Kimball International, Inc. (KBAL) today announced results for the quarter ended December 31, 2018.

Highlights:

Revenue growth of 13%, or 11% on an organic basis, led by double-digit growth in commercial, healthcare, and hospitality verticals.
Order growth of 5%, or 4% on an organic basis, with double-digit increases in healthcare and education verticals.
New product introductions rose to 27% of office furniture sales compared to 19% in the prior year.
Increases in tariffs, steel, and transportation costs were mitigated by cost savings initiatives.
Lower effective tax rate of 25.6% compared to prior year rate of 40.6%, as lower income tax rates are now fully in effect.

Kristie Juster, CEO, stated, “I was very pleased with our revenue growth during the quarter. It was a strong delivery with growth across 5 of our 6 verticals combined with continued diligent management of our cost savings initiatives. In fact, we are increasing our projected savings from these initiatives in fiscal year 2019 from $7 million to $10 million, made possible by the hard work and ideas from our dedicated employees.”

Ms. Juster continued, “Our strong financial position has allowed us to make solid investments in our strategic growth initiatives for 2019: new products, the healthcare vertical, our deeper focus on the Architectural and Design community and the recently announced David Edward acquisition. These strategic investments are a critical step in setting the foundation for our next chapter of growth. Since becoming CEO in November, I have valued my time getting to know our employees, obtaining a deeper understanding of our core competency of manufacturing and connecting with our dealer partners. It is truly an exciting time for Kimball International. We are actively involved in the development of our new growth strategy that is grounded in a clear purpose and a renewed focus on the opportunities ahead of us. We at Kimball International are committed to delivering long-term value for our shareowners.”

* The items indicated represent Non-GAAP measurements. See “Reconciliation of Non-GAAP Financial Measures” below.

Prior period financial statements were recast due to the full retrospective adoption of guidance on the recognition of revenue from contracts with customers.

Consolidated net sales increased 13%, or 11% on an organic basis, driven by increases in all vertical markets except the government vertical. The commercial vertical had strong momentum with 29% growth, and the healthcare vertical grew 20% on continued strategic focus within this vertical. The hospitality vertical grew 16% on increases of both program business and higher margin custom business. Sales in the government vertical declined 21% as the project nature of this vertical often results in fluctuations.
The Company continues to develop and launch new products. New product sales approximated 27% of total office furniture sales compared to 19% in the prior year second quarter, driven by a 60% increase in sales of new office furniture products. New products are defined as those introduced within the last three years.
Orders received during the second quarter of fiscal year 2019 increased 5% from the prior year, or 4% on an organic basis. The increase was primarily attributable to the healthcare (up 22%), education (up 10%), and commercial (up 5%) vertical markets. The healthcare and education verticals have experienced steady growth due to increasing strategic focus, and the commercial vertical is benefiting from new product introductions.
Gross profit as a percent of net sales increased 20 basis points from the prior year as incremental margins from price increases, leverage from higher sales volumes, savings realized from cost reduction initiatives, and lower healthcare costs, were partially offset by higher tariffs, steel, and transportation costs. The David Edward acquisition also negatively impacted gross profit in the second quarter, as expected, and will continue to in the short-term until productivity improvements and synergies are realized.
Selling and administrative expenses in the second quarter increased 20 basis points as a percent of net sales and increased 13% in absolute dollars compared to the prior year. The increase in selling and administrative expense was driven by higher incentive compensation and commission costs related to improved sales and operating profits, salaries, costs related to strategic growth investments, and CEO transition costs.
The Company benefited from a lower effective tax rate of 25.6% for the second quarter of fiscal year 2019 compared to the prior year effective tax rate of 40.6%. The decline was primarily driven by the Tax Cuts and Jobs Act enacted in December 2017, under which the Company’s statutory federal tax rate for fiscal year 2019 declined to 21% from the prior year second quarter tax rate of 28.1%.
Operating cash flow for the second quarter of fiscal year 2019 was $16.8 million compared to operating cash flow of $8.4 million in the prior year, an increase of $8.4 million. The increase was primarily driven by payments of employee incentives that occurred during the prior year second quarter but not in the current 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 $81.1 million at December 31, 2018, compared to $87.3 million at June 30, 2018. The fiscal year 2019 decrease was primarily due to capital expenditures of $10.7 million, a $4.9 million cash outflow for the David Edward acquisition, and the return of capital to shareowners in the form of $9.1 million in stock repurchases and $5.6 million in dividends, which more than offset $23.9 million of cash flows from operations.