WASHINGTON, D.C. 20549
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| KIMBALL INTERNATIONAL, INC. |
| (Exact name of registrant as specified in its charter) |
| Indiana | | 35-0514506 |
| (State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
| incorporation or organization) | | |
| 1600 Royal Street, Jasper, Indiana | | 47549-100147546-2256 |
| (Address of principal executive offices) | | (Zip Code) |
| (812) 482-1600 |
| Registrant’s telephone number, including area code |
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| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each Class | Trading Symbol(s) | Name of each exchange on which registered |
| Class B Common Stock, par value $0.05 per share | KBAL | The NASDAQNasdaq Stock Market LLC |
| Securities registered pursuant to Section 12(g) of the Act: None |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o Emerging growth company o (Do not check if a smaller reporting company) |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
Class A Common Stock is not publicly traded and, therefore, no market value is available, but it is convertible on a one-for-one basis into Class B Common Stock. The aggregate market value of the Class B Common Stock held by non-affiliates, as of December 29, 201731, 2020 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $676.1$432.3 million,, based on 97.2%98.2% of Class B Common Stock held by non-affiliates.
The number of shares outstanding of the Registrant’s common stock as of August 27, 201823, 2021 was:
Class A Common Stock - 263,991187,939 shares
Class B Common Stock - 36,898,27836,659,367 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of ShareownersShareholders to be held on October 30, 2018,26, 2021 are incorporated by reference into Part III.
KIMBALL INTERNATIONAL, INC.
FORM 10-K INDEX
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| PART I |
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| PART II |
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| PART III |
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| PART IV |
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PART I
Forward-Looking Statements
This document contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These are statements made by management, using their best business judgment based upon facts known at the time of the statements or reasonable estimates, about future results, plans, or future performance and business of the Company. Such statements involve risk and uncertainty, and their ultimate validity is affected by a number of factors, both specific and general. They should not be construed as a guarantee that such results or events will, in fact, occur or be realized as actual results may differ materially from those expressed in these forward-looking statements. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “seeks,” “likely,” “future,” “may,” “might,” “should,” “would,” “will,” and similar expressions. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historical results. We make no commitment to update these factors or to revise any forward-looking statements for events or circumstances occurring after the statement is issued, except as required in current and quarterly periodic reports filed with the Securities and Exchange Commission (“SEC”) or otherwise by law. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the outcomepossibility that any of a governmental reviewthe anticipated benefits of the Poppin acquisition will not be realized or will not be realized within the expected time period; the risk that integration of the operations of Poppin with the Company will be materially delayed or will be more costly or difficult than expected; the risk that any projections or guidance by the Company, including revenues, margins, earnings or any other financial results are not realized; the impact of COVID-19 on our subcontractor reporting practices,business; disruptions in our supply chain and freight channels including any impact of COVID-19 on cost and availability; adverse changes in global economic conditions,conditions; successful execution of Phase 2 of our restructuring plan; increased global competition; the impact of changes in tariffs, increased global competition, significant reduction in customer order patterns, loss of key suppliers,the regulatory environment; the loss of or significant volume reductions from key contract customers,customers; the financial stability of key customers and suppliers, relationships with strategic customers and product distributors, availability or cost of raw materials, components, or services, changes in the regulatory environment,suppliers; or similar unforeseen events. Additional risks and uncertainties discussed in Item 1A - Risk Factors of this report could also cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our results to differ materially from those expressed in forward-looking statements. At any time when we make forward-looking statements, we desire to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 where factors could cause actual results to differ materially from forward-looking statements.
Item 1 - Business
As used herein, the terms “Company,” “Kimball International,” “we,” “us,” or “our” refer to Kimball International, Inc., the Registrant, and its subsidiaries. Reference to a year relates to a fiscal year, ended June 30 of the year indicated, rather than a calendar year unless the context indicates otherwise. Additionally, references to the first, second, third, and fourth quarters refer to those respective quarters of the fiscal year indicated.
General Description of Business
Overview
Kimball International was incorporatedis a leading omnichannel commercial furnishings company with deep expertise in Indiana in 1939.the Workplace, Health and Hospitality markets. We combine our bold entrepreneurial spirit, a history of craftsmanship and today’s design-driven thinking alongside a commitment to our culture of caring and lasting connections with our customers, shareholders, employees and communities. For over 70 years, our brands have seized opportunities to customize solutions into personalized experiences, turning ordinary spaces into meaningful places. Our family of brands includes Kimball, National, Etc., Interwoven, Kimball Hospitality, D’style and Poppin. Our corporate headquarters is located at 1600 Royal Street, Jasper, Indiana.
We create design driven, innovative furnishings soldserve our customers through our family of brands: Kimball, National,three end markets: hospitality, health, and Kimball Hospitality.workplace. Our diverse portfolio offers solutions forworkplace end market includes sales to the workplace, learning, healing,commercial, financial, government and hospitality environments.education vertical markets and eBusiness. Our values and high integrity are demonstrated daily by living our Guiding Principlespurpose and creating a culture of caringguiding principles that establishesestablish us as an employer of choice. “We Build Success”build success by establishinggrowing long-term relationships with customers, employees, suppliers, shareownersshareholders and the communities in which we operate.
Recent Business Changes
‘Kimball International Connect’ Strategy
In May 2019, Kimball International introduced a comprehensive strategy to connect our purpose, our people, and our brands to drive growth and unlock the Company’s full potential. Kimball International Connect seeks to enable the power of our people and position our organization to engage at higher levels of collaboration and interdependence.
Our Kimball International Connect Strategy is comprised of four pillars:
▪Inspire Our People: Leveraging our legacy of a bold and entrepreneurial spirit, we are working to cultivate a high-performance, caring culture. We are investing in our training, technology and systems to remain an employer of choice and a great place to work.
▪Build Our Capabilities: We created center-led functions, including finance, human resources, information technology and legal and centralized supply chain leadership to reduce duplication, deliver efficiencies, and drive consistency. We are also adopting new ways of working to ensure the use of common best practices and approaches. To achieve our goals, we established a Program Management Office to oversee execution.
▪Fuel Our Future: 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 more formal standardized operating practices.
▪Accelerate Our Growth: We are continuing to advance new product development across our brands, selectively expanding our verticals and channels, including health 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.
‘Kimball International Connect 2.0’ Strategy
In August 2020, Kimball International announced Connect 2.0, which centers around accelerating our growth. The four pillars of our previously announced strategy remain constant: inspire our people with a purpose driven and high performance culture, build our capabilities by expanding our work on innovation, fuel our future through the dedication to cost savings, and accelerate our growth. Connect 2.0 is designed to accelerate the growth of Kimball International and enable us to effectively manage through the current economic downturn, by driving market share gains as well as yielding additional cost savings. The Company has been reorganized into four market centric business units which are Workplace, Health, Hospitality, and eBusiness that will accelerate our ability to redesign and reimagine the new workplace, build a new work from home portfolio, continue assembling experts in health, and expand our hospitality business into other commercial direct sales environments. The dedicated eBusiness unit will take a leadership role in establishing all e-commerce across our brands and end markets. Each of these four business units will be supported by the agility and efficiency of Global Operations and the streamlined center-led structure that we implemented in year one of our strategy and the transformation restructuring plan described below.
Transformation Restructuring Plan Phase 1
In June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. We believe phase 1 of our transformation restructuring plan has established a more cost-efficient structure to better align our operations with our long-term strategic goals. The transformation restructuring plan included the following:
•We reviewed our overall manufacturing facility footprint to reduce excess capacity and gain efficiencies by centralizing manufacturing operations. We ceased operations at a leased seating manufacturing facility in Martinsville, Virginia, and consolidated a David Edward production facility in Red Lion, Pennsylvania into our Baltimore, Maryland facility.
•The creation of center-led functions for finance, human resources, information technology and legal functions resulted in the standardization of processes and the elimination of duplication. In addition, we centralized our supply chain efforts to maximize supplier value and plan to drive more efficient practices and operations within our logistics function.
•Kimball brand selling resources were reallocated to higher-growth markets. We also ceased use of four leased furniture showrooms across our brands during the first quarter of fiscal year 2020.
Phase 1 of our transformation restructuring plan was substantially complete as of June 30, 2021.
Transformation Restructuring Plan Phase 2
In August 2020, we announced the second phase of our transformation restructuring plan that will align our business units to a new market-centric orientation and is expected to yield additional cost savings that will aid us to effectively manage through the downturn caused by the COVID-19 pandemic. Phase 2 of the transformation restructuring plan builds on the initial strategy and the transformation restructuring plan announced in June 2019. Phase 2 of the transformation restructuring plan began in the first quarter of our fiscal year 2021, and we expect a substantial majority of the underlying activities of these aforementioned actions
to be completed by the end of our fiscal year 2023. The following is a summary of the activities we are undertaking pursuant to phase 2 of the transformation restructuring plan:
•As part of the previously announced plan to consolidate manufacturing of all brands into one world-class global operations group, we are streamlining our manufacturing facilities by leveraging production capabilities across all facilities, establishing centers of excellence, and setting up processes to facilitate flexing of product between facilities in response to volume fluctuations. We are also reviewing our overall facility footprint to identify opportunities to reduce capacity and gain efficiencies, including the consolidation of our Baltimore, Maryland facility into other manufacturing facilities.
•We are streamlining our workforce to align with the new organizational structure and respond to lower volumes created by the COVID-19 pandemic, creating a more efficient organization to deliver on our Connect 2.0 strategy.
•During fiscal year 2021, we offered two voluntary retirement incentive programs to eligible employees. Employees electing to participate were paid special termination benefits, including a severance benefit and cash payment that may be used to pay for a period of healthcare coverage or for any other purpose.
•Starting in fiscal year 2022, many of our showrooms will feature multiple brands thus eliminating the need for more than one showroom in the same city. Showroom locations are being reviewed and select leased showroom locations will be closed.
Acquisition of Poppin, Inc.
On December 9, 2020, we acquired Poppin, a tech-enabled, market-leading B2B commercial furniture design company headquartered in New York City, New York. Poppin designs commercial-grade furniture that is made to mix, match, and scale in today’s modern office and work-from-home environments. The acquisition purchase price totaled $110.4 million in initial cash consideration plus additional contingent payments of $65.0 million if all remaining revenue and profitability milestones are achieved through June 30, 2024. As of the acquisition date the fair value of the contingent earn-out liability was $31.8 million. During the fourth quarter of fiscal year 2021 the fair value of the contingent earn-out liability decreased to $20.2 million due to Poppin not achieving certain milestones.
Sales and Offerings
We have been in the furniture business since 1950. Our coreend markets include workplace, health, and hospitality. Our workplace end market includes sales to the commercial, hospitality, healthcare, education,financial, government and finance markets.education vertical markets and eBusiness. Through each of our brands, we offer a wide range of possibilities for creating functional environments that convey just the right image for each unique setting, as furniture solutions are tailored to the specific end user’s needs and demands. The workplace model is evolving to optimize human interaction,Our family of brands includes Kimball, National, Etc., Interwoven, Kimball Hospitality, D’Style and Poppin.
Kimball, National and Etc.
Kimball and National provide residentially inspired furniture solutions which create spaces where people can connect. Ourthat aid productivity and promote engagement. Product offerings include desks/workstations, benching, seating, lounge, storage, tables, and casegoods. Etc. offers on-trend workspace furniture inspired by global trends in silhouette, color and material. While our rich heritage of wood heritage and craftsmanship remain, whileremains, our new products andproduct portfolio incorporates the use of mixed materials, are integrated into our product portfolio, satisfying the marketplace’s need for multifunctional,multi-functional, open accommodations throughout all industries. Our furniture solutions are used in collaborative and open work space areas,spaces, conference and meeting/huddle rooms, training rooms, private offices, learning areas, classrooms, lobby/reception areas, and dining/café areas with a vast mix of wood, metal, laminate, paint, fabric, solid surface, and plastic options. In addition,As the need to work from home continues, we are offering a work-from-home portfolio to help redefine the future of work.
Interwoven
We offer Interwoven products specifically designed specificallyto improve patient and guest comfort at all types of healthcare facilities. Our health products are focused on meeting healthcare professional needs and preferences in flexible, adaptable, and collaborative spaces while putting the patient at the center of care. Our furnishings enable exam rooms to be a flexible space that can be used for consultation, telehealth and specific treatments or examinations. The products offered for areas surrounding the healthcare market such as patient/exam roomtreatment areas are designed to be welcoming and lounge seatingrelaxing to support the families of the patients. By providing thoughtful and casegoods. purposeful solutions, we enable our clients to safely care for their patients, families, staff and community.
Kimball Hospitality and D’Style
In the hospitality industry, Kimball Hospitality (“Hospitality”) works with leading designers, purchasing agents, and hotel owners to create furniture
which that extends the unique ambiance of a property into guest rooms and public spaces by providing
furniture solutions for hotel properties and mixed use developments, including commercial and residential.residential developments. D’Style offers custom hospitality furniture, which is created in collaboration with the leading designers, design firms, purchasing agents and owners to create artful and beautifully crafted furniture. Hospitality and D’Style products include, but are not limited to, headboards, tables, seating, vanities, casegoods, lighting, and products that are enhanced with technology features withutilizing a broad mix of wood, metal, stone, laminate, finish, glass, and fabric options.
Production currently occurs in Company-owned or leased facilities located inPoppin
Poppin products are designed to make outfitting the
United States and Mexico. We also engage with third-party manufacturers within the U.S. as well as internationally to produce select finished goods and accessories for our brands. In the United States, we have manufacturing facilities and showrooms in nine states and the District of Columbia. Financial information by geographic area for each of the three years in the period ended June 30, 2018 is included in Note 14 - Geographic Information of Notes to Consolidated Financial Statements and is incorporated herein by reference. Spin-Off of Kimball Electronics
On October 31, 2014 (“Distribution Date”), we completed the spin-off of our Electronic Manufacturing Services (“EMS”) segment by distributing the related shares of Kimball Electronics, Inc. (“Kimball Electronics”), on a pro rata basis, to our shareowners of record as of October 22, 2014. After the Distribution Date, we no longer beneficially own any Kimball Electronics shares and Kimball Electronics is an independent publicly traded company. Kimball International, Inc. trades on the Nasdaq Stock Market LLC (“Nasdaq”) under the ticker symbol “KBAL” and Kimball Electronics, Inc. trades on Nasdaq under the ticker symbol “KE”.
The disclosures within this Part I describe the continuing operations of Kimball International, Inc. after the spin-off.
Recent Business Changes
Acquisition of D’style, Inc.
During the second quarter of fiscal year 2018, we acquired certain assets of D’style, Inc. (“D’style”), headquartered in Chula Vista, California.office easy. This acquisition expanded our reach into hospitality public spaces and added an attractive product portfolio of solutionseffortless one-stop solution for the residential market through the acquired Allan Copley Designs brand. These offerings enable us to take advantage of the trend where hospitality, residentialcustomer’s entire workspace, including working from home, school and commercial designs are merging. As part of this acquisition, weon-the-go applications, offers commercial-grade office furniture and supplies with a focus on lowering prices and reducing delivery times. Poppin markets and sells products online and also acquired all of the capital stock of Diseños de Estilo S.A. de C.V. headquartered in Tijuana, Mexico, another member of the D’style group which manufactures exclusivelyhas showrooms for D’style, strengthening our North American manufacturing footprint and serving as a distribution channel to the Mexico and Latin America hospitality markets. The cash paid for the acquisition totaled $18.2 million. An earn-out of up to $2.2 million may be paid, which is contingent based upon fiscal year 2018 and 2019 D’style, Inc. operating income compared to a predetermined target for each fiscal year. See Note 2 - Acquisition of Notes to Consolidated Financial Statements for more information on the acquisition.Capacity Utilization Restructuring Plan
In November 2014, we announced a capacity utilization restructuring plan which included the consolidation of our metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and the reduction of our Company plane fleet from two jets to one.
The transfer of work from our Idaho facility involved the start-up of metal fabrication capabilities in an existing Company-owned facility, along with the transfer of certain assembly operations into two additional existing Company-owned facilities, all located in southern Indiana. All production was transferred out of the Idaho facility as of March 2016, after which work continued in the Indiana facilities to train employees, ramp up production and eliminate the inefficiencies associated with the start-up of production in these facilities. The improvement of customer delivery, supply chain dynamics, and reduction of transportation costs began to generate pre-tax annual savings of approximately $5 million in fiscal year 2017. In addition, during the first quarter of fiscal year 2017, we sold our Post Falls, Idaho facility and land. See Note 4 - Property and Equipment of Notes to Consolidated Financial Statements for more information on the sale of the Idaho facility.The reduction of our plane fleet from two jets to one reduced our cost structure while aligning the plane fleet size with our needs following the spin-off of Kimball Electronics on October 31, 2014. Previously, one of our jets was used primarily for the successful strategy of transporting customers to visitview the products. Building our showrooms, offices, researchcollection like a family, with a common elemental aesthetic, we design products that perform and development center,feel at home in any environment. Products include, but are not limited to, desks and manufacturing locations, while the remaining jet was used primarily for management travel. The plane used primarily for management travel was sold in the third quarter of fiscal year 2015,benching, adjustable height desks, office chairs and as a result, we began realizing the expected annual pre-tax savings of $0.8 million. We believe that our location in rural Jasper, Indianastools, file cabinets, tables, lounge seating, PoppinSpaces and the location of our manufacturing locations in small towns away from major metropolitan areas necessitates the need for the remaining jet to efficiently transport customers.PoppinPods.
Outsourcing of Shipping Function
During fiscal year 2018 we outsourced the remainder of our outbound shipping that was previously transported by our Company-owned shipping fleet to a dedicated freight provider and sold our fleet of over-the-road tractors and trailers. The outsourcing to a dedicated freight provider is expected to partially mitigate increasing transportation costs from non-dedicated freight carriers. In addition, we expect to minimize risks associated with operating an internal shipping fleet and to increase utilization of the outsourced transportation fleet over our previous internal fleet which was being impacted by driver shortages. The dedicated freight provider operates transportation equipment with our Company branding. We continue to operate Company-owned tractors and trailers to move products between our production facilities and distribution warehouses.
Seasonality
The impact of seasonality on our revenue includes lower sales in the third quarter of our fiscal year due to the buying season of the government, lower sales to educational institutions during our second and third fiscal quarters, and lower sales of hospitality furniture during times of high hotel occupancy such as the summer months.
Locations
As of June 30, 2018, our products were primarily produced at eleven plants: seven located in Indiana, two in Kentucky, one in Virginia, and one in Mexico. In addition, select finished goods are purchased from domestic and foreign sources. As described above, our facility in Idaho was sold in fiscal year 2017. We continually assess manufacturing capacity and adjust such capacity as necessary.
A facility in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom was sold near the end of fiscal year 2017. We leased a portion of the facility back until December 2017 to facilitate the transition of those functions to other existing Indiana locations. Furniture showrooms are currently maintained in eight cities in the United States. Office space is leased in Dongguan, Guangdong, China and Ho Chi Minh City, Vietnam to facilitate sourcing of select finished goods and components from the Asia Pacific Region. As a result of the acquisition of D’style, we also lease office and manufacturing space in Chula Vista, California and Tijuana, Mexico.Markets
Marketing Channels
Our furniture is marketed to end users by both independent and employee sales representatives, office furniture dealers, wholesalers, brokers, designers, purchasing companies, and catalog houses, throughout North America and on an international basis.Poppin products are sold online in a B2B and direct to consumer manner. Customers can access our products globally through a variety of distribution channels.
We currently categorize our sales by the following verticalend markets:
Commercial Workplace - The largest portion of our business is inOur workplace end market includes sales to the commercial, market.financial, government and education vertical markets, and eBusiness. We are a full-facility provider offering products for a variety of commercial applications including: office, collaborative and open plan, home office, lobby-lounge, conferencing and meeting/huddle, training, dining/café, learning, lobby and reception, and other public spaces.
Education - Whether Banking and financial offices require affordable, functional, and stylish environments, and our versatile and customizable furnishings offer sophisticated styles for reception areas, employee work spaces, executive offices, and boardrooms. We also supply furniture for federal, state, and local government offices, as well as other government-related entities, and we hold two Federal Supply Service contracts with the General Services Administration (“GSA”) that are subject to government subcontract reporting requirements. We partner with multiple general purchasing organizations that assist public agencies such as state and local governments with furniture purchases. Our education products are sold to K-12, higher education, vocational training or anyand other learning institution, we understand that furniture for education needs to enhanceinstitutions, and the products are focused on both enhancing learning and creating social environments. We offer flexible, collaborative, and technology-driven furnishings designed to make students and faculty more productive and comfortable. We equip hallways, lounges, and other gathering spaces with versatile furniture that extends learning outside the classroom with areas designed for individual, one-on-one, and larger group use.
Healthcare Health - We are focused on better outcomes for patients, their families, the staff that heals them, and the environments surrounding them by offering productsOur health end market includes sales to value-conscious healthcare customers, including hospitals, clinics, physician office buildings, long-term care facilities, and assisted living facilities throughout the country. Our health product offerings fulfill the specific demands of healthcare settings to support patient comfort and cleanliness.
Hospitality - We offer a complete package of products for guest rooms and public spaces plus service support to the hospitality industry. We partner with the most recognized hotel brands to meet their specific requirements for properties throughout the world by working with a worldwide manufacturing base to offer the best solution to fulfill the project.
Finance - Banking and financial offices require affordable, functional, and stylish environments. Our versatile and customizable furnishings offer sophisticated styles for reception areas, employee work spaces, executive offices, and boardrooms.
Government - We supply office furniture including desks, tables, seating, bookcases and filing and storage units for federal, state, and local government offices, as well as other government related entities. We hold two Federal Supply Service contracts with the General Services Administration (“GSA”) that are subject to government subcontract reporting requirements. We also partner with multiple general purchasing organizations which assist public agencies such as state and local governments with furniture purchases. The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. During fiscal year
2018, sales related to our GSA contracts were approximately 7.5% of our consolidated sales, with one contract accounting for approximately 5.3% of our consolidated sales and the other contract accounting for approximately 2.2% of our consolidated sales.
Major Competitive Factors
Our products are sold in the contract furniture and hospitality furniture industries. These industries have similar major competitive factors, which include price in relation to quality and appearance, product design, the utility of the product, including adaptability and cleanability, supplier lead time, reliability of on-time delivery, sustainability, and the ability to respond to requests for special and non-standard products. We offer payment terms similar to industry standards and in unique circumstances may grant alternate payment terms.
Certain industries are more price sensitive than others, but all expect on-time, damage-free delivery. In addition to the many options available on our standard furniture products, custom furniture is produced to customer specifications and shipping timelines on a project basis. We offer several programs that include furniture for a variety of spaces with quick-ship options.
Competitors
There are numerous furniture manufacturers competing within the marketplace, with a significant number of competitors offering similar products.
Our competition includes furniture manufacturers such as Steelcase Inc., Herman Miller Inc., Knoll, Inc. (MillerKnoll), HNI Corporation, and a large number of smaller privately-owned furniture manufacturers, both domestic and foreign-based.
Working CapitalProduct Development and Trends
Our robust product development process is comprised of ideation, development, and execution. Research informed design is accomplished through partnering with external research firms and utilizing internal and external design intelligence to gain market insights and obtain design validation. Successful new product introductions fuel the growth of our business as they incorporate evolving customer needs with improved manufacturing efficiencies. Products are tested for performance, quality and compliance with applicable standards and regulations. We do not believeinvested approximately $10 million, $5 million, and $6 million in research and development related activities in fiscal years 2021, 2020, and 2019, respectively. In addition, we periodically pay royalties to external designers as select products are sold.
Our product designs focus on providing solutions which include addressing trends in the marketplace, such as the evolving flexible workplace environment. Key elements of the evolving flexible workplace include pairing residential elements with highly functional and flexible commercial office offerings that we, or the industry in general, have any special practices or special conditions affecting working capital itemshigh cleanability. Within healthcare settings, products are trending toward adaptable designs that are significantfocused on both the patients and the caregivers with a continued focus on cleanability.
Locations
As of June 30, 2021, our products were primarily produced at nine Company-owned or leased manufacturing facilities: six located in Indiana, two in Kentucky, and one in Mexico. We also engage with third-party manufacturers within the U.S. as well as internationally to produce select finished goods and accessories for understanding our brands. As part of our transformation restructuring plan, near the end of our fiscal year 2021, we are consolidating our Baltimore, Maryland manufacturing facility into other existing locations and are evaluating our production capabilities and capacity across our organization to identify additional opportunities.
As of June 30, 2021, fifteen furniture business. We do receive advance payments from customers on select furniture projects primarilyshowrooms were maintained in ten cities in the hospitality industry. United States inclusive of the Poppin showrooms. During fiscal year 2022 we plan to implement a showroom strategy where we highlight our Kimball, National, Etc., and Interwoven brands in shared showroom spaces which will eliminate having multiple showrooms in a single city. Office space is leased in Dongguan and Shenzen, both located in the province of Guangdong, China and Ho Chi Minh City, Vietnam to facilitate sourcing of select finished goods and components from the Asia Pacific Region. We lease office and manufacturing space in Chula Vista, California and Tijuana, Mexico.
Financial information by geographic area for each of the three years in the period ended June 30, 2021 is included in Note 18 - Geographic Information of Notes to Consolidated Financial Statements and is incorporated herein by reference. Resources
Raw Material Availability
Certain components used in the production of furniture are manufactured internally and are generally readily available, as are other raw materials used in the production of wood and non-wood furniture. Certain fabricated seating components, wood frame assemblies as well as finished furniture products, electrical components, stone, fabrics, and fabricated metal components, which are generally readily available, are sourced on a global scale in an effort to provide quality products at the lowest total cost. The cost and availability ofCOVID-19 global pandemic has affected both domestic and foreign sourced product could beglobal supply chains. Disruptions related to certain specific commodities have begun to ease; however we expect other commodities and components to remain impacted if tariffs are imposed on such products.
Order Backlog
The aggregate sales price of products pursuant to open orders, which may be canceled by the customer, was as follows:global COVID-19 pandemic which could increase cost and limit availability of certain raw materials.
Working Capital
We do not believe that we, or the contract furniture or hospitality furniture industries in general, have any special practices or special conditions affecting working capital items that are significant for understanding our furniture business. We do receive advance payments from customers on select furniture projects, primarily in the hospitality industry.
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| (Amounts in Millions) | June 30,
2018 | | June 30,
2017 |
| Order Backlog | $ | 148.9 |
| | $ | 131.6 |
|
Of the order backlog increase, $7.5 million was due to orders of D’style products in fiscal year 2018, and $2.0 million was due to the acceleration of orders into the fourth quarter of fiscal year 2018 in connection with a pricing increase for one of our brands announced during the fourth quarter of fiscal year 2018 that took effect on July 2, 2018. The open orders as of June 30, 2018 are expected to be filled within the next fiscal year. Open orders may not be indicative of future sales trends.
Research and Development
Research and development activities include the development of manufacturing processes, engineering and testing procedures, major process and technology improvements, new product development and product redesign, and information technology initiatives.
Research and development costs were approximately:
|
| | | | | |
| | Year Ended June 30 |
| (Amounts in Millions) | 2018 | | 2017 | | 2016 |
| Research and Development Costs | $7 | | $7 | | $6 |
Intellectual Property
In connection with our business operations, we hold both trademarks and patents in various countries and continuously have additional pending trademarks and patents. The intellectual property which we believe to be the most significant to the Company includes: Kimball, National, D’style, David Edward, Etc. (pending), Poppin, Fringe, Waveworks, Xsite, Narrate, Pairings, Respitality, and Dock,Allan Copley Designs, which are all registered trademarks.trademarks, and the unregistered trademarks Priority and Whittaker. Our patents expire at various times depending on the patent’s date of issuance.
Seasonality
The impact of seasonality on our revenue includes lower sales to educational institutions during our second and third fiscal quarters, lower sales of hospitality furniture during times of high hotel occupancy such as the summer months, and lower sales in our third fiscal quarter due to the buying season of the government.
Human Capital
Employee Engagement
Employee engagement is a key component of our culture of caring. We conduct employee engagement surveys periodically to take a pulse on our working environment. Recently, our outreach to employees has included a wide range of activities such as targeted pulse surveys across our various business units and functions. The surveys focus on organizational vitality, communication, and returning to work post-COVID. In response to employee feedback, we added new forums to engage our employees:
•Created regular interactive “Executive Chat” sessions where executive team members update the organization on strategic initiatives and an open forum for Q&A. These live sessions present opportunities for open dialogue on current and relevant topics across the organization.
•Created a communication platform making it easier for key messages to be shared with our manufacturing employees.
•Developed a new hybrid work policy.
Diversity, Equity, Inclusion and Belonging
We promote an environment where each employee is valued, respected, and treated with dignity. We believe that diverse voices are essential in creating an organization where every person feels a sense of belonging and we are committed to creating equity and a sense of inclusion for all. This is our mission and commitment.
Kimball International prohibits unlawful discrimination, harassment, and retaliation. Our employment practices are non-discriminatory and non-retaliatory, and our policies are designed to safeguard all employees and job applicants from discrimination, harassment and retaliation on the basis of race, color, religion, sex (including pregnancy, gender identity, and sexual orientation), parental status, national origin, age, disability, genetic information including family medical history, political affiliation, military service, or other legally protected status or actions. We are committed to eliminating barriers to success. This includes, but is not limited to, hiring qualified applicants with disabilities, and providing employees with disabilities reasonable accommodations that do not impose an undue hardship.
Talent Development
We are committed to employee and leadership development. Our flagship senior leadership program provides leadership development through coaching, assessments, and experiential action learning projects with direct mentoring from our CEO. We offer a frontline leadership program for emerging managers and leadership roundtables. We also sponsor employee participation in training programs and have a tuition reimbursement program and support continuing education to maintain professional certifications.
Compensation, Benefits, and Wellness
The goals of our compensation philosophy are to reward performance, align with shareholders’ interest, and retain key talent. We offer employee participation in a defined contribution 401(k) plan through our Kimball International Retirement Plan. We offer comprehensive benefits to our U.S. full-time employees, including healthcare, pharmacy, a health savings account, an employee assistance program, dental, vision, short-term and long-term disability insurance, life and dependent insurance, accidental death and dismemberment insurance, critical illness insurance, accident, and hospital indemnity insurance. We also partner with a health management company to offer a Company-sponsored health clinic which offers on-site and telehealth appointments for employees and dependents.
Employee Counts
| | | | | | | | | | | |
| | June 30,
2021 | | June 30,
2020 |
| United States | 2,093 | | | 2,663 | |
| Foreign Countries | 103 | | | 145 | |
| Total Employees | 2,196 | | | 2,808 | |
Our U.S. operations are not subject to collective bargaining arrangements. Outside of the U.S., approximately 40 employees are represented by worker’s unions that operate to promote the interests of workers. We believe that our employee relations are good.
Employee Turnover
| | | | | | | | | | | |
| Year Ended |
| June 30 |
| | 2021 | | 2020 |
| Voluntary | 27.5 | % | | 26.5 | % |
| Involuntary | 7.7 | % | | 6.5 | % |
| Health/Retirement | 6.0 | % | | 3.6 | % |
| Total Turnover % | 41.2 | % | | 36.6 | % |
We monitor voluntary and involuntary turnover independently on a month-to-month basis, taking actions where we see rates exceed our established targets. Our turnover has been impacted by permanent layoffs driven by the COVID-19 pandemic and by a voluntary early retirement option which was offered to select roles.
Environment and Energy Matters
Our operations are subject to various federal, state, local, and foreign laws and regulations with respect to environmental matters. We believe that we are in substantial compliance with present laws and regulations and that there are no material liabilities related to such items.
We are dedicated to excellence, leadership, and stewardship in matters of protecting the environment and communities in which we have operations. Reinforcing our commitment to the environment, sixfive of our showrooms and one non-manufacturing location were designed under the guidelines of the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) for Commercial Interiors program. One manufacturing facility was designed underOur headquarters received the LEED OperationsWELL Health-Safety Rating that focuses on operational policies, maintenance protocols, emergency plans and Maintenance program guidelines. Our National brand headquarters is Fitwel certified, which is a building certification that supports healthier workplace environments to improve occupant health and productivity.shareholder engagement strategies.
We believe that continued compliance with foreign, federal, state, and local laws and regulations, which have been enacted relating to the protection of the environment, will not have a material effect on our capital expenditures, earnings, or competitive position. We believe capital expenditures for environmental control equipment during the next twocurrent fiscal year and subsequent fiscal years ending June 30, 2020, will not represent a material portion of total capital expenditures during those years.
Our manufacturing operations require the use of natural gas and electricity. Federal and state regulations may control the allocation of fuels available to us, but to date we have experienced no interruption of production due to such regulations. In our wood furniture manufacturing plants, a portion of energy requirements are satisfied internally by the use of our own scrap wood produced during the manufacturing of product.
Employees
|
| | | | | |
| | June 30
2018 | | June 30
2017 |
| United States | 2,921 |
| | 3,024 |
|
| Foreign Countries | 153 |
| | 65 |
|
| Total Employees | 3,074 |
| | 3,089 |
|
Our U.S. operations are not subject to collective bargaining arrangements. Outside of the U.S., approximately 52 employees are represented by worker’s unions that operate to promote the interests of workers. We believe that our employee relations are good.expenditures.
Available Information
We make available free of charge through our website, https://www.kimballinternational.com/public-filings, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. All reports we file with the SEC are also available via the SEC website, http://www.sec.gov, or may be read and copied at the SEC Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Our Internet website and the information contained on, or accessible through, such website is not incorporated into this Annual Report on Form 10-K.
Additionally, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.SEC.gov.
Item 1A - Risk Factors
The following important risk factors could affect future results and events, causing results and events to differ materially from those expressed or implied in forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition, and results of operations and should be carefully considered before deciding to invest in, or retain, shares of our common stock. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also affect
our business, financial condition, or results of operations. Because of these and other factors, past performance should not be considered an indication of future performance.
ChangesEconomic, Financial and Strategic Risk Factors
The COVID-19 pandemic has had, and is expected to government regulations may significantly increase our operating costs in the United States and abroad. Legislative and regulatory reforms by the U.S. federal and foreign governments could significantly impact our profitability by burdening us with forced cost choices that are difficultcontinue to recover with increased pricing. For example:
We depend on suppliers globally to provide materials, parts, finished goods, and components for use in our products. We utilize both steel and aluminum in our products, most of which is sourced domestically. The U.S. recently imposed tariffs of 25% on steel and 10% on aluminum imported from several countries which could adversely impact our input costs. The government has also recently proposed to expand its list of products subject to tariffs to include furniture products, parts, and components, and if approved, the landed cost of our products could increase materially, which would reduce our net income if we are unable to mitigate the additional cost. Additional tariffs or changes in global trade agreements or in U.S. governmental import/export regulations could have, an adverse effect on our business. The COVID-19 pandemic and the actions taken by various governments and third parties to combat the spread of COVID-19 (including, in some cases, mandatory quarantines and other suspensions of non-essential business operations) have led to significant disruptions in our manufacturing and distribution operations and our supply chains during 2021. Many office workers have been required to work from home for an extended period of time which has had a negative impact on demand for office furniture and our revenue. New order rates have also slowed in our end markets. We expect that our revenues will continue to be negatively impacted while the impact of COVID-19 continues and the severity of various impacts will depend in part on the speed of vaccine uptake, the emergence of new variants of COVID-19, the timing of when companies have their employees return to the office and the pace of the recovery of economic conditions. Our dealers and suppliers are also experiencing similar negative impacts from the COVID-19 pandemic. In order to preserve cash during this period of time, we have reduced spending on discretionary expenditures, which may have a negative impact on our financial condition, resultsemployee retention and growth in the future.
The economic impacts of operations,the COVID-19 pandemic have had, or cash flows.
We conduct business with entitiesare likely to have, a negative impact on many of our customers, particularly those in Canadathe hospitality market and, Mexico; therefore, a modification or withdrawal fromthus, may negatively affect our future revenues and increase credit risk. Though in certain areas, COVID-19 related restrictions imposed by governments have been lifted, the North American Free Trade Agreement byduration and severity of the U.S. federal government could have an adverse impact on our financial condition, results of operations, or cash flows.
We import a portion ofbusiness, our wooden furniture productsindustry and the global economy are thus subject to an anti-dumping tariff specifically on wooden bedroom furniture supplied from China. The tariffs are subject to review and could result in retroactive and prospective tariff rate increases which could have an adverse impact on our financial condition, results of operations, or cash flows.
State and foreign regulations are increasing in many areas such as hazardous waste disposal, labor relations, employment practices and data privacy, such as the California Consumer Privacy Act. Compliance with these regulations could require us to update our processesnot yet fully known and could have an adverse impact on our financial condition, results of operations, or cash flows.
We may be unable to purchase a sufficient amount of materials, parts, and components for use in our products at a competitive price, in a timely manner, or at all. We depend on suppliers globally to provide timely delivery of materials, parts, and components for use in our products. We monitor the financial stability of suppliers when feasible, as the loss of a significant supplier could have an adverse impact on our operations. Certain finished products and components we purchase are primarily manufactured in select regions of the world and issues in those regions could cause manufacturing delays. In addition, delays can occur related to the transport of products and components via container ships, which load and unload through various U.S. ports which sometimes experience congestion. Price increases of commodity components could have an adverse impact on our profitability if we cannot offset such increases with other cost reductions or by price increases to customers. New tariffs or trade regulations which have been and could be imposed by the U.S. federal government may adversely impact our access, price, and delivery of finished products and components from foreign sources, and therefore adversely affect our profitability. Materials we utilize are generally available, but future availability is unknown and could impact our ability to meet customer order requirements. If suppliers fail to meet commitments to us in terms of price, delivery, or quality, it could interrupt our operations and negatively impact our ability to meet commitments to customers.
Uncertain macroeconomic and industry conditions, or a sustained slowdown or significant downturn in our markets, could adversely impact demand for our products and adversely affect operating results. Market demand for our products, which impacts revenues and gross profit, is influenced by a variety of economic and industry factors such as:
•global consumer confidence;
•volatility and the cyclical nature of worldwide economic conditions;
•increased working from home;
•weakness in the global financial markets;
•general corporate profitability of the end markets to which we sell;
•credit availability to the end markets to which we sell;
•service-sector unemployment rates;
•commercial property vacancy rates;
new office•non-residential construction and refurbishment rates;
•deficit status of many governmental entities which may result in declining purchases of office furniture;
uncertainty surrounding potential reform of the Affordable Care Act;•COVID-19 impacts; and
•new hotel and casino construction and refurbishment rates.
We must make decisions based on order volumes in order to achieve manufacturing efficiency. These decisions include determining what level of additional business to accept, production schedules, component procurement commitments, and personnel requirements, among various other considerations. We must constantly monitor the changing economic landscape and may modify our strategic direction accordingly. If we do not react quickly enough to the changes in market or economic conditions, it could result in lost customers, decreased market share, and increased operating costs.
We operate in a highly competitive environment and may not be able to compete successfully. The office and hospitality furniture industries are competitive due to numerous global manufacturers competing in the marketplace. In times of reduced demand for office furniture, large competitors may have greater efficiencies of scale or may apply more pressure to their distribution to sell their products exclusively, which could lead to reduced opportunities for our products.
We may not be successful in implementing and managing our Kimball International Connect Strategies. In May 2019, we introduced our comprehensive Kimball International Connect strategy that is intended to connect our purpose, our people, and our brands to drive growth. In August 2020, we announced the continuation of our strategy that we call Connect 2.0 which centers around accelerating our growth. Our plan is designed to enable us to effectively manage through the current economic downturn, by driving market share gains for the Company and yielding additional cost savings. The execution of these strategies involves risk, as management’s focus and Company resources could be diverted from our core operations, growth in our business could lead to operating inefficiencies, our corporate culture could be disrupted, which could lead to employee attrition, and our revenues could fall or could fail to grow as intended, any of which would have an adverse impact on our financial condition, results of operations, or cash flows.
We may pursue acquisitions that present risks and may not be successful. Our sales growth plans may occur through both organic growth and acquisitions. Acquisitions involve many risks that could have an adverse effect on our business, financial condition or results of operations, including:
•difficulties in identifying suitable acquisition candidates and in negotiating and consummating acquisitions on terms attractive to us;
•difficulties in the assimilation of the operations of the acquired company;
•the diversion of resources, including diverting management’s attention from our current operations;
•risks of entering new geographic or product markets in which we have limited or no direct prior experience;
•the potential loss of key customers, suppliers and employees of the acquired company;
•the potential incurrence of indebtedness to fund the acquisition;
•the potential issuance of common stock for some or all of the purchase price, which could dilute ownership interests of our current shareholders;
•the acquired business not achieving anticipated revenues, earnings, cash flow, or market share;
•excess capacity;
•failure to achieve the expected synergies resulting from the acquisition;
•inaccurate assessment of undisclosed, contingent, or other liabilities or problems and unanticipated costs associated with the acquisition;
•incorrect estimates made in accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill that could adversely affect our financial results; and
•dilution of earnings.
We may not be successful in launching start-up operations or expanding our business in digital marketplaces. We are committed to growing our business, and therefore from time to time, we may determine that it would be in our best interests to start up a new operation or expand our digital presence to sell certain products. Start-up operations involve a number of risks and uncertainties, such as funding the capital expenditures related to the start-up operation, developing a management team for the new operation, diversion of management focus away from current operations, and creation of excess capacity. The risks and uncertainties that come with a digital presence include competition from more established competitors in the marketplace, responding quickly to consumer traffic patterns, supporting demand outside our current distribution channels, and additional cybersecurity risks. Any of these risks could have a material adverse effect on our financial position, results of operations, or cash flows.
A change in our sales mix among our diversified product offerings could have a negative impact on our gross profit margin. Changes in product sales mix could negatively impact our gross margin, as margins of different products vary. We strive to improve the margins of all products, but certain products have lower margins in order to price the product competitively. An increase in the proportion of sales of products with lower margins could have an adverse impact on our financial position, results of operations, or cash flows.
Our restructuring efforts may not be successful. In June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. A critical component of our transformation restructuring plan is the transfer of production among facilities, which may result in management’s focus being diverted from our core operations, manufacturing inefficiencies, and excess working capital during the transition period. We also created center-led functions for finance, human resources, information technology and legal functions and centralized our supply chain efforts. Kimball brand selling resources are being reallocated to higher-growth markets, and we exited four furniture showrooms during fiscal year 2020, which could cause a temporary or permanent decline if revenues are not realized in the higher-growth markets. If our closed leased facilities are not able to be subleased in the future according to our assumptions, we may incur additional impairment charges through restructuring expense.
The second phase of our transformation restructuring plan was announced in August 2020 that will align the Company’s business units to a new market-centric orientation. The Company has begun to streamline manufacturing facilities by leveraging production capabilities across all facilities, establishing centers of excellence, and setting up processes to facilitate flexing of product between facilities in response to volume fluctuations. The Company has been reorganized into four market centric business units which are Workplace, Health, Hospitality, and eBusiness. The Company will streamline its workforce to align with the new organizational structure and respond to lower volumes created by the COVID-19 pandemic. In addition, our harmonized showroom strategy will consolidate our Kimball and National showrooms to provide a multi-branded selling solution for our brands. The successful execution of both phases of our transformation restructuring plan is also dependent on the realization of cost savings, and, even if successful, the transformation restructuring plan may not be accomplished as quickly or effectively as anticipated.
We could incur losses due to asset impairment. As business conditions change, we must continually evaluate and work toward the optimum asset base. It is possible that certain assets such as, but not limited to, facilities, equipment, lease assets, goodwill, or other intangible assets, could be impaired in the future depending on changing business conditions or internal restructuring plans. If our closed leased facilities are not able to be subleased in the future according to our assumptions, we may incur additional impairment charges. Goodwill and certain intangible assets are tested for impairment annually or when triggering events occur. Such resulting impairment could have an adverse impact on our financial position and results of operations.
We may not be successful managing risk with derivative financial instruments. From time to time the business may utilize derivative financial instruments to mitigate risks associated with interest rates, foreign currency translation rates or the cost of commodities used in our manufacturing process. The use of derivatives involves management judgement and we may not be successful at managing the aforementioned risks, which could result in negative financial impacts to the Company. If we are unable to achieve or maintain hedge accounting treatments, it could have an adverse impact on our financial position and results of operations.
Selling and Customer Risk Factors
A loss of independent sales representatives, dealers, or other sales channels could lead to a decline in sales. Our workplace and health furniture is marketed to end users through both independent and employee sales representatives, furniture dealers, wholesalers, brokers, designers, purchasing companies, catalog houses, and eCommerce services. Our hospitality furniture is marketed to end users using independent sales representatives. A significant loss within any of these sales channels could result in a sales decline and thus have an adverse impact on our financial position, results of operations, or cash flows. Additionally, the closures of furniture showrooms across our brands could negatively affect our current commercial relationships, which could have an adverse impact on our financial position, results of operations or cash flows.
We may be exposed to the credit risk of our customers who are adversely affected by weakness in market conditions. Weakness in market conditions, including that caused by the COVID-19 pandemic, may drive an elevated risk of potential cash flow issues or bankruptcy of our customers resulting in a greater risk of uncollectible outstanding accounts receivable. The realization of these risks could have a negative impact on our profitability.
Reduction of purchases by or the loss of a significant number of customers could reduce revenues and profitability. Significant declines in the level of purchases by customers or the loss of a significant number of customers could have a material adverse effect on our business. A reduction of, or uncertainty surrounding, government spending could also have an adverse impact on our sales levels. We can provide no assurance that we will be able to fully replace any lost sales, which could have an adverse effect on our financial position, results of operations, or cash flows.
If efforts to introduce new products or start-up new programs are not successful, this could limit sales growth or cause sales to decline. We regularly introduce new products to keep pace with workplace trends and evolving regulatory and industry requirements, including environmental, health, and safety standards such as sustainability and ergonomic considerations, and similar standards for the workplace and for product performance. Shifts in workforce demographics, the popularity of working from home, working styles, and technology may impact the quantity and types of furniture products purchased by our customers. The introduction of new products or the start-up of new programs require the coordination of the design, manufacturing, and marketing of such products. The design and engineering required for certain new products or programs can take an extended period of time, and further time may be required to achieve customer acceptance. Accordingly, the launch of any particular product or program may be delayed or may be less successful than we originally anticipated. Difficulties or delays in introducing new products or programs, or lack of customer acceptance of new products or programs could limit sales growth or cause sales to decline.
If customers do not perceive our products and services to be innovative and of high quality, our brand and name recognition and reputation could suffer. We believe that establishing and maintaining good brand and name recognition and a good reputation is critical to our business. Promotion and enhancement of our name and brands will depend on the effectiveness of marketing and advertising efforts and on successfully providing design-driven, innovative, and high-quality products and superior services. If customers do not perceive our products and services to be design-driven, innovative, and of high quality, our reputation, brand and name recognition could suffer, which could have a material adverse effect on our business.
Operational, Supply Chain and Distribution Risk Factors
We may be unable to purchase a sufficient amount of materials, parts, and components for use in our products at a competitive price, in a timely manner, or at all. We depend on suppliers globally to provide timely delivery of materials, parts, and components for use in our products. The costs of commodities as well as fuel, freight, energy, labor and other input
costs can fluctuate due to changes in global, regional, or local supply and demand. Price increases of commodity components could have an adverse impact on our profitability if we cannot offset such increases with other cost reductions or by price increases to customers. Tariffs or trade regulations which have been or could be imposed by the U.S. federal government may adversely impact our access, price, and delivery of finished products and components from foreign sources, and therefore adversely affect our profitability. The COVID-19 pandemic has had a negative impact on our ability to source certain raw materials in the quantities that we need for our operations. These reductions in availability have not had a significant impact on our ability to manufacture and supply products to our customers, but they have negatively impacted the cost of procuring such raw materials that are made primarily or include significant quantities of these commodities. Certain finished products and components we purchase are primarily manufactured in select regions of the world, and issues in those regions could cause manufacturing delays.
The loss of a significant supplier could have an adverse impact on our operations. The limited availability of certain raw materials and components could cause an increase in product lead time. In addition, delays can occur related to the transport of products and components via container ships, which load and unload through various U.S. ports that sometimes experience congestion. If suppliers fail to meet commitments to us in terms of price, delivery, or quality, it could interrupt our operations and negatively impact our ability to meet commitments to customers.
Turnover and shortages of production personnel could cause manufacturing inefficiencies. The demand for manufacturing labor in certain geographic areas makes retaining experienced production employees difficult. Turnover could result in lost time due to inefficiencies and the need for additional training, which could impact our operating results.
Our failure to retain our existing management team, maintain our engineering, technical, and manufacturing process expertise, or continue to attract qualified personnel could adversely affect our business. We depend significantly on our executive officers and other key personnel. Our success is also dependent on sustaining employee engagement and organizational vitality, keeping pace with technological advancements, and adapting services to provide manufacturing capabilities that meet customers’ changing needs. To do that, we must retain our qualified engineering and technical personnel and successfully anticipate and respond to technological changes in a cost effective and timely manner. Our culture and guiding principles focus on continuous training, motivation, and development of employees, and we strive to attract, motivate, and retain qualified personnel. Failure to retain our executive officers and retain and attract other key personnel could adversely affect our business.
A shortage of freight carrier capacity in the trucking industry could drive increases in freight costs. We outsource inbound and outbound shipping to third-party contract carriers, including a dedicated freight provider that operates transportation equipment with our Company branding, and other commercialdomestic and international contract carriers. We have experiencedmay experience pressure on freight costs as theif our demand exceeds the capacity of available trucking and ocean fleets, particularly for commercial contract carriers. IfIn periods of tight capacity, remains tight, and we aremay be unable to mitigate a freight cost increase through our supply chain planning or by increasing prices on our products, itwhich could adversely affect our profitability.
Changes in U.S. fiscalWe are subject to manufacturing and tax policieswarehousing inefficiencies due to the transfer of production among our facilities and other factors. At times we may adversely affectexperience labor or other manufacturing inefficiencies due to factors such as new product introductions, transfers of production among our business. On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because Kimball International has a June 30 fiscal year-end, the lower corporate federal income tax rate was phased in, resulting in a U.S. federal statutory tax rate of 28.1% for our fiscal year ended June 30, 2018. The statutory federal tax rate will be 21% in subsequent fiscal years. Fiscal year 2018 included approximately $3.3 million in reduced income tax expense to reflect federal taxes on current year taxable income at the lower blended effective tax rate, partially offset by a discrete tax impact of $1.8 million in additional expense as a result of applying the new lower federal income tax rates to our net tax assets. The changes included in the Tax Act are broad and complex and future impacts may be dependent on interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, ormanufacturing facilities, changes in accounting standards for income taxesour warehousing strategy, a sudden decline in sales such as due to COVID-19, a new operating system, or related interpretationsturnover in response to the Tax Act. While the Tax Act reduced our current rate, future changes to the federal tax ratepersonnel. Manufacturing and warehousing inefficiencies could have an adverse impact.impact on our financial position, results of operations, or cash flows.
Our international operations involve financial and operational risks. We have a manufacturing operation outside the United States in Mexico, and administrative offices in China and Vietnam that coordinate with suppliers in those countries. These international operations are subject to a number of risks, including the following:
•economic and political instability;
•various and potentially conflicting cultural norms and business practices;
•warfare, riots, terrorism, and other forms of violence or geopolitical disruption;
•compliance with laws, such as the Foreign Corrupt Practices Act, applicable to U.S. companies doing business outside the United States;
•changes in foreign regulatory requirements and laws;
•health and security issues;
•tariffs and other trade barriers;
•potentially adverse tax consequences, including the manner in which multinational companies are taxed in the U.S.;
•COVID-19 impacts; and
•foreign labor practices.
These risks could have an adverse effect on our financial position, results of operations, or cash flows. In addition, statesfluctuations in exchange rates could impact our operating results. Our risk management strategy may include the use of derivative financial instruments to hedge certain foreign currency exposures. Any hedging techniques we implement contain risks and may not be entirely effective. Exchange rate fluctuations could also make our products more expensive than a competitor's products not subject to these fluctuations, which could adversely affect our revenues and profitability in international markets.
Regulatory and Compliance Risk Factors
Our sales to Government entities are subject to compliance with regulatory and contractual requirements, and noncompliance could expose us to liability or impede current or future business. The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting.
Changes to government regulations may significantly increase our operating costs in the United States and abroad. Legislative and regulatory reforms by the U.S. federal and foreign jurisdictions may amend their tax lawsgovernments could significantly impact our profitability by burdening us with forced cost choices that are difficult to recover with increased pricing. For example:
•We depend on suppliers globally to provide materials, parts, finished goods, and policiescomponents for use in responseour products. We utilize both steel and aluminum in our products, most of which is sourced domestically. Tariffs or changes in global trade agreements or in U.S. governmental import/export regulations could cause the landed cost of our products to increase materially and could reduce our net income if we are unable to mitigate the Tax Act,additional cost, which would have an adverse impact on our financial condition, results of operations, or cash flows.
•We import a portion of our wooden furniture products and are thus subject to an anti-dumping tariff specifically on wooden bedroom furniture supplied from China. The tariffs are subject to review and could result in retroactive and prospective tariff rate increases, which could have a materialan adverse impact on our futurefinancial condition, results of operations, or cash flows.
•State and foreign regulations are increasing in many areas, such as hazardous waste disposal, labor relations, employment practices and data privacy, including the California Consumer Privacy Act, among others. Compliance with privacy regulations requires us to change our effective tax rate.processes in order to track personal information collected from consumers and implement procedures to obtain consent from consumers regarding the usage of their information. These additional processes, or any violations of these state and foreign regulations, could have an adverse impact on our financial condition, results of operations, or cash flows.
Fluctuations in our effective tax rate could have a significant impact on our financial position, results of operations, or cash flows. We are subject to income taxes as well as non-income based taxes, mainly in the United States. Judgment is required in determining the worldwide provision for income taxes, other tax liabilities, interest, and penalties. Future events could change management’s assessment. We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We have also made assumptions about the realization of deferred tax assets. Changes in these assumptions could result in a valuation allowance for these assets. Final determination of tax audits or tax disputes may be different from what is currently reflected by our income tax provisions and accruals.
Our failure to retain our existing management team, maintain our engineering, technical, and manufacturing process expertise, or continue to attract qualified personnelaccruals, which could adversely affect our business. We depend significantly on our executive officers and other key personnel. Our success is also dependent on keeping pace with technological advancements and adapting services to provide manufacturing capabilities which meet customers’ changing needs. To do that, we must retain our qualified engineering and technical personnel and successfully anticipate and respond to technological changes in a cost effective and timely manner. Our culture and guiding principles focus on continuous training, motivation, and development of employees, and we strive to attract, motivate, and retain qualified personnel. Failure to retain our executive officers and retain and attract other key personnel could adversely affect our business. Mr. Schneider, our Chief Executive Officer, plans to retire effective October 31, 2018. The Board of Directors has created a Continuity Committee to facilitate our succession planning process relative to Mr. Schneider’s retirement; however, the change in executive leadership could impact the execution of our business strategy. If we encounter difficulties in the transition, that could affect our relationship with our customers and could adversely impact our financial results.
Our sales to the U.S. government are subject to compliance with regulatory and contractual requirements and noncompliance could expose us to liability or impede current or future business. The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting.
In March 2016, in connection with a renewal of one of our contracts with the GSA, we became aware of noncompliance and inaccuracies in our GSA subcontractor reporting. Accordingly, we retained outside legal counsel to assist in conducting an internal review of our reporting practices, and we self-reported the matter and the results of the internal review to the GSA. We have promptly responded to inquiries from the GSA since our initial reporting, have met with government officials as requested on two occasions, and intend to cooperate fully with any further inquiries or investigations. While we are not able to reasonably estimate the future financial impact, if any, of the possible sanctions at this time, any of them could, if imposed, have a material adverse impact on our business, future financial position, results of operations, or cash flows. The timing of the government’s review and determination of any outcome of these matters is uncertain and, therefore, it is unclear as to when and to what extent, if any, our previously issued financial targets might be impacted. We have incurred, and may incur additional, legal and related costs in connection with our internal review and the government’s response to this matter. During fiscal year 2018, sales related to our GSA contracts were approximately 7.5% of our consolidated sales, with one contract accounting for approximately 5.3% of our consolidated sales and the other contract accounting for approximately 2.2% of our consolidated sales.
We may pursue acquisitions that present risks and may not be successful. Our sales growth plans may occur through both organic growth and acquisitions. Acquisitions involve many risks that could have an adverse effect on our business, financial condition or results of operations, including:
difficulties in identifying suitable acquisition candidates and in negotiating and consummating acquisitions on terms attractive to us;
difficulties in the assimilation of the operations of the acquired company;
the diversion of resources, including diverting management’s attention from our current operations;
risks of entering new geographic or product markets in which we have limited or no direct prior experience;
the potential loss of key customers of the acquired company;
the potential loss of key employees of the acquired company;
the potential incurrence of indebtedness to fund the acquisition;
the potential issuance of common stock for some or all of the purchase price, which could dilute ownership interests of our current shareowners;
the acquired business not achieving anticipated revenues, earnings, cash flow, or market share;
excess capacity;
failure to achieve the expected synergies resulting from the acquisition;
inaccurate assessment of undisclosed, contingent, or other liabilities or problems and unanticipated costs associated with the acquisition;
incorrect estimates made in accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill that could adversely affect our financial results; and
dilution of earnings.
We may not be successful in launching start-up operations. We are committed to growing our business, and therefore from time to time, we may determine that it would be in our best interests to start up a new operation. Start-up operations involve a number of risks and uncertainties, such as funding the capital expenditures related to the start-up operation, developing a management team for the new operation, diversion of management focus away from current operations, and creation of excess capacity. Any of these risks could have a material adverse effect on our financial position, results of operations, or cash flows.
We are subject to extensive environmental regulation and significant potential environmental liabilities. Our past and present operation and ownership of manufacturing plants and real property are subject to extensive federal, state, local, and foreign environmental laws and regulations, including those relating to discharges in air, water, and land, the handling and disposal of solid and hazardous waste, and the remediation of contamination associated with releases of hazardous substances. In addition, the increased prevalence of global climate issues may result in new regulations that may negatively impact us. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist with respect to our facilities and real property. Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures, some of which could be material. In addition, any investigations or remedial efforts relating to environmental matters could involve material costs or otherwise result in material liabilities.
The Company’s business involves the potential for product recalls, product liability and other claims against it which could affect its earnings and financial condition. New and existing products may be subject to the United States Consumer Products Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act of 2008, which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous, and similar laws under foreign jurisdictions. Under certain circumstances, the Consumer Products Safety Commission or comparable foreign agency could require the Company to repurchase or recall one or more of its products. Any purchase or recall of the Company’s products could be costly and damaging to the Company’s reputation. If the Company were required to remove, or voluntarily removed, its products from the market, the Company’s reputation could be impacted and the Company may have large quantities of finished product that it could not sell. The Company also faces exposure to product liability claims in the event that one of its products is alleged to have resulted in property damage, bodily injury or other adverse effects. In addition to the risk of substantial monetary judgments or fines or penalties that may result from any governmental investigations, product liability claims or regulatory actions could result in negative publicity that could harm the Company’s reputation in the marketplace, adversely impact the value of its brands, or result in an increase in the cost of producing the Company’s products.
A failure to comply with the financial covenants under our $125.0 million revolving credit facility could adversely impact us. Our revolving credit facility requires us to comply with certain financial covenants. We believe the most significant covenants under this revolving credit facility are the adjusted leverage ratio and the fixed charge coverage ratio. More detail on these financial covenants is discussed in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K. As of June 30, 2021, we had $40.0 million of borrowings outstanding under this revolving credit facility and we had $1.7 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. In the future, a default on the financial covenants under our revolving credit facility could cause an increase in our borrowing rates or could make it more difficult for us to secure future financing, which could adversely affect our financial condition. General Risk Factors
Our business depends on information technology systems and digital capabilities whichthat are implemented in a manner intended to minimize the risk of a cybersecurity breach or other such threat, including the misappropriation of assets or other sensitive information or data corruption, which could cause operational disruption. An ongoing commitment of significant resources is required to maintain and enhance our existing information systems and implement the new and emerging technology necessary to meet customer expectations and compete in our end markets. The techniques used to obtain unauthorized access change frequently and are not often recognized until after they have been launched. We recognize that any breach could disrupt our operations, damage our reputation, erode our share value, drive remediation expenses, or increase costs related to the mitigation of, response to, or litigation arising from any such issue. We cannot guarantee that our cybersecurity measures will completely prevent others from obtaining unauthorized access to our enterprise network, system and data.
Many states and the U.S. federal government are increasingly enacting laws and regulations to protect consumers against identity theft and to also protect their privacy. As our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions. If we are the target of a cybersecurity attack resulting in unauthorized disclosure of sensitive or confidential data, we may be required to execute costly notification procedures. Compliance with these laws will likely increase the costs of doing business. If we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential claims for damages and other remedies, which could harm our business.
If the distribution or certain internal transactions undertaken relating to the spin-off do not qualify as tax-free transactions, the Company, our shareowners as of the Distribution Date, and Kimball Electronics could be subject to substantial tax liabilities. On October 10, 2014 we received a favorable written tax ruling from the Internal Revenue Service (“IRS”) that our stock unification in connection with the spin-off will not cause us to recognize income or gain as a result of the unification. In addition, we have also received an opinion of Squire Patton Boggs (US) LLP to the effect that the distribution satisfies the requirements to qualify as a tax-free transaction (except for cash received in lieu of fractional shares) for U.S. federal income tax purposes to the Company, our shareowners and Kimball Electronics under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”).
The tax ruling and the tax opinion rely on the accuracy of certain factual representations and assumptions provided by the Company and Kimball Electronics in connection with obtaining the tax ruling and tax opinion, including with respect to post-spin-off operations and conduct of the parties. If these factual representations and assumptions are inaccurate or incomplete in any material respect, we will not be able to rely on the tax ruling and/or the tax opinion.
Furthermore, the tax opinion will not be binding on the IRS or the courts. Accordingly, the IRS or the courts may reach conclusions with respect to the spin-off that are different from the conclusions reached in the tax opinion. If, notwithstanding our receipt of the tax opinion, the spin-off is determined to be taxable, then (i) we would be subject to tax as if we sold the Kimball Electronics common stock in a taxable sale for its fair market value; and (ii) each shareowner who received Kimball Electronics common stock would be treated as receiving a distribution of property in an amount equal to the fair market value of the Kimball Electronics common stock that would generally result in varied tax liabilities for each shareowner depending on the facts and circumstances.
We entered into a Tax Matters Agreement with Kimball Electronics that governs the respective rights, responsibilities and obligations of us and Kimball Electronics after the spin-off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local and foreign income taxes, other tax matters and related tax returns. The Tax Matters Agreement also provides special rules for allocating tax liabilities in the event that the spin-off or certain internal transactions undertaken in anticipation of the spin-off do not qualify as tax-free transactions. Though valid as between us and Kimball Electronics, the Tax Matters Agreement will not be binding on the IRS.
Pursuant to the Tax Matters Agreement, (i) we have agreed (a) not to enter into any transaction that could cause any portion of the spin-off to be taxable to Kimball Electronics, including under Section 355(e) of the Code; and (b) to indemnify Kimball Electronics for any tax liabilities resulting from such transactions entered into by us; and (ii) Kimball Electronics has agreed to indemnify us for any tax liabilities resulting from such transactions entered into by Kimball Electronics. In addition, under U.S. Treasury regulations, each member of our consolidated group at the time of the spin-off (including Kimball Electronics) would be jointly and severally liable for the resulting U.S. federal income tax liability if all or a portion of the spin-off does not or certain internal transactions undertaken in anticipation of the spin-off do not qualify as tax-free transactions. These obligations may discourage, delay or prevent a change of control of our Company.
If Kimball Electronics were to default in its obligation to us to pay taxes under the Tax Matters Agreement, we could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of tax liabilities. To the extent we are responsible for any liability under the Tax Matters Agreement, there could be a material adverse impact on our business, financial condition, results of operations and cash flows.
We may be exposed to the credit risk of our customers who are adversely affected by weakness in market conditions. Weakness in market conditions may drive an elevated risk of potential bankruptcy of our customers resulting in a greater risk of uncollectible outstanding accounts receivable. The realization of these risks could have a negative impact on our profitability.
Reduction of purchases by or the loss of a significant number of customers could reduce revenues and profitability. Significant declines in the level of purchases by customers or the loss of a significant number of customers could have a material adverse effect on our business. A reduction of, or uncertainty surrounding, government spending could also have an adverse impact on our sales levels. We can provide no assurance that we will be able to fully replace any lost sales, which could have an adverse effect on our financial position, results of operations, or cash flows.
We operate in a highly competitive environment and may not be able to compete successfully. The office and hospitality furniture industries are competitive due to numerous global manufacturers competing in the marketplace. In times of reduced demand for office furniture, large competitors may have greater efficiencies of scale or may apply more pressure to their aligned distribution to sell their products exclusively which could lead to reduced opportunities for our products. While we work toward reducing costs to respond to pricing pressures, if we cannot achieve the proportionate reductions in costs, profit margins may suffer.
Our operating results could be adversely affected by increases in the cost of fuel and other energy sources. The cost of energy is a critical component of freight expense and the cost of operating manufacturing facilities. Increases in the cost of energy could reduce our profitability.
We are subject to manufacturing inefficiencies due to the transfer of production among our facilities and other factors. At times we may experience laborNatural disasters or other catastrophic events may impact our production schedules and, in turn, negatively impact profitability. Natural disasters or other catastrophic events, including severe weather, terrorist attacks, power interruptions, pandemics, and fires, could disrupt operations and likewise our ability to produce or deliver products. Our manufacturing inefficiencies due to factorsoperations require significant amounts of energy, including natural gas and oil, and governmental regulations may control the allocation of such fuels. Employees are an integral part of our business, and events such as new product introductions, transfersa pandemic could reduce the availability of production among our manufacturing facilities,employees reporting for work. In the event we experience a sudden decline in sales, a new operating system,temporary or turnover in personnel. Manufacturing inefficiencies could have an adverse impact on our financial position, results of operations, or cash flows.
A changepermanent interruption in our sales mix amongability to produce or deliver product, revenues could be reduced, and our diversified product offeringsbusiness could have a negative impact on our gross profit margin. Changesbe materially adversely affected. In addition, catastrophic events, or the threat thereof, can adversely affect U.S. and world economies, and could result in product sales mix could negatively impact our gross margin as margins of different products vary. We strive to improve the margins of all products, but certain products have lower margins in order to price the product competitively. An increase in the proportion ofdelayed or lost sales of products with lower margins could have an adverse impact on our financial position, results of operations, or cash flows.
Our international operations involve financial and operational risks. We have a manufacturing operation outside the United States in Mexico, and administrative offices in China and Vietnam which coordinate with suppliers in those countries. These international operations are subject to a number of risks, including the following:
economic and political instability;
warfare, riots, terrorism, and other forms of violence or geopolitical disruption;
compliance with laws, such as the Foreign Corrupt Practices Act, applicable to U.S. companies doing business outside the United States;
changes in foreign regulatory requirements and laws;
tariffs and other trade barriers;
potentially adverse tax consequences including the manner in which multinational companies are taxed in the U.S.; and
foreign labor practices.
These risks could have an adverse effect on our financial position, results of operations, or cash flows.products. In addition, fluctuationsany continuing disruption in exchange rates could impact our operating results. Our risk management strategy can include the use of derivative financial instruments to hedge certain foreign currency exposures. Any hedging techniques we implement contain risks and may not be entirely effective. Exchange rate fluctuations could also make our products more expensive than competitor's products not subject to these fluctuations, whichcomputer system could adversely affect our revenuesability to receive and profitability in international markets.
If efforts to introduce newprocess customer orders, manufacture products, or start-up new programs are not successful, thisand ship products on a timely basis, and could limit sales growth or cause sales to decline. We regularly introduce new products to keep paceadversely affect relations with workplace trends and evolving regulatory and industry requirements, including environmental, health, and safety standards such as sustainability and ergonomic considerations, and similar standards for the workplace and for product performance. Shifts in workforce demographics, working styles, and technology may impact the quantity and types of furniture products purchased by our customers, as commercial office spaces occupy smaller footprints and collaborative, open-plan workstations gain popularity. The introductionpotentially resulting in a reduction in orders from customers or a loss of new productscustomers. We maintain insurance
to help protect us from costs relating to some of these matters, but such insurance may not be sufficient or start-up of new programs requirepaid in a timely manner to us in the coordination of the design, manufacturing, and marketingevent of such products. The designan interruption. Additionally, we maintain a business continuity and engineering required for certain new productsdisaster recovery plan; however it may not be possible to enact this plan in an effective or programs can take an extended period of time, and further time may be required to achieve customer acceptance. Accordingly, the launch of any particular product or program may be delayed or may be less successful than we originally anticipated. Difficulties or delays in introducing new products or programs, or lack of customer acceptance of new products or programs could limit sales growth or cause sales to decline.timely manner.
If customers do not perceive our products and services to be innovative and of high quality, our brand and name recognition and reputation could suffer. We believe that establishing and maintaining good brand and name recognition and a good reputation is critical to our business. Promotion and enhancement of our name and brands will depend on the effectiveness of marketing and advertising efforts and on successfully providing design driven, innovative, and high quality products and superior services. If customers do not perceive our products and services to be design driven, innovative, and of high quality, our reputation, brand and name recognition could suffer, which could have a material adverse effect on our business.
A loss of independent sales representatives, dealers, or other sales channels could lead to a decline in sales. Our office furniture is marketed to end users through both independent and employee sales representatives, office furniture dealers, wholesalers, brokers, designers, purchasing companies, and catalog houses. Our hospitality furniture is marketed to end users using independent sales representatives. A significant loss within any of these sales channels could result in a sales decline and thus have an adverse impact on our financial position, results of operations, or cash flows.
Failure to effectively manage working capital may adversely affect our cash flow from operations. We closely monitor inventory and receivable efficiencies and continuously strive to improve these measures of working capital, but customer financial difficulties, cancellation or delay of customer orders, transfers of production among our manufacturing facilities, or manufacturing delays, or the impacts of the COVID-19 pandemic could adversely affect our cash flow from operations.
Our insurance may not adequately protect us from liabilities related to product defects.We maintain product liability and other insurance coverage that we believe to be generally in accordance with industry practices, but our insurance coverage does not extend to field visits to repair, retrofit or replace defective products, or to product recalls. As a result, our insurance coverage may not be ableadequate to achieve maximum utilizationprotect us fully against substantial claims and costs that may arise from liabilities related to product defects, particularly if we have a large number of defective products that we must repair, retrofit, replace, or recall. Additionally, the cost of insurance for a given level of coverage may increase which may impact profitability or lead us to reduce insurance coverage levels.
We may be sued by third parties for alleged infringement of their intellectual property rights and incur substantial litigation or other costs. Prior to launching major new products in our key markets, we normally evaluate existing intellectual property rights. However, our competitors may have filed for patent protection that is not, at the time of our manufacturing capacity. Fluctuationsevaluation, a matter of public knowledge. Our efforts to identify and deferrals of customer ordersavoid infringing upon third parties' intellectual property rights may have a material adverse effect on our ability to utilize our fixed capacity and thus negatively impact our operating margins.
not be successful. We could incur losses duebe notified of a claim regarding intellectual property rights, which could lead us to asset impairment. As business conditions change, we must continually evaluatespend time and work towardmoney to defend or address the optimum asset base. Itclaim. Even if the claim is possible that certain assets such as, but not limited to, facilities, equipment, goodwill, or other intangible assets,without merit, it could be impaired at some pointresult in substantial costs and diversion of resources.
Increases in the future depending on changing business conditions. Goodwill and certain intangible assets are tested for impairment annually or when triggering events occur. Such resulting impairmentcost of providing employee healthcare benefits could have an adverse impact onreduce our financial position and results of operations.
A failureprofitability. There may continue to comply with the financial covenants under our $30 million credit facility could adversely impact us. Our credit facility requires us to comply with certain financial covenants. We believe the most significant covenants under this credit facility are the adjusted leverage ratio and the fixed charge coverage ratio. More detail on these financial covenants is discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of Part II of this Annual Report on Form 10-K. As of June 30, 2018, we had no borrowings under this credit facility and we had $1.4 million in letters of credit outstanding which reduced our borrowing capacitybe upward pressure on the credit facility. At June 30, 2018,cost of providing healthcare benefits to our cash and cash equivalents totaled $87.3 million. Inemployees. We are self-insured for healthcare benefits, so we incur the future,cost of claims, including catastrophic claims that may occasionally occur, with employees bearing only a default on the financial covenants under our credit facility could causelimited portion of healthcare costs through employee healthcare premium withholdings. Healthcare claims declined when COVID-19 hit as elective procedures were delayed. We expect there to be an increase in the borrowing rates orclaims when employees choose to have elective procedures completed. There can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could make it more difficult for us to secure future financing which could adversely affect the financial condition of the Company.reduce our profitability.Failure to protect our intellectual property could undermine our competitive position. We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of patent, trademark, copyright, and trade secret laws, as well as licensing agreements and third-party non-disclosure and assignment agreements. Because of the differences in foreign laws concerning proprietary rights, our intellectual property rights do not generally receive the same degree of protection in foreign countries as they do in the United States, and therefore in some parts of the world, we have limited protections, if any, for our intellectual property. Competing effectively depends, to a significant extent, on maintaining the proprietary nature of our intellectual property. The degree of protection offered by our various patents and trademarks may not be broad enough to provide significant proprietary protection or competitive advantages to the Company, and patents or trademarks may not be issued on pending or contemplated applications. In addition, not all of our products are covered by patents. It is also possible that our patents and trademarks may be challenged, invalidated, canceled, narrowed, or circumvented.
We may be sued by third parties for alleged infringement of their intellectual property rights and incur substantial litigation or other costs. We could be notified of a claim regarding intellectual property rights which could lead us to spend time and money to defend or address the claim. Even if the claim is without merit, it could result in substantial costs and diversion of resources.
Our insurance may not adequately protect us from liabilities related to product defects. We maintain product liability and other insurance coverage that we believe to be generally in accordance with industry practices, but our insurance coverage does not extend to field visits to repair, retrofit or replace defective products, or to product recalls. As a result, our insurance coverage may not be adequate to protect us fully against substantial claims and costs that may arise from liabilities related to product defects, particularly if we have a large number of defective products that we must repair, retrofit, replace, or recall.
Increases in the cost of providing employee healthcare benefits could reduce our profitability. There may continue to be upward pressure on the cost of providing healthcare benefits to our employees. We are self-insured for healthcare benefits so we incur the cost of claims, including catastrophic claims that may occasionally occur, with employees bearing only a limited portion of healthcare costs through employee healthcare premium withholdings. There can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce our profitability.
We are subject to extensive environmental regulation and significant potential environmental liabilities. Our past and present operation and ownership of manufacturing plants and real property are subject to extensive federal, state, local, and foreign environmental laws and regulations, including those relating to discharges in air, water, and land, the handling and disposal of solid and hazardous waste, and the remediation of contamination associated with releases of hazardous substances. In addition, the increased prevalence of global climate issues may result in new regulations that may negatively impact us. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist with respect to our
facilities and real property. Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures, some of which could be material. In addition, any investigations or remedial efforts relating to environmental matters could involve material costs or otherwise result in material liabilities.
Turnover in personnel could cause manufacturing inefficiencies. The demand for manufacturing labor in certain geographic areas makes retaining experienced production employees difficult. Turnover could result in lost time due to inefficiencies and additional training that could impact our operating results.
Natural disasters or other catastrophic events may impact our production schedules and, in turn, negatively impact profitability. Natural disasters or other catastrophic events, including severe weather, terrorist attacks, power interruptions, and fires, could disrupt operations and likewise our ability to produce or deliver products. Our manufacturing operations require significant amounts of energy, including natural gas and oil, and governmental regulations may control the allocation of such fuels. Employees are an integral part of our business and events such as a pandemic could reduce the availability of employees reporting for work. In the event we experience a temporary or permanent interruption in our ability to produce or deliver product, revenues could be reduced, and our business could be materially adversely affected. In addition, catastrophic events, or the threat thereof, can adversely affect U.S. and world economies, and could result in delayed or lost sales of our products. In addition, any continuing disruption in our computer system could adversely affect the ability to receive and process customer orders, manufacture products, and ship products on a timely basis, and could adversely affect relations with our customers, potentially resulting in a reduction in orders from customers or loss of customers. We maintain insurance to help protect us from costs relating to some of these matters, but such insurance may not be sufficient or paid in a timely manner to us in the event of such an interruption.
The value of our common stock may experience substantial fluctuations for reasons over which we may have littlelimited control. The value of our common stock could fluctuate substantially based on a variety of factors, including, among others:
•actual or anticipated fluctuations in operating results;
•announcements concerning our Company, competitors, or industry;
•overall volatility of the stock market;
•changes in the financial estimates of securities analysts or investors regarding our Company, the industry, or competitors;
•general market or economic conditions;conditions including the economic impacts of the COVID-19 pandemic; and
•proxy contests or other shareownershareholder activism.
We also provide financial targetsobjectives for our expected operating results for future periods. While the information is provided based on current and projected data about the markets we deliver to and our operational capacity and capabilities, the financial targetsobjectives are subject to risks and uncertainties. If our future results do not match our financial targetsobjectives for a particular period, or if the financial targetsobjectives are reduced in future periods, the value of our common stock could decline.
Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in results of operations and general economic, political, and market conditions, may adversely affect the value of our common stock.
Item 1B - Unresolved Staff Comments
None.
Item 2 - Properties
The location, number, and use of our major facilities, including our executive and administrative offices, as of June 30, 2018,2021, are as follows:
|
| | | | | | | |
| Number of Facilities | Use |
| North America | | |
| United States: | | |
| Indiana | 15 | Manufacturing, Warehouse, Office |
| Kentucky | 2 | Manufacturing, Office |
| California | 1 | Warehouse, Office |
Virginia Maryland | 1 | Manufacturing, Warehouse, Office |
MexicoNew York | 1 | Manufacturing, Office |
AsiaMexico | 1 | Manufacturing, Office |
ChinaAsia | 1 | Office |
Vietnam China | 12 | Office |
| Vietnam | 1 | Office |
| Total Facilities | 2224 | |
The listed facilities occupy approximately 3,227,0003,273,000 square feet in aggregate as of June 30, 2021, of which approximately 3,050,0003,049,000 square feet are owned, and 177,000224,000 square feet are leased.
During fiscal year 2017, a facility in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom was sold. We leased a portion of the facility back to facilitate the transition of those functions to other existing Indiana locations. The lease expired in fiscal year 2018.
During the second quarter of fiscal year 2018, we acquired certain assets of D’style, headquartered in Chula Vista, California, and all of the capital stock of Diseños de Estilo S.A. de C.V., a Mexican corporation located in Tijuana, Mexico, which resulted in our acquisition of 27,000 square feet and 33,000 square feet of leased space, respectively.
Generally, properties are utilized at normal capacity levels on a multiple shift basis. At times, certain facilities utilize a reduced second or third shift. Due to sales fluctuations, not all facilities were utilized at normal capacity during fiscal year 2018. We continually assess our capacity needs and evaluate our operations to optimize our service levels by geographic region.
Significant loss of income resulting from a facility catastrophe would be partially offset by business interruption insurance coverage.
Operating leases for all facilities and related land, including twelvefifteen leased office furniture showroom facilities whichthat are not included in the table above, total 265,000318,000 square feet and expire from fiscal year 20192022 to 2027 with many of the leases subject to renewal options. The leased showroom facilities are in sixeight states and the District of Columbia.Columbia as of June 30, 2021. During fiscal year 2022 we plan to implement a showroom strategy where we highlight our Kimball, National, Etc., and Interwoven brands in shared showroom spaces which will eliminate having multiple showrooms in a single city. During fiscal year 2021 we reviewed our overall facility footprint to identify opportunities to reduce capacity and gain efficiencies, and the consolidation of our Baltimore, Maryland facility into other manufacturing facilities is expected to be complete in the first quarter of fiscal year 2022. See Note 5 - Commitments and Contingent LiabilitiesLeases of Notes to Consolidated Financial Statements for additional information concerning leases. We own approximately 331327 acres of land, which includes land where various facilities reside, including approximately 115 acres of land in the Kimball Industrial Park, Jasper, Indiana.
Item 3 - Legal Proceedings
We and our subsidiaries are not parties to any pending legal proceedings, other than ordinary routine litigation incidental to the business. The outcome of current routine pending litigation, individually and in the aggregate, is not expected to have a material adverse impact.
Item 4 - Mine Safety Disclosures
Not applicable.
Information about our Executive Officers of the Registrant
Our executive officers as of August 28, 201831, 2021 are as follows:
(Age as of August 28, 2018)31, 2021)
|
| | | | | | |
| Name | | Age | | Office and Area of Responsibility | | Executive Officer Since Calendar Year |
| Robert F. Schneider | | 57 | | Chairman of the Board, Chief Executive Officer, Kimball International | | 1992 |
| Donald W. Van Winkle | | 57 | | President, Chief Operating Officer, Kimball International | | 2010 |
| Michelle R. Schroeder | | 53 | | Vice President, Chief Financial Officer, Kimball International | | 2003 |
| Michael S. Wagner | | 46 | | Vice President, Kimball International; President, Kimball | | 2014 |
| R. Gregory Kincer | | 60 | | Vice President, Corporate Development, Kimball International | | 2014 |
| Julia E. Heitz Cassidy | | 53 | | Vice President, Chief Ethics & Compliance Officer, General Counsel and Secretary, Kimball International | | 2014 |
| Lonnie P. Nicholson | | 54 | | Vice President, Chief Administrative Officer, Kimball International | | 2014 |
| Kourtney L. Smith | | 48 | | Vice President, Kimball International; President, National Office Furniture | | 2015 |
| Kathy S. Sigler | | 55 | | Vice President, Kimball International; President, Kimball Hospitality | | 2018 |
| | | | | | | | | | | | | | | | | | | | |
| Name | | Age | | Office and Area of Responsibility | | Executive Officer Since Calendar Year |
| Kristine L. Juster | | 58 | | Chief Executive Officer & Director, Kimball International | | 2018 |
| Timothy Wolfe | | 44 | | Executive Vice President, Chief Financial Officer, Kimball International | | 2020 |
| R. Gregory Kincer | | 63 | | Executive Vice President, Corporate Development & Treasurer, Kimball International | | 2014 |
| Lonnie P. Nicholson | | 57 | | Executive Vice President, Chief Human Resources Officer, Kimball International | | 2014 |
| Kourtney L. Smith | | 51 | | Executive Vice President, Kimball International;
President, Workplace | | 2015 |
| Katherine S. Sigler | | 58 | | Executive Vice President, Kimball International;
President, Hospitality | | 2018 |
| Koorosh Sharghi | | 35 | | Executive Vice President, Chief Strategy & Innovation Officer, Kimball International; President, eBusiness | | 2019 |
| Phyllis M. Goetz | | 62 | | Executive Vice President, Kimball International; President, Health | | 2019 |
| Mark W. Johnson | | 44 | | Executive Vice President, Chief Legal, Governance Officer & Corporate Secretary, Kimball International | | 2020 |
| Greg A. Meunier | | 51 | | Executive Vice President, Global Operations, Kimball International | | 2020 |
Executive officers are elected annually by the Board of Directors.
Mr. SchneiderMs. Juster was appointed Chairman of the Board, Chief Executive Officer in November 20142018 and was appointed tohas served as a member of our Board of Directors since April 2016. Prior to her appointment as Chief Executive Officer, Ms. Juster served for over 20 years as a Global Executive at Newell Brands, Inc. (“Newell”), a leading global consumer goods and commercial products company, until her retirement from Newell in February 2014. He ledApril 2018. During her tenure at Newell, Ms. Juster served as President of the Kimball Hospitality subsidiaryGlobal Writing Segment from May 2014 until her retirement in 2013April 2018 and 2014,in other roles of increasing responsibility since joining Newell in 1995, including serving as President of Newell’s Baby and Parent Segment, President of Newell’s Home Décor Segment, and President of Newell’s Culinary Lifestyles Segment.
Mr. Wolfe was appointed Executive Vice President, Chief Financial Officer (“CFO”) from July 1997in October 2020. Prior to November 2014. He has been with the Company for 30 years in various financial and executive positions. As leader of Kimball Hospitality, he oversaw the businesshis appointment as it returned to profitability in fiscal year 2014. He was also responsible for strategic planning, SEC reporting, finance, capital structure, insurance, tax, internal audit, and treasury services as CFO of the Company. Mr. Schneider plans to retire effective October 31, 2018. The Board of Directors created a Continuity Committee to facilitate the succession planning process.
Mr. Van Winkle was appointed President, Chief Operating Officer in November 2014. He previously served as Executive Vice President, President — Furniture Group from March 2014 to November 2014. He also served as Vice President, President — Office Furniture Group from February 2010 until November 2013 when he was appointed Executive Vice President, President — Office Furniture Group. He had previously served as Vice President, General Manager of National from October 2003 until February 2010, and prior to that served as Vice President, Chief Finance and Administrative Officer for the Furniture Brands Group as well as other key finance roles within our Furniture business since joining the Company in January 1991.
Ms. Schroeder was appointed Vice President, Chief Financial Officer, in November 2014. She previouslyMr. Wolfe served as Vice President and Chief AccountingFinancial Officer, a position she assumedGreat Britain of Coca-Cola European Partners, the largest global Coca-Cola bottler, since May 2019. Mr. Wolfe also served in the roles of Vice President, Finance Shared Services and Transformation from June 2016 to April 2019, Vice President, Chief Compliance and Risk Officer from January 2014 to May 2009. She2016, and Director, Corporate Strategy from January 2012 to December 2013, among other roles.
Mr. Kincer was appointed toExecutive Vice President, Corporate Development & Treasurer in December 2004,January 2020 and previously served as Vice President, Corporate Controller from August 2002 until May 2009,Development, since November 2014.
Mr. Nicholson was appointed Executive Vice President, Chief Human Resources Officer in January 2020 and prior to thatpreviously served as Assistant Corporate Controller and Director of Financial Analysis. As CFO, Vice President, Chief Administrative Officer, since February 2015.
Ms. Schroeder has responsibility for the accounting, internal audit, investor relations, tax and treasury functions, as well as setting financial strategy and policies for the Company.
Mr. WagnerSmith was appointed President, KimballWorkplace in November 2014August 2020, and was also appointed as aExecutive Vice President of Kimball International, Inc. in February 2015. Prior to that, he served as Vice President, General Manager of Kimball. Since joiningJanuary 2020 and is responsible for the Company in October 2013, Mr. Wagner has led the extensive salesstrategic growth and aggressive cost reductions at Kimball. Prior to joining the Company, he most recently served as Senior Vice Presidentdirection of Sales and Marketing with OFS Brands, Inc. (an office furniture manufacturing company) from 2004 until October 2013. His career spans over 20 years of experience in the office furniture industry with leadership positions in sales, sales management, marketing, and strategic planning.
Mr. Kincer was appointed Vice President, Corporate Development in November 2014. Prior to that, he served as Vice President, Business Development, Treasurer since 2006 with responsibility for global treasury operations managing Company-wide liquidity, commercial banking relationships, corporate debt facilities, foreign exchange risk, and insurance programs as well as the evaluation of acquisition opportunities. He also served in various finance and leadership roles of progressing responsibility since joining the Company in 1994.
Ms. Heitz Cassidy was appointed Vice President, General Counsel and Secretary in November 2014 and to the additional role of Chief Compliance Officer in July 2016, which was adjusted to Chief Ethics and Compliance Officer in October 2016, where she has the responsibility to provide and oversee the provision of legal advice and guidance as needed by the Company, oversee compliance with laws, assist in instilling and maintaining an ethical corporate culture, and implement and maintain our compliance policies and program. She provides strategic-thinking leadership, advice and counsel to our executive management, and as Secretary, assists the Board of Directors.Workplace business unit. She previously served as Deputy General Counsel since August 2009, with responsibility for handling all day-to-day legal activities of the Company and was appointed to Vice President in October 2013. She joined the Company in 1996 as an associate corporate counsel and has held positions of increasing responsibility within the legal department during her career.
Mr. Nicholson was appointed Vice President, Chief Administrative Officer in February 2015 with responsibility for the human resources and information technology functions. He also served as Vice President, Chief Information Officer from January 2014 until March 2015. Throughout 2013 he served as Director, Business Analytics and then Vice President, Business Analytics, with oversight of strategic application of data analysis, social media and mobile computing in support of the growth of our information management into more predictive analysis in order to build greater responsiveness to customer needs and improvement of operational decision making. He also served as Director of Organizational Development from November 2011 until January 2013, and Director of Employee Engagement from November 2008 until November 2011 following other roles of advancing responsibility in the areas of application development, systems analysis, process re-engineering, lean/continuous improvement and enterprise resource planning since joining the Company in 1986.
Ms. Smith was appointed President, National Office Furniture insince January 2018, and has served as Vice President of Kimball International, Inc. since October 2015. Prior to January 2018, sheShe held the position of President, Kimball Hospitality from August 2015 until January 2018, where she was responsible for strategic growth and direction. Previously, she served as Vice President, Marketing for National Office Furniture, a position she assumed in 2010, where she led product development, marketing, sustainability, vertical markets, and increasing brand awareness in the architect and design community. Prior to that, she held various other roles of increasing responsibility in marketing, product development, sales and service. She has over 25 years of experience in the office and hospitality industries.
Ms. Sigler was appointed President, Kimball Hospitality in August 2020, and also appointed as aExecutive Vice President of Kimball International, Inc. in January 2018. She2020 and is responsible for the strategic growth and direction of our Hospitality business unit. She previously served as
President, Kimball Hospitality.Hospitality and as Vice President of Kimball International, Inc. since January 2018. Prior to that, she served as Vice President, Operations, for the Kimball brand from February 2015 until January 2018, where she was responsible for the strategic and day-to-day execution of all direct manufacturing and manufacturing support (engineering, global supply chain, quality and continuous improvement) functions. From December 2012
Mr. Sharghi was appointed Chief Strategy and Innovation Officer and President, eBusiness in August 2020, Executive Vice President, Strategy and Transformation in January 2020 and previously served as Vice President, Strategy and Transformation since March 2019. He is responsible for our eCommerce merchandising and product portfolio, digital marketing and digital customer experience while still leading our transformational growth strategy and integration efforts and partnering with our executive management to execute our business strategy in alignment with our long-term growth strategy. Prior to joining the Company, Mr. Sharghi led the centralization of the global marketing function at Radio Systems Corporation, a pet products manufacturing company, as the Head of Global Marketing from April 2018 until February 2015, sheMarch 2019. He also held a variety of senior strategy and operations leadership roles at Newell, where he served as Director of Marketing Operations and Strategy from March 2016 until April 2018 and Senior Manager of aMarketing Operations from June 2014 until March 2016.
Ms. Goetz was appointed President, Health in August 2020, Executive Vice President of Kimball International, Inc. in January 2020 and is responsible for the strategic growth and direction of our Health business unit including brand manufacturing facility. From August 2004 to December 2012,and product marketing, health specialty design and innovation, health specialty applied research, sales operations and health-focused selling. She previously served as President, Kimball and Vice President of Kimball International, Inc. since July 2019, in which she held operationalwas responsible for the overall leadership roles of increasing responsibility within the Kimball brand. Before her time with the Kimball brand strategic plan, its activation, and the full operations of the business unit. Prior to joining the Company, Ms. Sigler held numerousGoetz was Senior Vice President, Chief Development Strategist at HKS, Inc., an architectural firm, from October 2017 until July 2019. Her career also included multiple leadership roles at Herman Miller, Inc. from June 2011 until October 2017 that included National Director A&D Healthcare from October 2015 until October 2017 and Director of Strategic Sales Initiatives for Herman Miller Healthcare from June 2011 until October 2015. She was also one of the founders of Nurture, which is the Healthcare business for Steelcase, Inc., during her 16-year career with Steelcase.
Mr. Johnson was appointed Executive Vice President, Chief Legal, Governance Officer and Corporate Secretary in Kimball HospitalityFebruary 2020 and leads the Company’s corporate business practices, including legal, compliance, investor relations and environmental, social, and corporate governance. Prior to joining the Company, Mr. Johnson served as Deputy General Counsel at Newell from 1992November 2009 until February 2020 where he was the legal department’s chief operating counsel and led the organization’s government affairs activities.
Mr. Meunier was appointed Executive Vice President, Global Operations in January 2020 where he leads our manufacturing operations and is responsible for the enhancement of manufacturing capabilities. Prior to 2004, including customer service, master scheduling, sales operations management, demand management,that, he served as Vice President, Global Operations, National Office Furniture from May 2016 until January 2020 and program management.Director of Operations, Casegoods Manufacturing, National Office Furniture from September 2010 until May 2016.
PART II
Item 5 - Market for Registrant’s Common Equity, Related ShareownerShareholder Matters and Issuer Purchases of Equity Securities
Market Prices
Our Class B common stock trades on the Nasdaq Global Select Market of Nasdaq under the symbol: KBAL. High and low sales prices by quarter for the last two fiscal years as quoted by the Nasdaq system were as follows:
|
| | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 20.24 |
| | $ | 15.60 |
| | $ | 13.46 |
| | $ | 10.99 |
|
| Second Quarter | $ | 20.96 |
| | $ | 15.40 |
| | $ | 18.00 |
| | $ | 11.97 |
|
| Third Quarter | $ | 20.17 |
| | $ | 15.70 |
| | $ | 17.98 |
| | $ | 15.66 |
|
| Fourth Quarter | $ | 17.70 |
| | $ | 15.88 |
| | $ | 18.94 |
| | $ | 15.84 |
|
There is no established public trading market for our Class A common stock. However, Class A shares are convertible on a one-for-one basis into Class B shares.
Dividends
Dividends declared on our Class A and Class B common stock totaled $10.5$13.5 million and $9.0$13.4 million for fiscal years 20182021 and 2017,2020, respectively. Included in these figures are dividends computed and accruedConsistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on unvested restricted share units. Dividends on these restricted share units accumulate and, when the restricted share units vest, are paid in shares of our common stock, with the number of shares determined based on the closing price of our common stock on the vesting date. Dividends per share declared by quarter for fiscal year 2018 compared to fiscal year 2017 were as follows:a quarterly basis.
|
| | | | | | | |
| | 2018 | | 2017 |
| First Quarter | $ | 0.07 |
| | $ | 0.06 |
|
| Second Quarter | 0.07 |
| | 0.06 |
|
| Third Quarter | 0.07 |
| | 0.06 |
|
| Fourth Quarter | 0.07 |
| | 0.06 |
|
| Total Dividends | $ | 0.28 |
| | $ | 0.24 |
|
Shareowners
On August 27, 2018,23, 2021, our Class A common stock was owned by 108 shareowners89 shareholders of record, and our Class B common stock was owned by 1,291 shareowners1,240 shareholders of record, of which 5044 also owned Class A common stock. The shares of our Class B common stock are equal to the shares of our Class A common stock with respect to all matters, including without limitation, dividend payments and voting rights, except that while Class A shares are convertible on a one-for-one basis into Class B shares, our Class B shares cannot be converted into Class A shares.
Securities Authorized for Issuance Under Equity Compensation Plans
Issuer Purchases of Equity Securities
A share repurchase program authorized by the Board of Directors was announced on October 16, 2007.August 11, 2015. The program allowedallows for the repurchase of up to two million shares of common stock. During fiscal year 2017, we repurchasedstock and will remain in effect until all remaining shares originally authorized.
authorized have been repurchased. On August 11, 2015February 7, 2019, an additional two million shares of common stock were authorized by the Board of Directors for repurchase and will remain in effect until all shares authorized have been repurchased.repurchase. The Board of Directors can discontinue this repurchase program at any time. At June 30, 2018, 1.22021, 2.2 million shares remained available under the repurchase program.
During each of fiscal years 20182021 and 2017,2020, we repurchased 0.50.3 million and 0.1 million shares, respectively, of our common stock. The following table presents a summary of our share repurchases during the fourth quarter of fiscal year 2018:2021: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| Month #1 (April 1 - April 30, 2021) | | 57,555 | | | $ | 14.04 | | | 57,555 | | | 2,279,191 |
| Month #2 (May 1 - May 31, 2021) | | — | | | $ | — | | | — | | | 2,279,191 |
| Month #3 (June 1 - June 30, 2021) | | 49,633 | | | $ | 13.52 | | | 49,633 | | | 2,229,558 |
| Total | | 107,188 | | | $ | 13.80 | | | 107,188 | | | |
| | | | | | | | |
|
| | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| Month #1 (April 1 - April 30, 2018) | | 16,530 |
| | $ | 16.52 |
| | 16,530 |
| | 1,236,816 |
| Month #2 (May 1 - May 31, 2018) | | 3,900 |
| | $ | 16.39 |
| | 3,900 |
| | 1,232,916 |
| Month #3 (June 1 - June 30, 2018) | | 11,210 |
| | $ | 16.01 |
| | 11,210 |
| | 1,221,706 |
| Total | | 31,640 |
| | $ | 16.32 |
| | 31,640 |
| | |
Performance GraphsGraph
The following performance graphs aregraph is not deemed to be “soliciting��soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate themit by reference into such a filing.
The first graph below compares the cumulative total return to shareownersshareholders of our common stock from June 30, 20132016 through June 30, 2018,2021, the last business day in the respective fiscal years, to the cumulative total return of the Nasdaq Stock Market (U.S. and Foreign) and a peer group index for the same period of time.
The spin-off of Kimball Electronics is reflected as an increase in the total cumulative return to shareowners as a result of each shareowner receiving a distribution of three shares of Kimball Electronics for every four shares of the Company. The increase in the total cumulative return was calculated based on the value of Kimball Electronics stock, using a 30-day volume weighted average price calculation to eliminate the impact of stock price volatility immediately after the October 31, 2014 spin-off date.
Due to the diversity of our operations, prior to the spin-off date, we are not aware of any public companies that are directly comparable. Therefore, the peer group index is comprised of publicly traded companies in both the furniture industry and in our former EMS segment, as follows:
Furniture peers: HNI Corporation, Knoll, Inc., Steelcase Inc., Herman Miller, Inc.
EMS peers (applicable through the October 31, 2014 spin-off): Benchmark Electronics, Inc., Jabil, Inc., Plexus Corp.
In order to reflect the segment allocation of Kimball International prior to the October 31, 2014 spin-off date, a market capitalization-weighted index was first computed for each peer group, then a composite peer group index was calculated based on each segment’s proportion of net sales to total consolidated sales for fiscal year 2014 and for fiscal year 2015 through the October 31, 2014 spin-off date. After the spin-off date, only the Furniture peer companies were used in the capitalization-weighted peer group index. The public companies included in the peer groups have a larger revenue base than our furniture business and our former EMS business.
The graph assumes $100 is invested in our Class B common stock and each of the two indexes at the closing market quotations on June 30, 20132016 and that dividends and the Kimball Electronics spin-off stock distribution are reinvested in Kimball International.reinvested. The performances shown on the graph are not necessarily indicative of future price performance.
| | | | | | | | | | | | | | | | | | | | |
| | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Kimball International, Inc. | $ | 100.00 | | $ | 148.94 | | $ | 146.55 | | $ | 161.29 | | $ | 109.86 | | $ | 128.72 | |
| Nasdaq Composite Index | $ | 100.00 | | $ | 128.30 | | $ | 158.57 | | $ | 170.91 | | $ | 216.96 | | $ | 315.10 | |
| Peer Group Index | $ | 100.00 | | $ | 96.04 | | $ | 99.99 | | $ | 120.88 | | $ | 80.42 | | $ | 134.82 | |
|
| | | | | | | | | | | | | | | | | | |
| | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
| Kimball International, Inc. | $ | 100.00 |
| $ | 174.54 |
| $ | 230.35 |
| $ | 220.16 |
| $ | 327.85 |
| $ | 322.46 |
|
| Nasdaq Stock Market (U.S. & Foreign) | $ | 100.00 |
| $ | 131.17 |
| $ | 150.10 |
| $ | 147.58 |
| $ | 189.34 |
| $ | 234.02 |
|
| Peer Group Index | $ | 100.00 |
| $ | 113.84 |
| $ | 127.88 |
| $ | 118.66 |
| $ | 113.09 |
| $ | 118.06 |
|
The spin-off of Kimball Electronics, which represented more than half of our Company in sales and the majority of earnings, makes comparable long-term stock price performance very difficult. Publicly available stock price analyses, such as five-year stock price trends, are not representative of our performance as stock prices in the pre-spin period are not comparable to stock prices in the post-spin period. To aid in trending our performance, below is a cumulative total return performance graph from the spin-off date forward.
Item 6 - Selected Financial Data[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30 |
(Amounts in Thousands, Except for Per Share Data) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Net Sales | $ | 685,600 |
| | $ | 669,934 |
| | $ | 635,102 |
| | $ | 600,868 |
| | $ | 543,817 |
|
| Income from Continuing Operations | $ | 34,439 |
| | $ | 37,506 |
| | $ | 21,156 |
| | $ | 11,143 |
| | $ | 3,419 |
|
| Earnings Per Share from Continuing Operations: | | |
| | |
| | |
| | |
|
| Basic: | $ | 0.92 |
| | $ | 1.00 |
| | $ | 0.56 |
| | | | |
| Class A | | | | | | | $ | 0.25 |
| | $ | 0.07 |
|
| Class B | | | | | | | $ | 0.29 |
| | $ | 0.09 |
|
| Diluted: | $ | 0.92 |
| | $ | 0.99 |
| | $ | 0.56 |
| | | | |
| Class A | | | | | | | $ | 0.25 |
| | $ | 0.07 |
|
| Class B | | | | | | | $ | 0.29 |
| | $ | 0.09 |
|
| Total Assets | $ | 330,168 |
| | $ | 313,747 |
| | $ | 273,570 |
| | $ | 265,279 |
| | $ | 722,146 |
|
| Long-Term Debt, Less Current Maturities | $ | 161 |
| | $ | 184 |
| | $ | 212 |
| | $ | 241 |
| | $ | 268 |
|
| Cash Dividends Per Share: | $ | 0.28 |
| | $ | 0.24 |
| | $ | 0.22 |
| | |
| | |
|
| Class A | | | | | | | $ | 0.195 |
| | $ | 0.18 |
|
| Class B | | | | | | | $ | 0.20 |
| | $ | 0.20 |
|
On October 31, 2014, we completed the spin-off of our EMS segment. The EMS segment was reclassified to discontinued operations in the Consolidated Statements of Income for all periods presented. Discontinued operations did not have an impact on the financial results of fiscal years 2018, 2017 and 2016. The preceding table excludes all income statement activity of the discontinued operations. The balance sheet data in the preceding table includes the EMS segment for fiscal years prior to 2015.
Fiscal year 2017 income from continuing operations included $1.1 million ($0.03 per diluted share) of after-tax restructuring gains driven by the sale of the Idaho facility.
Fiscal year 2016 income from continuing operations included $4.5 million ($0.12 per diluted share) of after-tax restructuring expenses.
Fiscal year 2015 income from continuing operations included $3.2 million ($0.08 per diluted share) of after-tax restructuring expenses and $3.2 million ($0.08 per diluted share) of after-tax expense related to the spin-off.
Fiscal year 2014 income from continuing operations included an after-tax gain of $1.1 million ($0.03 per diluted share) for the sale of an idle Furniture segment manufacturing facility and land located in Jasper, Indiana, after-tax impairment of $0.7 million ($0.02 per diluted share) for an aircraft which was subsequently sold, and $1.4 million ($0.04 per diluted share) of after-tax expense related to the spin-off.
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Kimball International Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) creates design driven, innovativeis a leading omnichannel commercial furnishings sold throughcompany with deep expertise in the Workplace, Health and Hospitality markets. We combine our familybold entrepreneurial spirit, a history of brands: Kimball, National,craftsmanship and Kimball Hospitality. Our diverse portfolio offers solutions for the workplace, learning, healing, and hospitality environments. Our values and integrity are demonstrated daily by livingtoday’s design-driven thinking alongside a commitment to our Guiding Principles and creating a culture of caring that establishes us as an employerand lasting connections with our customers, shareholders, employees and communities. For over 70 years, our brands have seized opportunities to customize solutions into personalized experiences, turning ordinary spaces into meaningful places. Our family of choice. “We Build Success” by establishing long-term relationships with customers, employees, suppliers, shareownersbrands includes Kimball, National, Etc., Interwoven, Kimball Hospitality, D’style and the communities in which we operate.Poppin.
We closely monitor key indicators for the markets in which we compete. As reported by the Business and Institutional Furniture Manufacturer Association (“BIFMA”), the forecast by IHS Markit, a global information provider, as of April 2018May 2021 for the U.S. commercialoffice furniture market, which they define as including office, education, and healthcare furniture products, projects a year-over-year increase of 1.9%1.8% for calendar year 2018 and 3.6% for calendar year 2019.2021. The forecast for two of the leading indicators for the hospitality furniture market (May 2018in the May 2021 PwC Hospitality Directions U.S. report)report includes a projected 40.1% increase in RevPAR (Revenue Per Available
Room) of 3.0% for calendar year 2018 and 2.8% for calendar year 2019,2021, while the occupancy levels for calendar 2021 are anticipated to increase to 57.2%, compared to 44.1% in calendar year 2018 and 2019 continue to hover at peak levels.2020.
Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
| |
• | On November 6, 2017, we successfully completed the acquisition of certain assets of D’style, Inc. (“D’style”) and all of the capital stock of Diseños de Estilo S.A. de C.V., which have administrative and sales offices and warehousing in Chula Vista, California and a manufacturing location in Tijuana, Mexico. The acquisition expands our hospitality offerings beyond guest rooms to public spaces and provides new mixed material manufacturing capabilities. The cash paid for the acquisition totaled $18.2 million, inclusive of a $0.4 million post-closing working capital adjustment. An earn-out of up to $2.2 million may be paid, which is contingent based upon fiscal year 2018 and 2019 D’style operating income compared to a predetermined target for each fiscal year. As of June 30, 2018, the fair value of the earn-out was $1.1 million. See Note 2 - Acquisition of Notes to Consolidated Financial Statements for additional information. |
On December 22, 2017,•COVID-19 - The COVID-19 pandemic continued to adversely impact our financial performance during fiscal year 2021, but the Tax Cutsnegative effects are expected to decline as the markets to which we sell rebound. The expected duration and Jobs Act (“Tax Act”) was signed into law. The Tax Actseverity of the COVID-19 impact on our business is affected by plans to return to the workplace balanced with working from home and the potential prolonged reduction in travel. Our dealers and suppliers are also experiencing similar negative impacts from the COVID-19 pandemic. Total orders received during fiscal year 2021 declined compared to fiscal year 2020 due to declines in workplace, health, and hospitality. Order rates gained momentum sequentially through fiscal year 2021 in our workplace and health end markets, but have not yet reached pre-pandemic levels. We are closely monitoring market changes and our liquidity in order to proactively adjust our operating costs. In order to preserve cash during this time, we have also reduced federal corporate income tax rates effective January 1, 2018spending on discretionary expenditures, but plan to invest appropriately to fuel our growth during fiscal year 2022. Managing working capital in conjunction with fluctuating demand levels is likewise key. We continue to believe our principal sources of liquidity from available funds on hand, cash generated from operations, and changed numerousthe availability of borrowing under our amended revolving credit facility will be sufficient to meet our working capital and other provisions. Because operating needs for at least the next twelve months.
•‘Kimball International Connect 2.0’ Strategy - In August 2020, Kimball International announced Connect 2.0, which centers around accelerating our growth. The four pillars of our previously announced strategy remain constant: inspire our people with a purpose driven and high performance culture, build our capabilities by expanding our work on innovation, fuel our future through the dedication to cost savings, and accelerate our growth. Connect 2.0 is designed to accelerate the growth of Kimball International and aid us in effectively managing through the current economic downturn, by driving market share gains as well as yielding additional cost savings. The Company has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal tax rate of 28.1% forbeen reorganized into four market centric business units which are Workplace, Health, Hospitality, and eBusiness that will accelerate our fiscal year ending June 30, 2018. The statutory federal tax rate will be 21% in subsequent fiscal years. Our fiscal year 2018 included approximately $3.3 million in reduced income tax expense reflecting federal taxes on current year taxable income at the lower blended effective tax rate, partially offset by a fiscal year 2018 discrete tax impact of $1.8 million in additional expense as a result of applyingability to redesign and reimagine the new lower federal income tax ratesworkplace, build a new work from home portfolio, continue assembling experts in health, and expand our hospitality business into other commercial direct sales environments. The dedicated eBusiness unit has taken a leadership role in establishing all e-commerce across our brands and end markets. Each of these four business units is supported by the agility and efficiency of Global Operations and the streamlined center-led structure that we implemented in year one of our strategy and the transformation restructuring plan described below.
•Transformation Restructuring Plan Phase 1 - In June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our net tax assets. The changes included in the Tax Act are broad and complex. The Securities and Exchange Commissionorganization. We believe phase 1 of our transformation restructuring plan has issued rules that would allow forestablished a measurement periodmore cost-efficient structure to better align our operations with our long-term strategic goals. Phase 1 of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We have finalized and recorded the related tax impactsour transformation restructuring plan is substantially complete as of June 30, 2018. We expect2021. See Note 3 - Restructuring of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information. •Transformation Restructuring Plan Phase 2 - In August 2020, we announced the lower statutory tax ratenext phase of our transformation restructuring plan that will align our business units to generate significantly lower tax expense in future periods, which will be partially offset by the loss of the deductibility of certain expenses.
The impact of higher transportationa new market-centric orientation and commodity prices is expected to intensify as pricing pressure from our vendors increases. We utilize both steelyield additional cost savings that will aid us in effectively managing through the downturn caused by the COVID-19 pandemic. Phase 2 of
the transformation restructuring plan builds on the initial strategy and aluminumthe transformation restructuring plan announced in our products, mostJune 2019. Phase 2 of which is sourced domestically. The U.S. recently imposed tariffs of 25% on steel and 10% on aluminum imported from several countries which could adversely impact our input costs. The government has also recently proposed to expand its list of products subject to tariffs to include furniture products, parts, and components, and if approved, the landed costtransformation restructuring plan began in the first quarter of our products could increase materially, which would reduce our net income iffiscal year 2021, and we expect a substantial majority of the underlying activities of these aforementioned actions to be completed by the end of fiscal year 2023. We currently estimate the transformation restructuring plan will incur total pre-tax restructuring charges of approximately $16.0 million to $18.0 million related to the initiatives under phase 2 of the transformation restructuring plan, with $8.8 million recorded in fiscal year 2021, approximately $6.0 million in fiscal year 2022 and the remainder thereafter. The restructuring charges consist of approximately $5.1 million for severance and other employee-related costs, $1.6 million for facility costs, and $2.2 million for lease and other asset impairment. Approximately 65% of the total cost estimate is expected to be cash expense. The following is a summary of the activities we will be undertaking pursuant to phase 2 of the transformation restructuring plan:
•As part of the previously announced plan to consolidate manufacturing of all brands into one world-class global operations group, we are unablestreamlining our manufacturing facilities by leveraging production capabilities across all facilities, establishing centers of excellence, and setting up processes to mitigate the additional cost. We are monitoring this situation, but at this time we are uncertainfacilitate flexing of the potential impact that these tariffs may have on our results of operations. We striveproduct between facilities in response to offset increases in the cost of these materials through supplier negotiations, global sourcing initiatives, product re-engineering and parts standardization, and price increases on our products.volume fluctuations. We are also reviewing our overall facility footprint to identify opportunities to reduce capacity and gain efficiencies, including the consolidation of our Baltimore, Maryland facility into other manufacturing facilities.
•We are streamlining our workforce to align with the new organizational structure and respond to lower volumes created by the COVID-19 pandemic, creating a more efficient organization to deliver on our Connect 2.0 strategy.
•In the third quarter of fiscal 2021, we offered two voluntary retirement incentive programs to eligible employees. Employees electing to participate were paid special termination benefits, including a severance benefit and cash payment that may be used to pay for a period of healthcare coverage or for any other purpose.
•Starting in fiscal year 2022, many of our showrooms will feature multiple brands thus eliminating the need for more than one showroom in the same city. Showroom locations are being reviewed and select leased showroom locations will be closed.
•During the second quarter of fiscal year 2021, we acquired Poppin, Inc. (“Poppin”), a tech-enabled, market-leading B2B commercial furniture design company headquartered in New York City, New York. Poppin designs commercial-grade furniture that is made to mix, match, and scale in today’s modern office and work-from-home environments. The acquisition purchase price totaled $110.4 million in cash consideration plus additional contingent payments, if all remaining milestones are achieved, of $65.0 million based on revenue and profitability milestones achieved through June 30, 2024. As of the acquisition date the fair value of the contingent earn-out was $31.8 million. During the fourth quarter of fiscal year 2021 the fair value of the contingent earn-out liability decreased to $20.2 million.
•In connection with and to facilitate the acquisition, on November 4, 2020, we amended our revolving credit facility to allow for up to $125.0 million in borrowings, with an option to increase the amount available for borrowing to $200.0 million at our request, subject to participating banks’ consent. We borrowed $40.0 million on our revolving credit facility which was utilized for the Poppin acquisition. The amended revolving credit facility maintains a maturity date of October 2024. The complete agreement was filed as Exhibit 10.1 to our Current Report on Form 8-K filed on November 4, 2020.
•We expect to continue to be exposed to fluctuationfluctuations in transportation costs which vary based uponboth domestic freight carrier capacity and fuel prices.ocean freight costs. Transportation costs are managed by optimizing logistics and supply chain planning, and increasing prices on our products is sometimes necessary. Our National brand recently implemented a price increasebut the current freight rate levels are elevated such that was effective on April 6, 2018, while our Kimball brand announced a price increase effective on July 2, 2018.
On May 7, 2018, Robert F. Schneider informedsignificant year-over-year increases occurred during the Board of Directors of Kimball International of his decision to retire as our Chief Executive Officer and Chairman of the Board. Mr. Schneider plans to retire effective October 31, 2018. The Board of Directors created a Continuity Committee to facilitate the appointment of a new CEO.
During the latter portionsecond half of our fiscal year 2017, we sold a facility2021 and are expected to remain elevated. We are experiencing commodity cost increases especially for wood components, steel, aluminum, foam and plastics. We expect these commodity pricing pressures to continue in Indiana which housed the education center for dealer and employee training, a research and development center, and a product showroom for proceedsfiscal year 2022. We are working to offset increases in these costs through pricing, inclusion of $3.8 million. We leased a portion of the facility through December 2017 to facilitate the short-term transition of those functions to other existing Indiana locations. The sale of the facility did not qualify for sale-leaseback accounting during fiscal year 2017,increased freight in quotes, supplier negotiations, global sourcing initiatives, product re-engineering and thus the $1.7 million pre-tax gain on the sale was not recognized in selling and administrative expenses until fiscal year 2018.parts standardization.
The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting. In March 2016, in connection with a renewal of one of our two contracts with the General Services Administration (“GSA”), we became aware of noncompliance and inaccuracies in our GSA subcontractor reporting. Accordingly, we retained outside legal counsel to assist in conducting an internal review of our reporting practices, and we self-reported the matter and the results of the internal review to the GSA. We have promptly responded to
inquiries from the GSA since our initial reporting, have met with government officials as requested on two occasions, and intend to cooperate fully with any further inquiries or investigations. We cannot reasonably predict the outcome of a government investigation at this time. During fiscal year 2018, sales related to our GSA contracts were approximately 7.5% of our consolidated sales, with one contract accounting for approximately 5.3% of our consolidated sales and the other contract accounting for approximately 2.2% of our consolidated sales.
•Due to the contract and project nature of furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business, which in turn impacts our operating results. Effective management of our manufacturing capacity is and will continue to be critical to our success. See below for further details regarding current sales and open order backlog trends.
•We expect to continue to invest in capital expenditures prudently, including potential acquisitions,particularly for projects that wouldwill enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
We have a strong focus on cost control and closely monitor market changes and our liquidity in order to proactively adjust our operating costs, discretionary capital spending, and dividend levels as needed. Managing working capital in conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of our Annual Cash Incentive plan is that it is linked to our Company-wide and business unit performance which is designed to adjust compensation expense as profits change.
•We continue to maintain a strong balance sheet. Our short-term liquidity available, represented as cash and cash equivalents and short-term investments plus the unused amount of our revolving credit facility, was $115.9$107.6 million at June 30, 2018.2021.
Fiscal Year 2018 Results of Operations - Fiscal Year 2021 Compared to Fiscal Year 2020
| | | | | | | | | | | | | At or for the
Year Ended | | |
| | At or for the Year Ended | | | | June 30 | | |
| | June 30 | | | |
| (Amounts in Millions) | 2018 | | 2017 | | % Change | |
| (Amounts in Millions, Except for Per Share Data) | | (Amounts in Millions, Except for Per Share Data) | 2021 | | 2020 | | % Change |
| Net Sales | $ | 685.6 |
| | $ | 669.9 |
| | 2 | % | Net Sales | $ | 569.0 | | | $ | 727.9 | | | (22%) |
| Organic Net Sales* | | Organic Net Sales* | 544.9 | | | 727.9 | | | (25%) |
| Gross Profit | 221.4 |
| | 223.3 |
| | (1 | %) | Gross Profit | 182.4 | | | 250.8 | | | (27%) |
| Selling and Administrative Expenses | 170.4 |
| | 168.5 |
| | 1 | % | Selling and Administrative Expenses | 181.8 | | | 187.9 | | | (3%) |
| Restructuring Gain | — |
| | (1.8 | ) | | | |
| Contingent Earn-out (Gain) Loss | | Contingent Earn-out (Gain) Loss | (11.6) | | | — | | |
| Restructuring Expense | | Restructuring Expense | 10.7 | | | 8.5 | | |
| Operating Income | 51.1 |
| | 56.7 |
| | (10 | %) | Operating Income | 1.5 | | | 54.4 | | | (97%) |
| Operating Income % | 7.4 | % | | 8.5 | % | | | Operating Income % | 0.3 | % | | 7.5 | % | |
| Adjusted Operating Income * | $ | 51.1 |
| | $ | 54.8 |
| | (7 | %) | Adjusted Operating Income * | $ | 12.4 | | | $ | 64.2 | | | (81%) |
| Adjusted Operating Income % * | 7.4 | % | | 8.2 | % | | | Adjusted Operating Income % * | 2.2 | % | | 8.8 | % | |
Net Income | $ | 34.4 |
| | $ | 37.5 |
| | (8 | %) | Net Income | $ | 7.4 | | | $ | 41.1 | | | (82%) |
| Net Income as a Percentage of Net Sales | | Net Income as a Percentage of Net Sales | 1.3 | % | | 5.6 | % | |
| Adjusted Net Income * | 34.4 |
| | 36.4 |
| | (5 | %) | Adjusted Net Income * | 13.0 | | | 47.9 | | | (73%) |
| Diluted Earnings Per Share | $ | 0.92 |
| | $ | 0.99 |
| | | Diluted Earnings Per Share | $ | 0.20 | | | $ | 1.11 | | | (82%) |
| Adjusted Diluted Earnings Per Share * | $ | 0.92 |
| | $ | 0.96 |
| | | Adjusted Diluted Earnings Per Share * | $ | 0.35 | | | $ | 1.29 | | | (73%) |
| Open Orders | $ | 148.9 |
| | $ | 131.6 |
| | 13 | % | |
| Return on Invested Capital ** | | Return on Invested Capital ** | 12.1 | % | | 37.5 | % | |
| Adjusted EBITDA * | | Adjusted EBITDA * | $ | 29.7 | | | $ | 81.3 | | | (63%) |
| Adjusted EBITDA %* | | Adjusted EBITDA %* | 5.2 | % | | 11.2 | % | |
| Order Backlog ** | | Order Backlog ** | $ | 141.4 | | | $ | 151.1 | | | (6%) |
* Items indicated represent Non-GAAP (Generally Accepted Accounting Principles) measurements for fiscal year 2017. measurements.
** Items indicated represent Key Performance Indicators.
See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
| | | | | | | | | | | | | | | | | |
| Net Sales by End Market | | | | | |
| | Year Ended | | |
| | June 30 | | |
| (Amounts in Millions) | 2021 | | 2020 | | % Change |
| Workplace | $ | 354.3 | | | $ | 435.4 | | | (19%) |
| Health | 97.3 | | | 108.9 | | | (11%) |
| Hospitality | 117.4 | | | 183.6 | | | (36%) |
| Total Net Sales | $ | 569.0 | | | $ | 727.9 | | | (22%) |
|
| | | | | | | | | | |
| Net Sales by End Market Vertical | | | | | |
| | Year Ended | | |
| | June 30 | | |
| (Amounts in Millions) | 2018 | | 2017 | | % Change |
| Commercial | $ | 201.7 |
| | $ | 198.5 |
| | 2 | % |
| Education | 82.8 |
| | 78.0 |
| | 6 | % |
| Finance | 66.6 |
| | 68.1 |
| | (2 | %) |
| Government | 81.3 |
| | 75.5 |
| | 8 | % |
| Healthcare | 86.6 |
| | 96.0 |
| | (10 | %) |
| Hospitality | 166.6 |
| | 153.8 |
| | 8 | % |
| Total Net Sales | $ | 685.6 |
| | $ | 669.9 |
| | 2 | % |
Fiscal year 20182021 consolidated net sales were $685.6$569.0 million compared to fiscal year 20172020 consolidated net sales of $669.9$727.9 million, a 2% increase, as $13.0 million of22% decrease. Organic net sales resulting from the D’style acquisitiondecreased $183.0 million, or 25%, year-over-year due to lower volume primarily in our workplace and price increases net of higher discountinghospitality end markets, which more than offset decreased organicincreased pricing. The declines in sales volume.
During fiscal year 2018 we redefinedvolumes in all three of our vertical market reporting to better reflect the end markets that we serve. The largest shifts among vertical markets were sales to certain government-affiliated medical facilities, which were previously classified in the government and commercial vertical markets and are now classified in the healthcare vertical market. Prior period information was estimated to reflect the new vertical market definitions on a comparable basis.
Key explanatory comments for our sales by vertical market follow:
For fiscal year 2018 compared to fiscal year 2017, increased hospitality vertical market sales were driven by the acquisition of the D’style business and increases in organic non-custom business, which more than offset a sales decline in our custom business.
Government vertical market sales for fiscal year 2018 increased as state and local government sales increased while sales to the federal government decreased.
Our sales to the education vertical market increased due to our greater focus on this market, despite educational funding being diverted to safety and security products which negatively impacted the timing and size of furniture orders received.
Although sales in the healthcare vertical market declined in fiscal year 2018 compared to fiscal year 2017, we have experienced a rebound in quoting activity which led to increased shipments and orders in the fourth quarter of our fiscal year 2018.
COVID-19 pandemic. Each of our verticalend market sales levels can fluctuate depending on the mix of projects in a given period.
Open ordersOrder backlog at June 30, 2018 increased 13%2021 decreased 6%, when compared to the open order level as of June 30, 2017 primarily due to higher hospitality furniture backlog2020, driven by both the D’style acquisition and growth in organic hospitality orders. Excluding an approximate $2.0 million positive impact from a price increase for one of our brands which took effect on July 2, 2018 and accelerated orders into our fiscal year 2018, office furniture backlog as of June 30, 2018 was flat.COVID-19 pandemic. Open orders at a point in time may not be indicative of future sales trends.
In fiscal year 2018 we recorded net income of $34.4 million, or $0.92 per diluted share. In fiscal year 2017 we recorded net income of $37.5 million, or $0.99 per diluted share, inclusive of $1.1 million, or $0.03 per diluted share, of after-tax restructuring gain from the sale of the Idaho facility. Excluding the non-recurring gain, our adjusted net income for fiscal year 2017 was $36.4 million, or $0.96 per diluted share. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Gross profit as a percent of net sales decreased 100240 basis points into 32.1% for fiscal year 20182021 compared to 34.5% for fiscal year 2017, as2020. The primary drivers for the decrease were loss of leverage on the lower sales volumes, increased product pricing and lower employee benefit expenses such as healthcare were more than offset by a shift in sales mix to lower margin products, freight cost increases, higher discounting, and an increase in our LIFO inventory reserve. See Note 3 - Inventories of Notes to Consolidated Financial Statements for more informationcosts, inflationary pressure on LIFO inventory. As a percent of net sales, selling and administrative expenses in fiscal year 2018 compared to fiscal year 2017 decreased 20 basis points due to the increased sales volumes. In absolute dollars selling and administrative spending increased 1% as the additional selling and administrative expenses of the D’style acquisition, higher salary expense,raw materials and higher marketing expenditures to grow the business werehealthcare costs, partially offset by lower incentive compensation costs. During fiscal year 2018 we recognized a $1.7 million pre-tax gain on the sale of anfavorable impacts from our operational excellence initiative and pricing increases.
Selling and administrative building, and in fiscal year 2017 we recognized $1.2 million of gains on the sale of land.
Fiscal year 2017 included a pre-tax restructuring gain of $1.8 million which included a gain on the sale of our Post Falls, Idaho facility and land of $2.1 million partially offset by restructuring expense of $0.3 million. See Note 17 - Restructuring Expense of Notes to Consolidated Financial Statements for further information on restructuring.Other Income (Expense) consisted of the following:
|
| | | | | | | |
| Other Income (Expense) | Year Ended |
| | June 30 |
| (Amounts in Thousands) | 2018 | | 2017 |
| Interest Income | $ | 1,057 |
| | $ | 536 |
|
| Interest Expense | (221 | ) | | (37 | ) |
| Foreign Currency (Loss) Gain | (93 | ) | | 18 |
|
| Gain on Supplemental Employee Retirement Plan Investments | 980 |
| | 1,215 |
|
| Other | (461 | ) | | (377 | ) |
| Other Income (Expense), net | $ | 1,262 |
| | $ | 1,355 |
|
Our fiscal year 2018 results of operations included the impact of the enactment of the Tax Act, which was signed into law on December 22, 2017. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because Kimball International has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ending June 30, 2018. The statutory federal tax rate will be 21% for subsequent fiscal years. Our fiscal year 2018 included approximately $3.3 million in reduced income tax expense to reflect federal taxes on current year taxable income at the lower blended effective tax rate, partially offset by a discrete tax impact of $1.8 million in additional expense as a result of applying the new lower federal income tax rates to our net tax assets.
Our fiscal year 2018 effective tax rate was 34.2%, as the benefits of the Tax Act were partially offset by the negative tax impact of applying the lower federal income tax rates to our net deferred tax assets. Our fiscal year 2018 effective tax rate also included a $0.6 million benefit resulting from a domestic manufacturing deduction. Our fiscal year 2017 effective tax rate was 35.4% and included the benefit of $1.5 million resulting from a domestic manufacturing deduction. The Tax Act repealed the domestic manufacturing deduction; thus future fiscal years will not have this benefit.
The changes included in the Tax Act are broad and complex. The transition impacts of the Tax Act may differ from the above estimate, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, and any changes in accounting standards for income taxes or related interpretations in response to the Tax Act. The Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Based on current interpretations, we have finalized our transition and recorded all resulting adjustments as of June 30, 2018.
Comparing the balance sheet as of June 30, 2018 to June 30, 2017, goodwill increased $8.8 million and intangible assets increased $9.7 million relating to the acquisition of D’style. Our prepaid expenses and other current assets line increased by $10.5 million primarily due to an overpayment of estimated income taxes for the fiscal year and also due to a shift in the Supplemental Employee Retirement Plan (“SERP”) balance from long term to short term in conjunction with the pending retirement of our Chief Executive Officer. Our deferred tax assets balance declined by $9.6 million as we accelerated the timing of certain incentive compensation payments and capital expenditures in order for them to be deductible in fiscal year 2018 before our statutory tax rate further decreases in fiscal year 2019.
Fiscal Year 2017 Results of Operations
|
| | | | | | | | | | |
| | At or for the Year Ended | | |
| | June 30 | | |
| (Amounts in Millions) | 2017 | | 2016 | | % Change |
| Net Sales | $ | 669.9 |
| | $ | 635.1 |
| | 5 | % |
| Gross Profit | 223.3 |
| | 203.8 |
| | 10 | % |
| Selling and Administrative Expenses | 168.5 |
| | 163.0 |
| | 3 | % |
| Restructuring (Gain) Expense | (1.8 | ) | | 7.3 |
| | |
| Operating Income | 56.7 |
| | 33.5 |
| | 69 | % |
| Operating Income % | 8.5 | % | | 5.3 | % | | |
| Adjusted Operating Income * | $ | 54.8 |
| | $ | 40.8 |
| | 34 | % |
| Adjusted Operating Income % * | 8.2 | % | | 6.4 | % | | |
Net Income | $ | 37.5 |
| | $ | 21.2 |
| | 77 | % |
| Adjusted Net Income * | 36.4 |
| | 25.7 |
| | 42 | % |
| Diluted Earnings Per Share | $ | 0.99 |
| | $ | 0.56 |
| | |
| Adjusted Diluted Earnings Per Share * | $ | 0.96 |
| | $ | 0.68 |
| | |
| Open Orders | $ | 131.6 |
| | $ | 129.9 |
| | 1 | % |
* Items indicated represent Non-GAAP measurements. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
|
| | | | | | | | | | |
| Net Sales by End Market Vertical | | | | | |
| | Year Ended | | |
| | June 30 | | |
| (Amounts in Millions) | 2017 | | 2016 | | % Change |
| Commercial | $ | 198.5 |
| | $ | 194.0 |
| | 2 | % |
| Education | 78.0 |
| | 69.5 |
| | 12 | % |
| Finance | 68.1 |
| | 60.5 |
| | 13 | % |
| Government | 75.5 |
| | 66.6 |
| | 13 | % |
| Healthcare | 96.0 |
| | 96.5 |
| | (1 | %) |
| Hospitality | 153.8 |
| | 148.0 |
| | 4 | % |
| Total Net Sales | $ | 669.9 |
| | $ | 635.1 |
| | 5 | % |
Fiscal year 2017 consolidated net sales were $669.9 million compared to fiscal year 2016 net sales of $635.1 million, a 5% increase. Increased volume across five of our verticals was the primary driver while the positive impact of price increases contributed to a lesser extent.
During fiscal year 2018 we redefined our vertical market reporting to better reflect the end markets that we serve. The largest shifts among vertical markets were sales to certain government-affiliated medical facilities, which were previously classified in the government and commercial vertical markets and are now classified in the healthcare vertical market. The net sales by vertical market was estimated for fiscal years 2017 and 2016 to reflect the new vertical market definitions on a comparable basis.
Key explanatory comments for our sales by vertical market follow:
Our education vertical market sales grew as we continued our focus on education products and distribution.
Our finance vertical market sales increase was driven by focus on strategic accounts and assisting financial institutions with refreshing their image and adding collaborative spaces.
Our sales in the government vertical market increased as we experienced improved order activity on awarded blanket purchase agreements and had success with larger projects relative to fiscal year 2016.
The hospitality vertical market sales increase was primarily driven by increased non-custom business.
Each of our vertical market sales levels can fluctuate depending on the mix of projects in a given period.
Open orders at June 30, 2017 increased 1% when compared to the open order level as of June 30, 2016 as demand for office furniture increased and hospitality furniture open orders declined slightly.
In fiscal year 2017 we recorded net income of $37.5 million, or $0.99 per diluted share, inclusive of a $1.1 million after-tax restructuring gain, or $0.03 per diluted share, from the sale of the Idaho facility. In fiscal year 2016 we recorded net income of $21.2 million, or $0.56 per diluted share, inclusive of $4.5 million, or $0.12 per diluted share, of after-tax restructuring expense. Excluding these non-recurring gains or expenses, our adjusted net income for fiscal year 2017 improved to $36.4 million, or $0.96 per diluted share, compared to adjusted net income for fiscal year 2016 of $25.7 million, or $0.68 per diluted share. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Gross profit as a percent of net sales increased 120 basis points in fiscal year 20172021 compared to fiscal year 2016.2020 increased 610 basis points due to the decline in volume outpacing our reduction in selling and administrative expenses. The improvement was driven by the favorable impact of price increases, the benefit of leverage gained on higher sales volumes, and the benefits from our restructuring plan involving the transfer of metal fabrication production from Idaho into facilitiesyear-over-year 3% reduction in Indiana. Higher employee benefit costs in fiscal year 2017, retirement expense in particular, partially offset the aforementioned improvements.
As a percent of net sales, selling and administrative expenses in fiscal year 2017 compared to fiscal year 2016 decreased 50 basis pointsabsolute dollars was driven by reduced marketing expenses, reduced travel expenses due to increased sales volumes. In absolute dollars sellingthe COVID-19 pandemic, decreased retirement contribution expense, lower incentive compensation, savings resulting from our transformation restructuring plan, and administrative spending increased 3% primarilylower commissions due to higher incentive compensation costs as a result of higher earnings levels and higher salary expense. We also had an unfavorable variance withinthe volume decline. Partially offsetting the decline in selling and administrative expenses were the increased amortization expense of $1.2 million for fiscal year 2017 comparedintangible assets primarily due to fiscal year 2016the acquisition of Poppin, higher professional services costs related to the acquisition of Poppin, higher healthcare costs, and higher expense related to the normal revaluation to fair value of our SERPSupplemental Employee Retirement Plan (“SERP”) liability. The impact from the change in the SERP liability that was recognized in selling and administrative expenses was offset with the change in fair value of the SERP investments which was recorded in Other Income (Expense), and thus there was no effect on net income. During fiscal year 2017
In June 2019, we also recognized $1.2 million of gains on the sale of land.
Fiscal year 2017 includesannounced a pre-taxtransformation restructuring gain of $1.8 million which includedplan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. The transformation restructuring plan has established a gain on the sale ofmore cost-efficient structure to better align our Post Falls, Idaho facility and land of $2.1 million partially offset by restructuring expense of $0.3 million.operations with our long-term strategic goals. We recognized pre-tax restructuring expense of $7.3$10.7 million in fiscal year 2016. The improvement of customer delivery, supply chain dynamics,2021 and reduction of transportation costs were expected to generate annual pre-tax savings of approximately $5 million per year, and we achieved savings of approximately $4.7$8.5 million in fiscal year 2017 as savings began2020 related to ramp up duringboth phases of our first quarter.transformation restructuring plan. See Note 173 - Restructuring Expense of Notes to Consolidated Financial Statements for further information on restructuring.our transformation restructuring plan.Other Income (Expense)income (expense), net consisted of the following:
| | | Other Income (Expense) | Year Ended | |
| Other Income (Expense), net | | Other Income (Expense), net | Year Ended |
| | June 30 | | June 30 |
| (Amounts in Thousands) | 2017 | | 2016 | (Amounts in Thousands) | 2021 | | 2020 |
| Interest Income | $ | 536 |
| | $ | 275 |
| Interest Income | $ | 336 | | | $ | 1,641 | |
| Interest Expense | (37 | ) | | (22 | ) | Interest Expense | (453) | | | (79) | |
| Foreign Currency Gain (Loss) | 18 |
| | (17 | ) | |
| Gain (Loss) on SERP Investments | 1,215 |
| | (13 | ) | |
| | Gain on Supplemental Employee Retirement Plan Investments | | Gain on Supplemental Employee Retirement Plan Investments | 3,324 | | | 600 | |
| Other | (377 | ) | | (330 | ) | Other | (118) | | | (419) | |
| Other Income (Expense), net | $ | 1,355 |
| | $ | (107 | ) | Other Income (Expense), net | $ | 3,089 | | | $ | 1,743 | |
Our fiscal year 20172021 effective tax rate of (60.9%) was 35.4% as higher taxable income generateddriven by the book versus tax treatment of the $11.6 million Poppin earn-out gain and a $1.2$0.6 million higher domestic manufacturing deduction than fiscal year 2016.research and development tax credit. Our fiscal year 20162020 effective tax rate of 26.9% was 36.6%higher than the combined federal and did not include any material unusual items.state statutory rate primarily from the impact of nondeductible officer compensation which more than offset a $0.4 million research and development tax credit.
Comparing our balance sheets as of June 30, 2021 to June 30, 2020, our cash balance declined and our long-term debt increased as we funded our acquisition of the Poppin business. See Note 2 - Acquisition of Notes to Consolidated Financial Statements for details of the purchase which drove increases in the following lines on our balance sheet: goodwill, other intangible assets, and contingent earn-out liability. Our accounts receivable balance declined as a result of our reduced sales volumes near the end of fiscal year 2021 compared to the prior year. Our deferred tax asset increased primarily due to the acquisition of Poppin and a research and development tax credit carryforward. Results of Operations - Fiscal Year 2020 Compared to Fiscal Year 2019
For the comparison of fiscal years ended June 30, 2020 and June 30, 2019, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K filed August 28, 2020.
Liquidity and Capital Resources
Our cash position, which is comprised oftotal cash, cash equivalents, and short-term investments decreased to $87.3was $24.3 million at June 30, 2018 from $98.62021 and $97.1 million at June 30, 2017, primarily due to an $18.22020. We borrowed cash of $40 million and subsequently expended net cash outflowof $101.5 million for the D’style acquisition,Poppin acquisition. Cash flows from operations of $27.3 million were more than offset by capital expenditures, including capitalized software, of $22.3$19.5 million in fiscal year 2018, and the return of capital to shareownersshareholders in the form of dividends totaling $13.3 million and stock repurchases and dividends totaling $19.0$3.6 million in fiscal year 2018, which more than offset $46.9 million of cash flows from operations during fiscal year 2018.2021.
Working capital at June 30, 20182021 was $85.1$44.1 million compared to working capital of $82.5$123.1 million at June 30, 2017.2020. The current ratio was 1.71.4 and 2.1 at both June 30, 20182021 and June 30, 2017.2020, respectively.
Our short-term liquidity available, represented as cash and cash equivalents and short-term investments plus the unused amount of our revolving credit facility, totaled $115.9$107.6 million at June 30, 2018.2021. At June 30, 2018,2021, we had $1.4$1.7 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. We had no$40.0 million of revolving credit facility borrowings outstanding as of June 30, 2018 or2021. Total availability to borrow under the credit facility totaled $83.3 million at June 30, 2017.
During fiscal year 2017 we sold a2021. We had no revolving credit facility in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom for proceeds of $3.8 million. We were leasing a portion of the facility back to facilitate the short-term transition of those functions to other existing Indiana locations. The sale of the facility did not qualify for sale-leaseback accounting thus the book value of the building remained on the property and equipment line of our Consolidated Balance Sheetborrowings outstanding as of June 30, 20172020.
We acquired Poppin, Inc. subsequent to their borrowing of a Paycheck Protection Program (“PPP”) loan. During the fourth quarter of fiscal year 2021 we were notified that Poppin’s PPP loan had been forgiven in full and the related sale-leaseback financing obligation was a current liability on our Consolidated Balance Sheet asproceeds were paid in the first quarter of June 30, 2017. During fiscal year 2018,2022 to the lease terminatedformer Poppin, Inc. equity holders per the terms of the agreement and the sales transaction was recognized, resulting in a $1.7 million pre-tax gain which was recorded in selling and administrative expense.plan of merger.
Cash Flows
The following table reflects the major categories of cash flows for fiscal years 2018, 2017,2021 and 2016.2020.
| | | | | Year Ended | | Year Ended | |
| | | June 30 | | June 30 | |
| (Amounts in thousands) | | 2018 | | 2017 | | 2016 | (Amounts in thousands) | | 2021 | | 2020 | |
| Net cash provided by operating activities | | $ | 46,866 |
| | $ | 64,844 |
| | $ | 49,352 |
| Net cash provided by operating activities | | $ | 27,294 | | | $ | 29,798 | | |
| Net cash used for investing activities | | $ | (35,216 | ) | | $ | (36,176 | ) | | $ | (16,883 | ) | |
| Net cash used for financing activities | | $ | (21,869 | ) | | $ | (13,362 | ) | | $ | (19,554 | ) | |
| Net cash provided by (used for) investing activities | | Net cash provided by (used for) investing activities | | $ | (115,984) | | | $ | 6,141 | | |
| Net cash provided by (used for) financing activities | | Net cash provided by (used for) financing activities | | $ | 21,973 | | | $ | (17,332) | | |
Cash Flows from Operating Activities
For fiscal years 20182021 and 2017,2020, net cash provided by operating activities was $46.9$27.3 million and $64.8$29.8 million, respectively, fueled bybeginning with net income of $34.4$7.4 million and $37.5$41.1 million, respectively. In fiscal year 2018, changes in working capital balances used $15.2 million and a reduction in deferred income tax and other deferred charges increased cash flow by $9.1 million. Changes in working capital balances provided $10.1$6.1 million of cash in fiscal year 2017. Cash generated from operating activities2021 and used $42.6 million of cash in fiscal year 2016 totaled $49.4 million, which was impacted by net income of $21.2 million, and changes in working capital provided $4.6 million of cash.2020.
The $15.2 million of cash used as a result of changes in working capital balances in fiscal year 2018 was partially driven by an increase of $6.7 million in prepaid expenses and other current assets primarily due to an overpayment of estimated income taxes for fiscal year 2018. Statutory federal tax rates declined in the latter half of our fiscal year as the Tax Act was enacted, and we accelerated certain deductions into the current fiscal year to take advantage of higher tax rates in fiscal year 2018 versus fiscal year 2019. Also contributing was an increase of $5.7 million in our accounts receivable balance primarily driven by increased sales toward the end of fiscal year 2018 compared to fiscal year 2017.
The $10.1$6.1 million of cash provided by changes in working capital balances in fiscal year 20172021 was primarily driven by a combined $5.7$12.7 million increasedecrease in our accounts receivable balance due to decreased sales in the latter portion of fiscal year 2021 and an $11.2 million decrease in our inventories balance as we scaled to the new order levels. These changes were partially offset by a $10.4 million decrease to our accrued annual cash incentive compensationexpenses balance and accrued retirement plan contributions.a $6.6 million decrease in our accounts payable balance in conjunction with the lower inventory purchases.
The $4.6$42.6 million usage of cash provided byfrom changes in working capital balances in fiscal year 20162020 was primarilypartially due to the $4.9$17.9 million sourcecash impact of a reduction in our accrued expenses balance as the cash driven byincentive compensation and retirement profit sharing contribution accruals for fiscal year 2020 were lower than for fiscal year 2019 and our accrual for customer incentives were also lower for fiscal year 2020 as programs were altered due to COVID-19. In addition, the impact of COVID-19 drove an $8.3 million cash decrease in our accounts payable as our expenditures declined, a decrease$5.2 million cash increase in our accounts receivable balance, as the collection process was improved atand a select location.$5.0 million cash reduction in customer deposits.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for boththe fiscal years ended June 30, 20182021 and June 30, 2017 was 27.0 days.2020 were 34 days and 32 days, respectively. We define DSO as the average of monthly trade accounts and notes receivable divided by an average day’s net sales. Our Production Days Supply on Hand (“PDSOH”) of inventory measure for boththe fiscal years ended June 30, 20182021 and June 30, 2017 was 47.02020 were 65 and 50 days, respectively. While inventory, excluding inventory acquired with Poppin, has declined since last year, there are certain minimum inventory thresholds essential to efficiently serving our customers causing an increase in our inventory days on hand. In addition, the Poppin inventory levels acquired increased our PDSOH by approximately 9 days. We define PDSOH as the average of the monthly grossnet inventory divided by an average day’s cost of sales.
Cash Flows from Investing Activities
During fiscal year 2018,2021, we expended $101.5 million for the Poppin acquisition which is less than the $110.4 million initial cash consideration due to adjustments for cash acquired and cash diverted to escrow for payment of the PPP loan for the benefit of the Poppin equity holders upon the forgiveness of the loan, which occurred in the fourth quarter of fiscal year 2021. During fiscal year 2021 we invested $42.5$10.0 million in available-for-sale securities, and $42.8$15.3 million matured. During fiscal year 2017,2020, we invested $42.1$25.0 million in available-for-sale securities, and $5.9$52.9 million matured. OurWhile we held no short-term investments as of June 30, 2021, throughout fiscal years 2021 and 2020, our short-term investments included municipal bonds, certificates of deposit purchased in the secondary market, and U.S. Treasury and federal agency securities. During fiscal year 2018, we had a cash outflow of $18.2 million upon the D’style acquisition.securities, and municipal bonds. During fiscal years 2018 2021
and 2017,2020, we received proceeds from the sale of assets net of selling expenses of $5.8reinvested $19.5 million and $13.2 million, respectively, the majority of which related to the sale of our fleet of over-the-road tractors and trailers in fiscal year 2018 and the sale of our Idaho facility in fiscal year 2017, respectively. During fiscal years 2018, 2017, and 2016 we reinvested $22.3 million, $12.7 million, and $16.2$21.1 million, respectively, into capital investments for the future. The current year capital investments were primarily for various manufacturing equipment upgrades to increase automation in the currentproduction facilities, configuration design software, and facility improvements. The prior year capital investments were primarily for facility improvements such as renovations to our corporate headquarters and showrooms, and various manufacturing equipment upgrades to increase automation in production facilities. The capital investments during fiscal year 2017 were primarily for facility improvements such as renovations to showrooms and the corporate headquarters, various manufacturing equipment, and replacements of tractors and trailers in our fleet. The fiscal year 2016 capital investments were primarily for manufacturing equipment such as an automated finish technology upgrade and equipment related to the transition of the metal fabrication capabilities and assembly operations to certain Indiana facilities and various facility and showroom improvements.upgrades.
Cash Flows from Financing Activities
During fiscal year 2021, we had proceeds from borrowings on our revolving credit facility of $40.0 million which was utilized for the Poppin acquisition. We paid $10.1$13.3 million of dividends in fiscal year 20182021 compared to paying $8.8$12.9 million of dividends in fiscal year 2017 and $8.1 million of dividends in fiscal year 2016.2020. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. We repurchased shares pursuant to a previously announced stock repurchase program, which drove cash outflow of $8.9$3.6 million in fiscal year 2018, $6.72021 and $3.0 million in fiscal year 2017, and $9.7 million in2020. Future debt payments may be paid out of cash flows from operations or from future refinancing of our debt.
Revolving Credit Facility
During fiscal year 2016.
Credit Facility
We maintain2021, we amended our revolving credit facility to increase our maximum borrowing available. The complete agreement was filed as Exhibit 10.1 to our Current Report on Form 8-K filed on November 4, 2020. As of June 30, 2021 we had a $30.0$125 million revolving credit facility with a maturity date of October 20192024 that allowsallowed for both issuances of letters of credit and cash borrowings. This facility providesWe also have an option to request an increase of the amount available for borrowing to $55.0$200 million, subject to participating banks’ consent. The loans under the Credit Agreement could consist of, at our request, subjectelection, advances in U.S. dollars or advances in any other currency that was agreed to by the consentlenders. The proceeds are to be used for general corporate purposes including acquisitions. A portion of the participating banks.revolving credit facility, not to exceed $10 million of the principal amount, was available for the issuance of letters of credit. At June 30, 2018,2021, we had $1.4$1.7 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. At both June 30, 20182021 we had $40.0 million in borrowings outstanding, and at June 30, 2017,2020 we had no borrowings outstanding.
The revolving credit facility requiresrequired us to comply with certain debt covenants, the most significant of which arewere the adjusted leverage ratio and the fixed chargeinterest coverage ratio. The adjusted leverage ratio iswas defined as (a) consolidated total indebtedness minus unencumbered U.S. cash on hand in the U.S.equivalents in excess of $15,000,000 provided that the maximum subtraction did not exceed $35,000,000 to (b) adjusted consolidated EBITDA, determined as of the end of each of our fiscal quarters for the then most recently ended four fiscal quarters, and mayto not be greater than 3.03.00 to 1.0.1.00. The fixed chargeinterest coverage ratio, is defined asfor any period, of (a) the sum of (i) consolidatedConsolidated EBITDA minus (ii) 50% of depreciation expense, minus (iii) taxes paid, minus (iv) dividends and distributions paid,for such period to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii)cash interest expense for such period, calculated on a consolidated basis in accordance with U.S. GAAP determined as of the end of each of our fiscal quarters for the trailing four fiscal quartersquarter period then ending, and mayto not be less than 1.103.00 to 1.00. We were in compliance with all debt covenants of the revolving credit facility during fiscal year 2018.the twelve-month period ended June 30, 2021.
The table below compares the adjusted leverage ratio and fixed chargeinterest coverage ratio with the limits specified in the credit agreement.
| | | | | At or For the Period Ended | | Limit As Specified in | | | | At or For the Period Ended | | Limit As Specified in | |
| Covenant | | June 30, 2018 | | Credit Agreement | | Excess | Covenant | | June 30, 2021 | | Credit Agreement | | Excess |
| Adjusted Leverage Ratio | | (0.55 | ) | | 3.00 |
| | 3.55 |
| Adjusted Leverage Ratio | | 1.06 | | | 3.00 | | | 1.94 | |
| Fixed Charge Coverage Ratio | | 135.72 |
| | 1.10 |
| | 134.62 |
| |
| Interest Coverage Ratio | | Interest Coverage Ratio | | 78.00 | | | 3.00 | | | 75.00 | |
Future Liquidity
WeWhile we expect the impact of COVID-19 will continue to impact our sales levels, we believe our principal sources of liquidity from available funds on hand, and short-term investments, cash generated from operations, and the availability of borrowing under our amended revolving credit facility will be sufficient to fund future dividends and meet our working capital and other operating needs for at least the next 12twelve months. DuringOur Board of Directors declared quarterly dividends of $0.09 per share which was paid during our first quarter of fiscal year 2019, we anticipate2022. Future cash outflowdividends are subject to approval by our Board of approximately $11.3 million for accrued cash incentive compensation related toDirectors and may be adjusted as business needs or market conditions change. We reinstated our share repurchase program during fiscal year 2018 performance. We will2021 and plan to continue to evaluate marketrepurchasing shares when conditions in determining future share repurchases.are favorable. At June 30, 2018, 1.22021, 2.2 million shares remained available under the repurchase program.
During fiscal year 20192022, we expect to continue investmentsinvest approximately $25 million in capital expenditures, particularly for construction of a warehouse and projects such as our headquarters renovation, showroom renovations, machinery and equipment upgrades and automation,automation. Additionally, we have short-term purchase obligations as of June 30, 2021 of approximately $52 million. Our purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. Purchase obligations include contractual commitments for items such as raw materials, supplies, capital expenditures, services, and software acquisitions/license commitments. As of June 30, 2021, our short-term contractual obligations also included lease liability, short-term debt, and a liability for SERP and severance future payments. Refer to Note 5 - Leases, Note 11 - Long-Term Debt and Revolving Credit Facility and Note 12 - Employee Benefit Plans, respectively, of Notes to Consolidated Financial Statements for details. Our long-term purchase obligations as of June 30, 2021 are approximately $26 million, and are of a similar nature to the aforementioned purchase obligations. In addition to the purchase obligations, as of June 30, 2021, our long-term contractual obligations also included lease liability, long-term debt, primarily related to our acquisition of Poppin in fiscal year 2021, and a liability for SERP and severance future payments. Refer to Note 5 - Leases, Note 11 - Long-Term Debt and Revolving Credit Facility and Note 12 - Employee Benefit Plans, respectively, of Notes to Consolidated Financial Statements for details. We continuous monitor for potential acquisitions that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability. Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by factors such as general economic and market conditions, including reduced revenues from the COVID-19 pandemic, the impact of changes in tariffs, lack of availability of raw material components in the supply chain, a decline in demand for our services, the impactlack of changes in tariffs,availability or cost of manufacturing labor, loss of key contract customers, including government subcontract customers, or the outcome of a governmental review of our GSA subcontractor reporting practices, and other unforeseen circumstances. In particular, should demand for our products decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted.
Non-GAAP Financial Measures and Other Key Performance Indicators
This Management’s Discussion and Analysis (“MD&A”) contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with U.S. GAAP in the United States in the statements of income, statements of comprehensive income, balance sheets, or statements of cash flows, or statements of shareholders’ equity of the company. The non-GAAP financial measures used within this MD&A include (1) organic net sales, defined as net sales excluding acquisition-related net sales; (2) adjusted operating income, defined as operating income excluding restructuring; (2)restructuring expenses, CEO transition costs, acquisition-related amortization and inventory valuation adjustments, costs of the acquisition, contingent earn-out (gain) loss, and market value adjustments related to our SERP liability; (3) adjusted operating income percentage, defined as adjusted operating income as a percentage of net sales; (4) adjusted net income, defined as net income excluding restructuring;restructuring expenses, CEO transition costs, acquisition-related amortization and (3)inventory valuation adjustments, costs of the acquisition, and contingent earn-out (gain) loss; (5) adjusted diluted earnings per share, defined as diluted earnings per share excluding restructuring.restructuring expenses, CEO transition costs, acquisition-related amortization and inventory valuation adjustments, costs of the acquisition, and contingent earn-out (gain) loss; (6) adjusted EBITDA, defined as earnings before interest, statutory income tax impacts for after-tax measures, depreciation, and amortization and excluding restructuring expenses, CEO transition costs, acquisition-related inventory valuation adjustments, costs of the acquisition, and contingent earn-out (gain) loss; and (7) adjusted EBITDA percentage, defined as adjusted EBITDA as a percentage of net sales. Reconciliations of the reported GAAP numbers to these non-GAAP financial measures are included in the tabletables below. Management believes it is useful for investors to understand how its core operations performed without gains or expenses incurred in executing its restructuring plan. Excluding these amounts allows investorsand to be able to meaningfully trend, analyze and benchmark the performance ofhow our core operations.operations performed without market value adjustments related to our SERP liability, without expenses incurred in executing our transformation restructuring plan, without CEO transition costs, and without acquisition-related costs. Many of our internal performance measures that management uses to make certain operating decisions exclude these gains/expenses to enable meaningful trending of core operating metrics. These non-GAAP financial measures should not be viewed as an alternative to the GAAP measures and are presented as supplemental information.
| | | | | |
| Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators |
| (Amounts in Thousands, Except for Per Share Data) | |
| |
| Organic Net Sales | Fiscal Year Ended |
| June 30, |
| 2021 |
| Net Sales, as reported | $ | 569,008 | |
| Less: Poppin acquisition net sales | 24,070 | |
| Organic Net Sales | $ | 544,938 | |
| |
|
| |
| |
|
| | | | | | | | | | | |
| Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators | | |
| (Amounts in Thousands, Except for Per Share Data) | | | | | |
| | Year Ended |
| | June 30 |
| | 2018 | | 2017 | | 2016 |
| Operating Income | $ | 51,063 |
| | $ | 56,663 |
| | $ | 33,497 |
|
| Pre-tax Restructuring (Gain) Expense | — |
| | (1,832 | ) | | 7,328 |
|
| Adjusted Operating Income | $ | 51,063 |
| | $ | 54,831 |
| | $ | 40,825 |
|
| Net Sales | $ | 685,600 |
| | $ | 669,934 |
| | $ | 635,102 |
|
| Adjusted Operating Income % | 7.4 | % | | 8.2 | % | | 6.4 | % |
| | | | | | |
| Net Income | $ | 34,439 |
| | $ | 37,506 |
| | $ | 21,156 |
|
| Pre-tax Restructuring (Gain) Expense | — |
| | (1,832 | ) | | 7,328 |
|
| Tax on Restructuring (Gain) Expense | — |
| | 713 |
| | (2,825 | ) |
| After-tax Restructuring (Gain) Expense | — |
| | (1,119 | ) | | 4,503 |
|
| Adjusted Net Income | $ | 34,439 |
| | $ | 36,387 |
| | $ | 25,659 |
|
| | | | | | |
| Diluted Earnings Per Share | $ | 0.92 |
| | $ | 0.99 |
| | $ | 0.56 |
|
| Impact of Restructuring (Gain) Expense | — |
| | (0.03 | ) | | 0.12 |
|
| Adjusted Diluted Earnings Per Share | $ | 0.92 |
| | $ | 0.96 |
| | $ | 0.68 |
|
| | | | | | | | | | | | | |
| Adjusted Operating Income | Fiscal Year Ended | | |
| June 30, | | |
| 2021 | | 2020 | | |
| Operating Income, as reported | $ | 1,521 | | | $ | 54,387 | | | |
| | | | | |
| Add: Pre-tax Restructuring Expense | 10,727 | | | 8,489 | | | |
| Add: Pre-tax Expense Adjustment to SERP Liability | 3,324 | | | 600 | | | |
| Add: Pre-tax CEO Transition Costs | 564 | | | 698 | | | |
| Add: Pre-tax Acquisition-related Amortization | 3,737 | | | — | | | |
| Add: Pre-tax Acquisition-related Inventory Valuation Adjustment | 536 | | | — | | | |
| Add: Pre-tax Costs of Acquisition | 3,579 | | | — | | | |
| Subtract: Contingent Earn-Out (Gain) Loss | (11,600) | | | — | | | |
| Adjusted Operating Income | $ | 12,388 | | | $ | 64,174 | | | |
| Net Sales | $ | 569,008 | | | $ | 727,859 | | | |
| Adjusted Operating Income % | 2.2 | % | | 8.8 | % | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Adjusted Net Income | Fiscal Year Ended | | |
| June 30, | | |
| 2021 | | 2020 | | |
| Net Income, as reported | $ | 7,416 | | | $ | 41,054 | | | |
| Pre-tax Restructuring Expense | 10,727 | | | 8,489 | | | |
| Tax on Restructuring Expense | (2,761) | | | (2,185) | | | |
| Add: After-tax Restructuring Expense | 7,966 | | | 6,304 | | | |
| Pre-tax CEO Transition Costs | 564 | | | 698 | | | |
| Tax on CEO Transition Costs | (144) | | | (180) | | | |
| Add: After-tax CEO Transition Costs | 420 | | | 518 | | | |
| Pre-tax Acquisition-related Amortization | 3,737 | | | — | | | |
| Tax on Acquisition-related Amortization | (962) | | | — | | | |
| Add: After-tax Acquisition-related Amortization | 2,775 | | | — | | | |
| Pre-tax Acquisition-related Inventory Valuation Adjustment | 536 | | | — | | | |
| Tax on Acquisition-related Inventory Valuation Adjustment | (139) | | | — | | | |
| Add: After-tax Acquisition-related Inventory Adjustment | 397 | | | — | | | |
| Pre-tax Costs of Acquisition | 3,579 | | | — | | | |
| Tax on Costs of Acquisition | (921) | | | — | | | |
| Add: After-tax Costs of Acquisition | 2,658 | | | — | | | |
| Pre-tax Contingent Earn-Out (Gain) Loss | (11,600) | | | — | | | |
| Tax on Contingent Earn-Out (Gain) Loss | 2,986 | | | — | | | |
| Subtract: After-tax Contingent Earn-Out (Gain) Loss | (8,614) | | | — | | | |
| Adjusted Net Income | $ | 13,018 | | | $ | 47,876 | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | |
| Adjusted Diluted Earnings Per Share | Fiscal Year Ended | | |
| June 30, | | |
| 2021 | | 2020 | | |
| Diluted Earnings Per Share, as reported | $ | 0.20 | | | $ | 1.11 | | | |
| Add: After-tax Restructuring Expense | 0.22 | | | 0.17 | | | |
| Add: After-tax CEO Transition Costs | 0.01 | | | 0.01 | | | |
| Add: After-tax Acquisition-related Amortization | 0.07 | | | — | | | |
| Add: After-tax Acquisition-related Inventory Adjustment | 0.01 | | | — | | | |
| Add: After-tax Costs of Acquisition | 0.07 | | | — | | | |
| Subtract: After-tax Contingent Earn-Out (Gain) Loss | (0.23) | | | — | | | |
| Adjusted Diluted Earnings Per Share | $ | 0.35 | | | $ | 1.29 | | | |
| | | | | |
| | | | | | | | | | | | | |
| Earnings Before Interest, Taxes, Depreciation, and Amortization excluding Restructuring Expense, CEO Transition Costs, Acquisition-related Inventory Valuation Adjustment, Costs of Acquisition, and Contingent Earn-Out (Gain) Loss (“Adjusted EBITDA”) | | | | | |
| | | | | |
| Fiscal Year Ended | | |
| June 30, | | |
| 2021 | | 2020 | | |
| Net Income | $ | 7,416 | | | $ | 41,054 | | | |
| Provision (Benefit) for Income Taxes | (2,806) | | | 15,076 | | | |
| Income Before Taxes on Income | 4,610 | | | 56,130 | | | |
| | | | | |
| | | | | |
| Interest Expense | 453 | | | 79 | | | |
| Interest Income | (336) | | | (1,641) | | | |
| Depreciation | 14,511 | | | 15,107 | | | |
| Amortization | 6,683 | | | 2,402 | | | |
| Restructuring Expense | 10,727 | | | 8,489 | | | |
| CEO Transition Costs | 564 | | | 698 | | | |
| Acquisition-related Inventory Valuation Adjustment | 536 | | | — | | | |
| Costs of Acquisition | 3,579 | | | — | | | |
| Contingent Earn-Out (Gain) Loss | (11,600) | | | — | | | |
| Adjusted EBITDA | $ | 29,727 | | | $ | 81,264 | | | |
| Net Sales | $ | 569,008 | | | $ | 727,859 | | | |
| Net Income % | 1.3 | % | | 5.6 | % | | |
| Adjusted EBITDA % | 5.2 | % | | 11.2 | % | | |
| | | | | |
| | | | | |
| | | | | |
The open ordersorder backlog metric is a key performance indicator representing firm orders placed by our customers which have not yet been fulfilled and are expected to be recognized as revenue during future quarters. The timing of shipments can vary, but generally openthe backlog of orders areis expected to ship within a twelve-monthsix-month period. Adjusted operating income percentage
Return on Invested Capital is also a key performance indicator whichcalculated as: [(Earnings Before Interest, Taxes, Amortization, Restructuring Expense, CEO Transition Costs, Acquisition-related Inventory Valuation Adjustments, Costs of the Acquisition, and Contingent Earn-out Gain/ Loss) multiplied by (1 minus Effective Tax Rate)] divided by (Total Shareholders’ Equity plus Net Debt). Net Debt is defined as adjusted operating income as a percentagecurrent maturities of net sales.long-term debt plus long-term debt less cash, cash equivalents, and short-term investments.
Fair Value
During fiscal year 2018,2021, no financial instruments were affected by a lack of market liquidity. Financial assets classified as level 1 assets were valued using readily available market pricing. For commercial paper and available-for-sale securities classified as level 2 assets, the fair values are determined based on market data which use evaluated pricing models and incorporate available trade, bid, and other
market information. We evaluated the inputs used to value the instruments and validated the accuracy of the instrument fair values based on historical evidence. The investment in stock warrants and non-marketable equity securities without readily determinable fair value of a privately-held company are classified as level 3 financial assets. The stock warrants are accounted for as a derivative instrument valued on a recurring basis considering the pricing of recent purchases or sales if any, of the investment as well as positive and negative qualitative evidence, while the non-marketable equity securities without readily determinable fair value are accounted for as a cost-method investment which carries the securities at cost, except in the event of impairment. Our foreign currency derivatives, which were classified as level 2 liabilities, were valued using observable market inputs such as forward interest rate yield
curves, current spot rates, and time value calculations. To verify the reasonableness of the determined fair values, these derivative fair values were compared to fair values calculated by the counterparty banks. Our own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency derivatives. The contingent earn-out liability incurred in the acquisition of D’style is classified as a levelLevel 3 financial liability and is valued based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the D’style acquisition and a discount rate that captures the risk associated with the liability.
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2018.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due During Fiscal Years Ending June 30 |
| (Amounts in Millions) | Total | | 2019 | | 2020-2021 | | 2022-2023 | | Thereafter |
Recorded Contractual Obligations: (a) | |
| | |
| | | |
| | | |
| | | |
|
Long-Term Debt Obligations (b) | $ | 0.2 |
| | $ | — |
| | | $ | 0.1 |
| | | $ | 0.1 |
| | | $ | — |
|
Other Long-Term Liabilities Reflected on the Balance Sheet (c) (d) (e) | 19.4 |
| | 5.6 |
| | | 3.8 |
| | | 2.7 |
| | | 7.3 |
|
| Unrecorded Contractual Obligations: | | | |
| | | |
| | | |
| | | |
|
Operating Leases (e) | 22.5 |
| | 4.0 |
| | | 6.9 |
| | | 5.7 |
| | | 5.9 |
|
Purchase Obligations (f) | 56.0 |
| | 40.2 |
| | | 8.3 |
| | | 7.5 |
| | | — |
|
Other (b) | 0.1 |
| | — |
| | | 0.1 |
| | | — |
| | | — |
|
| Total | $ | 98.2 |
| | $ | 49.8 |
| | | $ | 19.2 |
| | | $ | 16.0 |
| | | $ | 13.2 |
|
| |
(a) | As of June 30, 2018, we had no Capital Lease Obligations. |
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(b) | Refer to Note 6 - Long-Term Debt and Credit Facilities of Notes to Consolidated Financial Statements for more information regarding Long-Term Debt Obligations. Accrued interest is also included on the Long-Term Debt Obligations line. The fiscal year 2019 amount includes less than $0.1 million of long-term debt obligations due in fiscal year 2019 which were recorded as a current liability. The estimated interest not yet accrued related to debt is included in the Other line item within the Unrecorded Contractual Obligations.
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(c) | The timing of payments of certain items included on the “Other Long-Term Liabilities Reflected on the Balance Sheet” line above is estimated based on the following assumptions: |
The timing of long-term SERP payments is estimated based on an assumed retirement age of 62 with payout based on the prior distribution elections of participants. The fiscal year 2019 amount includes $3.9 million for SERP payments recorded as current liabilities.
The timing of severance plan payments is estimated based on the average remaining service life of employees. The fiscal year 2019 amount includes $0.5 million for severance payments recorded as a current liability.
The timing of warranty payments is estimated based on historical data. The fiscal year 2019 amount includes $0.7 million for short-term warranty payments recorded as a current liability.
The timing of earn-out liability is contingent based upon fiscal year 2018 and 2019 D’style operating income compared to a predetermined target for each fiscal year. The fiscal year 2019 amount includes $0.5 million for earn-out payments recorded as a current liability.
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(d) | Excludes $1.7 million of long-term unrecognized tax benefits and associated accrued interest and penalties along with deferred tax liabilities and miscellaneous other long-term tax liabilities which are not tied to a contractual obligation and for which we cannot make a reasonably reliable estimate of the period of future payments.
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(f) | Purchase Obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. The amounts listed above for purchase obligations include contractual commitments for items such as raw materials, supplies, capital expenditures, services, and software acquisitions/license commitments. Cancellable purchase obligations that we intend to fulfill are also included in the purchase obligations amount listed above through fiscal year 2023. |
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to standby letters of credit, a performance bond, and operating leases entered into in the normal course of business. These arrangements do not have a material current effect and are not reasonably likely to have a material future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. See Note 5 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for more information on the standby letters of credit and the performance bond. We do not have material exposures to trading activities of non-exchange traded contracts.Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in preparation of our consolidated financial statements and are the policies that are most critical in the portrayal of our financial position and results of operations. Management has discussed these critical accounting policies and estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.
Revenue recognition - Revenue is measured as the amount of consideration we expect to receive in exchange for transferring distinct goods or providing services to customers. Our revenue consists substantially of product sales, and is reported net of sales discounts, rebates, incentives, returns, and other allowances offered to customers. We recognize revenue when persuasive evidenceperformance obligations under the terms of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the title and the risk of losscontracts with our customers are satisfied, which occurs when control passes to a customer to enable them to direct the use of and obtain benefit from the product. This typically occurs when a customer obtains legal title, obtains the risks and rewards of ownership, has received the goods according to the contractual shipping terms ofeither at the contract. Titleshipping point or destination, and risk of loss are transferred upon shipmentis obligated to or receipt at our customers’ locations, or in limited circumstances, as determined by other specific sales terms ofpay for the transaction.product. Shipping and handling fees billed to customersactivities are recordedrecognized as sales whilefulfillment activities and are expensed at the related shipping and handling costs are included in cost of goods sold.time revenue is recognized. We recognize sales net of applicable sales tax. Based on estimated product returnstaxes and price concessions,similar revenue-based taxes.
We use judgment in estimating the reduction in net sales driven by customer rebate and incentive programs. Judgments primarily include expected sales levels to be achieved and the corresponding rebate and incentive amounts expected to be earned by dealers and salespersons.
We also use judgment in estimating a reserve for returns and allowances which is recorded at the time of the sale, resultingbased on estimated product returns and price concessions. The reserve for returns and allowances is recorded in accrued expenses on the Consolidated Balance Sheets, and the expense is recorded as a reduction of revenue.net sales in the Consolidated Statements of Income.
We perform ongoing credit evaluations of our customers and impair receivable balances by recording specific allowances for bad debts based on judgment using factors such as current trends, the length of time the receivables are past due, and historical collection experience. The allowance for accounts receivable balances that are determined likely to be uncollectible are a reduction in the receivables line of the Consolidated Balance Sheets, and the expense is recorded in selling and administrative expenses in the Consolidated Statements of Income.
Inventory - Inventories are stated at the lower of cost or market value. Cost includes material, labor, and applicable manufacturing overhead. Costs associated with underutilization of capacity are expensed as incurred. Inventories were valued using the last-in, first-out (“LIFO”) method for approximately 67% and 93% of consolidated inventories at June 30, 2021 and June 30, 2020, respectively, and the remaining inventories were valued using the first-in, first-out (“FIFO”) method and average cost method. Inventory valued using the LIFO method requires judgement in the determination of appropriate indices used for evaluating price level changes and the application of indices to the various types of inventory within LIFO inventory pools. See Note 1 -Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for further information regarding the LIFO calculation. As of June 30, 2021 and 2020, the LIFO reserve was $18.2 million and $16.2 million, respectively. Inventories recorded on our balance sheets are adjusted for excess and obsolete inventory. For inventory using the LIFO method, excess and obsolete inventory is determined based upon FIFO inventory values, but the LIFO reserve is adjusted to prevent recognizing excessive inventory reserves in total. Self-insurance reserves - We are self-insured up to certain limits for autoautomobile and general liability, workers’ compensation, and certain employee health benefits such as medical, short-term disability, and dental, with the related liabilities included in the accompanying financial statements. Our policy is to estimate reserves based upon a number of factors, including known claims, estimated incurred but not reported claims, and other analyses, which are based on historical information, along with certain assumptions about future events. Changes in assumptions for such matters as a result of increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At June 30, 20182021 and June 30, 2017,2020, our accrued liabilities for self-insurance exposure were $4.1$3.0 million and $4.3$2.7 million, respectively.
Taxes
Business Combinations, including Contingent Earn-Out Liability - Deferred income taxes are recognizedWe completed the acquisition of Poppin during the second quarter of fiscal year 2021. The accounting for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existinga business combination requires tangible and intangible assets acquired and liabilities assumed to be recorded at estimated fair value. We valued intangible assets at their estimated fair values at the acquisition date based upon assumptions related to the future cash flows and their respective tax bases.discount rates utilizing currently available information, and in some cases, valuation results from independent valuation specialists. The deferred taxes are measured using enacted tax rates expecteduse of a discounted cash flow analysis requires significant judgment to apply to taxable income inestimate the years in whichfuture cash flows derived from the temporary differences are expected to reverse. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictionsasset and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extendedexpected period of time over which those cash flows will occur and to resolve. However, we believe we have made adequate provision for incomedetermine an appropriate discount rate.
The acquisition purchase price includes contingent payments if revenue and other taxes for all years thatEBITDA milestones are subject to audit. As tax positions are effectively settled, the tax provision will be adjusted accordingly. The liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions, was $1.9 million atachieved through June 30, 20182024. The fair value at initial measurement was $31.8 million, and $2.8 million atas of June 30, 2017.2021, the fair value of the contingent earn-out liability was $20.2 million. We utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process. The fair value of the contingent earn-out liability was estimated using the Monte Carlo Simulation methodology, which is a discounted cash flow method. The fair value determination of the contingent earn-out liability required significant estimates and assumptions related to the forecasts of revenue and EBITDA, and the selection of the discount and volatility rates.
Goodwill - Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions.combinations. Goodwill is assigned to and the fair value is tested at the reporting unit level. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test. We comparetest which compares the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. IfUsing the quantitative test, we determine the fair value of our reporting unit generally using market data, appraised values and discounted cash flow analyses. The use of a discounted cash flow analysis requires significant judgment to estimate the future cash flows derived from the business and the period of time over which those cash flows will occur, as well as to determine an appropriate discount rate. Under the quantitative assessment, if the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date. During fiscal year 2018years 2021 and 2020, no goodwill impairment was recognized. At June 30, 2018,2021 and June 30, 2020, goodwill totaled $8.8 million.
$82.0 million and $11.2 million, respectively.
New Accounting Standards
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk: We hold an investment portfolio of available-for-sale securities, comprised of municipal bonds, certificates of deposit purchased in the secondary market, U.S. Treasury and federal agency securities. As of June 30, 2018, the fair value of the investment portfolio was $34.6 million. Our investment policy dictates that municipal bonds, U.S. Treasury and federal agency securities must be investment grade quality, and all certificates of deposit are Federal Deposit Insurance Corporation insured. These securities are fixed income instruments and will decline in value if market interest rates increase. A hypothetical 100 basis point increase in an annual period in market interest rates from levels at June 30, 2018 would cause the fair value of these investments to decline by an immaterial amount. Further information on investments is provided in Note 12 - Investments of Notes to Consolidated Financial Statements.We also hold a total investment of $2.0 million in a privately-held company, consisting of $0.5 million in non-marketable equity securities and $1.5 million in stock warrants. The fair value of the investment may fluctuate due to events and changes in circumstances, but we have incurred no impairment during fiscal year 2018 or 2017.
Commodity Risk: We are exposed to market risk with respect to commodity price fluctuations for components used in the manufacture of our products, primarily related to wood and wood-related components, steel, aluminum, foam, and plastics. These components are impacted by global pricing pressures, and general economic conditions. The U.S. recently imposed tariffs of 25% on steelconditions, and 10% on aluminum imported from several countries, which could adversely impact our input costs. The government has also recently proposed to expand its list of products subject to tariffs to include furniture products, parts, and components, and if approved, the landed cost of our products could increase materially, which would reduce our net income if we are unable to mitigate the additional cost. We are monitoring this situation, but at this time we are uncertain of the potential impact that these tariffs may have on our results of operations.changes in tariff rates. We strive to offset increases in the cost of these materials through supplier negotiations, global sourcing initiatives, and product re-engineering and parts standardization, and price increases on our products.standardization. We are also exposed to fluctuationfluctuations in transportation costs, which vary based uponmay continue to remain at elevated levels depending on freight carrier capacity and fuel prices. Transportation costs are managed by optimizing logistics and supply chain planning, and increasing pricesplanning.
Interest Rate Risk: We had proceeds from borrowings on our products.revolving credit facility of $40.0 million which was utilized for the Poppin acquisition. The debt has a variable interest rate. In July 2021, we entered an interest rate swap to hedge the variable rate interest rate of our long-term revolving credit facility debt.
Foreign Exchange Rate Risk: We have minimal foreign currency risk and held an immaterial amount ofno derivative instrumentssecurities to hedge foreign currency risk as of June 30, 2018,2021 and none as of June 30, 2017. Further information on derivative financial instruments is provided2020.
Equity Rate Risk: We hold a total investment of $2.0 million in Note 11 - Derivative Instrumentsa privately-held company, consisting of Notes$0.5 million in equity securities without readily determinable fair value and $1.5 million in stock warrants. The fair value of the investment may fluctuate due to Consolidated Financial Statements.
events and changes in circumstances, but we have incurred no impairment during fiscal years 2021 or 2020.
Item 8 - Financial Statements and Supplementary Data
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Kimball International, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting and for the preparation and integrity of the accompanying financial statements and other related information in this report. The consolidated financial statements of the Company and its subsidiaries, including the footnotes, were prepared in accordance with accounting principles generally accepted in the United States of America and include judgments and estimates, which in the opinion of management are applied appropriately. We maintain a system of internal and disclosure controls intended to provide reasonable assurance that assets are safeguarded from loss or material misuse, transactions are authorized and recorded properly, and that the accounting records may be relied upon for the preparation of the financial statements. This system is tested and evaluated regularly for adherence and effectiveness by employees who work within the internal control processes, by our staff of internal auditors, as well as by the independent registered public accounting firm in connection with their annual audit.
Management’s assessment of the effectiveness of internal control over financial reporting excluded D’style,Poppin, an acquisition completed in November 2017 which consisted of certain assets of D’style, Inc. and all of the capital stock of Diseños de Estilo, S.A. de C.V.December 2020. This acquisition represented 7%32% and 2%4% of consolidated total assets and consolidated net sales, respectively, of the Company as of and for the year ended June 30, 2018.2021. Under guidelines established by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their first assessment of internal control over financial reporting within one year of the date of the acquisition.
The Audit Committee of the Board of Directors, which is comprised of directors who are not employees of the Company, meets regularly with management, our internal auditors, and the independent registered public accounting firm to review our financial policies and procedures, our internal control structure, the objectivity of our financial reporting, and the independence of the independent registered public accounting firm. The internal auditors and the independent registered public accounting firm have free and direct access to the Audit Committee, and they meet periodically, without management present, to discuss appropriate matters.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.
These consolidated financial statements are subject to an evaluation of internal control over financial reporting conducted under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, conducted under the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, management concluded that our internal control over financial reporting was effective as of June 30, 2018.2021.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued an audit report on our internal control over financial reporting which is included herein.
| | | | | |
| /s/ KRISTINE L. JUSTER |
| /s/ ROBERT F. SCHNEIDERKristine L. Juster |
| Robert F. Schneider |
| Chairman of the Board, |
| Chief Executive Officer |
| August 28, 201831, 2021 |
| |
| /s/ MICHELLE R. SCHROEDERTIMOTHY J. WOLFE |
| Michelle R. SchroederTimothy J. Wolfe |
| Vice President, |
| Chief Financial Officer |
| August 28, 201831, 2021 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Shareowners of Kimball International, Inc.
Jasper, Indiana
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kimball International, Inc. and subsidiaries (the “Company”) as of June 30, 20182021 and 2017,2020, the related consolidated statements of income, comprehensive income, cash flows, and shareowners’shareholders’ equity, for each of the three years in the period ended June 30, 2018,2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of June 30, 2018,2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018,2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018,2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
As described in Management’s Report on Internal Control overOver Financial Reporting, management excluded from its assessment the internal control over financial reporting at D’style (consisting of certain assets of D’style,Poppin, Inc. and all of the capital stock of Diseños de Estilo, S.A. de C.V.), which was acquired in November 2017on December 9, 2020 and whose financial statements constitute 7%approximately 32% of total assets and 2%4% of net salesrevenues of the consolidated financial statement amounts as of and for the year ended June 30, 2018.2021. Accordingly, our audit did not include the internal control over financial reporting at D’style.
Poppin, Inc.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventory – Last-In, First-Out Reserve — Refer to Notes 1 and 8 to the financial statements
Critical Audit Matter Description
The Company recognizes a substantial portion of its inventory using the last-in, first-out (“LIFO”) method. There is judgment inherent in management's determination of the appropriate indices to use for evaluating price level changes relevant to the determination of the LIFO cost of inventory at each period-end. Further, there is inherent complexity in the accounting for the interaction between the determination of the LIFO reserve and other aspects of inventory valuation such as the analysis of excess and obsolete inventories and the evaluation of the lower of cost or market adjustment.
The LIFO reserve is calculated under the inventory price index computation method in which inventory items are grouped by pools and are priced in terms of each pool’s aggregate base year cost. The result is compared with each pool's aggregate base year cost as of the end of the prior year to determine whether the inventory level of each LIFO pool has increased or whether a portion of the inventory has been liquidated. The determination of the pool’s base year costs involves judgement, particularly as it relates to the process of determining the appropriate indices to apply to the various inventory types within the inventory pools. Additionally, there is judgment involved in determining whether the ending LIFO reserve is sufficient to conclude the inventory is valued at the lower of cost or market. As of June 30, 2021, the LIFO reserve was $18.2 million offset against $72.5 million of FIFO inventory, resulting in net inventory of $54.3 million.
We identified the LIFO reserve as a critical audit matter because of the judgments necessary to determine the appropriate indices for evaluation of price level changes and due to the complexity of interaction between the determination of the LIFO reserve, the excess and obsolete inventory and the lower of cost or market adjustments. This required significant audit effort due to a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to testing the appropriateness of the LIFO reserve included the following, among others:
•We tested the effectiveness of the control over the LIFO reserve calculation, including management’s control over the key inputs of the calculation for inventory valuation.
•We obtained management’s LIFO reserve calculation and performed the following:
◦Evaluated the reconciliation of the gross inventory balances used within the LIFO reserve calculation to the inventory subledger and general ledger.
◦For a sample of individual inventory items, tested the completeness and accuracy of the LIFO reserve calculation by evaluating whether the selected items were included in the LIFO reserve calculation and in the appropriate category based on their assigned index.
◦For a sample of individual inventory items, tested the appropriateness of the assigned index for each selected inventory part by comparing such index category against the nature of the material based on documentary evidence and corroboration with individuals outside of the accounting department.
◦Tested the mathematical accuracy of management’s LIFO pool calculation and the aggregation of the pools to arrive at the final LIFO reserve.
◦Evaluated the Company’s position regarding the adequacy of the excess and obsolete inventory adjustments in comparison to the LIFO reserve in order to record inventory at the lower of cost or market.
Acquisitions – Contingent Earn-Out Liability — Refer to Notes 2 and 14 to the financial statements
Critical Audit Matter Description
The Company completed the acquisition of Poppin, Inc. for $142 million during the second quarter of fiscal year 2021. The acquisition purchase price includes contingent payments if milestones are achieved. The fair value at initial measurement was $31.8 million and as of June 30, 2021, the fair value of the contingent earn-out liability was $20.2 million. Management estimates the fair value of the contingent earn-out liability using the Monte Carlo Simulation methodology, which is a discounted cash flow method. The fair value determination of the contingent earn-out liability required management to make significant estimates and assumptions related to the forecasts of revenue and earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and the selection of the discount rate.
Given the fair value determination of the contingent earn-out liability requires management to make significant estimates and assumptions related to the forecasts of future revenue, future EBITDA, and the selection of the discount rate, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of future revenue, future EBITDA and the selection of the discount rate for the contingent earn-out liability included the following, among others:
•We tested the effectiveness of controls over the valuation of the contingent earn-out liability, including management’s controls over forecasts of future revenue, future EBITDA and the selection of the discount rate.
•We assessed the reasonableness of management’s forecasts of future revenue and future EBITDA by comparing the projections to historical results and certain peer companies.
•We evaluated whether the forecasts of future revenue and future EBITDA were consistent with evidence obtained in other areas of the audit.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by:
◦Testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation.
◦Developing a range of independent estimates and comparing those to the discount rate selected by management.
| | | | | |
| |
| /s/ Deloitte & Touche LLP |
| DELOITTE & TOUCHE LLP |
| Indianapolis, Indiana |
| August 28, 201831, 2021 |
We have served as the Company's auditor since 2002.
KIMBALL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data)
| | | | | | | | | | | |
| June 30,
2021 | | June 30,
2020 |
| ASSETS | | | |
| Current Assets: | | | |
| Cash and cash equivalents | $ | 24,336 | | | $ | 91,798 | |
| Short-term investments | — | | | 5,294 | |
| Receivables, net of allowances of $1,121 and $2,574, respectively | 58,708 | | | 68,365 | |
| Inventories | 54,291 | | | 49,857 | |
| Prepaid expenses and other current assets | 22,012 | | | 16,869 | |
| Assets held for sale | — | | | 215 | |
| Total current assets | 159,347 | | | 232,398 | |
| Property and Equipment, net of accumulated depreciation of $191,757 and $193,641, respectively | 90,623 | | | 92,041 | |
| Right-of-use Operating Lease Assets | 14,654 | | | 16,461 | |
| Goodwill | 81,962 | | | 11,160 | |
| Other Intangible Assets, net of accumulated amortization of $41,796 and $40,442, respectively | 64,478 | | | 13,949 | |
| Deferred Tax Assets | 16,368 | | | 7,485 | |
| Other Assets | 17,163 | | | 12,773 | |
| Total Assets | $ | 444,595 | | | $ | 386,267 | |
| | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current Liabilities: | | | |
| Current maturities of long-term debt | $ | 30 | | | $ | 27 | |
| Accounts payable | 41,537 | | | 40,229 | |
| Customer deposits | 24,438 | | | 19,649 | |
| Current portion of operating lease liability | 6,590 | | | 4,886 | |
| Dividends payable | 3,532 | | | 3,454 | |
| Accrued expenses | 39,115 | | | 41,076 | |
| Total current liabilities | 115,242 | | | 109,321 | |
| Other Liabilities: | | | |
| Long-term debt, less current maturities | 40,079 | | | 109 | |
| Long-term earn-out liability | 20,190 | | | — | |
| Long-term operating lease liability | 12,536 | | | 16,610 | |
| Other | 16,878 | | | 15,431 | |
| Total other liabilities | 89,683 | | | 32,150 | |
| Shareholders’ Equity: | | | |
| Common stock-par value $0.05 per share: | | | |
Class A - Shares authorized: 50,000,000 Shares issued: 188,000 and 193,000, respectively | 9 | | | 10 | |
Class B - Shares authorized: 100,000,000 Shares issued: 42,835,000 and 42,830,000, respectively | 2,142 | | | 2,141 | |
| Additional paid-in capital | 5,298 | | | 3,770 | |
| Retained earnings | 299,034 | | | 305,024 | |
| Accumulated other comprehensive income | 1,980 | | | 2,137 | |
| Less: Treasury stock, at cost, 6,148,000 shares and 6,110,000 shares, respectively | (68,793) | | | (68,286) | |
| Total Shareholders’ Equity | 239,670 | | | 244,796 | |
| Total Liabilities and Shareholders’ Equity | $ | 444,595 | | | $ | 386,267 | |
|
| | | | | | | |
| | June 30,
2018 | | June 30,
2017 |
| ASSETS | | | |
| Current Assets: | | | |
| Cash and cash equivalents | $ | 52,663 |
| | $ | 62,882 |
|
| Short-term investments | 34,607 |
| | 35,683 |
|
| Receivables, net of allowances of $1,317 and $1,626, respectively | 60,984 |
| | 53,909 |
|
| Inventories | 39,509 |
| | 38,062 |
|
| Prepaid expenses and other current assets | 18,523 |
| | 8,050 |
|
| Assets held for sale | 281 |
| | 4,223 |
|
| Total current assets | 206,567 |
| | 202,809 |
|
| Property and Equipment, net of accumulated depreciation of $180,059 and $182,803, respectively | 84,487 |
| | 80,069 |
|
| Goodwill | 8,824 |
| | — |
|
| Other Intangible Assets, net of accumulated amortization of $36,757 and $35,148, respectively | 12,607 |
| | 2,932 |
|
| Deferred Tax Assets | 4,916 |
| | 14,487 |
|
| Other Assets | 12,767 |
| | 13,450 |
|
| Total Assets | $ | 330,168 |
| | $ | 313,747 |
|
| | | | |
| LIABILITIES AND SHAREOWNERS’ EQUITY | |
| | |
|
| Current Liabilities: | |
| | |
|
| Current maturities of long-term debt | $ | 23 |
| | $ | 27 |
|
| Accounts payable | 48,214 |
| | 44,730 |
|
| Customer deposits | 21,253 |
| | 20,516 |
|
| Sale-leaseback financing obligation | — |
| | 3,752 |
|
| Dividends payable | 2,662 |
| | 2,296 |
|
| Accrued expenses | 49,294 |
| | 49,018 |
|
| Total current liabilities | 121,446 |
| | 120,339 |
|
| Other Liabilities: | |
| | |
|
| Long-term debt, less current maturities | 161 |
| | 184 |
|
| Other | 15,537 |
| | 17,020 |
|
| Total other liabilities | 15,698 |
| | 17,204 |
|
| Shareowners’ Equity: | |
| | |
|
| Common stock-par value $0.05 per share: | |
| | |
|
Class A - Shares authorized: 50,000,000 Shares issued: 264,000 and 280,000, respectively | 13 |
| | 14 |
|
Class B - Shares authorized: 100,000,000 Shares issued: 42,761,000 and 42,744,000, respectively | 2,138 |
| | 2,137 |
|
| Additional paid-in capital | 1,881 |
| | 2,971 |
|
| Retained earnings | 249,945 |
| | 230,763 |
|
| Accumulated other comprehensive income | 1,816 |
| | 1,115 |
|
| Less: Treasury stock, at cost, 5,901,000 shares and 5,726,000 shares, respectively | (62,769 | ) | | (60,796 | ) |
| Total Shareowners’ Equity | 193,024 |
| | 176,204 |
|
| Total Liabilities and Shareowners’ Equity | $ | 330,168 |
| | $ | 313,747 |
|
KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
| | | | | | | | | | | | | | | | | |
| Year Ended June 30 |
| 2021 | | 2020 | | 2019 |
| Net Sales | $ | 569,008 | | | $ | 727,859 | | | $ | 768,070 | |
| Cost of Sales | 386,580 | | | 477,098 | | | 513,518 | |
| Gross Profit | 182,428 | | | 250,761 | | | 254,552 | |
| Selling and Administrative Expenses | 181,780 | | | 187,885 | | | 204,140 | |
| Contingent Earn-Out (Gain) Loss | (11,600) | | | — | | | — | |
| Restructuring Expense | 10,727 | | | 8,489 | | | 937 | |
| Operating Income | 1,521 | | | 54,387 | | | 49,475 | |
| Other Income (Expense): | | | | | |
| Interest income | 336 | | | 1,641 | | | 1,931 | |
| Interest expense | (453) | | | (79) | | | (174) | |
| Non-operating income | 3,860 | | | 932 | | | 978 | |
| Non-operating expense | (654) | | | (751) | | | (540) | |
| Other income (expense), net | 3,089 | | | 1,743 | | | 2,195 | |
| Income Before Taxes on Income | 4,610 | | | 56,130 | | | 51,670 | |
| Provision (Benefit) for Income Taxes | (2,806) | | | 15,076 | | | 12,326 | |
| Net Income | $ | 7,416 | | | $ | 41,054 | | | $ | 39,344 | |
| | | | | |
| Earnings Per Share of Common Stock: | | | | | |
| Basic Earnings Per Share | $ | 0.20 | | | $ | 1.11 | | | $ | 1.07 | |
| Diluted Earnings Per Share | $ | 0.20 | | | $ | 1.11 | | | $ | 1.06 | |
| | | | | |
| Class A and B Common Stock: | | | | | |
| Average Number of Shares Outstanding - Basic | 36,901 | | | 36,883 | | | 36,842 | |
| Average Number of Shares Outstanding - Diluted | 37,372 | | | 37,037 | | | 37,064 | |
|
| | | | | | | | | | | |
| | Year Ended June 30 |
| | 2018 | | 2017 | | 2016 |
| Net Sales | $ | 685,600 |
| | $ | 669,934 |
| | $ | 635,102 |
|
| Cost of Sales | 464,154 |
| | 446,629 |
| | 431,298 |
|
| Gross Profit | 221,446 |
| | 223,305 |
| | 203,804 |
|
| Selling and Administrative Expenses | 170,383 |
| | 168,474 |
| | 162,979 |
|
| Restructuring (Gain) Expense | — |
| | (1,832 | ) | | 7,328 |
|
| Operating Income | 51,063 |
| | 56,663 |
| | 33,497 |
|
| Other Income (Expense): | |
| | |
| | |
|
| Interest income | 1,057 |
| | 536 |
| | 275 |
|
| Interest expense | (221 | ) | | (37 | ) | | (22 | ) |
| Non-operating income | 953 |
| | 1,276 |
| | 79 |
|
| Non-operating expense | (527 | ) | | (420 | ) | | (439 | ) |
| Other income (expense), net | 1,262 |
| | 1,355 |
| | (107 | ) |
| Income Before Taxes on Income | 52,325 |
| | 58,018 |
| | 33,390 |
|
| Provision for Income Taxes | 17,886 |
| | 20,512 |
| | 12,234 |
|
| Net Income | $ | 34,439 |
| | $ | 37,506 |
| | $ | 21,156 |
|
| | | | | | |
| Earnings Per Share of Common Stock: | | | | | |
| Basic Earnings Per Share | $ | 0.92 |
| | $ | 1.00 |
| | $ | 0.56 |
|
| Diluted Earnings Per Share | $ | 0.92 |
| | $ | 0.99 |
| | $ | 0.56 |
|
| | | | | | |
| Class A and B Common Stock: | | | | | |
| Average Number of Shares Outstanding - Basic | 37,314 |
| | 37,334 |
| | 37,462 |
|
| Average Number of Shares Outstanding - Diluted | 37,494 |
| | 37,833 |
| | 37,852 |
|
KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, 2021 | | Year Ended June 30, 2020 | | Year Ended June 30, 2019 |
| Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
| Net income | | | | | $ | 7,416 | | | | | | | $ | 41,054 | | | | | | | $ | 39,344 | |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | $ | (44) | | | $ | 12 | | | $ | (32) | | | $ | 12 | | | $ | (3) | | | $ | 9 | | | $ | 73 | | | $ | (19) | | | $ | 54 | |
| | | | | | | | | | | | | | | | | |
| Postemployment severance actuarial change | 258 | | | (66) | | | 192 | | | 596 | | | (154) | | | 442 | | | 484 | | | (124) | | | 360 | |
| Derivative gain (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (11) | | | 2 | | | (9) | |
| Reclassification to (earnings) loss: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Amortization of actuarial change | (427) | | | 110 | | | (317) | | | (338) | | | 87 | | | (251) | | | (404) | | | 104 | | | (300) | |
| Derivatives | — | | | — | | | — | | | — | | | — | | | — | | | 21 | | | (5) | | | 16 | |
| Other comprehensive income (loss) | $ | (213) | | | $ | 56 | | | $ | (157) | | | $ | 270 | | | $ | (70) | | | $ | 200 | | | $ | 163 | | | $ | (42) | | | $ | 121 | |
| Total comprehensive income | | | | | $ | 7,259 | | | | | | | $ | 41,254 | | | | | | | $ | 39,465 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, 2018 | | Year Ended June 30, 2017 | | Year Ended June 30, 2016 |
| | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
| Net income | | | | | $ | 34,439 |
| | | | | | $ | 37,506 |
| | | | | | $ | 21,156 |
|
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | $ | (11 | ) | | $ | 3 |
| | $ | (8 | ) | | $ | (34 | ) | | $ | 13 |
| | $ | (21 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Postemployment severance actuarial change | 895 |
| | (296 | ) | | 599 |
| | 186 |
| | (72 | ) | | 114 |
| | 576 |
| | (225 | ) | | 351 |
|
| Derivative gain (loss) | (10 | ) | | 3 |
| | (7 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Reclassification to (earnings) loss: | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | 4 |
| | (1 | ) | | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of actuarial change | (260 | ) | | 84 |
| | (176 | ) | | (473 | ) | | 184 |
| | (289 | ) | | (441 | ) | | 172 |
| | (269 | ) |
| Other comprehensive income (loss) | $ | 618 |
| | $ | (207 | ) | | $ | 411 |
| | $ | (321 | ) | | $ | 125 |
| | $ | (196 | ) | | $ | 135 |
| | $ | (53 | ) | | $ | 82 |
|
| Total comprehensive income | |
| | |
| | $ | 34,850 |
| | |
| | |
| | $ | 37,310 |
| | |
| | |
| | $ | 21,238 |
|
KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended June 30 |
| 2021 | | 2020 | | 2019 |
| Cash Flows From Operating Activities: | | | | | |
| Net income | $ | 7,416 | | | $ | 41,054 | | | $ | 39,344 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 14,511 | | | 15,107 | | | 14,803 | |
| Amortization | 6,683 | | | 2,402 | | | 1,777 | |
| Loss (Gain) on sales of assets | (80) | | | 81 | | | (1,117) | |
| Restructuring and asset impairment charges | 2,998 | | | 4,493 | | | — | |
| Deferred income tax and other deferred charges | (3,019) | | | 1,206 | | | (3,807) | |
| Stock-based compensation | 5,676 | | | 4,919 | | | 6,617 | |
| | | | | |
| Change in long-term earn-out liability | (11,600) | | | — | | | — | |
| Other, net | (1,427) | | | 3,096 | | | (1,456) | |
| Change in operating assets and liabilities: | | | | | |
| Receivables | 12,717 | | | (5,247) | | | (338) | |
| Inventories | 11,185 | | | (3,045) | | | (4,505) | |
| Prepaid expenses and other current assets | (3,503) | | | (3,105) | | | 4,894 | |
| Accounts payable | (6,643) | | | (8,341) | | | (1,298) | |
| Customer deposits | 2,744 | | | (4,962) | | | 2,480 | |
| Accrued expenses | (10,364) | | | (17,860) | | | 7,573 | |
| Net cash provided by operating activities | 27,294 | | | 29,798 | | | 64,967 | |
| Cash Flows From Investing Activities: | | | | | |
| Capital expenditures | (14,490) | | | (17,551) | | | (19,693) | |
| Proceeds from sales of assets | 821 | | | 84 | | | 1,291 | |
| Cash paid for acquisitions | (101,478) | | | — | | | (4,288) | |
| Purchases of capitalized software | (5,044) | | | (3,525) | | | (1,278) | |
| Purchases of available-for-sale securities | (10,000) | | | (24,977) | | | (40,778) | |
| Maturities of available-for-sale securities | 15,250 | | | 52,884 | | | 42,406 | |
| Other, net | (1,043) | | | (774) | | | 154 | |
| Net cash provided by (used for) investing activities | (115,984) | | | 6,141 | | | (22,186) | |
| Cash Flows From Financing Activities: | | | | | |
| | | | | |
| | | | | |
| Repayments of long-term debt | (27) | | | (25) | | | (23) | |
| | | | | |
| Proceeds from long-term debt | 40,000 | | | — | | | — | |
| Dividends paid to shareholders | (13,285) | | | (12,921) | | | (11,435) | |
| Repurchases of Common Stock | (3,553) | | | (3,004) | | | (9,132) | |
| | | | | |
| | | | | |
| Repurchase of employee shares for tax withholding | (1,162) | | | (1,382) | | | (1,675) | |
| Net cash provided by (used for) financing activities | 21,973 | | | (17,332) | | | (22,265) | |
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash (1) | (66,717) | | | 18,607 | | | 20,516 | |
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year (1) | 92,444 | | | 73,837 | | | 53,321 | |
Cash, Cash Equivalents, and Restricted Cash at End of Year (1) | $ | 25,727 | | | $ | 92,444 | | | $ | 73,837 | |
| Supplemental Disclosure of Cash Flow Information | | | | | |
| Non-cash items: | | | | | |
| Initial contingent earn-out liability for Poppin, Inc. acquisition | $ | 31,790 | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | |
| | Year Ended June 30 |
| | 2018 | | 2017 | | 2016 |
| Cash Flows From Operating Activities: | | | | | |
| Net income | $ | 34,439 |
| | $ | 37,506 |
| | $ | 21,156 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
|
| Depreciation and amortization | 15,470 |
| | 15,553 |
| | 14,996 |
|
| (Gain) Loss on sales of assets | (2,050 | ) | | (3,148 | ) | | 181 |
|
| Restructuring and asset impairment charges | — |
| | 241 |
| | 153 |
|
| Deferred income tax and other deferred charges | 9,082 |
| | (1,580 | ) | | 2,523 |
|
| Stock-based compensation | 4,179 |
| | 6,303 |
| | 5,558 |
|
| Other, net | 984 |
| | (125 | ) | | 201 |
|
| Change in operating assets and liabilities: | | | | | |
| Receivables | (5,682 | ) | | (3,550 | ) | | 4,874 |
|
| Inventories | 8 |
| | 2,876 |
| | (3,304 | ) |
| Prepaid expenses and other current assets | (6,741 | ) | | 2,694 |
| | 459 |
|
| Accounts payable | 3,062 |
|
| 1,998 |
|
| 2,874 |
|
| Customer deposits | (2,347 | ) | | 1,891 |
| | 7 |
|
| Accrued expenses | (3,538 | ) | | 4,185 |
| | (326 | ) |
| Net cash provided by operating activities | 46,866 |
| | 64,844 |
| | 49,352 |
|
| Cash Flows From Investing Activities: | |
| | |
| | |
|
| Capital expenditures | (21,575 | ) | | (11,751 | ) | | (15,028 | ) |
| Proceeds from sales of assets | 5,817 |
| | 13,200 |
| | 290 |
|
| Cash paid for acquisition | (18,201 | ) | | — |
| | — |
|
| Purchases of capitalized software | (724 | ) | | (982 | ) | | (1,138 | ) |
| Purchases of available-for-sale securities | (42,497 | ) | | (42,059 | ) | | — |
|
| Maturities of available-for-sale securities | 42,839 |
| | 5,941 |
| | — |
|
| Other, net | (875 | ) | | (525 | ) | | (1,007 | ) |
| Net cash used for investing activities | (35,216 | ) | | (36,176 | ) | | (16,883 | ) |
| Cash Flows From Financing Activities: | |
| | |
| | |
|
| Net change in capital leases and long-term debt | (27 | ) | | (30 | ) | | (27 | ) |
| Proceeds from sale-leaseback financing obligation | — |
| | 3,752 |
| | — |
|
| Dividends paid to Shareowners | (10,084 | ) | | (8,783 | ) | | (8,078 | ) |
| Repurchases of Common Stock | (8,936 | ) | | (6,665 | ) | | (9,665 | ) |
| Repurchase of employee shares for tax withholding | (2,822 | ) | | (1,636 | ) | | (1,784 | ) |
| Net cash used for financing activities | (21,869 | ) | | (13,362 | ) | | (19,554 | ) |
| Net (Decrease) Increase in Cash and Cash Equivalents | (10,219 | ) | | 15,306 |
| | 12,915 |
|
| Cash and Cash Equivalents at Beginning of Year | 62,882 |
| | 47,576 |
| | 34,661 |
|
| Cash and Cash Equivalents at End of Year | $ | 52,663 |
| | $ | 62,882 |
| | $ | 47,576 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | June 30,
2021 | | June 30,
2020 | | June 30,
2019 | | June 30,
2018 |
| Cash and Cash Equivalents | $ | 24,336 | | | $ | 91,798 | | | $ | 73,196 | | | $ | 52,663 | |
| Restricted Cash Included in Other Assets | 1,391 | | | 646 | | | 641 | | | 658 | |
| Total Cash, Cash Equivalents, and Restricted Cash at End of Year | $ | 25,727 | | | $ | 92,444 | | | $ | 73,837 | | | $ | 53,321 | |
KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS’SHAREHOLDERS’ EQUITY
(Amounts in Thousands, Except for Share and Per Share Data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Shareholders’ Equity |
| Class A | | Class B | |
| Amounts at June 30, 2018 | $ | 13 | | | $ | 2,138 | | | $ | 1,881 | | | $ | 249,945 | | | $ | 1,816 | | | $ | (62,769) | | | $ | 193,024 | |
| Net income | | | | | | | 39,344 | | | | | | | 39,344 | |
| Other comprehensive income (loss) | | | | | | | | | 121 | | | | | 121 | |
| Issuance of non-restricted stock (42,000 shares) | | | | | (563) | | | | | | | 552 | | | (11) | |
Conversion of Class A to Class B common stock (13,000 shares) | (1) | | | 1 | | | | | | | | | | | — | |
| Compensation expense related to stock incentive plans | | | | | 6,617 | | | | | | | | | 6,617 | |
| Performance share issuance (81,000 shares) | | | | | (1,717) | | | | | | | 1,061 | | | (656) | |
| Restricted share units issuance (106,000 shares) | | | | | (2,125) | | | | | | | 1,379 | | | (746) | |
| Relative total shareholder return performance units issuance (27,000 shares) | | | | | (523) | | | | | | | 350 | | | (173) | |
| | | | | | | | | | | | | |
| Repurchase of Common Stock (567,000 shares) | | | | | | | | | | | (9,132) | | | (9,132) | |
| Dividends declared ($0.32 per share) | | | | | | | (11,898) | | | | | | | (11,898) | |
| Amounts at June 30, 2019 | $ | 12 | | | $ | 2,139 | | | $ | 3,570 | | | $ | 277,391 | | | $ | 1,937 | | | $ | (68,559) | | | $ | 216,490 | |
| Net income | | | | | | | 41,054 | | | | | | | 41,054 | |
| Other comprehensive income (loss) | | | | | | | | | 200 | | | | | 200 | |
| Issuance of non-restricted stock (34,000 shares) | | | | | (440) | | | | | | | 440 | | | — | |
Conversion of Class A to Class B common stock (58,000 shares) | (2) | | | 2 | | | (21) | | | | | | | 21 | | — | |
| Compensation expense related to stock incentive plans | | | | | 5,454 | | | | | | | | | 5,454 | |
| Performance share issuance (67,000 shares) | | | | | (1,391) | | | | | | | 879 | | | (512) | |
| Restricted share units issuance (99,000 shares) | | | | | (1,768) | | | | | | | 1,313 | | | (455) | |
| Relative total shareholder return performance units issuance (48,000 shares) | | | | | (954) | | | | | | | 624 | | | (330) | |
| | | | | | | | | | | | | |
| Reclassification of equity-classified awards | | | | | (680) | | | | | | | | | (680) | |
| Repurchase of Common Stock (146,000 shares) | | | | | | | | | | | (3,004) | | | (3,004) | |
| Dividends declared ($0.36 per share) | | | | | | | (13,421) | | | | | | | (13,421) | |
| Amounts at June 30, 2020 | $ | 10 | | | $ | 2,141 | | | $ | 3,770 | | | $ | 305,024 | | | $ | 2,137 | | | $ | (68,286) | | | $ | 244,796 | |
| Net income | | | | | | | 7,416 | | | | | | | 7,416 | |
| Other comprehensive income (loss) | | | | | | | | | (157) | | | | | (157) | |
| Issuance of non-restricted stock (45,000 shares) | | | | | (617) | | | | | | | 594 | | | (23) | |
Conversion of Class A to Class B common stock (5,000 shares) | (1) | | | 1 | | | | | | | | | | | — | |
| Compensation expense related to stock incentive plans | | | | | 5,676 | | | | | | | | | 5,676 | |
| | | | | | | | | | | | | |
| Restricted share units issuance (163,000 shares) | | | | | (2,945) | | | | | | | 2,140 | | | (805) | |
| Relative total shareholder return performance units issuance (32,000 shares) | | | | | (586) | | | | | | | 430 | | | (156) | |
| Cumulative effect of change in accounting principle | | | | | | | 134 | | | | | | 134 | |
| Repurchase of Common Stock (278,000 shares) | | | | | | | | | | | (3,671) | | | (3,671) | |
| Dividends declared ($0.36 per share) | | | | | | | (13,540) | | | | | | | (13,540) | |
| Amounts at June 30, 2021 | $ | 9 | | | $ | 2,142 | | | $ | 5,298 | | | $ | 299,034 | | | $ | 1,980 | | | $ | (68,793) | | | $ | 239,670 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Shareowners’ Equity |
| | Class A | | Class B | |
| Amounts at June 30, 2015 | $ | 19 |
| | $ | 2,132 |
| | $ | 3,445 |
| | $ | 194,372 |
| | $ | 1,229 |
| | $ | (59,692 | ) | | $ | 141,505 |
|
| Adjustment of Kimball Electronics, Inc. distribution | | | | |
|
| | (4 | ) | |
|
| | | | (4 | ) |
| Net income | | | | | | | 21,156 |
| | | | | | 21,156 |
|
| Other comprehensive income | | | | | | | | | 82 |
| | | | 82 |
|
| Issuance of non-restricted stock (44,000 shares) | | | | | (1,058 | ) | | | | | | 950 |
| | (108 | ) |
Conversion of Class A to Class B
common stock (94,000 shares) | (5 | ) | | 5 |
| |
|
| | | | | | | | — |
|
| Compensation expense related to stock incentive plans | | | | | 5,558 |
| | | | | | | | 5,558 |
|
| Performance share issuance (235,000 shares) | | | | | (3,445 | ) | | (2,132 | ) | | | | 4,424 |
| | (1,153 | ) |
| Restricted share units issuance (56,000 shares) | | | | | (1,583 | ) | | | | | | 1,389 |
| | (194 | ) |
| Repurchase of Common Stock (736,000 shares) | | | | | | | | | | | (8,686 | ) | | (8,686 | ) |
| Dividends declared ($0.22 per share) | | | | | | | (8,288 | ) | | | | | | (8,288 | ) |
| Amounts at June 30, 2016 | $ | 14 |
| | $ | 2,137 |
| | $ | 2,917 |
| | $ | 205,104 |
| | $ | 1,311 |
| | $ | (61,615 | ) | | $ | 149,868 |
|
| Net income | | | | | | | 37,506 |
| | | | | | 37,506 |
|
| Other comprehensive income | | | | | | | | | (196 | ) | | | | (196 | ) |
| Issuance of non-restricted stock (49,000 shares) | | | | | (1,205 | ) | | | | | | 1,204 |
| | (1 | ) |
Conversion of Class A to Class B
common stock (11,000 shares) | — |
| | — |
| | | | | | | | | | — |
|
| Compensation expense related to stock incentive plans | | | | | 6,303 |
| | | | | | | | 6,303 |
|
| Performance share issuance (192,000 shares) | | | | | (3,096 | ) | | (2,823 | ) | | | | 4,751 |
| | (1,168 | ) |
| Restricted share units issuance (61,000 shares) | | | | | (1,948 | ) | | | | | | 1,529 |
| | (419 | ) |
| Repurchase of Common Stock (516,000 shares) | | | | | | | | | | | (6,665 | ) | | (6,665 | ) |
| Dividends declared ($0.24 per share) | | | | | | | (9,024 | ) | | | | | | (9,024 | ) |
| Amounts at June 30, 2017 | $ | 14 |
| | $ | 2,137 |
| | $ | 2,971 |
| | $ | 230,763 |
| | $ | 1,115 |
| | $ | (60,796 | ) | | $ | 176,204 |
|
| Net income | | | | | | | 34,439 |
| | | | | | 34,439 |
|
| Other comprehensive income | | | | | | | | | 411 |
| | | | 411 |
|
| Issuance of non-restricted stock (39,000 shares) | | | | | (624 | ) | | | | | | 624 |
| | — |
|
Conversion of Class A to Class B
common stock (16,000 shares) | (1 | ) | | 1 |
| | | | | | | | | | — |
|
| Compensation expense related to stock incentive plans | | | | | 4,179 |
| | | | | | | | 4,179 |
|
| Performance share issuance (226,000 shares) | | | | | (2,261 | ) | | (4,463 | ) | | | | 4,622 |
| | (2,102 | ) |
| Restricted share units issuance (58,000 shares) | | | | | (1,101 | ) | | | | | | 760 |
| | (341 | ) |
| Relative total shareholder return performance units issuance (38,000 shares) | | | | | (1,283 | ) | | | | | | 957 |
| | (326 | ) |
| Reclassification of change in enacted income tax rate to retained earnings | | | | | | | (290 | ) | | 290 |
| | | | — |
|
| Repurchase of Common Stock (536,000 shares) | | | | | | | | | | | (8,936 | ) | | (8,936 | ) |
| Dividends declared ($0.28 per share) | | | | | | | (10,504 | ) | | | | | | (10,504 | ) |
| Amounts at June 30, 2018 | $ | 13 |
| | $ | 2,138 |
| | $ | 1,881 |
| | $ | 249,945 |
| | $ | 1,816 |
| | $ | (62,769 | ) | | $ | 193,024 |
|
KIMBALL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts of all subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation.
Operating Segments: We sell a Our operating segments are aligned with our four business units: Workplace, Health, Hospitality, and eBusiness. Our portfolio of furniture products and services are sold across all business units under threeour family of brands: Kimball, National, Etc., Interwoven, Kimball Hospitality, D’Style, and Kimball Hospitality. We consider each of the three brands to bePoppin. Our 4 operating segments which aggregate into one1 reportable segment. The brands operate within six market verticals, sellingsegment as they share similar long-term economic characteristics, use similar production and distribution processes, and sell to similar types of customers. Our products and services are similar in nature and utilize similar production and distribution processes. Our three brands share similar long-term economic characteristics.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts included in the consolidated financial statements and related note disclosures. While efforts are made to assure estimates used are reasonably accurate based on management’s knowledge of current events, actual results could differ from those estimates.
Revenue Recognition: Revenue is measured as the amount of consideration we expect to receive in exchange for transferring distinct goods or providing services to customers. Our revenue consists substantially of product sales, and is reported net of sales discounts, rebates, incentives, returns, and other allowances offered to customers. We recognize revenue when persuasive evidenceperformance obligations under the terms of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the title and the risk of losscontracts with our customers are satisfied, which occurs when control passes to a customer to enable them to direct the use of and obtain benefit from the product. This typically occurs when a customer obtains legal title, obtains the risks and rewards of ownership, has received the goods according to the contractual shipping terms ofeither at the contract. Titleshipping point or destination, and risk of loss are transferred upon shipmentis obligated to or receipt at our customers’ locations, or in limited circumstances, as determined by other specific sales terms ofpay for the transaction.product. Shipping and handling fees billed to customersactivities are recordedrecognized as sales whilefulfillment activities and are expensed at the related shipping and handling costs are included in cost of goods sold.time revenue is recognized. We recognize sales net of applicable sales tax. Based on estimated product returnstaxes and price concessions,similar revenue-based taxes. We use judgment in estimating the reduction in net sales driven by customer rebate and incentive programs. Judgments primarily include expected sales levels to be achieved and the corresponding rebate and incentive amounts expected to be earned by dealers and salespersons. We also use judgment in estimating a reserve for returns and allowances which is recorded at the time of the sale, resultingbased on estimated product returns and price concessions. The reserve for returns and allowances is recorded in Accrued Expenses on the Consolidated Balance Sheets, and the expense is recorded as a reduction of revenue.Net Sales in the Consolidated Statements of Income. We perform ongoing credit evaluations of our customers and impair receivable balances by recording specific allowances for bad debts based on judgment using factors such as current trends, the length of time the receivables are past due, and historical collection experience. The allowance for accounts receivable balances that are determined likely to be uncollectible are a reduction in the Receivables line of the Consolidated Balance Sheets, and the expense is recorded in Selling and Administrative Expenses in the Consolidated Statements of Income.
Cash and Cash Equivalents: Cash equivalents consist primarily of highly liquid investments with original maturities of three months or less at the time of acquisition. Cash and cash equivalents consist of bank accounts and money market funds, and commercial paper.funds. Bank accounts are stated at cost, which approximates fair value, and money market funds and commercial paper are stated at fair value.
Short-Term Investments: Short-term investments consist primarily of municipal bonds, certificates of deposit purchased in the secondary market, and U.S. Treasury and federal agency securities. Municipal bonds include general obligation bonds and revenue bonds, some of which are pre-refunded. U.S. Treasury securities represent Treasury Bills and Notes of the U.S. government. Federal agency securities represent debt securities of a U.S. government sponsored agency, some of which are callable. Our investment policy dictates that municipal bonds, U.S. Treasury and federal agency securities must be investment grade quality. Our secondarymarket. Secondary market certificates of deposit are classified as investment securities, being purchased in the secondary market through a broker and available to be sold in the secondary market. AllOur investment policy dictates that certificates of deposit aremust be FDIC insured. All investments have maturities exceeding three months and are classified as available-for-sale securities which are recorded at fair value. Unrealized losses on available-for-sale securities are recognized in earnings when there is intent to sell or it is likely to be required to sell before recovery of the loss, or when the available-for-sale securities have incurred a credit loss. Otherwise, unrealized gains and losses are recorded net of the tax-related effect as a component of Shareowners’Shareholders’ Equity.
Notes Receivable and Trade Accounts Receivable: Our notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.
Our policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable includes analysisconsiders several factors including historical write-off experience, overall customer credit quality in relation to general economic and market conditions, and specific customer account analyses to estimate the collectability of certain accounts. The specific customer account analyses considers such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for credit losses on the trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed
uncollectible. Our limited amount of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses. Customary terms require payment within 30 days, with terms beyond 30 days being considered extended.
Inventories: Inventories are stated at the lower of cost or market value. Cost includes material, labor, and applicable manufacturing overhead. Costs associated with underutilization of capacity are expensed as incurred. TheInventory cost was determined using the last-in, first-out (“LIFO”) method was used for approximately 92%67% and 94%93% of consolidated inventories at June 30, 20182021 and June 30, 2017,
2020, respectively. The remaining inventories were valued using the first-in, first-out (“FIFO”) method and average cost method.
The cost of inventory valued under the LIFO method is calculated using the inventory price index computation (“IPIC”) method, in which external indexes are used to calculate inflation for the purpose of valuing LIFO inventories. Under this method, inventory is grouped into LIFO pools consisting of inventory with similar productive activities, including methods of obtaining, processing, and selling inventory. A cumulative inflation index is computed for each LIFO pool, calculated as the weighted average inflation rate of the various inventory categories making up the pool. Our source of LIFO inflation indices is the producer price index (“PPI”) published by the U.S. Bureau of Labor Statistics. We assign PPI categories to similar types of inventory items in order to measure inflation for each type of inventory. The pools’ cumulative indexes are used to deflate the inventory current-year cost to base period prices, which is then compared to the prior year’s inventory valued at base period prices. If the current year’s inventory at base is greater than the previous year’s inventory at base, the increment is multiplied by the pool cumulative inflation index to price the LIFO layer. If the current year’s inventory at base is less than the previous year’s inventory at base, the decrement erodes a previous LIFO layer and is priced using the index originally used to price the layer. A LIFO reserve is calculated as the difference between the FIFO value and the total computed LIFO layers. The LIFO reserve reduces the value of FIFO inventory to LIFO cost. During periods of rising prices, the LIFO method generally results in higher current costs being charged against income while lower costs are retained in inventories. Conversely, during periods of decreasing prices, the LIFO method generally results in lower current costs being charged against income and higher stated inventories.
Inventories are adjusted for excess and obsolete inventory. Evaluation of excess inventory includes such factors as anticipated usage, inventory turnover, inventory levels, and product demand levels. Factors considered when evaluating obsolescence include the age of on-hand inventory and reduction in value due to damage, use as showroom samples, design changes, or cessation of product lines. For inventory valued using the LIFO method, excess and obsolete inventory is determined based upon FIFO inventory values, but the LIFO reserve is adjusted to prevent recognizing excessive inventory reserves in total.
Property, Equipment, and Depreciation: Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful life of the assets using the straight-line method for financial reporting purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. Major maintenance activities and improvements are capitalized; other maintenance, repairs, and minor renewals are expensed. Depreciation and expenses for maintenance, repairs and minor renewals are included in both the Cost of Sales line and the Selling and Administrative ExpenseExpenses line of the Consolidated Statements of Income.
Impairment of Long-Lived Assets: We perform reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Assets to be disposed of are recorded at the lower of net book value or fair market value less cost to sell at the date management commits to a plan of disposal.
Business Combinations: The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired business are included in our operating results from the day of acquisition. Any contingent earn-out liability is assessed quarterly and is recorded at fair value as of the reporting date.
Goodwill and Other Intangible Assets: Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Goodwill is assigned to and the fair value is tested at the reporting unit level. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test. We comparetest which compares the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. IfUnder the quantitative assessment, if the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. Goodwill is assigned to
During the quarter ended June 30, 2020, as a result of a deterioration of our industry conditions and a decline in our forecasted revenues driven by the fair value isCOVID-19 pandemic, we quantitatively tested at the reporting unit level.our goodwill for impairment, and concluded no impairment of goodwill. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date. During fiscal year 2018years 2021 and 2019, no goodwill impairment was recognized.
During fiscal year 2018,2021, we recorded $8.8$70.8 million and $10.7 million, respectively, in goodwill and other intangible assets from the acquisition of D’style,Poppin, Inc. See Note 2 - Acquisition to Consolidated Financial Statements for more information on this acquisition. Other Intangible Assets reported on the Consolidated Balance Sheets consist of capitalized software, product rights,acquired technology, customer relationships, trade names, non-compete agreements and non-compete agreements.patents and trademarks. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. During the quarter ended June 30, 2020, as a result of a deterioration of our industry conditions and a decline in our forecasted revenues driven by the COVID-19 pandemic, we assessed our customer relationship intangible assets for impairment, and concluded no impairment. A summary of intangible assets subject to amortization is as follows:
| | | | June 30, 2018 | | June 30, 2017 | | June 30, 2021 | | June 30, 2020 |
| (Amounts in Thousands) | Cost | | Accumulated Amortization | | Net Value | | Cost | | Accumulated Amortization | | Net Value | (Amounts in Thousands) | Cost | | Accumulated Amortization | | Net Value | | Cost | | Accumulated Amortization | | Net Value |
| Capitalized Software | $ | 38,482 |
| | $ | 35,922 |
| | $ | 2,560 |
| | $ | 37,918 |
| | $ | 34,986 |
| | $ | 2,932 |
| Capitalized Software | $ | 43,200 | | | $ | 34,058 | | | $ | 9,142 | | | $ | 43,671 | | | $ | 37,566 | | | $ | 6,105 | |
| Product Rights | 162 |
| | 162 |
| | — |
| | 162 |
| | 162 |
| | — |
| |
| Acquired Technology | | Acquired Technology | 7,000 | | | 559 | | | 6,441 | | | — | | | — | | | — | |
| Customer Relationships | 7,050 |
| | 422 |
| | 6,628 |
| | — |
| | — |
| | — |
| Customer Relationships | 19,050 | | | 3,936 | | | 15,114 | | | 7,050 | | | 1,871 | | | 5,179 | |
| Trade Names | 3,570 |
| | 238 |
| | 3,332 |
| | — |
| | — |
| | — |
| Trade Names | 36,570 | | | 3,154 | | | 33,416 | | | 3,570 | | | 952 | | | 2,618 | |
| Non-Compete Agreements | 100 |
| | 13 |
| | 87 |
| | — |
| | — |
| | — |
| Non-Compete Agreements | 100 | | | 73 | | | 27 | | | 100 | | | 53 | | | 47 | |
| Patents and Trademarks | | Patents and Trademarks | 354 | | | 16 | | | 338 | | | — | | | — | | | — | |
| Other Intangible Assets | $ | 49,364 |
| | $ | 36,757 |
| | $ | 12,607 |
| | $ | 38,080 |
| | $ | 35,148 |
| | $ | 2,932 |
| Other Intangible Assets | $ | 106,274 | | | $ | 41,796 | | | $ | 64,478 | | | $ | 54,391 | | | $ | 40,442 | | | $ | 13,949 | |
During fiscal years 2018, 2017,2021, 2020, and 2016,2019, amortization expense of other intangible assets was, in thousands, $1,769, $1,071,$6,683, $2,402, and $786,$1,777, respectively. Amortization expense in future periods is expected to be, in thousands, $1,909, $1,955, $1,572, $1,252,$9,438, $8,604, $7,999, $7,762, and $1,029$7,408 in the five years ending June 30, 2023,2026, and $4,890$23,267 thereafter. The estimated useful life of internal-usecapitalized software ranges from 2 to 10 years. The estimated useful life of acquired technology is 7 years. The amortization period for customer relationship intangible assets is 10 years to 20 years. The estimated useful life of trade names is 10 years. The estimated useful life of non-compete agreements is 5 years. The estimated useful life of patents is 14 years and the estimated useful life of trademarks is 15 years.
Internal-useCapitalized software is stated at cost less accumulated amortization and is amortized using the straight-line method. During the software application development stage, capitalized costs include external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project. Upgrades and
enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process reengineering costs are expensed in the period in which they are incurred.
Trade names, non-compete agreements, acquired technology, patents and product rights to produce and sell certain productstrademarks are amortized on a straight-line basis over their estimated useful lives. Capitalized customerCustomer relationships are amortized based on estimated attrition raterates of customers. We have no intangible assets with indefinite useful lives which are not subject to amortization.
Research and Development: The costs of research and development are expensed as incurred. Research and development costs were approximately, in millions, $7, $7,$10, $5, and $6 in fiscal years 2018, 2017,2021, 2020, and 2016,2019, respectively.
Advertising: Advertising costs are expensed as incurred. Advertising costs, included in selling and administrative expenses were, in millions, $5.8, $4.3,$4.9, $4.1, and $4.0,$4.9, in fiscal years 2018, 2017,2021, 2020, and 2016,2019, respectively.
Insurance and Self-insurance: We are self-insured for certain employee health benefits including medical, short-term disability, and dental. Our self-insured reserves are estimated based upon a number of factors including known claims, estimated incurred but not reported claims, and other analyses, which are based on historical information along with certain assumptions about future events. We carry medical coverage for our eligible workforce not covered by self-insured plans. Insurance benefits are not provided to retired employees.
We also participate, along with other companies, in a group captive insurance company (“Captive”). The Captive insures losses related to workman'sworker's compensation, motor vehicle liability, product liability, and general liability. The Captive reinsures
catastrophic losses for all participants, including Kimball International, in excess of predetermined amounts. We pay premiums to the Captive which accumulate as a prepaid deposit estimated for losses related to the above coverage. We also maintain a reserve for outstanding unpaid workers’ compensation claims, including an estimate of incurred but not reported claims.
Additionally, we purchase insurance coverage for property insurance, director and officer liability insurance, umbrella coverage, and other risks.
Income Taxes: Deferred income taxes are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The deferred taxes are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment. We classify allnet deferred tax assets and liabilities as noncurrentnon-current assets in our consolidated balance sheets.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex uncertain tax positions, which may require an extended period of time to resolve. A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We maintain a liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions. As tax positions are effectively settled, the tax liability is adjusted accordingly. We recognize interest and penalties related to unrecognized tax benefits in the Provision for Income Taxes line of the Consolidated Statements of Income.
Concentrations of Credit Risk: Certain business and credit risks are inherent in our business. Additionally, weWe currently have notes receivable from independent dealership financing and other miscellaneous notes receivable which are included on the Receivables and Other Assets lines of the Consolidated Balance Sheets.receivable. At June 30, 20182021 and 2017, $0.82020, $1.0 million and $0.6$1.3 million, respectively, were outstanding under the notes receivable. The credit risk associated with receivables is disclosed in Note 19 - Credit Quality and Allowance for Credit Losses of Notes Receivable of Notes to Consolidated Financial Statements. Off-Balance Sheet Risk: Our off-balance sheet arrangements are limited to standby letters of credit aand performance bond, and operating leasesbonds entered into in the normal course of business as described in Note 510 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements. Non-operating Income and Expense: Non-operating income and expense include the impact of such items as fair value adjustments on Supplemental Employee Retirement Plan (“SERP”) investments, amortization of actuarial income, foreign currency rate movements, bank charges, investment gain or loss, non-production rent income, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain or loss on SERP investments is offset by a change in the SERP liability that is recognized in selling and administrative expenses.
Foreign Currency Translation: Our foreign operations use the U.S. Dollar as their functional currency. Foreign currency assets and liabilities are remeasured into functional currencies at end-of-period exchange rates, except for nonmonetary assets and equity, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at the weighted average exchange rate during the fiscal year, except for expenses related to nonmonetary assets, which are remeasured at historical exchange rates. Gains and losses from foreign currency remeasurement are reported in the Non-operating income or expense line item on the Consolidated Statements of Income.
Derivative Instruments and Hedging Activities: Derivative financial instruments are recognized on the balance sheet as assets and liabilities and are measured at fair value. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is designated and effective as part of a hedge transaction, and if it is, the type of hedge transaction. Hedge accounting is utilized when a derivative is expected to be highly effective upon execution and continues to be highly effective over the duration of the hedge transaction. Hedge accounting permits gains and losses on derivative instruments to be deferred in accumulated other comprehensive income and subsequently included in earnings in the periods in which earnings are affected by the hedged item, or when the derivative is determined to be ineffective. We usehave used derivatives primarily for forward purchases of foreign currency to manage exposure to the variability of cash flows, primarily related to the foreign exchange rate risks inherent in forecasted transactions denominated in foreign currency.currency and interest rate risk inherent in the variable rate of our revolving credit facility.
We also hold a totalan investment of $2.0 million in a privately-held company, including $1.5 million in stock warrants purchased during fiscal year 2017. The investment in stock warrantswhich is accounted for as a derivative instrument and is included in the Other Assets line of the Consolidated Balance Sheets. See Note 1115 - Derivative Instruments of Notes to Consolidated Financial Statements for more information on derivative instruments and hedging activities.
Stock-Based Compensation: As described in Note 813 - Stock Compensation Plans of Notes to Consolidated Financial Statements, we maintain a stock-based compensation plan which allows for the issuance of stock unit awards, restricted stock awards, stock options, stock appreciation rights, and other stock-based awards.awards, each of which may include performance-based conditions, to certain employees, non-employee directors, consultants, and advisors. We recognize the cost resulting from share-based payment transactions using a fair-value-based method. The estimated fair value of outstanding performance shares and restricted share units is based on the stock price at the date of the grant. For performance shares, the price is reduced by the present value of dividends normally paid over the vesting period which are not payable on outstanding performance share awards. The estimated fair value of outstanding relative total shareholder return performance units (“RTSR”) is based on the grant date fair value of RTSR awards using a Monte Carlo simulation which includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends. Stock-based compensation expense is recognized for the portion of the awards that are ultimately expected to vest. Forfeitures are accounted forrecognized as they occur. Recently Adopted Accounting Pronouncements:
In February 2018,January 2021, the Financial Accounting Standards Board (“FASB”) issued guidance that allowsrefines the reclassificationapplication of Topic 848 - Reference Rate Reform. The reference rate reform guidance was originally issued in March 2020 and temporarily eased the income tax effectspotential burden in accounting for reference rate reform primarily resulting from the Tax Cuts and Jobs Act (“Tax Act”) from accumulated other comprehensive income to retained earnings. Under the Tax Act, deferred taxes were adjusted to reflect the reductiondiscontinuance of the federal income taxLondon Interbank Offered Rate (“LIBOR”). The original guidance provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met, and applies prospectively to contract modifications that reference LIBOR beginning March 12, 2020 through December 31, 2022. The January 2021 update clarifies the newly enacted federal income tax rate which left the tax effects on items within accumulated other comprehensive income stranded at historical tax rates. ThisFASB’s guidance requires qualitative disclosureas part of the ongoing monitoring of global reference rate reform. Entities are permitted to elect certain optional expedients and exceptions when accounting policy for releasing income tax effects from accumulated other comprehensive incomederivative contracts and ifcertain hedging relationships affected by changes in the reclassification election is made, the impacts of the change on the consolidatedinterest rates used for discounting cash flows, computing variation margin settlements and calculating price alignment interest in connection with reference rate reform activities under way in global financial statements.markets. The guidance iswas effective for our first quarter of fiscal year 2020 with early adoption permittedimmediately upon issuance and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the Tax Act changes are recognized. We earlywe adopted the guidance inprospectively during our fourth quarter of fiscal year 20182021. Our current debt agreement and reclassifiedour derivative agreement executed in July 2021 include language that addresses the entire tax effect out of accumulated other comprehensive income and into retained earningstransition from LIBOR to an alternative reference rate. We are electing the optional expedients in the amount of $0.3 million. Our policy for releasing disproportionate income tax effects from accumulated other comprehensive income utilizes the aggregate approach.
In August 2017, the FASB issued guidance on accounting for derivatives and hedging activities. The objective of this guidance is to better align a company’s risk management activities and financial reporting for hedging relationships, simplify thepreserve hedge accounting requirements, and improve the disclosuresrelationships. The adoption of hedging arrangements. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted. We early adopted the guidance in our fourth quarter of fiscal year 2018 and thethis guidance did not have a material effectimpact on our consolidated financial statements.
In January 2017,August 2018, the FASB issued guidance on simplifyinga customer’s accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the test for goodwill impairment by eliminating the requirement to estimate the implied fair value of a reporting unit from the goodwill impairment test.vendor. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value ofarrangement that has a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An
entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.software license. The guidance is effective prospectively forwas adopted during our first quarter of fiscal year 2021 financial statements with earlyand was applied prospectively. The adoption permitted. In conjunction with our acquisition of D’style, Inc. we early adopted the guidance in our second quarter of fiscal year 2018, and the guidance did not have a material effect on our consolidated financial statements.
In January 2017, the FASB issued guidance which revises the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted and the amendments can be applied to transactions occurring before the guidance was issued as long as the applicable financial statements have not been issued. In conjunction with our acquisition of D’style, Inc., we early adopted the guidance in our second quarter of fiscal year 2018 and thethis guidance did not have a material effect on our consolidated financial statements.
In August 2016,2018, the FASB issued guidance that clarifies and provides specific guidance on eight cash flow classification issues that are not addressed by current GAAP. The new guidance is intended to reduce diversity in practice in how certain transactions are classified inwhich changes the statement of cash flows, including how to classify contingent consideration payments made after a business combination, which will impact the presentation of future earn-out payments for our acquisition of D’style, Inc.fair value measurement disclosure requirements. The guidance is effectivemodifies and removes certain disclosures related to the fair value hierarchy, and adds new disclosure requirements such as disclosing the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance was adopted during our first quarter of fiscal year 2019 with early2021 and was applied retrospectively. The adoption permitted. We early adopted the guidance in our second quarter of fiscal year 2018 and thethis guidance did not have a material effect on our consolidated financial statements.
In July 2015, the FASB issued guidance on simplifying the measurement of inventory which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Inventory within the scope of this update is required to be measured at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The guidance does not impact inventory measured on a last-in, first-out (“LIFO”) basis. The guidance was adopted prospectively in our first quarter of fiscal year 2018 and did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted:
In June 2018, the FASB issued guidance to improve the accounting for and to reduce the cost and complexity of share-based payments to nonemployees for goods and services. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted but may not be adopted earlier than the adoption of the new revenue standard. We expect to adopt the standard at the beginning of our fiscal year 2019, and it will be applied to awards that have not been settled by the date of adoption. We do not expect the adoption to have a material effect on our consolidated financial statements.
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted and will be applied prospectively to awards modified on or after the adoption date. We do not expect the adoption to have a material effect on our consolidated financial statements.
In March 2017, the FASB issued guidance that will shorten the amortization period for certain callable debt securities held at a premium to the earliest call date. This guidance does not require an accounting change for securities held at a discount. This guidance is to be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted. We have not yet determined the effect of this guidance on our consolidated financial statements.
In March 2017, the FASB issued guidance that requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic benefit cost in operating expenses, which will impact the presentation of our postemployment benefit plan. Employers are required to present all other components of net benefit cost separate from the service costs and disclose the line item in which the components of net benefit cost other than the service cost are included. Retrospective application of the change in the statement of income presentation is required. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted. We do not expect the adoption to have a material effect on our consolidated financial statements.
In February 2017, the FASB issued guidance that clarifies the scope of guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. This new guidance is meant to clarify the scope of the original guidance that was issued in connection with the guidance relating to the recognition of revenue from contracts with customers, as defined below, which addresses recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted, and we are required to adopt concurrent with the adoption of the guidance on recognition of revenue from contracts with customers. We are reviewing the impact of this rule but have not yet determined the effect of this guidance on our consolidated financial statements.
In November 2016, the FASB issued guidance which requires an entity to include in their cash and cash equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The guidance is
effective for our first quarter of fiscal year 2019 with early adoption permitted and is required to be applied using a retrospective transition method to each prior reporting period. We do not expect the adoption to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued guidance on the measurement of credit losses on financial instruments. Under the guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The guidance is also intended to reduce the complexity by decreasing the number of credit impairment models that entities use to account for debt instruments. In May 2019, the FASB amended the new standard to allow entities to elect the fair value option on certain financial instruments that were previously recorded at amortized cost. In November 2019, the FASB amended the new standard to extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis. The guidance is effective forwas adopted during our first quarter of fiscal year 2021 with early adoption in our fiscal year 2020 permitted. Weand did not have not yet determined the effect of this guidance on our consolidated financial statements.
In February 2016, the FASB issued guidance that revises the accounting for leases. The guidance is intended to improve financial reporting of leasing transactions by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Leases will continue to be classified as either operating or finance leases, with the classification affecting the pattern of expense recognition in the statement of income. The guidance will also require additional disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In January 2018, the FASB issued additional guidance for land easements which permits entities to forgo the evaluation of existing land easement arrangements to determine if they contain a lease. New land easement arrangements, or modifications to existing arrangements, after the adoption of the lease standard will be evaluated to determine if they meet the definition of a lease. In July 2018, the FASB amended the new standard to clarify certain aspects of the guidance, and they also issued another new standard in July 2018 that allows the option to apply the transition provisions at the adoption date instead of at the earliest comparative period in the consolidated financial statements. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted and is required to be applied either using a modified retrospective approach to each prior reporting period or initial application as of the beginning of the period of adoption. We are currently evaluating the impact of this guidance but have not yet determined thematerial effect on our consolidated financial statements.
In January 2016,Recently Issued Accounting Pronouncements Not Yet Adopted:
We evaluate all accounting pronouncements issued by the FASB for consideration of their applicability to our consolidated financial statements. We have assessed all accounting pronouncements that were recently issued, guidance which is intendedbut not yet adopted and concluded that those not disclosed are either not applicable to improve the recognition and measurement of financial instruments. The guidance revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective prospectively for our first quarter of fiscal year 2019 financial statements with early adoption allowed on certain provisions. We dous or are not expect the adoptionexpected to have a material effect on our consolidated financial statements.
In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. To achieve this core principle, the guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance addresses several areas including transfer of control, contracts with multiple performance obligations, and costs to obtain and fulfill contracts. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB decided to defer the effective date for this new revenue standard by one year, which will make the guidance effective for our first quarter of fiscal year 2019 financial statements using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients; or (ii) adoption with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures. In March 2016, the FASB issued additional guidance which further clarifies assessing whether an entity is a principal or an agent in a revenue transaction, and impacts whether an entity reports revenue on a gross or net basis; in April 2016, the FASB issued additional guidance that addresses identifying performance obligations and implementing licensing guidance; and in May 2016, the FASB issued additional guidance that clarifies collectability, noncash consideration, and other transition issues. The amendments have the same effective date and transition requirements as the new revenue standard.
We have completed a preliminary review of the impact of the new revenue standard and expect the primary change to be the reclassification of certain items on the statement of income. For contracts involving products that are sold directly to end customers, currently any fees paid to dealer agents for facilitating the sale and performing certain services are netted against revenue. Under the new standard, fees paid to dealer agents will be recognized as either cost of sales or selling expense. In addition, any commissions or fees paid to third-party purchasing organizations will be recognized as a selling expense rather than being netted against revenue. Although the result of these changes will be increases in net sales, cost of sales, and selling expenses, these changes will have no impact to operating income dollars but will reduce operating income as a percent of net sales. The new standard will also require several less significant changes including classifying the reserve for returns and allowance as a liability rather than a contra-receivable, recognizing a recovery asset for potential product returns, and capitalizing costs to obtain and fulfill sales contracts. The new standard will also require significantly more disclosure than is required under current rules. We continue to evaluate the impact that will result from adoption of the new standard, and we are
finalizing changes to our business processes, systems, and internal controls to support recognition and disclosure under the new standard. We expect to adopt the standard at the beginning of our fiscal year 2019 using the full retrospective approach which, upon adoption, will adjust fiscal years 2017 and 2018 to provide comparable financial reporting for these periods.
Note 2 Acquisition
During the second quarter of fiscal year 2018,On December 9, 2020, we acquired certain assets of D’style,Poppin, Inc. (“D’style”Poppin”), a tech-enabled, market-leading B2B commercial furniture design company headquartered in Chula Vista, California. ThisNew York City, New York. Poppin designs commercial-grade furniture that is made to mix, match, and scale in today’s modern office and work-from-home environments. The acquisition expanded our reach into hospitality public space areaspurchase price totaled $110.4 million in initial cash consideration plus additional contingent payments, if all remaining milestones are achieved, of $65.0 million based on revenue and added an attractive product portfolio of solutions for the residential marketprofitability milestones achieved through the acquired Allan Copley Designs brand. These offerings enable us to take advantageJune 30, 2024. As of the trend where hospitality, residential and commercial designs are merging. As part of this acquisition we also acquired all of the capital stock of Diseños de Estilo S.A. de C.V. headquartered in Tijuana, Mexico, another member of the D’style group which manufactures exclusively for D’style, strengthening our North American manufacturing footprint and serving as a distribution channel to the Mexico and Latin America hospitality markets. The cash paid for the acquisition totaled $18.2 million. An earn-out of up to $2.2 million may be paid, which is contingent based upon fiscal year 2018 and 2019 D’style, Inc. operating income compared to a predetermined target for each fiscal year. As of June 30, 2018,date the fair value of the contingent earn-out was $1.1$31.8 million. During the fourth quarter of fiscal year 2021 the fair value of the contingent earn-out liability decreased to $20.2 million.
A summary of the preliminary purchase price allocation is as follows:
| | | | | |
| Purchase Price Allocation | |
| (Amounts in Thousands) | |
| Cash | $ | 5,768 | |
| Receivables | 2,814 | |
| Inventories | 15,718 | |
| Other current assets | 700 | |
| Net property and equipment | 975 | |
| Other intangible assets | 52,394 | |
| Goodwill | 70,801 | |
| Right-of-use operating lease assets | 5,103 | |
| Other long-term assets | 4,161 | |
| Deferred tax assets | 5,836 | |
| Total Assets | $ | 164,270 | |
| |
| Current maturities of long-term debt | 1,252 | |
| Accounts payable | 7,715 | |
| Customer deposits | 2,045 | |
| Current portion of operating lease liability | 1,937 | |
| Accrued expenses | 5,260 | |
| Long-term debt, less current maturities | 1,252 | |
| Long-term operating lease liability | 2,565 | |
| Other long-term liabilities | 80 | |
| Total Liabilities | $ | 22,106 | |
| Net Assets | $ | 142,164 | |
|
| | | | |
| Purchase Price Allocation | | |
| (Amounts in Thousands) | | |
| Assets: | | |
| Receivables | | $ | 1,467 |
|
| Inventories | | 1,455 |
|
| Prepaid expenses and other current assets | | 1,120 |
|
| Net property and equipment | | 184 |
|
| Goodwill | | 8,824 |
|
| Other intangible assets | | 10,720 |
|
| Deferred tax assets | | 302 |
|
| | | $ | 24,072 |
|
| | | |
| Liabilities: | | |
| Accounts payable | | $ | 774 |
|
| Customer deposits | | 3,084 |
|
| Accrued expenses | | 333 |
|
| | | $ | 4,191 |
|
| | | $ | 19,881 |
|
| | | | | |
| Consideration | |
| (Amounts in Thousands) | |
| Cash | $ | 110,374 | |
| Contingent earn-out — fair value at acquisition date | 31,790 | |
| Fair value of total consideration | $ | 142,164 | |
| Less: Acquired cash | 5,768 | |
| Total consideration less acquired cash | $ | 136,396 | |
|
| | | | |
| Consideration | | |
| (Amounts in Thousands) | | |
| Cash | | $ | 18,201 |
|
| Contingent earn-out — fair value at acquisition date | | 1,680 |
|
| Fair value of total consideration | | $ | 19,881 |
|
As of the acquisition date the fair value of the earn-out was $1.7 million. At June 30, 2018, the fair value of the contingent earn-out liability was adjusted to $1.1 million, resulting in a $0.6 million pre-tax gain, recognized as a $0.8 million pre-tax gain included in Selling and Administrative Expenses, offset in part by $0.2 million of Interest Expense attributable to an adjustment of the contingent earn-out liability that will be based upon fiscal year 2018 and 2019 D’style, Inc. operating income compared to a predetermined target for each fiscal year.
The operating results of this acquisition are included in our consolidated financial statements beginning on November 6, 2017.December 9, 2020. For the fiscal year ended June 30, 2018,2021, net sales and net incomeloss related to D’stylePoppin were $13.0$24.1 million and $0.8$9.1 million, respectively. The aforementioned net loss includes amortization on acquired intangibles and excludes earn-out adjustments related to operating performance after the acquisition date. Direct costs of the acquisition forduring the fiscal year ended June 30, 2018, of approximately $0.8
2021 were $3.6 million werewhich was expensed as incurred and were included on the Selling and Administrative Expenses line of our Consolidated Statements of Income.
The goodwill is not deductible for tax purposes. Goodwill is primarily attributable to the anticipated revenue and supply chain and revenue synergies including cross selling initiatives expected from the operations of the combined company. An immaterial amount of goodwill is not deductible for tax purposes, while the tax deductible portion is deductible over 15 years. See Note 1 - Summary of Significant Accounting Policiesof Notes to Consolidated Financial Statements for more information on goodwill and other intangible assets. The following summarizes our goodwill activity for fiscal year 2018: |
| | | | |
| Goodwill | | |
| (Amounts in Thousands) | | |
| Goodwill - June 30, 2017 | | $ | — |
|
| Goodwill - at acquisition date | | 8,559 |
|
| Working capital adjustments | | 265 |
|
| Goodwill - June 30, 2018 | | $ | 8,824 |
|
The purchase price allocation is provisional pending final valuations and purchase accounting adjustments such as pre-acquisition liabilities, which were not final as of June 30, 2018.2021. We utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process.
The following summarizes goodwill activity related to the acquisition:
| | | | | |
| Goodwill | |
| (Amounts in Thousands) | |
| Goodwill - June 30, 2020 | $ | — | |
| Goodwill - at acquisition date | 71,798 | |
| Adjustments to purchase price allocation | (997) | |
| Goodwill - June 30, 2021 | $ | 70,801 | |
Pro Forma Information
The following unaudited pro forma financial information summarizes the combined results of operations for Kimball International, Inc. and Poppin, Inc. as if the companies were combined as of the beginning of fiscal year 2020: | | | | | | | | | | | |
| (unaudited) |
| | Year Ended |
| | June 30 |
| (Amounts in Thousands, Except Per Share Data) | 2021 | | 2020 |
| Net Sales | $ | 589,157 | | | $ | 801,492 | |
| Net Income | 4,210 | | | 28,165 | |
| Diluted Earnings Per Share of Common Stock | $ | 0.12 | | | $ | 0.76 | |
This pro forma financial information is based on historical results of operations, adjusted for the allocation of the purchase price and other acquisition accounting adjustments. This pro forma information is not necessarily indicative of what our results would have been had we operated the businesses since the beginning of the periods presented. The pro forma adjustments reflect the income statement effects of amortization of intangibles related to the fair value adjustments of the assets acquired, acquisition-related costs, incremental interest expense, and the related tax effects.
Note 3 Restructuring
During fiscal years 2021, 2020 and 2019, we recognized $10.7 million, $8.5 million and $0.9 million, respectively of pre-tax restructuring expense.
We utilized available market prices and management estimates to determine the fair value of impaired fixed assets. Restructuring is included in the Restructuring Expense line item on our Consolidated Statements of Income.
Transformation Restructuring Plan Phase 1:
In June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. We believe phase 1 of our transformation restructuring plan has established a more cost-efficient structure to better align our operations with our long-term strategic goals. Phase 1 of our transformation restructuring plan is substantially complete as of June 30, 2021. The transformation restructuring plan included the following:
•We reviewed our overall manufacturing facility footprint to reduce excess capacity and gain efficiencies by centralizing manufacturing operations. We have ceased operations at a leased seating manufacturing facility in Martinsville, Virginia, and consolidated a David Edward production facility in Red Lion, Pennsylvania into our Baltimore, Maryland facility.
•The creation of center-led functions for finance, human resources, information technology and legal functions resulted in the standardization of processes and the elimination of duplication. In addition, we centralized our supply chain efforts to maximize supplier value and plan to drive more efficient practices and operations within our logistics function.
•Kimball brand selling resources were reallocated to higher-growth markets. We also ceased use of 4 leased furniture showrooms across our brands during the first quarter of fiscal year 2020 and recognized impairment of the lease and associated leasehold improvements, and recognized subsequent impairment due to degradation of sublease assumptions resulting from the current economic environment.
A summary of the charges recorded in connection with phase 1 of the transformation restructuring plan is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Charges Incurred to Date | | | | |
| (Amounts in Thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2019 | | | | | |
| Cash-related restructuring charges: | | | | | | | | | | | |
| Severance and other employee related costs | $ | 62 | | | $ | 2,159 | | | $ | 663 | | | $ | 2,884 | | | | | |
| Facility exit costs and other cash charges | 998 | | | 1,837 | | | 203 | | | 3,038 | | | | | |
| | | | | | | | | | | |
| Total cash-related restructuring charges | $ | 1,060 | | | $ | 3,996 | | | $ | 866 | | | $ | 5,922 | | | | | |
| Non-cash charges: | | | | | | | | | | | |
| Transition stock compensation | — | | | 654 | | | 71 | | | 725 | | | | | |
| Impairment of assets | 770 | | | 3,690 | | | — | | | 4,460 | | | | | |
| Other non-cash charges | 72 | | | 149 | | | — | | | 221 | | | | | |
| | | | | | | | | | | |
| Total non-cash charges | $ | 842 | | | $ | 4,493 | | | $ | 71 | | | $ | 5,406 | | | | | |
| Total charges | $ | 1,902 | | | $ | 8,489 | | | $ | 937 | | | $ | 11,328 | | | | | |
A summary of the current period activity in accrued restructuring related to phase 1 of the transformation restructuring plan is as follows:
| | | | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | Severance and other employee related costs | | | | Other costs | | Total |
| Balance at June 30, 2019 | $ | 619 | | | | | $ | 203 | | | $ | 822 | |
| Additions charged to expense | 2,716 | | | | | 444 | | | 3,160 | |
| Cash payments charged against reserve | (2,792) | | | | | (582) | | | (3,374) | |
| Non-cash adjustments | (376) | | | | | — | | | (376) | |
| Balance at June 30, 2020 | $ | 167 | | | | | $ | 65 | | | $ | 232 | |
| Additions charged to expense | 62 | | | | — | | | 62 | |
| Cash payments charged against reserve | (229) | | | | | (60) | | | (289) | |
| Non-cash adjustments | — | | | | | (5) | | | (5) | |
| Balance at June 30, 2021 | $ | — | | | | | $ | — | | | $ | — | |
Transformation Restructuring Plan Phase 2:
In August 2020, we announced the next phase of our transformation restructuring plan that will align our business units to a new market-centric orientation and is expected to yield additional cost savings that will aid us in effectively managing through the downturn caused by the COVID-19 pandemic. Phase 2 of the transformation restructuring plan builds on the initial strategy and the transformation restructuring plan announced in June 2019. The following is a summary of the activities we will be undertaking pursuant to phase 2 of the transformation restructuring plan:
•As part of the previously announced plan to consolidate manufacturing of all brands into one world-class global operations group, we are streamlining our manufacturing facilities by leveraging production capabilities across all facilities, establishing centers of excellence, and setting up processes to facilitate flexing of product between facilities in response to volume fluctuations. We are also reviewing our overall facility footprint to identify opportunities to reduce capacity and gain efficiencies, including the consolidation of our Baltimore, Maryland facility into other manufacturing facilities.
•We are streamlining our workforce to align with the new organizational structure and respond to lower volumes created by the COVID-19 pandemic, creating a more efficient organization to deliver on our Connect 2.0 strategy.
•In the third quarter of fiscal 2021, we offered two voluntary retirement incentive programs to eligible employees. Employees electing to participate were paid special termination benefits, including a severance benefit and cash payment that may be used to pay for a period of healthcare coverage or for any other purpose.
•Starting in fiscal year 2022, many of our showrooms will feature multiple brands thus eliminating the need for more than one showroom in the same city. Showroom locations are being reviewed and select leased showroom locations will be closed.
Phase 2 of the transformation restructuring plan began in the first quarter of our fiscal year 2021, and we expect a substantial majority of the underlying activities of these aforementioned actions to be completed by the end of fiscal year 2023.
In addition to the savings already generated from phase 1 of the transformation restructuring plan, the efforts of the phase 2 transformation restructuring plan are expected to generate annualized pre-tax savings of approximately $16.0 million when it is fully implemented. We currently estimate the phase 2 transformation restructuring plan will incur total pre-tax restructuring charges of approximately $16.0 million to $18.0 million, with approximately $6.0 million expected to be recorded in fiscal year 2022, and approximately $2.0 million thereafter. The restructuring charges are expected to consist of approximately $5.0 million to $5.5 million for severance and other employee-related costs, $5.0 million to $6.0 million for facility costs, and $6.0 million to $6.5 million for lease and other asset impairment. Approximately 65% of the total cost estimate is expected to be cash expense.
A summary of the charges recorded in connection with phase 2 of the transformation restructuring plan is as follows:
| | | | | | | | | | |
| | Year Ended | | |
| (Amounts in Thousands) | | June 30, 2021 | |
| Cash-related restructuring charges: | | | | |
| Severance and other employee related costs | | $ | 5,082 | | | |
| Facility exit costs and other cash charges | | 1,587 | | | |
| Total cash-related restructuring charges | | $ | 6,669 | | | |
| Non-cash charges: | | | | |
| Impairment of assets and accelerated depreciation | | 2,156 | | | |
| | | | |
| | | | |
| | | | |
| Total charges | | $ | 8,825 | | | |
A summary of the current period activity in accrued restructuring related to phase 2 of the transformation restructuring plan is as follows:
| | | | | | | | | | | |
| (Amounts in Thousands) | Severance and other employee related costs | | | | | | |
| Balance at June 30, 2020 | $ | — | | | | | | | |
| Additions charged to expense | 5,716 | | | | | | | |
| Cash payments charged against reserve | (3,696) | | | | | | | |
| Non-cash adjustments | (634) | | | | | | | |
| Balance at June 30, 2021 | $ | 1,386 | | | | | | | |
Note 4 Revenue
Performance Obligations
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring distinct goods or providing services to customers. Our revenue consists substantially of product sales, and is reported net of sales discounts, rebates, incentives, returns, and other allowances offered to customers. We recognize revenue when performance obligations under the terms of contracts with our customers are satisfied, which occurs when control passes to a customer to enable them to
direct the use of and obtain benefit from a product. This typically occurs when a customer obtains legal title, obtains the risks and rewards of ownership, has received the goods according to the contractual shipping terms either at the shipping point or destination, and is obligated to pay for the product. Customary terms require payment within 30 days, and for certain customers, deposits may be required in advance of shipment.
We sell products both to independent dealers and directly to end customers. Sales to independent dealers typically include products only, as the independent dealer provides additional value-added services to end customers. Direct sales to end customers include products and may include related services such as installation and design services. These services are distinct from the delivered products within the context of the contract, and therefore revenue is recognized for products, installation, and design on a discrete basis. The performance of services may be outsourced to independent dealers or other third parties, but we typically retain the primary responsibility for performance of the services when selling directly to end customers. For services, revenue is recognized when the service is performed and we have an enforceable right to payment. Service revenue does not represent a significant portion of our total sales.
We provide an assurance-type warranty that guarantees our product complies with agreed-upon specifications. This warranty is not sold separately and does not convey any additional services to the customer; therefore, our warranty is not considered a separate performance obligation. We estimate the costs that may be incurred under warranties and record a liability at the time product revenue is recognized. See Note 10 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for additional information on warranty obligations. Disaggregation of Revenue
The following table provides information about revenue by operating segment:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | June 30 |
| (Amounts in Millions) | | 2021 | | 2020 | | 2019 |
| Workplace | | $ | 330.0 | | | $ | 435.4 | | | $ | 462.7 | |
| Health | | 97.3 | | | 108.9 | | | 110.4 | |
| Hospitality | | 117.4 | | | 183.6 | | | 195.0 | |
| eBusiness | | 24.3 | | | — | | | — | |
| Total Net Sales | | $ | 569.0 | | | $ | 727.9 | | | $ | 768.1 | |
We report revenue under a single aggregated reportable segment consisting of 4 operating segments which have similar products and services in nature, utilize similar production and distribution processes, and share similar long-term economic characteristics.
Contract Balances
Receivables in the Consolidated Balance Sheets represent the amount of consideration to which we are entitled in exchange for the goods or services sold to our customers, net of allowances for doubtful accounts. Receivables are recorded when the right to consideration from the customer becomes unconditional, which is generally upon billing or upon satisfaction of a performance obligation, whichever is earlier. For the years ended June 30, 2021, June 30, 2020, and June 30, 2019, impairment losses on doubtful accounts receivable were $0.5 million, $1.4 million, and $0.5 million, respectively.
We also receive deposits from certain customers before revenue is recognized, resulting in the recognition of a contract liability reported as Customer Deposits in the Consolidated Balance Sheets. Changes in the customer deposits during fiscal years 2021 and 2020 were as follows:
| | | | | | | | | | | |
| (Amounts in Millions) | 2021 | | 2020 |
| Balance at the beginning of the year | $ | 19.6 | | | $ | 24.6 | |
| Customer deposits acquired in Poppin acquisition | 2.0 | | | — | |
| Increases due to deposits received, net of other adjustments | 82.3 | | | 105.4 | |
| Revenue recognized | (79.5) | | | (110.4) | |
| Balance at the end of the year | $ | 24.4 | | | $ | 19.6 | |
Customer deposits are typically utilized within a year of the receipt of the deposit. The amount of revenue recognized during the year ended June 30, 2021 that was included in the June 30, 2020 customer deposit balance was $18.9 million. The amount of
revenue recognized during the year ended June 30, 2020 that was included in the June 30, 2019 customer deposit balance was $24.6 million.
Additionally, funds paid to certain independent dealers in exchange for their multi-year commitment to market and sell our products represent costs of obtaining contracts. These incremental costs of obtaining contracts are capitalized to the extent we expect to recover them, and were not material as of June 30, 2021 and June 30, 2020. The amortization of the capitalized costs, recognized in Selling and Administrative Expenses, was $0.1 million, $0.2 million, and $0.4 million for the years ended June 30, 2021, 2020, and 2019, respectively.
Significant Judgments
We use significant judgment in estimating the reduction in net sales driven by customer rebate and incentive programs. Judgments primarily include an estimate of the most likely sales levels to be achieved and the corresponding rebate and incentive amounts expected to be earned by dealers and salespersons. In the years ended June 30, 2021, 2020, and 2019, we had an immaterial amount of adjustments to estimates for cumulative growth rebates and incentives that related to the preceding fiscal years. We also use judgment in estimating a reserve for returns and allowances recorded at the time of the sale, resulting in a reduction of revenue, based on estimated product returns and price concessions.
Accounting Policies and Practical Expedients Elected
For shipping and handling activities, we are applying an accounting policy election which allows an entity to account for shipping and handling activities as fulfillment activities rather than a promised good or service when the activities are performed, even if those activities are performed after the control of the good has been transferred to the customer. Therefore, we expense shipping and handling costs at the time revenue is recognized. We classify shipping and handling expenses in Cost of Sales in the Consolidated Statements of Income.
We are also applying an accounting policy election which allows an entity to exclude from revenue any amounts collected from customers on behalf of third parties, such as sales taxes and other similar taxes we collect concurrent with revenue-producing activities. Therefore, we present revenue net of sales taxes and similar revenue-based taxes.
Note 5 Leases
We have operating leases for showrooms, manufacturing facilities, warehouses, certain offices, and other facilities to support our operations in addition to select equipment that expire at various dates through 2027. We have no financing leases. Certain operating lease agreements include rental payments adjusted periodically for inflationary indexes. Additionally, some leases include options to renew or terminate the leases which can be exercised at our discretion. Lease terms include the noncancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods. Certain leases have terms that are dependent upon the occurrence of events, activities, or circumstances in lease agreements and incur variable lease expense driven by warehouse square footage utilized, property taxes assessed, and other non-lease component charges. Variable lease expense is presented as operating expense in our Consolidated Statements of Income and Comprehensive Income in the same line item as expense arising from fixed lease payments for operating leases. For all classes of assets, we do not separate non-lease components of a contract from the lease components to which they relate. We do not recognize a right-of-use asset or lease liability for short-term leases that have a lease term of twelve months or less. Our leases do not contain residual value guarantees or material restrictive covenants. As the rate implicit in our lease contracts cannot be readily determined, we use an estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The estimated incremental borrowing rate represents the estimated rate of interest we would have to pay to borrow an amount equal to the lease payments for a similar period of time on a collateralized basis.
Lease liabilities are recognized at the lease commencement date based upon the present value of the remaining lease payments. Right-of-use assets are based on the lease liability adjusted for prepaid rent, deferred rent, and tenant allowances received. Lease liabilities are amortized based upon the effective interest method, while right-of-use assets are amortized based upon the straight line expense less interest on the lease liability. Lease expense for lease payments is recognized on a straight-line basis over the lease term, except for impaired leases for which the lease expense is recognized on a declining basis over the remaining lease term.
The components of our lease expenses are as follows:
| | | | | | | | | | | |
| Year Ended | | Year Ended |
| (Amounts in Millions) | June 30, 2021 | | June 30, 2020 |
| Operating lease expense | $ | 4.5 | | | $ | 3.4 | |
| | | |
| Variable lease expense | 3.5 | | | 2.5 | |
| Total lease expense | $ | 8.0 | | | $ | 5.9 | |
Right-of-use assets for operating leases are tested for impairment in the same manner as long-lived assets used in operations as explained in Note 14 - Fair Value of Notes to Consolidated Financial Statements. During fiscal year 2021 and fiscal year 2020 we recorded $0.8 million and $3.7 million, respectively, of right-of-use asset and associated leasehold improvement impairments. The impairments resulted primarily from ceasing use of 4 furniture showrooms and furniture showroom sublease assumption modifications due to the degradation of the leasing environment driven by the COVID-19 pandemic. The impairment expenses are included in the Restructuring Expense line item on our Consolidated Statements of Income. Supplemental cash flow and other information related to leases are as follows:
| | | | | | | | | | | |
| Year Ended | | Year Ended |
| (Amounts in Millions) | June 30, 2021 | | June 30, 2020 |
| Cash flow information: | | | |
| Operating lease payments impacting lease liability | $ | 5.9 | | | $ | 4.8 | |
| Non-cash impact of obtaining new right-of-use assets | $ | 0.1 | | | $ | 2.6 | |
| | | |
| | | |
| As of | | As of |
| June 30, 2021 | | June 30, 2020 |
| Other information: | | | |
| Weighted-average remaining term (in years) | 4.3 | | 5.7 |
| Weighted-average discount rate | 4.6 | % | | 4.7 | % |
The following table summarizes the future minimum lease payments as of June 30, 2021:
| | | | | |
| Fiscal Year Ended |
| (Amounts in Millions) | June 30 (1) |
| 2022 | $ | 6.6 | |
| 2023 | 5.6 | |
| 2024 | 3.4 | |
| 2025 | 2.7 | |
| 2026 | 1.7 | |
| Thereafter | 0.9 | |
| Total lease payments | $ | 20.9 | |
| Less interest | 1.8 | |
| Present value of lease liabilities | $ | 19.1 | |
(1) Lease payments include options to extend lease terms that are reasonably certain of being exercised. The payments exclude legally binding minimum lease payments for leases signed but not yet commenced. At June 30, 2021, we have an additional operating lease that has not yet commenced for which we will record both a right-of-use asset and lease liability of $0.8 million. The lease is expected to commence in our first quarter of fiscal year 2022 with a lease term of approximately five and a half years.
Note 6 Earnings Per Share
Basic earnings per share are based on the weighted average number of shares outstanding during the period. Diluted earnings per share are based on the weighted average number of shares outstanding plus the assumed issuance of common shares for all
potentially dilutive securities. | | | | | | | | | | | | | | | | | |
| Year Ended June 30 |
| (Amounts in Thousands, Except for Per Share Data) | 2021 | | 2020 | | 2019 |
| Net Income | $ | 7,416 | | | $ | 41,054 | | | $ | 39,344 | |
| | | | | |
| Average Shares Outstanding for Basic EPS Calculation | 36,901 | | | 36,883 | | | 36,842 | |
| Dilutive Effect of Average Outstanding Compensation Awards | 471 | | | 154 | | | 222 | |
| Average Shares Outstanding for Diluted EPS Calculation | 37,372 | | | 37,037 | | | 37,064 | |
| | | | | |
| Basic Earnings Per Share | $ | 0.20 | | | $ | 1.11 | | | $ | 1.07 | |
| Diluted Earnings Per Share | $ | 0.20 | | | $ | 1.11 | | | $ | 1.06 | |
Note 7 Income Taxes
Kimball International, or one of its wholly-owned subsidiaries, files U.S. federal income tax returns and income tax returns in various state and local jurisdictions. Our provision (benefit) for income taxes is composed of the following items:
| | | | | | | | | | | | | | | | | |
| Year Ended June 30 |
| (Amounts in Thousands) | 2021 | | 2020 | | 2019 |
| Currently Payable: | | | | | |
| Federal | $ | (269) | | | $ | 9,890 | | | $ | 13,458 | |
| State | 510 | | | 4,019 | | | 2,677 | |
| Total current | $ | 241 | | | $ | 13,909 | | | $ | 16,135 | |
| Deferred Taxes: | | | | | |
| Federal | $ | (1,293) | | | $ | 1,979 | | | $ | (3,270) | |
| State | (1,754) | | | (812) | | | (539) | |
| Total deferred | $ | (3,047) | | | $ | 1,167 | | | $ | (3,809) | |
| | | | | |
| Total provision (benefit) for income taxes | $ | (2,806) | | | $ | 15,076 | | | $ | 12,326 | |
A reconciliation of the statutory U.S. income tax rate to Kimball International’s effective income tax rate follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended June 30 |
| 2021 | | 2020 | | 2019 |
| (Amounts in Thousands) | Amount | | % | | Amount | | % | | Amount | | % |
| Tax provision computed at U.S. federal statutory rate | $ | 968 | | | 21.0 | % | | $ | 11,787 | | | 21.0 | % | | $ | 10,851 | | | 21.0 | % |
| State income taxes, net of federal income tax benefit | (433) | | | (9.4) | | | 2,533 | | | 4.5 | | | 1,689 | | | 3.3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Change in fair value of contingent earn-out liability | (2,840) | | | (61.6) | | | — | | | — | | | — | | | — | |
| Research credit | (600) | | | (13.0) | | | (430) | | | (0.8) | | | (300) | | | (0.6) | |
| | | | | | | | | | | |
| Other - net | 99 | | | 2.1 | | | 1,186 | | | 2.2 | | | 86 | | | 0.2 | |
| Total provision (benefit) for income taxes | $ | (2,806) | | | (60.9 | %) | | $ | 15,076 | | | 26.9 | % | | $ | 12,326 | | | 23.9 | % |
Net cash payments for income taxes were, in thousands, $7,187, $11,114, and $10,225 in fiscal years 2021, 2020, and 2019, respectively.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets associated with net operating losses of, in thousands, $4,819 can be carried forward indefinitely and $17,116 expire from fiscal year 2022 to 2041. Deferred tax assets associated with tax credit carryforwards of, in thousands, $4,974, expire from fiscal year 2025 to 2041. Valuation allowances were provided as of June 30, 2021 for deferred tax assets relating to state net operating losses of, in thousands, $2,590, and foreign tax credits of, in thousands, $705, that we currently believe are more likely than not to remain unrealized in the future. In all periods presented, the change in the valuation allowance is reported as a component of income tax expense.
During fiscal year 2021, we acquired U.S. federal net operating losses (“NOLs”) with a tax benefit of approximately $16.2 million in connection with the Poppin, Inc. acquisition, all of which are available to offset future taxable income during the carryforward periods based on limitations under Section 382 of the Internal Revenue Code of 1986, as amended. We also acquired state NOLs with a tax benefit of approximately $3.5 million in connection with the Poppin, Inc. acquisition, of which an estimated $2.1 million are available to offset future taxable income during the carryforward periods. We provided a full valuation allowance against the available state NOLs, as we do not have sufficient positive evidence at this time to conclude that Poppin, Inc. will be able to utilize the NOL carryforwards in the states where the losses were generated, considering state limitations on the utilization of NOLs.
The components of the deferred tax assets and liabilities as of June 30, 2021 and 2020, were as follows:
| | | | | | | | | | | |
| (Amounts in Thousands) | 2021 | | 2020 |
| Deferred Tax Assets: | | | |
| Receivables | $ | 665 | | | $ | 892 | |
| Inventory | 3,242 | | | 421 | |
| Employee benefits | 246 | | | 247 | |
| Deferred compensation | 5,402 | | | 6,678 | |
| Other current liabilities | 459 | | | 492 | |
| Warranty reserve | 736 | | | 821 | |
| Tax credit carryforwards | 4,974 | | | 3,018 | |
| | | |
| Restructuring | 670 | | | 60 | |
| Net operating loss carryforward | 21,935 | | | 1,713 | |
| | | |
| Miscellaneous | 4,014 | | | 3,167 | |
| Valuation Allowance | (3,295) | | | (1,113) | |
| Total asset | $ | 39,048 | | | $ | 16,396 | |
| Deferred Tax Liabilities: | | | |
| Property and equipment | $ | 7,833 | | | $ | 7,067 | |
| Intangible assets | 12,423 | | | — | |
| Goodwill | 493 | | | — | |
| Miscellaneous | 1,931 | | | 1,844 | |
| Total liability | $ | 22,680 | | | $ | 8,911 | |
| Net Deferred Tax Assets | $ | 16,368 | | | $ | 7,485 | |
Changes in the unrecognized tax benefit, excluding accrued interest and penalties, during fiscal years 2021, 2020, and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | 2021 | | 2020 | | 2019 |
| Beginning balance - July 1 | $ | 798 | | | $ | 753 | | | $ | 989 | |
| Tax positions related to prior fiscal years: | | | | | |
| Additions | 24 | | | 74 | | | 80 | |
| Reductions | — | | | — | | | (222) | |
| Tax positions related to current fiscal year: | | | | | |
| Additions | — | | | ��� | | | — | |
| Reductions | — | | | — | | | — | |
| Settlements | — | | | — | | | — | |
| Lapses in statute of limitations | (10) | | | (29) | | | (94) | |
| Ending balance - June 30 | $ | 812 | | | $ | 798 | | | $ | 753 | |
| Portion that, if recognized, would reduce tax expense and effective tax rate | $ | 686 | | | $ | 676 | | | $ | 643 | |
Amounts accrued for interest and penalties were as follows:
| | | | | | | | | | | | | | | | | |
| As of June 30 |
| (Amounts in Thousands) | 2021 | | 2020 | | 2019 |
| Accrued Interest and Penalties: | | | | | |
| Interest | $ | 175 | | | $ | 156 | | | $ | 90 | |
| Penalties | $ | 143 | | | $ | 137 | | | $ | 101 | |
Interest and penalties expense (income) recognized for fiscal years 2021, 2020, and 2019 were, in thousands, $25, $102, and $23, respectively.
We are no longer subject to any significant U.S. federal tax examinations by tax authorities for years before fiscal year 2018, and to various state and local income tax examinations by tax authorities for years before 2017. We do not expect the change in the amount of unrecognized tax benefits in the next 12 months to have a significant impact on our results of operations or financial position.
We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. No provision was made for income taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested, which was $1.8 million on June 30, 2021. Future remittances of these undistributed earnings of foreign subsidiaries are not subject to U.S. income tax or foreign withholding taxes in the foreign country where the foreign subsidiaries operate.
Note 8 Inventories
Inventories are stated at the lower of cost or market value. Inventories are valued using the last-in, first-out (“LIFO”) method for approximately 92%67% and 94%93% of consolidated inventories at June 30, 20182021 and June 30, 2017,2020, respectively. The percentage of inventory subject to LIFO at the end of fiscal year 2021 decreased as a result of the addition of Poppin inventory, which is accounted for using the average cost method. The remaining inventories are valued using the first-in, first-out (“FIFO”) method and average cost method.
Had the FIFO methodnon-LIFO methods been used for all inventories, pre-tax income would have been $1.1$2.1 millionhigher in fiscal year 2018, $0.42021, $0.1 millionhigher lower in fiscal year 2017,2020, and $1.0$1.5 millionlower higher in fiscal year 2016.2019. Certain inventory quantity reductions caused liquidations of LIFO inventory values, which increased pre-tax income by an$1.3 million in 2021 and immaterial amountamounts in 2018, 20172020 and 2016.2019.
Inventory components at June 30 2018 were as follows:
| | | | | | | | | | | |
| (Amounts in Thousands) | 2021 | | 2020 |
| Finished products | $ | 37,787 | | | $ | 29,081 | |
| Work-in-process | 1,320 | | | 1,648 | |
| Raw materials | 33,428 | | | 35,295 | |
| Total FIFO inventory | $ | 72,535 | | | $ | 66,024 | |
| LIFO reserve | (18,244) | | | (16,167) | |
| Total inventory | $ | 54,291 | | | $ | 49,857 | |
|
| | | | | | | |
| (Amounts in Thousands) | 2018 | | 2017 |
| Finished products | $ | 23,756 |
| | $ | 24,537 |
|
| Work-in-process | 1,378 |
| | 1,346 |
|
| Raw materials | 29,158 |
| | 25,368 |
|
| Total FIFO inventory | $ | 54,292 |
| | $ | 51,251 |
|
| LIFO reserve, net | (14,783 | ) | | (13,189 | ) |
| Total inventory | $ | 39,509 |
| | $ | 38,062 |
|
Note 4 Property and Equipment
Major classes of property and equipment at June 30 consist of the following:
|
| | | | | | | |
| (Amounts in Thousands) | 2018 | | 2017 |
| Land | $ | 2,219 |
| | $ | 2,431 |
|
| Buildings and improvements | 105,372 |
| | 109,374 |
|
| Machinery and equipment | 152,653 |
| | 147,407 |
|
| Construction-in-progress | 4,302 |
| | 3,660 |
|
| Total | $ | 264,546 |
| | $ | 262,872 |
|
| Less: Accumulated depreciation | (180,059 | ) | | (182,803 | ) |
| Property and equipment, net | $ | 84,487 |
| | $ | 80,069 |
|
The useful lives used in computing depreciation are based on estimated service lives for classes of property, as follows:
|
| |
| Years |
Buildings and improvements | 5 to 40 |
Machinery and equipment | 2 to 20 |
Leasehold improvements | Lesser of Useful Life or Term of Lease |
Depreciation and amortization of property and equipment, including asset write-downs associated with restructuring plans, totaled, in millions, $13.7 for fiscal year 2018, $14.7 for fiscal year 2017, and $14.3 for fiscal year 2016.
At June 30, 2018, excess land located in Jasper, Indiana totaling $0.3 million was classified as held for sale. At June 30, 2017, our fleet of over-the-road tractors and trailers and a small parcel of land located in Jasper, Indiana totaling $4.2 million were classified as held for sale. During fiscal year 2018, we sold all of our over-the-road tractors and trailers and the small parcel of land and recognized a pre-tax gain of $0.4 million as the $4.8 million selling price exceeded the book value net of selling costs.
At June 30, 2016, assets totaling $9.2 million were classified as held for sale for a facility and land located in Post Falls, Idaho. During fiscal year 2017, we sold our Post Falls, Idaho facility and land and recognized a pre-tax gain of $2.1 million as the $12.0 million selling price exceeded the book value of the facility and land net of selling costs. The gain was recorded on the Restructuring (Gain) Expense line of the Consolidated Statements of Income. We also sold excess land for proceeds of $1.4 million and recognized pre-tax gains of $1.2 million which is recorded on the Selling and Administrative Expenses line of the Consolidated Statements of Income. In addition, during fiscal year 2017 we recognized impairment of $0.2 million as the carrying value of our fleet of over-the-road tractors and trailers exceeded the market value less selling costs.
During fiscal year 2017, we also sold a facility in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom for proceeds of $3.8 million. In order to allow for transition of those functions to our primary campus also located in Jasper, Indiana, we leased back a portion of the facility until December 31, 2017 at a favorable rate. The below-market terms of the leaseback are considered a form of continuing involvement that precludes sale treatment therefore we deferred the recognition of the sale until fiscal year 2018 when we recorded the pre-tax gain of $1.7 million on the sale.
Note 9 Property and Equipment
Major classes of property and equipment at June 30 consist of the following:
| | | | | | | | | | | |
| (Amounts in Thousands) | 2021 | | 2020 |
| Land | $ | 2,483 | | | $ | 2,298 | |
| Buildings and improvements | 120,135 | | | 116,718 | |
| Machinery and equipment | 153,388 | | | 161,795 | |
| Construction-in-progress | 6,374 | | | 4,871 | |
| Total | $ | 282,380 | | | $ | 285,682 | |
| Less: Accumulated depreciation | (191,757) | | | (193,641) | |
| Property and equipment, net | $ | 90,623 | | | $ | 92,041 | |
The useful lives used in computing depreciation are based on estimated service lives for classes of property, as follows:
| | | | | |
| Years |
| Buildings and improvements | 5 to 40 |
| Machinery and equipment | 2 to 20 |
| Leasehold improvements | Lesser of Useful Life or Term of Lease |
Depreciation of property and equipment, including asset write-downs, totaled, in millions, $14.5 for fiscal year 2021, $15.1 for fiscal year 2020, and $14.8 for fiscal year 2019.
Note 10 Commitments and Contingent Liabilities
Leases:
Operating leases for certain offices, showrooms, manufacturing facilities, land, and equipment, which expire from fiscal year 2019 to 2027, contain provisions under which minimum annual lease payments are, in millions, $4.0, $3.6, $3.3, $3.1, and $2.6 for the five years ending June 30, 2023, respectively, and aggregate $5.9 million from fiscal year 2024 to the expiration of the leases in fiscal year 2027. We are obligated under certain real estate leases to maintain the properties and pay real estate taxes. Certain leases include renewal options and escalation clauses. Total rental expense amounted to, in millions, $5.8, $6.0, and $6.7 in fiscal years 2018, 2017, and 2016, respectively, including certain leases requiring contingent lease payments based primarily on warehouse space utilized, which amounted to expense of, in millions, $1.2, $1.5, and $2.4 in fiscal years 2018, 2017, and 2016, respectively.
As of June 30, 2017, capitalized leases were not material and matured during fiscal year 2018.
During the latter portion of our fiscal year 2017, we sold a facility in Indiana which housed the education center for dealer and employee training, a research and development center, and a product showroom for proceeds of $3.8 million. We were leasing a portion of the facility back to facilitate the short-term transition of those functions to other existing Indiana locations. The sale of the facility did not qualify for sale-leaseback accounting during fiscal year 2017, and thus the $1.7 million pre-tax gain on the sale was not recognized in selling and administrative expenses until fiscal year 2018.
Guarantees:
Standby letters of credit were issued to lessors and insurance institutions and can only be drawn upon in the event of our failure to pay our obligations to a beneficiary. We had a maximum financial exposure from unused standby letters of credit totaling $1.4$1.7 million as of June 30, 20182021 and $1.2$1.6 million as of June 30, 2017.2020.
We are periodically required to provide performance bonds in order to conduct business with certain customers. The bonds are required to provide assurances to customers that the products and services they have purchased will be installed and/or provided properly and without damage to their facilities. We are ultimately liable for claims that may occur against the
performance bonds. We had a maximum financial exposure from performance bonds totaling $0.5$0.1 million and $8.7 million as of June 30, 20182021 and $0.4 million as of June 30, 2017.2020, respectively.
We are not aware of circumstances that would require us to perform under these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our consolidated financial statements. Accordingly, no liability has been recorded as of June 30, 20182021 and 20172020 with respect to the standby letters of credit or performance bonds. We also enter into commercial letters of credit to facilitate payments to vendors and from customers.
Product Warranties:
We provide an assurance-type warranty that guarantees our product complies with agreed-upon specifications. This warranty is not sold separately and does not convey any additional services to the customer. We estimate product warranty liability at the
time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability periodically based on changes in historical cost trends and in certain cases where specific warranty issues become known. The product warranty liability is included on the Accrued Expenses and Other lines of our Consolidated Balance Sheets.
Changes in the product warranty accrual during fiscal years 2018, 2017,2021, 2020, and 20162019 were as follows:
| | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | 2021 | | 2020 | | 2019 |
| Product Warranty Liability at the beginning of the year | $ | 3,190 | | | $ | 2,238 | | | $ | 2,294 | |
| Additions to warranty accrual (including changes in estimates) | 1,905 | | | 3,995 | | | 886 | |
| Settlements made (in cash or in kind) | (2,234) | | | (3,043) | | | (942) | |
| Product Warranty Liability at the end of the year | $ | 2,861 | | | $ | 3,190 | | | $ | 2,238 | |
|
| | | | | | | | | | | |
| (Amounts in Thousands) | 2018 | | 2017 | | 2016 |
| Product Warranty Liability at the beginning of the year | $ | 1,992 |
| | $ | 2,351 |
| | $ | 2,264 |
|
| Additions to warranty accrual (including changes in estimates) | 1,307 |
| | 562 |
| | 1,165 |
|
| Settlements made (in cash or in kind) | (1,005 | ) | | (921 | ) | | (1,078 | ) |
| Product Warranty Liability at the end of the year | $ | 2,294 |
| | $ | 1,992 |
| | $ | 2,351 |
|
Other Contingency:
The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting.
In March 2016, in connection with a renewal of one of our contracts, we became aware of noncompliance and inaccuracies in our General Services Administration (“GSA”) subcontractor reporting. Accordingly, we retained outside legal counsel to assist in conducting an internal review of our reporting practices, and we self-reported the matter and the results of the internal review to the GSA. We have promptly responded to inquiries from the GSA since our initial reporting, have met with government officials as requested on two occasions, and intend to cooperate fully with any further inquiries or investigations. While we are not able to reasonably estimate the future financial impact, if any, of the possible sanctions at this time, any of them could, if imposed, have a material adverse impact on our business, future financial position, results of operations, or cash flows. The timing of the government’s review and determination of any outcome of these matters is uncertain and, therefore, it is unclear as to when and to what extent, if any, our previously issued earnings guidance might be impacted. We have incurred, and may incur additional, legal and related costs in connection with our internal review and the government’s response to this matter. During fiscal year 2018, sales related to our GSA contracts were approximately 7.5% of our consolidated sales, with one contract accounting for approximately 5.3% of our consolidated sales and the other contract accounting for approximately 2.2% of our consolidated sales.
Note 611 Long-Term Debt and Revolving Credit FacilitiesFacility
Long-term debt, less current maturities as of June 30, 2018Short-term borrowings and2017, was, in thousands, $161 and $184, respectively, and current maturities of long-term debt were, in thousands, $23 and $27, respectively. Long-term debt consistsconsisted of a long-term note payable, which has an interest rate of 9.25% and matures in 2025. As of June 30, 2017, long-term debt also included capitalized leases, which matured during fiscal year 2018. the following obligations:
| | | | | | | | | | | |
| (Amounts in Thousands) | June 30,
2021 | | June 30,
2020 |
| Long-term debt under revolving credit facility due October 2024; 1.38% variable interest rate at June 30, 2021 | $ | 40,000 | | | $ | — | |
| Other debt maturing August 12, 2025; 9.25% fixed interest rate | 109 | | | 136 | |
| Total Debt | $ | 40,109 | | | $ | 136 | |
| | | |
| | | |
Aggregate maturities of long-term debt for the next fivefour years through maturity are, in thousands, $23, $25, $27, $30,$30, $33, $36, and $33, respectively, and aggregate $46 thereafter.$40,010, respectively.
We maintainAs of June 30, 2021 we had a $30$125.0 million revolving credit facility with a maturity date of October 31, 20192024 that allowsallowed for both issuances of letters of credit and cash borrowings. This facility providesWe also have an option to request an increase of the amount available for borrowing to $55$200.0 million, at our request, subject to the consent of the participating banks. At June 30, 2018 and 2017, we had no borrowings outstanding under the credit facility. At June 30, 2018, we had $1.4 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility to $28.6 million.
banks’ consent. The revolving loans under the Credit Agreement maycould consist of, at our election, advances in U.S. dollars or advances in any other currency that iswas agreed to by the lenders. The proceeds of the revolving loans are to be used for general corporate purposes including acquisitions. A portion of the revolving credit facility, not to exceed $10 million of the principal amount, will bewas available for the issuance of letters of credit. The commitment fee is payableAt June 30, 2021, we had $1.7 million in letters of credit outstanding, which reduced our borrowing capacity on the unused portion ofrevolving credit facility. Total availability to borrow under the revolving credit facility which was immaterial to our operating results for fiscal years 2018 and 2017.totaled $83.3 million at June 30, 2021. The commitment fee on the unused portion of principal amount of the revolving credit facility is payable at a rate that ranges from 20.020 to 25.030 basis points per annum as determined by our ratio of consolidated total indebtedness to adjusted consolidated EBITDA. The weighted average interest rate on borrowings outstanding at June 30, 2021 and June 30, 2020 was 1.40% and 9.25%, respectively. Interest expense incurred and paid on borrowings were, in thousands, $382, $15, and $87, in fiscal years 2021, 2020, and 2019, respectively.
The interest rate is dependent on the type of borrowings and will be one of the following two options:
The•the adjusted London Interbank Offered Rate (“Adjusted LIBO Rate” as defined in the Credit Agreement) in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period, plus the Eurocurrency Loans margin which can range from 125.0 to 175.0200.0 basis points based on ourthe Company's ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or
The•the Alternate Base Rate (the “ABR”) which is defined as the highest of the fluctuating rate per annum equal to the higher of
| |
a. | JP Morgan’s prime rate; |
| |
b. | 1% per annum above the Adjusted LIBO rate; or |
| |
c. | 0.5% per annum above the Federal funds rate; |
a.prime rate as last quoted by The Wall Street Journal; or
b.1% per annum above the Adjusted LIBO rate; or
c.0.5% per annum above the Federal Reserve Bank of New York;
plus the ABR Loans spread which can range from 25.0 to 75.0100.0 basis points based on ourthe Company's ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
OurWe were in compliance with all debt covenants of the revolving credit facility during the twelve-month period ended June 30, 2021. The most significant financial covenants under the Credit Agreement require:
An•an adjusted leverage ratio of (a) consolidated total indebtedness minus unencumbered U.S. cash on hand in the U.S.equivalents in excess of $15,000,000 provided that the maximum subtraction shall not exceed $35,000,000 to (b) adjusted consolidated EBITDA,
determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.03.00 to 1.0,1.00, and
A fixed charge•an interest coverage ratio, for any period, of (a) the sum of (i) consolidatedConsolidated EBITDA minus (ii) 50% of depreciation expense, minus (iii) taxes paid, minus (iv) dividends and distributions paid,for such period to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii)cash interest expense for such period, calculated on a consolidated basis in accordance with GAAP determined as of the end of each of its fiscal quarters for the trailing four fiscal quartersquarter period then ending, to not be less than 1.103.00 to 1.00.
Interest expense incurred on borrowingsSubsequent to June 30, 2021, we entered into an interest rate swap agreement with a bank with a notional value of $40 million. The interest rate swap became effective in July 2021 and will be accounted for using hedge accounting.
During fiscal year 2021, we acquired Poppin, Inc. subsequent to their borrowing of the Payment Protection Program (“PPP”) loan. During the fourth quarter of fiscal year 2021 we were notified that Poppin’s PPP loan had been forgiven in thousands, $70, $37,full and $22,the proceeds were paid in the first quarter of fiscal years 2018, 2017, and 2016, respectively.
Note 7 Employee Benefit Plans
Retirement Plans:
We have a trusteed defined contribution retirement plan in effect for substantially all domestic employees meeting the eligibility requirements. Employer contributionsyear 2022 to the trusteed plan have a five-year vesting schedule and are held forformer Poppin, Inc. equity holders per the sole benefit of participants. We also maintain a supplemental employee retirement plan (“SERP”) for executive employees which enables them to defer cash compensation on a pre-tax basis in excess of IRS limitations. The SERP is structured as a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy.
The discretionary employer contribution for domestic employees is determined annually by the Compensation and Governance Committeeterms of the Boardagreement and plan of Directors. Total expense related to employer contributions to the domestic retirement plans was, in millions, $5.9, $6.4, and $4.3 for fiscal years 2018, 2017, and 2016, respectively.merger.
Employees of certain foreign subsidiaries are covered by local pension or retirement plans. The expense related to employer contributions to these foreign plans for fiscal years 2018, 2017, and 2016 was not material.
Severance Plans:
Our domestic employees participate in severance plans which provide severance benefits to eligible employees meeting the plans’ qualifications, primarily for involuntary termination without cause.
There are no statutory requirements for us to contribute to the plans, nor do employees contribute to the plans. The plans hold no assets. Benefits are paid using available cash on hand when eligible employees meet plan qualifications for payment. Benefits are based upon an employee’s years of service and accumulate up to certain limits specified in the plans and include both salary and an allowance for medical benefits. The components and changes in the Benefit Obligation, Accumulated Other Comprehensive Income (Loss), and Net Periodic Benefit Cost are as follows:
|
| | | | | | | |
| | June 30 |
| (Amounts in Thousands) | 2018 | | 2017 |
| Changes and Components of Benefit Obligation: | |
| | |
|
| Benefit obligation at beginning of year | $ | 3,083 |
| | $ | 2,815 |
|
| Service cost | 521 |
| | 482 |
|
| Interest cost | 85 |
| | 65 |
|
| Actuarial (gain) loss for the period | (895 | ) | | (186 | ) |
| Benefits paid | (75 | ) | | (93 | ) |
| Benefit obligation at end of year | $ | 2,719 |
| | $ | 3,083 |
|
| Balance in current liabilities | $ | 494 |
| | $ | 561 |
|
| Balance in noncurrent liabilities | 2,225 |
| | 2,522 |
|
| Total benefit obligation recognized in the Consolidated Balance Sheets | $ | 2,719 |
| | $ | 3,083 |
|
|
| | | | | | | |
| | June 30 |
| (Amounts in Thousands) | 2018 | | 2017 |
| Changes and Components in Accumulated Other Comprehensive Income (Loss) (before tax): | | |
|
| Accumulated Other Comprehensive Income (Loss) at beginning of year | $ | 1,859 |
| | $ | 2,146 |
|
| Net change in unrecognized actuarial gain (loss) | 635 |
| | (287 | ) |
| Accumulated Other Comprehensive Income (Loss) at end of year | $ | 2,494 |
| | $ | 1,859 |
|
|
| | | | | | | | | | | |
| (Amounts in Thousands) | Year Ended June 30 |
| Components of Net Periodic Benefit Cost (before tax): | 2018 | | 2017 | | 2016 |
| Service cost | $ | 521 |
| | $ | 482 |
| | $ | 490 |
|
| Interest cost | 85 |
| | 65 |
| | 74 |
|
| Amortization of actuarial (gain) loss | (260 | ) | | (473 | ) | | (441 | ) |
| Net periodic benefit cost — Total cost | $ | 346 |
| | $ | 74 |
| | $ | 123 |
|
The benefit cost in the above table includes only normal recurring levels of severance activity, as estimated using an actuarial method. Unusual or non-recurring severance actions are not estimable using actuarial methods and are expensed in accordance with other applicable U.S. GAAP.
The actuarial gain is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. The estimated actuarial net gain for the severance plans that will be amortized from accumulated other comprehensive income into earnings over the next fiscal year is, pre-tax in thousands, $381.
Assumptions used to determine fiscal year end benefit obligations are as follows:
|
| | | |
| | 2018 | | 2017 |
| Discount Rate | 3.4% | | 2.8% |
| Rate of Compensation Increase | 3.0% | | 3.0% |
Weighted average assumptions used to determine fiscal year net periodic benefit costs are as follows:
|
| | | | | |
| | 2018 | | 2017 | | 2016 |
| Discount Rate | 3.0% | | 2.4% | | 2.7% |
| Rate of Compensation Increase | 3.0% | | 3.0% | | 3.0% |
Note 812 Employee Benefit Plans
Retirement Plans:
We have a tax-qualified defined contribution retirement plan in effect for substantially all domestic employees meeting the eligibility requirements. Employer contributions to the plan have a five-year vesting schedule and are held for the sole benefit of participants. We also maintain a supplemental employee retirement plan (“SERP”) for executive employees which enables them to defer cash compensation on a pre-tax basis in excess of IRS limitations. The SERP is structured as a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy.
The discretionary employer contribution for domestic employees is determined annually by the Compensation and Governance Committee of the Board of Directors. No employer contributions were paid to domestic retirement plans in fiscal year 2021. Total expense related to employer contributions to the domestic retirement plans was, in millions, $4.9 and $7.3 for fiscal years 2020 and 2019, respectively.
Employees of certain foreign subsidiaries are covered by local pension or retirement plans, and employees of recently acquired companies receive an employer matching contribution. The expense related to employer contributions to these plans for fiscal years 2021, 2020, and 2019 was not material.
Severance Plans:
Our domestic employees participate in severance plans which provide severance benefits to eligible employees meeting the plans’ qualifications, primarily for involuntary termination without cause.
There are no statutory requirements for us to contribute to the plans, nor do employees contribute to the plans. The plans hold no assets. Benefits are paid using available cash on hand when eligible employees meet plan qualifications for payment. Benefits are based upon an employee’s years of service and accumulate up to certain limits specified in the plans and include both salary and an allowance for medical benefits. The components and changes in the Benefit Obligation, Accumulated Other Comprehensive Income (Loss), and Net Periodic Benefit Cost are as follows:
| | | | | | | | | | | |
| June 30 |
| (Amounts in Thousands) | 2021 | | 2020 |
| Changes and Components of Benefit Obligation: | | | |
| Benefit obligation at beginning of year | $ | 2,739 | | | $ | 2,784 | |
| Service cost | 496 | | | 489 | |
| Interest cost | 46 | | | 66 | |
| Actuarial (gain) loss for the period | (258) | | | (596) | |
| Benefits paid | (52) | | | (4) | |
| Benefit obligation at end of year | $ | 2,971 | | | $ | 2,739 | |
| Balance in current liabilities | $ | 540 | | | $ | 498 | |
| Balance in non-current liabilities | 2,431 | | | 2,241 | |
| Total benefit obligation recognized in the Consolidated Balance Sheets | $ | 2,971 | | | $ | 2,739 | |
| | | | | | | | | | | |
| June 30 |
| (Amounts in Thousands) | 2021 | | 2020 |
| Changes and Components in Accumulated Other Comprehensive Income (Loss) (before tax): | | |
| Accumulated Other Comprehensive Income (Loss) at beginning of year | $ | 2,832 | | | $ | 2,574 | |
| | | |
| Net change in unrecognized actuarial gain (loss) | (169) | | | 258 | |
| Accumulated Other Comprehensive Income (Loss) at end of year | $ | 2,663 | | | $ | 2,832 | |
| | | |
| | | |
| | | |
| | | | | | | | | | | | | | | | | |
| (Amounts in Thousands) | Year Ended June 30 |
| Components of Net Periodic Benefit Cost (before tax): | 2021 | | 2020 | | 2019 |
| Service cost | $ | 496 | | | $ | 489 | | | $ | 506 | |
| Interest cost | 46 | | | 66 | | | 89 | |
| Amortization of actuarial (gain) loss | (427) | | | (338) | | | (404) | |
| Net periodic benefit cost — Total cost | $ | 115 | | | $ | 217 | | | $ | 191 | |
The benefit cost in the above table includes only normal recurring levels of severance activity, as estimated using an actuarial method. Unusual or non-recurring severance actions, such as the restructuring employee transition pay described in Note 3 - Restructuring of Notes to Consolidated Financial Statements, are not estimable using actuarial methods and are therefore excluded from the preceding tables. The Plan recognized actuarial gains during fiscal years 2021, 2020 and 2019 as a result of lower benefit payments than were assumed in the benefit obligation. The actuarial gains are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans.
Assumptions used to determine fiscal year end benefit obligations are as follows:
| | | | | | | | | | | |
| | 2021 | | 2020 |
| Discount Rate | 2.1% | | 1.6% |
| Rate of Compensation Increase | 2.0% | | 2.0% |
Weighted average assumptions used to determine fiscal year net periodic benefit costs are as follows:
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Discount Rate | 1.7% | | 2.5% | | 3.2% |
| Rate of Compensation Increase | 2.0% | | 2.8% | | 3.0% |
Note 13 Stock Compensation Plans
On October 31, 2017, the shareownersshareholders approved the 2017 Stock Incentive Plan (“the 2017 Plan”) which allows for the issuance of stock awards, restricted stock awards, stock options, stock appreciation rights, and other stock-based awards, each of which may include performance-based conditions, to certain employees, non-employee directors, consultants, and advisors. The 2017 Plan authorizes the issuance of 1,000,0002.1 million shares of our Class B Common Stock plus approximately 1.2 millionincluding unused shares from the former Amended and Restated 2003 Stock Option and Incentive Plan (“the 2003 Plan”).plan.
Stock-based compensation expense was $4.2$5.7 million, $6.3$5.6 million, and $5.6$6.6 million in fiscal years 2018, 20172021, 2020 and 2016,2019, respectively. The total income tax benefit for stock compensation arrangements was $2.1$1.1 million, $2.9$1.2 million, and $2.2$2.0 million in fiscal years 2018, 20172021, 2020 and 2016,2019, respectively. Included in the provision for income tax benefittaxes for fiscal years 20182021, 2020 and 2017,2019, respectively, was a $0.7$0.4 million increase in taxes, a $0.2 million increase in taxes and $0.5a $0.3 million reduction in taxes for excess tax benefits from the vesting of stock awards. We generally use treasury shares for issuance of shares.
Performance Shares:
We award performance shares to officers and other key employees. Under these awards, a number of shares will be issued to each participant based upon the attainment of the applicable performance conditions as applied to a total potential share award made and approved by the Compensation and Governance Committee. Currently outstanding are long-term performance share awards with a contractual life of five years. We also award annual performance share awards with a contractual life of one year. The performance conditions for both types of performance share awards are based on annual performance measurement periods. Annual performance shares vest at the end of the fiscal year. Long-term performance shares vest when issued as Common Stock shortly after the end of the fiscal year in which each performance measurement period is complete. Therefore, the long-term performance share awards include shares applicable to performance measurement periods in future fiscal years that will be measured at fair value when the performance targets are established in future fiscal years. The long-term performance share award is being phased out and has only one year remaining. If a participant is not employed on the date long-term performance shares are issued or the date annual performance shares are vested, the performance share award is forfeited, except in the case of death, retirement, total permanent disability, or certain other circumstances described in our employment policy. To the extent performance conditions are not fully attained, performance shares are forfeited.
A summary of performance share activity during fiscal year 2018 is presented below:
|
| | | | |
| | Number of Shares (1) | | Weighted Average Grant Date Fair Value |
| Performance Shares outstanding at July 1, 2017 | 466,778 |
| | $11.23 |
| Granted | 121,602 |
| | $16.62 |
| Vested | (401,833 | ) | | $11.86 |
| Forfeited | (82,324 | ) | | $16.61 |
| Performance Shares outstanding at June 30, 2018 | 104,223 |
| | $16.52 |
(1) The shares granted include the maximum number of shares that may vest under performance share awards; however, the actual number of shares which vest is determined based on the satisfaction of performance conditions, and therefore may be significantly lower. The shares vested include the earned number of shares to be issued based on performance conditions, while shares forfeited include shares that will not be issued as a result of not fully attaining the maximum performance conditions.
As of June 30, 2018, there was approximately $0.6 million of unrecognized compensation cost related to performance shares, based on the latest estimated attainment of performance conditions. That cost is expected to be recognized over annual performance periods ending July 2018 through July 2019, with a weighted average vesting period of less than one year. The fair value of performance shares is based on the stock price at the date of grant, reduced by the present value of dividends normally paid over the vesting period which are not payable on outstanding performance share awards. The weighted average grant date fair value was $16.62, $11.26, and $12.12 for performance share awards granted in fiscal years 2018, 2017, and
2016, respectively. During fiscal years 2018, 2017, and 2016, respectively, 401,833; 294,086; and 352,924 performance shares vested at a fair value of $4.8 million, $3.6 million, and $3.6 million. Annual performance shares that were granted in July 2016 and also in July 2017 vested during fiscal year 2018, as a result of annual performance shares now vesting on June 30 rather than in July. The fair value is equal to the closing price, less the present value of annual dividends, of shares of our Common Stock on the date of the grant.
The performance shares vested represent the total number of shares vested prior to the reduction of shares withheld to satisfy tax withholding obligations. The number of shares presented in the above table, the amounts of unrecognized compensation, and the weighted average period include long-term performance shares awarded that are applicable to the fiscal year 2019 performance measurement period and will be measured at fair value when the performance targets are established.
Relative Total Shareholder Return Performance Units:
We award relative total shareholder return performance units (“RTSR”) to key officers. Under these awards, a participant will earn from 0% to 200% of the target award depending upon how the compound annual growth rate of Kimball International common stock ranks within the peer group at the end of the performance period. RTSRs are vested at the end of the performance period and are issued as common shares shortly after the performance measurement period is complete. The
contractual life of the RTSRs is generally three years. If a participant is not employed on the date shares are vested, the RTSR award is forfeited, except in the case of death, retirement, total permanent disability, or certain other circumstances described in our employment policy. To the extent performance conditions are not fully attained, RTSRs are forfeited.
A summary of RTSR activity during fiscal year 20182021 is presented below:
| | | | | | | Number of Shares(1) | | Weighted Average Grant Date Fair Value |
| | Number of Shares (1) | | Weighted Average Grant Date Fair Value | |
| RTSRs outstanding at July 1, 2017 | 150,492 |
| | $14.49 | |
| RTSRs outstanding at July 1, 2020 | | RTSRs outstanding at July 1, 2020 | 150,088 | | | $21.12 |
| Granted | 52,334 |
| | $20.65 | Granted | 198,642 | | | $11.43 |
| Vested | (37,535 | ) | | $16.25 | Vested | (4,947) | | | $13.04 |
| Forfeited | (34,651 | ) | | $15.10 | Forfeited | (100,831) | | | $19.28 |
| RTSRs outstanding at June 30, 2018 | 130,640 |
| | $18.94 | |
| RTSRs outstanding at June 30, 2021 | | RTSRs outstanding at June 30, 2021 | 242,952 | | | $13.96 |
(1) The shares granted include the maximum number of shares that may vest under RTSR awards; however, the actual number of shares which vest is determined based on the satisfaction of performance conditions, and therefore may be significantly lower. The shares vested include the earned number of shares to be issued based on performance conditions, while shares forfeited include shares that will not be issued as a result of not fully attaining the maximum performance conditions.
Unrestricted shares may be granted to employees and non-employee members of the Board of Directors as consideration for service to Kimball International. Unrestricted share grants do not have vesting periods, holding periods, restrictions on sale, or other restrictions. The fair value of unrestricted shares is based on the stock price at the date of the award. During fiscal years 2018, 2017,2021, 2020, and 2016,2019, respectively, we granted a total of 38,696, 48,812,44,795, 33,334, and 47,47142,888 unrestricted shares of common stock at an average grant date fair value of $18.31, $14.12,$11.75, $15.93, and $11.21$15.42 for a total fair value, in thousands, of $709, $689,$526, $531, and $532.$661. These shares are the total number of shares granted, prior to the reduction of shares withheld to satisfy tax withholding obligations. Unrestricted shares were awarded to key employees and non-employee members of the Board of Directors as compensation for director’s fees and as a result of directors’ elections to receive unrestricted shares in lieu of cash payment. Director’s fees are expensed over the period that directors earn the compensation.
We categorize assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments when events or circumstances indicate a significant adverse effect on the fair value of the asset. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
The carrying value of our cash deposit accounts, trade accounts receivable, trade accounts payable, customer deposits, and dividends payable approximates fair value due to the relatively short maturity and immaterial non-performance risk.
Amounts in parentheses indicate reductions to income.
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
KIMBALL INTERNATIONAL, INC.
