers.
Product Warranties:
We provide an assurance-type warranty that guarantees our product complies with agreed-upon specifications. This warranty is not sold separately and does not convey any additional services to the customer. iWe 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. The product warranty liability is included on the Accrued Expenses and Other lines of our Condensed Consolidated Balance Sheets.
iChanges in the product warranty accrual for the three months ended September 30, 2022 and 2021 were as follows:
Three
Months Ended
September 30
(Amounts in Thousands)
2022
2021
Product Warranty Liability at the beginning of the period
$
i2,530
$
i2,861
Additions
to warranty accrual (including changes in estimates)
i1,196
i18
Settlements
made (in cash or in kind)
(i1,055)
(i376)
Product
Warranty Liability at the end of the period
$
i2,671
$
i2,503
/
Note
12. iFair Value
i
We categorize assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price
the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
•Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Our policy is to recognize transfers between these levels as of the end of each quarterly reporting
period. There were no transfers between these levels during the three months ended September 30, 2022 and 2021.
There were ino changes in the inputs or valuation techniques used to measure fair values compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
/
In
connection with the acquisition of Poppin, we entered into an earn-out arrangement with contingent payments up to $i45.0 million based on revenue and profitability milestones achieved through June 30, 2024. We do not currently expect to have any earn-out payments under this arrangement, therefore our contingent earn-out liability as of September 30, 2022 was izero.
As of June 30, 2022 the fair value of the contingent earn-out liability was $i3.2 million. The liability is carried at fair value and is classified in Level 3 of the fair value hierarchy and is included in Other long-term liabilities line on our Condensed Consolidated Balance Sheet. During the three months ended September 30, 2022 and 2021, the recurring
revaluation to fair value resulted in a gain of $i3.2 million and a loss of $i4.6 million,
respectively.
16
Financial Instruments Recognized at Fair Value:
iiThe
following methods and assumptions were used to measure fair value:
Financial Instrument
Level
Valuation Technique/Inputs Used
Cash Equivalents: Money market funds
1
Market - Quoted market prices
Trading
securities: Mutual funds held in nonqualified SERP
1
Market - Quoted market prices
Derivative Assets: Stock warrants
3
Market - The pricing of recent purchases or sales of the investment are considered, if any, as well as positive and negative qualitative evidence, in the assessment of fair value. The value of the stock warrants fluctuates primarily in relation to the value of the privately-held company's underlying securities.
Derivative Asset: Interest Rate Swap
2
Market
- Based on observable market inputs using standard calculations, such as time value, forward interest rate yield curves, and current spot rates adjusted for Kimball International's non-performance risk.
Contingent earn-out liability
3
Income - Based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the acquisition and a discount rate that captures the risk associated with the liability.
/
Recurring
Fair Value Measurements:
iAs of September 30, 2022 and June 30, 2022, the fair values of financial assets that are measured at fair value on a recurring basis using the market or income approach are categorized as follows:
Trading
Securities: Mutual funds in nonqualified SERP
i10,517
i—
i—
i10,517
Derivatives:
Stock warrants
i—
i—
i1,500
i1,500
Total
assets at fair value
$
i16,025
$
i1,986
$
i1,500
$
i19,511
Liabilities
Contingent
earn-out liability
i—
i—
i3,160
i3,160
Total
liabilities at fair value
$
i—
$
i—
$
i3,160
$
i3,160
/
17
Non-Recurring
Fair Value Measurements:
iCertain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments when events or circumstances indicate a significant adverse effect on the fair value of the asset. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.i
Non-recurring
Fair Value Adjustment
Level
Valuation Technique/Inputs Used
Impairment of Right of Use Lease Assets and Related Asset Groups
3
Income - Based on a valuation model that measures the present value of remaining lease payments less estimated sublease income at a discount rate that captures the risk associated with the future cash flows.
Impairment of Goodwill
3
Income
- Based on a valuation model that determines fair value based on estimated discounted future cash flows of each reporting unit, requiring the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, future market conditions and discount rates that capture the risk associated with future cash flows.
/
During the first quarter of fiscal year 2022, we recorded $i0.7
million of right-of-use asset and associated leasehold improvement impairment resulting from closure from our leased Pennsylvania and Maryland facilities as part of our transformation restructuring plan. The impairment loss is included as a component of the Restructuring Expense line item on our Condensed Consolidated Statements of Operations. The asset groups used to calculate impairment included the right-of-use lease assets, leasehold improvements, and lease liabilities.
Financial Instruments Not Carried At Fair Value:
iFinancial
instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include the following:
Financial Instrument
Level
Valuation Technique/Inputs Used
Notes receivable
2
Market
- Price approximated based on the assumed collection of receivables in the normal course of business, taking into account the customer’s non-performance risk.
Equity securities without readily determinable fair value
3
Cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Impairment is assessed qualitatively.
The carrying value of our cash deposit accounts, trade accounts receivable, trade accounts payable,
customer deposits, and dividends payable approximates fair value due to their relatively short maturity and immaterial non-performance risk. Based upon variable interest rates currently available to the Company, the fair value of our debt approximates the carrying value.
Note 13. iInvestments
Supplemental
Employee Retirement Plan Investments:
We maintain a self-directed supplemental employee retirement plan (“SERP”) in which executive employees are eligible to participate. The SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. We recognize SERP investment assets on the Condensed Consolidated Balance Sheets at current fair value. A SERP liability of the same amount is recorded on the Condensed Consolidated Balance Sheets 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) section of the Condensed Consolidated Statements of Operations. Adjustments made to revalue the SERP liability are also recognized in income or expense as selling and administrative expenses and offset
valuation adjustments on SERP investment assets. Net unrealized holding gains (losses) for the three months ended September 30, 2022 and 2021 were, in millions, $(i0.5) and $(i0.2),
respectively.
18
iSERP asset and liability balances were as follows:
Equity
securities without readily determinable fair value:
We hold a total investment of $i2.0 million in a privately-held company, including $i0.5
million in equity securities without readily determinable fair value. The investment in equity securities without readily determinable fair value is included in the Other Assets line of the Condensed Consolidated Balance Sheets. See Note 12 - Fair Value of Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities. We do not hold a majority voting interest and are not the variable interest primary beneficiary of the privately-held company, thus consolidation is not required.
Note 14. iDerivative
Instruments
Interest Rate Swap:
We are subject to interest rate risk related to the revolving credit facility and we enter into interest rate swap agreements that are based on LIBOR to manage this exposure. The interest rate swap agreements are designated as cash flow hedges that qualify for hedge accounting under the hypothetical derivative method. Fair value adjustments are recorded as a component of Accumulated Other Comprehensive Income (“AOCI”), net of tax in the Condensed Consolidated Balance Sheets. Balances in AOCI are reclassified into earnings when transactions related to the underlying risk are settled. As of September 30, 2022 we held an interest rate swap with a notional value totaling $i40.0 million
and a weighted average LIBOR fixed rate of i0.834%.
At September 30, 2022, our interest rate swap was recorded at fair value in current assets and non-current assets at $i1.3
million and $i1.4 million, respectively. At June 30, 2022, our interest rate swap was recorded in current assets and non-current assets at $i0.9
million and $i1.1 million, respectively.
The pre-tax balance of interest rate swap gains in AOCI as of September 30, 2022 was $i2.7 million.
See Note 9 - Accumulated Other Comprehensive Income of Notes to Condensed Consolidated Financial Statements for information regarding activity recorded as a component of AOCI during the three months ended September 30, 2022. As of September 30, 2022, we have $i1.3 million
of interest rate swap gains recorded in AOCI which are expected to be reclassified into earnings within the next twelve months.
Stock Warrants:
We hold a total investment of $i2.0 million in a privately-held company, including $i1.5
million in stock warrants. The investment in stock warrants is accounted for as a derivative instrument and is included in the Other Assets line of the Condensed Consolidated Balance Sheets. The stock warrants are convertible into equity shares of the privately-held company upon achieving certain milestones. The value of the stock warrants will fluctuate primarily in relation to the value of the privately-held company's underlying securities, either providing an appreciation in value or potentially expiring with no value. During the quarter ended September 30, 2022, the change in fair value of the stock warrants was not significant. See Note 12 - Fair Value of Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities.
Note
15. iStock Compensation
Stock-based compensation expense during the quarters ended September 30, 2022 and September 30, 2021 was $i1.2
million and $i1.1 million, respectively. The total income tax benefit for stock compensation arrangements was $i0.3
million for both quarters ended September 30, 2022 and September 30, 2021.
During fiscal year 2023, the following stock compensation was awarded to officers and other key employees and to members of the Board of Directors who are not employees. All awards were granted under the 2017 Stock Incentive Plan. For more
19
information on stock compensation awards, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.i
Type
of Award
Quarter Awarded
Targeted Shares or Units
Grant Date Fair Value (4)
Performance
Units (1)
1st Quarter
i152,034
$i7.33
Restricted
Stock Units (2)
1st Quarter
i379,087
$i7.83
Unrestricted
Shares (3)
1st Quarter
i21,318
$i7.77
/
(1)
Performance units were awarded to key officers. Vesting occurs at June 30, 2025. Participants will earn from i0% to i200%
of the target award depending upon the compound annual growth rate of Kimball International’s adjusted earnings per share at the end of the performance period. The maximum number of units that can be issued under these awards is i304,068.
(2) Restricted stock units were awarded to officers and key employees. Vesting occurs at June 30, 2025. Upon vesting,
the outstanding number of restricted stock units and the value of dividends accumulated over the vesting period are converted to shares of common stock.
(3) Unrestricted shares were awarded to non-employee members of the Board of Directors as consideration for service to Kimball International and do not have vesting periods, holding periods, restrictions on sale, or other restrictions.
(4) The grant date fair value of the performance units was based on the stock price at the date of the award, reduced by the present value of dividends normally paid over the vesting period which are not payable on outstanding performance units. The grant date fair value of the restricted stock units and unrestricted shares was based on the stock price at the date of the award.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Kimball International (the “Company,”“Kimball International,”“we,”“us,” or “our”) is a leading omnichannel commercial furnishings company with deep expertise in the Workplace, Health, and Hospitality markets. We combine our bold entrepreneurial spirit, a history of craftsmanship and today’s design-driven thinking alongside a commitment to our culture of caring and lasting connections with our customers, shareholders, employees, and communities. For over 70 years, our brands have seized opportunities to customize solutions into personalized experiences, turning ordinary spaces into meaningful places. Our family of brands
includes Kimball, National, Etc., Interwoven, Poppin, Kimball Hospitality, and D’style.
Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
•Operating Environment - During the first quarter of fiscal year 2023, the benefit of increased prices coupled with our cost savings initiatives had a positive financial impact, while inflationary pressures and supply chain disruptions continued to increase our production costs. While we are mindful of the challenging macroeconomic environment and heightened recessionary risks, through our focused set of strategic choices we are successfully delivering in-demand products and solutions to end markets and geographies with higher growth, resiliency and favorable return-to-office dynamics.
•Transformation Restructuring Plan - Current actions under our transformation restructuring plan are focused on activities such as the streamlining of manufacturing facilities, the consolidation of showrooms, and the closure of our manufacturing facility in Tijuana, Mexico which was completed during the first quarter of fiscal year 2023. This phase of the transformation restructuring plan began in the first quarter of our fiscal year 2021, and we expect a substantial majority of the restructuring actions to be completed by the end of fiscal year 2023. In addition to the savings already generated from the first phase of the transformation restructuring plan, the efforts of this second phase of the transformation restructuring plan are expected to generate annualized pre-tax savings of approximately $19.0 million when it is fully implemented. See Note
3 - Restructuring of Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
•Due to the contract and project nature of furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business, which in turn impacts our operating results. Effective management of our manufacturing capacity is and will continue to be critical to our success. See below for further details regarding current sales and order backlog trends
•We expect to continue to invest in capital expenditures prudently, particularly for projects that will enhance our capabilities and diversification while providing an opportunity for growth
and improved profitability.
•We continue to maintain a strong balance sheet. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our revolving credit facility, was $75.0 million at September 30, 2022.
See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Net Sales by End Market
Three
Months Ended
September 30
(Amounts in Millions)
2022
2021
% Change
Workplace
$
132.0
$
108.6
22
%
Health
26.1
23.0
13
%
Hospitality
19.7
25.0
(21
%)
Total
Net Sales
$
177.8
$
156.6
14
%
Our Workplace end market includes sales to the commercial, financial, government, and education vertical markets and eBusiness. The revenue of Poppin is included in eBusiness.
First quarter fiscal year 2023 consolidated net sales increased $21.2 million, or 14% compared to first quarter fiscal year 2022
net sales as increased pricing and increased volume of workplace products more than offset a lower volume in our hospitality market which has not yet rebounded from the negative impact of the pandemic. Each of our end market sales levels can fluctuate depending on overall demand and mix of projects in a given period.
21
Order backlog at September 30, 2022 increased $9.2 million, or 5%, when compared to the backlog level as of September 30, 2021 as the backlog of workplace and health increased. Backlog at a point in time may not be indicative of future sales trends.
Gross profit as a percent of net sales increased 220 basis points
to 33.5% for the first quarter of fiscal year 2023 from 31.3% for the first quarter of fiscal year 2022. The increased first quarter gross profit as a percent of net sales was driven by price increases and savings realized from our operational excellence initiatives which more than offset inflationary pressure on materials, increased freight costs, and manufacturing labor increases.
Selling and administrative (S&A) expenses in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022 increased $3.2 million and decreased 210 basis points as a percent of net sales, due to the leverage of our increased sales. Increased S&A expenses in the first quarter were driven by increased incentive compensation costs, increased salary expense driven by inflation, increased advertising and marketing expense, and higher warranty expense.
We recognized pre-tax
restructuring expense of $0.4 million for the three months ended September 30, 2022 and $1.5 million for the three months ended September 30, 2021. See Note 3 - Restructuring of Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Other Income (Expense) consisted of the following:
Three
Months Ended
September 30
(Amounts in Thousands)
2022
2021
Interest Income
$
77
$
9
Interest
Expense
(681)
(257)
Gain (Loss) on Supplemental Employee Retirement Plan Investments
(459)
(93)
Other
(31)
(93)
Other
Income (Expense), net
$
(1,094)
$
(434)
Our effective tax rate for the three months ended September 30, 2022 was 17.0% which was lower than the combined federal and state statutory tax rate primarily due to the sale of our Mexican subsidiary stock and an earn-out valuation adjustment. Our effective tax rate for the three months ended September 30, 2021 was 33.2%. This rate was higher than the combined federal and state statutory tax rate primarily due to an earn-out
valuation adjustment.
Comparing the balance sheet as of September 30, 2022 to June 30, 2022, our accounts receivable decreased as several larger projects were finalized and the payment was received. Our accrued expenses decreased due to payments of our accrued cash incentive compensation and company retirement contribution which were both related to our fiscal year 2022 performance.
Liquidity and Capital Resources
Our total cash and cash equivalents was $16.8 million at September 30, 2022 and $10.9 million at June 30, 2022.
Our total debt was $65.0 million at September 30, 2022 and $68.1 million at June 30, 2022. During the first three months of fiscal year 2023, cash flows provided by operations of $18.1 million more than offset capital expenditures including capitalized software of $5.4 million, the return of capital to shareholders in the form of dividends which totaled $3.3 million and stock repurchases which totaled $1.0 million.
Our
short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our revolving credit facility, totaled $75.0 million at September 30, 2022. At September 30, 2022, we had $1.8 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. We had $65.0 million and $68.0 million of borrowings on our revolving credit facility at September 30, 2022 and June 30, 2022, respectively. Total availability to borrow under the credit facility totaled $58.2 million at September 30, 2022.
22
Cash
Flows
The following table reflects the major categories of cash flows for the first three months of fiscal years 2023 and 2022.
Three Months Ended
September 30
(Amounts in Thousands)
2022
2021
Net
cash provided by operating activities
$
18,092
$
11,905
Net cash used for investing activities
$
(4,946)
$
(3,592)
Net cash used for financing activities
$
(7,399)
$
(5,085)
Cash
Flows from Operating Activities
For the first three months of fiscal year 2023 net cash provided by operating activities was $18.1 million inclusive of net income of $6.6 million. In the first three months of fiscal year 2022 net cash provided by operating activities was $11.9 million inclusive of a net loss of $5.0 million. Changes in working capital balances provided $9.0 million of cash in the first three months of fiscal year 2023 and provided $4.1 million of cash in the first three months of fiscal year 2022.
The $9.0 million of cash provided by changes in working capital balances in the first three months of fiscal year 2023 was driven by a $14.6 million decrease in receivables as several larger projects were finalized and the payment was received. The decrease in receivables was partially offset by a $9.5 million decrease in our accrued expenses as our accrued cash incentive
compensation and retirement profit sharing contribution were paid out during our first quarter of fiscal year 2023.
The $4.1 million of cash provided by changes in working capital balances in the first three months of fiscal year 2022 was driven by a $7.8 million increase in our accounts payable.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for the three-month periods ended September 30, 2022 and September 30, 2021were 35 and 32 days, respectively. We define DSO as the average of monthly accounts and notes receivable divided by an average day’s net sales. Our Production Days Supply on Hand (“PDSOH”) of inventory measure for the three-month periods ended September 30,
2022 and September 30, 2021 were 95 and 64 days, respectively. The increase in PDSOH was driven by increases in average inventory levels outpacing the sales ramp up with the majority of the inventory increase related to made-to-stock inventory in our eBusiness segment. We define PDSOH as the average of the monthly net inventory divided by an average day’s cost of sales.
Cash Flows from Investing Activities
During the first three months of fiscal years 2023 and 2022, our capital investments totaled $5.4 million and $3.8 million, respectively. The current year capital investments include final payments related to the construction of a warehouse, and both the current and prior year capital investments include manufacturing equipment upgrades to increase automation in production facilities and software upgrades.
Cash
Flows from Financing Activities
During the three months ended September 30, 2022, we had proceeds from borrowings on our revolving credit facility of $40.0 million and during the same period we repaid $43.0 million on our revolving credit facility. During the three months ended September 30, 2021 we had proceeds from borrowings on our credit facility of $10.0 million and repaid $10.0 million on our revolving credit facility. We paid dividends of $3.3 million in both the three-month periods ended September 30, 2022 and September 30, 2021. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. We repurchased shares pursuant to a previously announced
stock repurchase program, which drove cash outflow of $1.0 million and $1.5 million in the first quarters of fiscal year 2023 and 2022, respectively. Future debt payments may be paid out of cash flows from operations or from future refinancing of our debt.
Revolving Credit Facility
As of September 30, 2022 we had a $125.0 million revolving credit facility with a maturity date of October 2024 that allowed for both issuances of letters of credit and cash borrowings. We also have an option to request an increase of the amount available for borrowing to $200.0 million, subject to participating banks’ consent. The loans under the Credit Agreement could consist of, at our election, advances in U.S. dollars or advances in any other currency that was agreed to by the lenders. The proceeds are to be used for general corporate purposes including
acquisitions. A portion of the revolving credit facility, not to exceed $10 million of
23
the principal amount, was available for the issuance of letters of credit. At September 30, 2022, we had $1.8 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. At September 30, 2022 and June 30, 2022, we had $65.0 million and $68.0 million, respectively, in borrowings outstanding.
The revolving credit facility requires us to comply with certain debt covenants, the most significant of which is the adjusted leverage ratio and the interest
coverage ratio. The adjusted leverage ratio is defined as (a) consolidated total indebtedness minus unencumbered U.S. cash equivalents in excess of $15,000,000 provided that the maximum subtraction does not exceed $35,000,000 to (b) adjusted consolidated EBITDA, determined as of the end of each of our fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.00 to 1.00. The interest coverage ratio, for any period, of (a) Consolidated EBITDA for such period to (b) cash interest expense for such period, calculated on a consolidated basis in accordance with GAAP for the trailing four quarter period then ending, to not be less than 3.00 to 1.00. We were in compliance with all debt covenants of the revolving credit facility during the three-month period ended September 30, 2022.
The table below compares the adjusted leverage ratio and the interest
coverage ratio with the limits specified in the credit agreement.
We believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our revolving credit facility will be sufficient to meet our working capital and other operating needs for at least the next twelve months. Our Board of Directors declared quarterly dividends of $0.09 per share to be paid during our second quarter of fiscal year 2023. Future cash dividends are subject to approval by our Board of Directors and may be adjusted as business needs or market conditions change.
During the remainder of fiscal year 2023 we expect to invest approximately $20 million in capital expenditures, particularly for projects such as machinery and equipment upgrades and automation, software, and showroom related expenses. As of September 30, 2022, there have been
no material changes to our short-term and long-term contractual obligations as discussed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 outside the ordinary course of business. We are also assessing the potential of selling unused parcels of land. We continuously monitor for potential acquisitions that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
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, lack of availability or cost of manufacturing labor, loss of key contract
customers, and other unforeseen circumstances. In particular, should demand for our products decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted.
Non-GAAP Financial Measures and Other Key Performance Indicators
This Management’s Discussion and Analysis (“MD&A”) contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with U.S. GAAP in the statements of operations, statements of comprehensive income, balance sheets, statements of cash flows, or statements of shareholders’ equity of the
company. The non-GAAP financial measures used within this MD&A include:
•adjusted operating income, defined as operating income (loss) excluding restructuring expenses, market valuation adjustments related to our SERP liability, acquisition-related amortization and inventory valuation adjustments, and contingent earn-out gain or loss;
•adjusted operating income percentage, defined as adjusted operating income as a percentage of net sales;
•adjusted net income, defined as net income (loss) excluding restructuring expenses, acquisition-related amortization and inventory valuation adjustments, and contingent earn-out gain or loss;
24
•adjusted
diluted earnings per share, defined as diluted earnings (loss) per share excluding restructuring expenses, acquisition-related amortization and inventory valuation adjustments, and contingent earn-out gain or loss;
•adjusted EBITDA, defined as earnings before interest, statutory income tax impacts for taxable after-tax measures, depreciation, and amortization and excluding restructuring expenses, acquisition-related inventory valuation adjustments, and contingent earn-out gain or loss; and
•adjusted EBITDA percentage, defined as adjusted EBITDA as a percentage of net sales.
Reconciliations of the reported GAAP numbers to these non-GAAP financial measures are included in the tables below. Management believes it is useful for investors to understand and to be able to meaningfully trend, analyze
and benchmark how our core operations performed without market value adjustments related to our SERP liability, without expenses incurred in executing our transformation restructuring plan, and without acquisition-related costs. Many of our internal performance measures that management uses to make certain operating decisions exclude these expenses to enable meaningful trending of core operating metrics. These non-GAAP financial measures should not be viewed as an alternative to the GAAP measures and are presented as supplemental information.
Reconciliation
of Non-GAAP Financial Measures and Other Key Performance Indicators
The order backlog metric is a key performance indicator representing firm orders placed by our customers which have not yet been
fulfilled and are expected to be recognized as revenue during future quarters. The timing of shipments can vary, but generally the backlog of orders is expected to ship within a six-month period.
Return on Invested Capital is a key performance indicator calculated as: [(Earnings Before Interest, Taxes, Amortization, Restructuring Expense, Acquisition-related Inventory Valuation Adjustments, and Contingent Earn-out Gain or Loss) multiplied by (1 minus Effective Tax Rate)] divided by (Total Shareholders’ Equity plus Net Debt). Net Debt is defined as current maturities of long-term debt plus long-term debt less cash, cash equivalents, and short-term investments.
Critical Accounting Policies
Our Condensed Consolidated Financial
Statements have been prepared in accordance with U.S. GAAP. 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 continually reviews the accounting policies and financial information disclosures. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Goodwill - As a result of revenue and earnings forecast declines within our Poppin reporting unit, we determined that a triggering event had occurred; therefore, we performed a quantitative assessment of the fair value
of goodwill as of September 30, 2022. Based upon our quantitative impairment assessment, we determined the fair value exceeded the carrying amount of our Poppin reporting unit thus no impairment was recorded. However, further changes to the assumptions regarding the future performance, an adverse change to macroeconomic conditions, or a change to other assumptions could result in additional impairment losses in the future, which could be significant. The goodwill within our Poppin reporting unit remains susceptible to future impairment charges due to narrow differences between fair value and carrying value resulting from the $34.1 million goodwill impairment charge recorded in fiscal year 2022 which was primarily driven by reductions in our long-term net sales and profitability projections.
Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. The statements generally can
be identified by the use of words or phrases, including, but not limited to “intend,”“anticipate,”“believe,”“estimate,”“project,”“target,”“plan,”“expect,”“setting up,”“beginning to,”“will,”“should,”“would,”“resume,” or similar statements. We caution that forward-looking statements are subject to known and unknown risks and uncertainties that may cause the Company’s actual future results and performance to differ materially from expected results, including, but not limited to, the possibility that any of the anticipated benefits of the Poppin acquisition will not be realized or will not be realized within the expected time period; the risk that any projections or guidance by the Company, including
revenues, margins, earnings, or any other financial results are not realized; a shortage of manufacturing labor and related cost; disruptions in our supply chain and freight channels including impacts on cost and availability, adverse changes in global economic conditions; successful execution of the second phase of the Company’s restructuring plan; significant reduction in customer order patterns; loss of key suppliers; relationships with strategic customers and product distributors; changes in the regulatory environment; global health concerns; the potential for impairment of goodwill; or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of the Company are contained in the
Company’s Form 10-K filing for the fiscal year ended June 30, 2022 and other filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk with respect to commodity price fluctuations for components used in the manufacture of our products, primarily related to wood and wood-related components, steel, aluminum, foam, and plastics. These components are impacted by global pricing pressures, general economic conditions, and changes in tariff rates. We strive to offset increases in the cost of these materials through supplier negotiations, global sourcing initiatives, and product re-engineering and parts standardization. We are
also exposed to fluctuations in transportation costs, which may continue to remain at elevated levels depending on freight carrier capacity and fuel prices. Transportation costs are managed by optimizing logistics and supply chain planning.
During fiscal year 2023, we have experienced market price increases in certain commodities and transportation costs. Also, during fiscal year 2022, we entered into an interest rate swap agreement with a notional value of $40.0 million to mitigate the interest rate risk related to our variable rate borrowings on our revolving line of credit. There have been no material changes to other market risks, including foreign exchange rate risks and equity rate risk, from the information disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Item
4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures.
We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit 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 our management, including our 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 as of September 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective.
(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, 2022 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There
have been no additional material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
A share repurchase program authorized by the Board of Directors was announced on February 7, 2019. The program allows for the repurchase of up to two million shares of
common stock and will remain in effect until all shares authorized have been repurchased. At September 30, 2022, 1.8 million shares remained available under the repurchase program.
Period
Total
Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
The following materials from Kimball International, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2022 are formatted in Inline XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Income; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Shareholders’ Equity; and (vi) Notes to Condensed Consolidated Financial Statements
104
The cover page from the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022, formatted in Inline XBRL and contained in Exhibit 101
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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.
