Kimball International, Inc. (KBAL) today announced results for the quarter and fiscal year ended June 30, 2019.

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

Fourth Quarter FY 2019

Net sales growth of 3.1%, including a 1.3% organic growth contribution, driven by continued strong performance from our National and Kimball Hospitality Brands offset by a realignment of our Kimball Brand
Order decline of 1.6% on a difficult comparison of 17% prior year growth
Operating income margin of 6.8% or 7.6% on an adjusted basis, a decrease of 20 basis points; gross margin improvement of 40 basis points was offset by CEO transition costs, wage inflation, and increased healthcare costs
Adjusted EBITDA of $18.8 million, an increase of 1.0% and adjusted EBITDA margin of 9.6%, a decrease of 20 basis points
Diluted EPS at $0.30 or $0.32 on an adjusted basis, an increase of 14% compared to $0.28
Announced a Transformation Plan that will generate approximately $16.0 million of savings in fiscal year 2020, driven by restructuring related savings of approximately $8.0 million and an incremental $8.0 million savings related to lean and continuous improvement initiatives. Restructuring costs will total approximately $8.0 million

Fiscal Year 2019

Net sales growth of 9%, including a 7% organic growth contribution, driven primarily by double-digit growth in commercial, healthcare, and hospitality
Operating income margin of 6.4% or 6.9% on an adjusted basis, a decrease of 50 basis points; price yield and cost savings initiatives were more than offset by transportation costs, inflation, tariffs, the impact of the David Edward acquisition, higher employee costs, CEO transition costs, and higher commissions on increased sales
Adjusted EBITDA of $69.5 million, an increase of 3.8% and adjusted EBITDA margin of 9.0%, a decrease of 50 basis points
Diluted EPS at $1.06 or $1.12 on an adjusted basis, an increase of 22% compared to $0.92

Kimball International CEO Kristie Juster commented, “Results for the quarter were mixed as profits were relatively flat on 3% revenue growth. The National brand continued to deliver outstanding performance and our Kimball Hospitality brand had solid growth against strong double-digit prior year growth. Revenue in our Kimball brand was challenged for the quarter as we are realigning our selling organization and formalizing an operating rhythm to improve organizational effectiveness. While our short-term results did not meet expectations, our new Transformation Plan will allow a clearer line of sight to the ramp of our journey and a more consistent performance as we execute Kimball International Connect.”

Ms. Juster continued, “I have been very pleased with the organization’s reaction and motivation to make our new chapter a reality and remain extremely confident that our strategy and transformation plan rolled out last quarter will deliver our longer term three-year financial objectives.”

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 3.1%, or 1.3% on an organic basis. Sales increased in four of the six vertical markets, led by a strong 16% increase in healthcare as the Company continues with its strategy to invest in growth within this vertical especially within the Kimball brand. In addition, the hospitality vertical grew 6% relative to a prior year 26% growth on continuing growth in the custom business. The educational vertical also grew 6% as a result of successful promotional programs within this vertical.
Sales of office products introduced in the last three years increased 9% over the prior year fourth quarter. New product sales approximated 27% of total office sales compared to 25% in the prior year period. New product development is focused on higher growth categories including ancillary and healthcare.
Orders during the quarter decreased 1.6% on a difficult comparison to 17% in the prior year. Hospitality orders were down 16% against a prior year comparison of 50% which included three large projects. Healthcare continued its strong performance with orders up 28%.
Gross profit at 34.3% increased 40 basis points from the prior year, the highest level of the fiscal year. Price increase and cost savings initiatives were partially offset by higher healthcare costs. As expected, the David Edward acquisition negatively impacted gross profit in the fourth quarter by 60 basis points, as we continue to execute our acquisition integration plan to improve operating efficiency.
Selling and administrative expenses of $53.0 million increased 7% or $3.3 million compared to the prior year due to wage inflation, CEO transition costs, David Edward selling and administrative costs ($0.9 million), and healthcare costs ($0.8 million).
Restructuring expenses of $0.9 million resulted from initiation of our Transformation Plan. We expect total restructuring expense to be approximately $8 million through fiscal year 2020.
The Company benefited from a lower effective tax rate of 21.6% during the quarter compared to 31.4% in the prior year period. The decline was primarily driven by the Tax Cuts and Jobs Act enacted in December 2017.
Operating cash flow totaled $22.3 million compared to $20.5 million in the prior year, an increase of $1.8 million. The increase was primarily driven by improved working capital performance and higher net income.
As of June 30, 2019, the Company’s balance in cash, cash equivalents, and short-term investments totaled $106.3 million, up $19.0 million since June 30, 2018. The increase was primarily due to $65.0 million of cash flows from operations, partially offset by capital expenditures of $21.0 million, a $4.3 million cash outflow for the David Edward acquisition, and the return of capital to shareholders in the form of $9.1 million in share repurchases and $11.4 million in dividends.

Fiscal Year 2019

Fiscal year 2019 net sales of $768.1 million increased 9% or 7% on an organic basis.
Fiscal year 2019 operating income was $49.5 million, or 6.4% of net sales, compared to fiscal year 2018 operating income of $51.1 million, or 7.2% of net sales. Fiscal year 2019 adjusted operating income was $53.1 million, or 6.9% of net sales, inclusive of $2.0 million of CEO transition costs, $0.9 million of restructuring expense, and $0.7 million of SERP income compared to fiscal year 2018 adjusted operating income of $52.0 million, or 7.4% of net sales, inclusive of $1.0 million of SERP income. Fiscal year 2019 also included a $1.1 million gain on the sale of Internet protocol licenses while fiscal year 2018 included a $1.7 million gain on the sale of an administrative building.
Net income for fiscal year 2019 was $39.3 million, or $1.06 per diluted share, inclusive of $1.5 million or $0.04 per share of CEO transition costs and $0.7 million or $0.02 per share of restructuring expense. Fiscal year 2018 net income was $34.4 million, or $0.92 per diluted share. Adjusted net income for fiscal year 2019 was $41.6 million, or $1.12 per diluted share while adjusted net income for fiscal year 2018 was $34.4 million, or $0.92 per diluted share.
Fiscal year 2019 adjusted EBITDA was $69.5 million, or 9.0% of net sales, compared to fiscal year 2018 adjusted EBITDA of $67.0 million, or 9.5% of net sales.

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