Kimball International, Inc. (NASDAQ:KBAL) today announced the following results for the quarter ended December 31, 2017:

Revenue was $173.7 million, a 2% increase over the prior year second quarter.
Second quarter operating income was $12.0 million, or 6.9% of net sales, inclusive of a $1.7 million gain on the sale of an administrative building.
Second quarter net income was $7.4 million and diluted earnings per share was $0.20, inclusive of a one-time unfavorable $2.0 million deferred tax adjustment which was partially offset by a $1.6 million favorable tax rate adjustment, both driven by the Tax Cuts and Jobs Act.
Orders increased 8% over the prior year second quarter.
The D’style, Inc. acquisition was successfully completed on November 6, 2017.
Organic sales and orders in the hospitality vertical hit record levels in the second quarter.

Bob Schneider, Chairman and CEO, stated, “Our office-related verticals were generally challenged during the second quarter in a highly competitive market, while our hospitality furniture vertical had record sales. While our net sales were up 2%, I’m encouraged with strengthening consolidated orders during the quarter, which were up 8% with increases in all verticals except healthcare, which had a slight decline. We were disappointed in our operating performance this quarter with profits impacted by discounting and a shift to lower margin products. We are actively focused on improving profitability.”

Mr. Schneider continued, “The business climate continues to be strong with a strengthening U.S. economy, along with worldwide growth. Accordingly, we will stay the course to achieve our long-term strategic direction and will continue to invest in key initiatives rather than manage to short-term quarterly results. An important driver of the strong U.S. economic outlook is the recently passed tax act. The impact in our second quarter, however, was net-negative although we expect significant positive earnings impact in coming years.”

Consolidated net sales increased 2%, which included 1% from the D’style acquisition. The increase in net sales was driven by an increase in the hospitality, government, and education vertical markets, partially offset by declines in the healthcare and other commercial verticals. The government vertical increased as a result of growth in state and local government sales. In addition, the government and education verticals increased due to heightened focus in these areas. The hospitality vertical grew both due to the D’style acquisition and due to organic sales growth. Uncertainty in the healthcare market contributed to the decline in the healthcare vertical, and the other commercial vertical was negatively impacted by the timing of large projects.
Orders received during the second quarter of fiscal year 2018 increased 8% from the prior year second quarter, primarily driven by the hospitality, education, and government vertical markets. Hospitality orders increased across all major hotel brands that we service, and also increased due to D’style orders. Excluding the D’style acquisition, consolidated orders received would have increased by 6%. A positive outlook for the upcoming educational buying season contributed to the increase in educational orders, and strong state government growth increased government vertical orders.
Second quarter gross profit as a percent of net sales declined 170 basis points from the prior year second quarter due to a sales mix shift to lower margin products, freight cost increases, higher discounting, and an increase in the LIFO inventory reserve, partially offset by price increases and the additional margin contributed by D’style.
Selling and administrative expenses in the second quarter decreased 90 basis points as a percent of net sales and decreased 2% in absolute dollars compared to the prior year second quarter. The decrease in selling and administrative expense was driven by a $1.7 million pre-tax gain on the sale of an administrative building, and lower incentive compensation, partially offset by increases in salaries and additional costs related to the D’style acquisition including amortization of acquired intangibles and acquisition expenses.
The Company's 40.6% effective tax rate for the second quarter of fiscal year 2018 was higher than the prior year second quarter effective tax rate of 33.2%. The enactment of the Tax Cuts and Jobs Act in December 2017 required the Company to reduce the tax rate on net deferred tax assets which drove $2.0 million of additional tax expense, more than offsetting the lower tax rate on year-to-date pre-tax income which reduced current year taxes by $1.6 million. Under the new tax act the Company's statutory federal tax rate for fiscal year 2018 is a blended rate of 28.1% compared to the previous rate of 35%. The Company expects the lower tax rate to generate significant tax savings in future periods.
Operating cash flow for the second quarter of fiscal year 2018 was $8.4 million compared to operating cash flow of $19.1 million in the second quarter of the prior year, a decrease of $10.7 million. The decrease was primarily driven by changes in working capital balances and payments of employee incentives that occurred during the current year second quarter but not in the prior year second quarter as a result of a change in timing of annual cash incentive payments.
The Company's balance in cash, cash equivalents, and short-term investments was $79.6 million at December 31, 2017, compared to $98.6 million at June 30, 2017. The year-to-date fiscal year 2018 decrease was primarily due to a $17.8 million cash outflow for the D’style acquisition, capital expenditures of $12.1 million, and the return of capital to share owners in the form of stock repurchases and dividends totaling $6.6 million, which more than offset $15.4 million of cash flows from operations.
On November 6, 2017, the Company successfully completed the acquisition of privately-held D’style, Inc., which has administrative and sales offices in Chula Vista, CA and has a manufacturing location in Tijuana, Mexico. The acquisition expands the Company's hospitality offerings to public spaces beyond guest rooms, and provides new mixed material manufacturing capabilities. D’style was purchased for $20.0 million, inclusive of a $2.2 million contingent earn-out. The purchase price is subject to certain post-closing working capital adjustments.