Kimball International, Inc. today announced results for the quarter ended September 30, 2019.

Highlights (Performance is based upon year-over-year comparison):

First Quarter FY 2020

Net sales growth of 3.8%, including a 1.7% organic growth contribution, driven by continued solid performance from our National and Kimball Hospitality brands, partially offset by a decline in our Kimball brand on an organic basis
Order decline of 3.6% on a difficult comparison of 17.8% growth in the prior year
Operating income margin of 7.5%, or 9.8% on an adjusted basis, an increase of 200 basis points, driven by gross margin improvement of 100 basis points and a 160 basis point reduction in selling and administrative expenses
Transformation savings of $5.6M realized during the quarter
Net income of $11.4 million, an increase of 5%
Record adjusted EBITDA of $23.8 million, an increase of 23.9%, and adjusted EBITDA margin of 11.8%, an increase of 190 basis points
Diluted EPS of $0.31 or $0.40 on an adjusted basis, an increase of 29.0% on an adjusted basis compared to $0.31 a year ago

Kimball International CEO Kristie Juster commented, “I am extremely pleased with the improvement in earnings this quarter. Our first quarter performance gives us confidence that we are gaining traction in both our sustaining gross margin improvement and our ability to transform to a more efficient model. We do expect our revenues to ramp in the back half of the year as our investments start to take hold against specific growth initiatives.”

Ms. Juster continued, “Our revenue performance was mixed in the first quarter with industry leading metrics in healthcare and hospitality offset by the Kimball brand realignment strategy as well as comping double digit year over year performance. As we start our transformation journey, we are focused on gating our growth investments as we gain confidence in our cost savings projects. We are confident that fiscal year 2020 will position us well to deliver our long-term plan.”

• Consolidated net sales increased 3.8%, or 1.7% on an organic basis. Sales growth benefited from new ancillary products within National, healthcare products within Kimball, and custom business within Kimball Hospitality. Sales growth was partially offset by a decline within the Kimball brand as we realign our selling resources to higher growth areas.

• Four of the six product verticals reported sales growth led by an 18% increase in the healthcare vertical as the Company continued its strategy to invest in growth within this vertical. The government vertical experienced 9% growth on strong state government shipments. The hospitality vertical also grew 8% despite facing a prior year increase of 43%. Commercial vertical sales decreased 2% due to the decline in our Kimball brand.

• Sales of new office products, defined as those introduced in the last three years, increased 19% over the prior year first quarter. New product sales were approximately 30% of total office sales compared to 25% in the prior year period. The National brand is fueling the growth on a 48% growth in new products with much of this development focused on ancillary products.

• Orders during the quarter decreased 3.6% on a difficult comparison to 17.8% growth in the prior year. On a two-year stacked basis, orders are up 14.2%. The hospitality vertical orders declined 16% against a prior year comparison of 48%, which included four large projects. The commercial vertical orders declined 13% against strong growth of 24% in prior-year period as well as softness within the Kimball brand. Order growth within finance, education, government, and healthcare verticals partially offset these declines.

• Gross profit margin of 34.9% increased 100 basis points from the prior year. Increased product pricing and the savings realized from our transformation plan were partially offset by unfavorable sales mix shift. The David Edward acquisition also negatively impacted our gross profit by 50 basis points in the first quarter, as expected, and will continue to in the short-term until productivity improvements and synergies are fully realized.

• Selling and administrative expenses of $50.9 million, or 25.2% of net sales, decreased 160 basis points or $1.3 million compared to the prior year. Lower costs during the quarter compared to the prior year included benefit from the transformation plan of $1.3 million, reduced CEO transition costs of $0.9 million, reduced employee benefit cost of $0.7 million, offset by the prior year gain on sale of assets of $1.1 million and David Edward acquisition related cost of $0.8 million. The reduction in selling and administrative expenses was achieved while investing $1.0 million in growth initiatives related to our Kimball International Connect strategy. On an adjusted basis, selling and administrative dollars were flat year over year. We expect the investment in growth initiatives to increase during the remainder of the fiscal year which will partially offset the savings we expect to achieve from the transformation plan in future quarters.

• Restructuring expenses of $4.4 million were incurred related to the continuing execution of the transformation plan, primarily for lease-related impairment charges and employee transition costs. Total estimated restructuring expenses for the transformation plan are expected to be between $8.0 to $9.0 million.

• Our effective tax rate was 27.4% during the quarter compared to 24.4% in the prior year period. The increase was primarily driven by a prior year state tax provision adjustment. We continue to expect our fiscal year tax rate to be within a range of 25% to 28%.

• Operating cash flow totaled $11.1 million compared to $7.1 million in the prior year, an increase of 55%. The increase was primarily driven by higher net income, excluding non-cash impairment expenses. Capital expenditures during the quarter were $7.4 million, and we returned $2.9 million to shareholders in the form of dividends.

• As of September 30, 2019, the Company’s cash, cash equivalents, and short-term investments totaled $106.4 million, up $0.1 million since June 30, 2019.

• In October, subsequent to the end of our first quarter, we replaced our $30 million credit facility with a 5-year $75 million credit facility. The increase in size provides us additional liquidity to execute our strategy and invest in growth, both organically and inorganically.

Fiscal Year 2020 – 2022 Financial Targets

Organic sales growth: 4.0% to 7.0% CAGR
Adjusted EBITDA: 150 to 250 basis points improvement
Adjusted EPS: 10% to 15% CAGR