Kimball International, Inc. (KBAL) today announced results for the quarter ended March 31, 2019.
Kimball International CEO Kristie Juster commented, “We are pleased with the earnings growth realized this quarter, driven by increased demand for our new products, continued traction in our healthcare and hospitality verticals and the execution of our $10 million fiscal year 2019 cost reduction plan. We are excited in the developing momentum with the unveiling of our new strategy, called Kimball International Connect, and are confident we have the foundation to deliver on our vision and achieve our 3-year financial targets.”
Consolidated net sales increased 10%, or 8% on an organic basis. Sales increased in five of the six vertical markets, led by a strong 47% increase in healthcare as the Company continues its strategic focus in this marketplace which included aligning resources, building relationships, and introducing new healthcare products. The hospitality vertical grew 12% on increased momentum in both the program business and custom business. After several quarters of decline, sales in the government vertical increased 9% as a large number of projects shipped this quarter. Sales in the education and commercial verticals also delivered growth.
Sales of office products introduced in the last three years increased 29% over the prior year third quarter. New product sales approximated 27% of total office sales compared to 22% in the prior period.
Orders received during the quarter increased 16% from the prior year, including a 2% contribution from our David Edward acquisition in 2018. The hospitality vertical (up 29%) saw particularly strong order growth in custom as well as program. The healthcare vertical (up 27%) booked several large projects during the quarter as demand remains strong. The commercial vertical (up 20%) benefited from new product development in this broad market.
Gross profit as a percent of net sales increased 80 basis points from the prior year as incremental margins from price increases, savings realized from cost reduction initiatives, and leverage from higher volumes were partially offset by commodity inflation costs. As anticipated, the David Edward acquisition negatively impacted gross profit in the third quarter by 60 basis points, as we are in the process of executing our acquisition integration plan to improve operating efficiency.
Selling and administrative expenses of $47.5 million increased 15% compared to the prior year due to higher incentive compensation and commission costs related to improved sales and adjusted operating profits, and salaries. The David Edward acquisition added $0.8 million of expense. Expenses also increased $0.6 million related to strategic growth investments, and $0.3 million related to CEO transition costs. Additionally, market value adjustments of $1 million to the Supplemental Employee Retirement Plan (“SERP”) liability was offset with income in the Other Income (Expense) section netting to zero impact on net income.
The Company benefited from a lower effective tax rate of 24.1% during the quarter compared to 31.2% 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 $18.8 million compared to $11.0 million in the prior year, an increase of $7.8 million. The increase was primarily driven by improved working capital performance and higher net income.
As of March 31, 2019, the Company’s balance in cash, cash equivalents, and short-term investments totaled $91.3 million, up $4.0 million since June 30, 2018. The increase was primarily due to $42.7 million of cash flows from operations, partially offset by capital expenditures of $16.4 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 $8.5 million in dividends.
‘Kimball International Connect’ Strategy
Kimball International, Inc. is introducing a comprehensive strategy and transformation plan to connect our Purpose, our people, and our brands to drive growth and unlock our true potential. Kimball International Connect enables the power of our people and positions our organization to engage at higher levels of collaboration and interdependence. We believe our vision will successfully position us for the future and result in enhanced shareowner value over the long-term. Our Kimball International Connect Strategy comprises four pillars:
Inspire Our People: Leveraging our strong legacy of a bold and entrepreneurial spirit, we are cultivating a high-performance, caring culture. We are launching a new Purpose which will be first unveiled to our employees on May 9th and are investing in our training, technology and systems to remain an employer of choice and a great place to work.
Build Our Capabilities: We are creating center-led functions including Finance, HR, IT, Legal and centralizing Supply Chain leadership to reduce duplication, deliver efficiencies, and drive consistency. In addition, we are building a Center of Excellence in the area of Digital to build best-in-class capabilities and enable faster decision-making. Finally, we are adopting world-class ways of working to ensure common practices and approaches. To achieve our goals, we established a Program Management Office (PMO) to oversee execution.
Fuel Our Future: With a heightened focus on operational excellence, we are driving lean throughout the organization, removing duplication at the business-level, and infusing capital to accelerate efficiencies. Related to this, we are employing a more metrics-based approach and driving toward a more rigorous operating rhythm. To ensure success, we are developing an incentive plan aligned with achieving our strategic objectives.
Accelerate Our Growth: We are continuing to advance new product development across the brands, selectively expanding verticals and channels, including healthcare and e-commerce, and driving commercial excellence. We believe by being our customers’ first choice for shaping places that bring collaboration, discovery, wellness and relaxation to life, we will capture greater market share.
To achieve our strategic imperatives, we are focused on both organic and inorganic execution. We will remain disciplined in pursuit of strategic acquisitions that meet our robust financial and strategic criteria, including:
Accretive to EPS within the first full year
ROIC > WACC within three years
Strengthen core by seeking:
º Higher growth products that add to our existing platform
º New product categories and/or channels to expand our reach
Strong organizational culture aligned with Kimball International values
Ms. Juster commented, “Today’s announcement builds on an exciting legacy of strong values, innovation, and core competencies that have served to differentiate Kimball International. I am proud of our organization’s rich history and excited for our future. Through a comprehensive strategic review process, we have identified a clear roadmap to build an even stronger organization and deliver on our vision. To transform our company, it will take our entire organization — our employees, leadership and board — working together and, based on the reaction we have seen thus far, I’m confident our team is up to that task.”
To support this important effort, we recently hired Koorosh Sharghi as Vice President of Strategy and Transformation. Mr. Sharghi is a seasoned industry professional with relevant experience in cross-functions and business transformation and will serve on Kimball International’s Senior Leadership Team.
Introduces Fiscal Year 2020 – 2022 Financial Targets
Kimball International is also announcing long-term targets that align with its strategic imperatives.
Organic sales growth: 4.0% to 7.0% CAGR
Adjusted EBITDA: 150 to 250 basis points improvement
Adjusted EPS: 10% to 15% CAGR
US GDP growth of ~1.5% to 2.5%
Share repurchase to offset stock compensation dilution
“Today marks another significant step in our company’s journey, as we seek to delight our customers, inspire our employees and deliver value to all our shareowners,” added Ms. Juster. “As we execute our plan, guided by our Purpose, I look forward to communicating our progress and celebrating our successes together.”