UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20192020
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-3279
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KIMBALL INTERNATIONAL, INC. |
(Exact name of registrant as specified in its charter) |
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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 |
Not Applicable |
Former name, former address and former fiscal year, if changed since last report |
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 Nasdaq Stock Market LLC |
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 every Interactive Data File required to be submitted 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 such files).
Yes x No o
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
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
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
Securities registered pursuant to Section 12(b) of the Act:
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| | |
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 NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
The number of shares outstanding of the Registrant’s common stock as of May 1, 2019April 30, 2020 was:
Class A Common Stock - 251,420193,162 shares
Class B Common Stock - 36,470,74236,641,799 shares
KIMBALL INTERNATIONAL, INC.
FORM 10-Q
INDEX
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PART I FINANCIAL INFORMATION | | | |
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PART II OTHER INFORMATION | | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data)
| | | | | | | | | | | |
| (Unaudited) | | | |
| March 31, 2020 | | June 30, 2019 |
ASSETS | | | | | |
Current Assets: | | | | | |
Cash and cash equivalents | $ | 76,636 | | | $ | 73,196 | |
Short-term investments | 13,658 | | | 33,071 | |
Receivables, net of allowances of $2,531 and $1,321, respectively | 68,934 | | | 63,120 | |
Inventories | 50,710 | | | 46,812 | |
Prepaid expenses and other current assets | 13,855 | | | 13,105 | |
Assets held for sale | 215 | | | 281 | |
Total current assets | 224,008 | | | 229,585 | |
Property and Equipment, net of accumulated depreciation of $192,134 and $185,865, respectively | 93,344 | | | 90,671 | |
Right-of-use operating Lease Assets | 18,219 | | | — | |
Goodwill | 11,160 | | | 11,160 | |
Other Intangible Assets, net of accumulated amortization of $39,998 and $38,320, respectively | 13,339 | | | 12,108 | |
Deferred Tax Assets | 9,188 | | | 8,722 | |
Other Assets | 12,184 | | | 12,420 | |
Total Assets | $ | 381,442 | | | $ | 364,666 | |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current Liabilities: | | | |
Current maturities of long-term debt | $ | 27 | | | $ | 25 | |
Accounts payable | 38,675 | | | 47,916 | |
Customer deposits | 27,377 | | | 24,611 | |
Current portion of operating lease liability | 4,820 | | | — | |
Dividends payable | 3,493 | | | 3,038 | |
Accrued expenses | 36,912 | | | 57,494 | |
Total current liabilities | 111,304 | | | 133,084 | |
Other Liabilities: | | | |
Long-term debt, less current maturities | 109 | | | 136 | |
Long-term operating lease liability | 17,203 | | | — | |
Other | 14,576 | | | 14,956 | |
Total other liabilities | 31,888 | | | 15,092 | |
Shareholders’ Equity: | | | |
Common stock-par value $0.05 per share: | | | |
Class A - Shares authorized: 50,000,000 Shares issued: 193,000 and 251,000, respectively | 10 | | | 12 | |
Class B - Shares authorized: 100,000,000 Shares issued: 42,830,000 and 42,773,000, respectively | 2,141 | | | 2,139 | |
Additional paid-in capital | 4,311 | | | 3,570 | |
Retained earnings | 299,194 | | | 277,391 | |
Accumulated other comprehensive income | 2,150 | | | 1,937 | |
Less: Treasury stock, at cost, 6,205,000 shares and 6,212,000 shares, respectively | (69,556) | | | (68,559) | |
Total Shareholders’ Equity | 238,250 | | | 216,490 | |
Total Liabilities and Shareholders’ Equity | $ | 381,442 | | | $ | 364,666 | |
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| (Unaudited) | | |
|
| March 31, 2019 | | June 30, 2018 |
ASSETS | |
| | |
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Current Assets: | |
| | |
|
Cash and cash equivalents | $ | 49,489 |
| | $ | 52,663 |
|
Short-term investments | 41,821 |
| | 34,607 |
|
Receivables, net of allowances of $1,352 and $1,317, respectively | 55,722 |
| | 62,276 |
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Inventories | 45,140 |
| | 39,509 |
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Prepaid expenses and other current assets | 12,578 |
| | 18,523 |
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Assets held for sale | 281 |
| | 281 |
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Total current assets | 205,031 |
| | 207,859 |
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Property and Equipment, net of accumulated depreciation of $183,529 and $180,059, respectively | 89,910 |
| | 84,487 |
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Goodwill | 11,153 |
| | 8,824 |
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Other Intangible Assets, net of accumulated amortization of $38,002 and $36,757, respectively | 11,957 |
| | 12,607 |
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Deferred Tax Assets | 9,494 |
| | 4,916 |
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Other Assets | 12,969 |
| | 12,767 |
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Total Assets | $ | 340,514 |
| | $ | 331,460 |
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LIABILITIES AND SHAREOWNERS’ EQUITY | | | |
Current Liabilities: | | | |
Current maturities of long-term debt | $ | 25 |
| | $ | 23 |
|
Accounts payable | 41,377 |
| | 48,214 |
|
Customer deposits | 27,624 |
| | 21,253 |
|
Dividends payable | 3,075 |
| | 2,662 |
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Accrued expenses | 45,818 |
| | 50,586 |
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Total current liabilities | 117,919 |
| | 122,738 |
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Other Liabilities: | | | |
Long-term debt, less current maturities | 136 |
| | 161 |
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Other | 15,462 |
| | 15,537 |
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Total other liabilities | 15,598 |
| | 15,698 |
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Shareowners’ Equity: | | | |
Common stock-par value $0.05 per share: | | | |
Class A - Shares authorized: 50,000,000 Shares issued: 257,000 and 264,000, respectively | 13 |
| | 13 |
|
Class B - Shares authorized: 100,000,000 Shares issued: 42,768,000 and 42,761,000, respectively | 2,138 |
| | 2,138 |
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Additional paid-in capital | 3,590 |
| | 1,881 |
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Retained earnings | 269,254 |
| | 249,945 |
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Accumulated other comprehensive income | 1,881 |
| | 1,816 |
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Less: Treasury stock, at cost, 6,313,000 shares and 5,901,000 shares, respectively | (69,879 | ) | | (62,769 | ) |
Total Shareowners’ Equity | 206,997 |
| | 193,024 |
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Total Liabilities and Shareowners’ Equity | $ | 340,514 |
| | $ | 331,460 |
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KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | | | (Unaudited) | | |
| Three Months Ended | | | | Nine Months Ended | | |
| March 31 | | | | March 31 | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net Sales | $ | 178,174 | | | $ | 177,369 | | | $ | 571,790 | | | $ | 572,500 | |
Cost of Sales | 117,680 | | | 120,808 | | | 375,585 | | | 385,077 | |
Gross Profit | 60,494 | | | 56,561 | | | 196,205 | | | 187,423 | |
Selling and Administrative Expenses | 45,606 | | | 47,508 | | | 146,239 | | | 151,178 | |
| | | | | | | |
Restructuring Expense | 818 | | | — | | | 6,564 | | | — | |
Operating Income | 14,070 | | | 9,053 | | | 43,402 | | | 36,245 | |
Other Income (Expense): | | | | | | | |
Interest income | 386 | | | 492 | | | 1,482 | | | 1,339 | |
Interest expense | (21) | | | (40) | | | (65) | | | (146) | |
Non-operating income (expense), net | (2,078) | | | 970 | | | (1,360) | | | 71 | |
Other income (expense), net | (1,713) | | | 1,422 | | | 57 | | | 1,264 | |
Income Before Taxes on Income | 12,357 | | | 10,475 | | | 43,459 | | | 37,509 | |
Provision for Income Taxes | 2,906 | | | 2,521 | | | 11,585 | | | 9,274 | |
Net Income | $ | 9,451 | | | $ | 7,954 | | | $ | 31,874 | | | $ | 28,235 | |
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Earnings Per Share of Common Stock: | | | | | | | |
Basic Earnings Per Share | $ | 0.26 | | | $ | 0.22 | | | $ | 0.86 | | | $ | 0.77 | |
Diluted Earnings Per Share | $ | 0.25 | | | $ | 0.22 | | | $ | 0.86 | | | $ | 0.76 | |
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Class A and B Common Stock: | | | | | | | |
Average Number of Shares Outstanding - Basic | 36,813 | | | 36,712 | | | 36,890 | | | 36,871 | |
Average Number of Shares Outstanding - Diluted | 37,089 | | | 36,909 | | | 37,234 | | | 37,260 | |
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| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
| 2019 | | 2018 | | 2019 | | 2018 |
Net Sales | $ | 177,369 |
| | $ | 160,897 |
| | $ | 572,500 |
| | $ | 514,871 |
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Cost of Sales | 120,808 |
| | 110,933 |
| | 385,077 |
| | 343,480 |
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Gross Profit | 56,561 |
| | 49,964 |
| | 187,423 |
| | 171,391 |
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Selling and Administrative Expenses | 47,508 |
| | 41,454 |
| | 151,178 |
| | 134,919 |
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Operating Income | 9,053 |
| | 8,510 |
| | 36,245 |
| | 36,472 |
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Other Income (Expense): | | | | | | | |
Interest income | 492 |
| | 258 |
| | 1,339 |
| | 726 |
|
Interest expense | (40 | ) | | (55 | ) | | (146 | ) | | (160 | ) |
Non-operating income (expense), net | 970 |
| | (205 | ) | | 71 |
| | 344 |
|
Other income (expense), net | 1,422 |
| | (2 | ) | | 1,264 |
| | 910 |
|
Income Before Taxes on Income | 10,475 |
| | 8,508 |
| | 37,509 |
| | 37,382 |
|
Provision for Income Taxes | 2,521 |
| | 2,658 |
| | 9,274 |
| | 13,197 |
|
Net Income | $ | 7,954 |
| | $ | 5,850 |
| | $ | 28,235 |
| | $ | 24,185 |
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Earnings Per Share of Common Stock: | |
| | |
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Basic Earnings Per Share | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.77 |
| | $ | 0.65 |
|
Diluted Earnings Per Share | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.76 |
| | $ | 0.64 |
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Dividends Per Share of Common Stock | $ | 0.08 |
| | $ | 0.07 |
| | $ | 0.24 |
| | $ | 0.21 |
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| | | | | | | |
Class A and B Common Stock: | | | | | | | |
Average Number of Shares Outstanding - Basic | 36,712 |
| | 37,259 |
| | 36,871 |
| | 37,388 |
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Average Number of Shares Outstanding - Diluted | 36,909 |
| | 37,539 |
| | 37,260 |
| | 37,713 |
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KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | | | | | (Unaudited) | | | | |
| Three Months Ended | | | | | | Three Months Ended | | | | |
| March 31, 2020 | | | | | | March 31, 2019 | | | | |
(Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
Net income | | | | | | $ | 9,451 | | | | | | | $ | 7,954 | |
Other comprehensive income (loss): | | | | | | | | | | | |
Available-for-sale securities | $ | 3 | | | $ | (1) | | | $ | 2 | | | $ | 27 | | | $ | (7) | | | $ | 20 | |
Postemployment severance actuarial change | 120 | | | (31) | | | 89 | | | 100 | | | (26) | | | 74 | |
| | | | | | | | | | | |
Reclassification to (earnings) loss: | | | | | | | | | | | |
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Amortization of actuarial change | (82) | | | 21 | | | (61) | | | (100) | | | 26 | | | (74) | |
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Other comprehensive income (loss) | $ | 41 | | | $ | (11) | | | $ | 30 | | | $ | 27 | | | $ | (7) | | | $ | 20 | |
Total comprehensive income | | | | | | $ | 9,481 | | | | | | | $ | 7,974 | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Three Months Ended |
| March 31, 2019 | | March 31, 2018 |
(Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
Net income | | | | | $ | 7,954 |
| | | | | | $ | 5,850 |
|
Other comprehensive income (loss): | | | | | | | | | | | |
Available-for-sale securities | $ | 27 |
| | $ | (7 | ) | | $ | 20 |
| | $ | — |
| | $ | (4 | ) | | $ | (4 | ) |
Postemployment severance actuarial change | 100 |
| | (26 | ) | | 74 |
| | 87 |
| | (30 | ) | | 57 |
|
Reclassification to (earnings) loss: | | | | | | | | | | | |
Available-for-sale securities | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Amortization of actuarial change | (100 | ) | | 26 |
| | (74 | ) | | (58 | ) | | 19 |
| | (39 | ) |
Other comprehensive income (loss) | $ | 27 |
| | $ | (7 | ) | | $ | 20 |
| | $ | 30 |
| | $ | (15 | ) | | $ | 15 |
|
Total comprehensive income | | | | | $ | 7,974 |
| | | | | | $ | 5,865 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| (Unaudited) | | | | | | (Unaudited) | | | | |
| Nine Months Ended | | | | | | Nine Months Ended | | | | |
| March 31, 2020 | | | | | | March 31, 2019 | | | | |
(Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
Net income | | | | | | $ | 31,874 | | | | | | | $ | 28,235 | |
Other comprehensive income (loss): | | | | | | | | | | | |
Available-for-sale securities | $ | (17) | | | $ | 4 | | | $ | (13) | | | $ | 42 | | | $ | (11) | | | $ | 31 | |
Postemployment severance actuarial change | 565 | | | (146) | | | 419 | | | 338 | | | (87) | | | 251 | |
Derivative gain (loss) | — | | | — | | | — | | | (11) | | | 2 | | | (9) | |
Reclassification to (earnings) loss: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Amortization of actuarial change | (260) | | | 67 | | | (193) | | | (302) | | | 78 | | | (224) | |
Derivatives | — | | | — | | | — | | | 21 | | | (5) | | | 16 | |
Other comprehensive income (loss) | $ | 288 | | | $ | (75) | | | $ | 213 | | | $ | 88 | | | $ | (23) | | | $ | 65 | |
Total comprehensive income | | | | | | $ | 32,087 | | | | | | | $ | 28,300 | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Nine Months Ended | | Nine Months Ended |
| March 31, 2019 | | March 31, 2018 |
(Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
Net income | | | | | $ | 28,235 |
| | | | | | $ | 24,185 |
|
Other comprehensive income (loss): | | | | | | | | | | | |
Available-for-sale securities | $ | 42 |
| | $ | (11 | ) | | $ | 31 |
| | $ | (30 | ) | | $ | 8 |
| | $ | (22 | ) |
Postemployment severance actuarial change | 338 |
| | (87 | ) | | 251 |
| | 593 |
| | (218 | ) | | 375 |
|
Derivative gain (loss) | (11 | ) | | 2 |
| | (9 | ) | | — |
| | — |
| | — |
|
Reclassification to (earnings) loss: | | | | | | | | | | | |
Available-for-sale securities | — |
| | — |
| | — |
| | 4 |
| | (1 | ) | | 3 |
|
Amortization of actuarial change | (302 | ) | | 78 |
| | (224 | ) | | (191 | ) | | 62 |
| | (129 | ) |
Derivatives | 21 |
| | (5 | ) | | 16 |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) | $ | 88 |
| | $ | (23 | ) | | $ | 65 |
| | $ | 376 |
| | $ | (149 | ) | | $ | 227 |
|
Total comprehensive income | | | | | $ | 28,300 |
| | | | | | $ | 24,412 |
|
KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
| | | | | | | | | | | |
| (Unaudited) | | |
| Nine Months Ended | | |
| March 31 | | |
| 2020 | | 2019 |
Cash Flows From Operating Activities: | | | |
Net income | $ | 31,874 | | | $ | 28,235 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 11,337 | | | 11,077 | |
Amortization | 1,707 | | | 1,455 | |
Loss (Gain) on sales of assets | 75 | | | (1,140) | |
Restructuring and asset impairment charges | 2,954 | | | — | |
Deferred income tax and other deferred charges | (500) | | | (4,571) | |
Stock-based compensation | 3,850 | | | 4,749 | |
Other, net | 3,043 | | | (1,319) | |
Change in operating assets and liabilities: | | | |
Receivables | (5,815) | | | 6,848 | |
Inventories | (3,898) | | | (2,863) | |
Prepaid expenses and other current assets | (960) | | | 5,769 | |
Accounts payable | (7,929) | | | (7,534) | |
Customer deposits | 2,766 | | | 6,371 | |
Accrued expenses | (21,136) | | | (4,397) | |
Net cash provided by operating activities | 17,368 | | | 42,680 | |
Cash Flows From Investing Activities: | | | |
Capital expenditures | (16,132) | | | (15,577) | |
Proceeds from sales of assets | 138 | | | 1,277 | |
Cash paid for acquisition | — | | | (4,850) | |
Purchases of capitalized software | (3,011) | | | (805) | |
Purchases of available-for-sale securities | (24,977) | | | (39,778) | |
Maturities of available-for-sale securities | 44,488 | | | 32,550 | |
Other, net | (818) | | | (3) | |
Net cash used for investing activities | (312) | | | (27,186) | |
Cash Flows From Financing Activities: | | | |
| | | |
| | | |
Change in long-term debt | (25) | | | (23) | |
| | | |
Dividends paid to shareholders | (9,607) | | | (8,498) | |
Repurchases of Common Stock | (3,004) | | | (9,132) | |
Repurchase of employee shares for tax withholding | (976) | | | (1,035) | |
Net cash used for financing activities | (13,612) | | | (18,688) | |
| | | |
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash (1) | 3,444 | | | (3,194) | |
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period (1) | 73,837 | | | 53,321 | |
Cash, Cash Equivalents, and Restricted Cash at End of Period (1) | $ | 77,281 | | | $ | 50,127 | |
Supplemental Disclosure of Cash Flow Information | | | |
Cash paid during the period for: | | | |
Income taxes | $ | 10,406 | | | $ | 6,758 | |
Interest expense | $ | 15 | | | $ | 82 | |
|
| | | | | | | |
| (Unaudited) |
| Nine Months Ended |
| March 31 |
| 2019 | | 2018 |
Cash Flows From Operating Activities: | | | |
Net income | $ | 28,235 |
| | $ | 24,185 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation | 11,077 |
| | 10,232 |
|
Amortization | 1,455 |
| | 1,280 |
|
Gain on sales of assets | (1,140 | ) | | (2,124 | ) |
Deferred income tax and other deferred charges | (4,571 | ) | | 5,464 |
|
Stock-based compensation | 4,749 |
| | 3,326 |
|
Other, net | (1,319 | ) | | 443 |
|
Change in operating assets and liabilities: | | | |
Receivables | 6,848 |
| | 8,311 |
|
Inventories | (2,863 | ) | | 480 |
|
Prepaid expenses and other current assets | 5,769 |
| | (7,690 | ) |
Accounts payable | (7,534 | ) | | (5,525 | ) |
Customer deposits | 6,371 |
| | 1,784 |
|
Accrued expenses | (4,397 | ) | | (13,767 | ) |
Net cash provided by operating activities | 42,680 |
| | 26,399 |
|
Cash Flows From Investing Activities: | | | |
Capital expenditures | (15,577 | ) | | (15,332 | ) |
Proceeds from sales of assets | 1,277 |
| | 5,660 |
|
Cash paid for acquisitions | (4,850 | ) | | (17,800 | ) |
Purchases of capitalized software | (805 | ) | | (510 | ) |
Purchases of available-for-sale securities | (39,778 | ) | | (33,825 | ) |
Maturities of available-for-sale securities | 32,550 |
| | 30,737 |
|
Other, net | (3 | ) | | (154 | ) |
Net cash used for investing activities | (27,186 | ) | | (31,224 | ) |
Cash Flows From Financing Activities: | | | |
Net change in capital leases and long-term debt | (23 | ) | | (27 | ) |
Dividends paid to shareowners | (8,498 | ) | | (7,480 | ) |
Repurchases of Common Stock | (9,132 | ) | | (8,120 | ) |
Repurchase of employee shares for tax withholding | (1,035 | ) | | (2,426 | ) |
Net cash used for financing activities | (18,688 | ) | | (18,053 | ) |
Net Decrease in Cash, Cash Equivalents, and Restricted Cash (1) | (3,194 | ) | | (22,878 | ) |
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period (1) | 53,321 |
| | 63,088 |
|
Cash, Cash Equivalents, and Restricted Cash at End of Period (1) | $ | 50,127 |
| | $ | 40,210 |
|
Supplemental Disclosure of Cash Flow Information | | | |
Cash paid during the period for: | | | |
Income taxes | $ | 6,758 |
| | $ | 13,635 |
|
Interest expense | $ | 82 |
| | $ | 160 |
|
(1) The following table reconciles cash and cash equivalents in the balance sheets to cash, cash equivalents, and restricted cash per the statements of cash flows to the balance sheets.flows. The restricted cash included in other assets on the balance sheet represents amounts pledged as collateral for a long-term financing arrangement as contractually required by a lender. The restriction will lapse when the related long-term debt is paid off. Beginning in the second quarter of fiscal year 2018, restrictedRestricted cash also included customer deposits held due to a foreign entity being classified as a restricted entity by a government agency subsequent to our receipt of the deposit.
| | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in Thousands) | March 31, 2020 | | June 30, 2019 | | March 31, 2019 | | June 30, 2018 |
Cash and Cash Equivalents | | $ | 76,636 | | | $ | 73,196 | | | $ | 49,489 | | | $ | 52,663 | |
Restricted cash included in Other Assets | | 645 | | | 641 | | | 638 | | | 658 | |
Total Cash, Cash Equivalents, and Restricted Cash at end of period | | $ | 77,281 | | | $ | 73,837 | | | $ | 50,127 | | | $ | 53,321 | |
|
| | | | | | | | | | | | | | | |
(Amounts in Thousands) | March 31, 2019 | | June 30, 2018 | | March 31, 2018 | | June 30, 2017 |
Cash and Cash Equivalents | $ | 49,489 |
| | $ | 52,663 |
| | $ | 39,554 |
| | $ | 62,882 |
|
Restricted cash included in Other Assets | 638 |
| | 658 |
| | 656 |
| | 206 |
|
Total Cash, Cash Equivalents, and Restricted Cash at end of period | $ | 50,127 |
| | $ | 53,321 |
| | $ | 40,210 |
| | $ | 63,088 |
|
KIMBALL INTERNATIONAL, INC.
CONDENSED 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 |
Three months ended March 31, 2020 (Unaudited) | Class A | | Class B | | | | | | | | | | |
Amounts at December 31, 2019 | $ | 10 | | | $ | 2,141 | | | $ | 3,423 | | | $ | 293,089 | | | $ | 2,120 | | | $ | (68,194) | | | $ | 232,589 | |
Net income | | | | | | | 9,451 | | | | | | | 9,451 | |
Other comprehensive income (loss) | | | | | | | | | 30 | | | | | 30 | |
Issuance of non-restricted stock (6,000 shares) | | | | | (79) | | | | | | | 79 | | | — | |
Conversion of Class A to Class B common stock (1,000 shares) | — | | | — | | | (21) | | | | | | | 21 | | — | |
Compensation expense related to stock compensation plans | | | | | 1,315 | | | | | | | | | 1,315 | |
| | | | | | | | | | | | | |
Restricted share units issuance (15,000 shares) | | | | | (327) | | | | | | | 202 | | | (125) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Repurchase of Common Stock (81,000 shares) | | | | | | | | | | | (1,664) | | | (1,664) | |
Dividends declared ($0.09 per share) | | | | | | | (3,346) | | | | | | | (3,346) | |
Amounts at March 31, 2020 | $ | 10 | | | $ | 2,141 | | | $ | 4,311 | | | $ | 299,194 | | | $ | 2,150 | | | $ | (69,556) | | | $ | 238,250 | |
| | | | | | | | | | | | | |
Three months ended March 31, 2019 (Unaudited) | | | | | | | | | | | | | |
Amounts at December 31, 2018 | $ | 13 | | | $ | 2,138 | | | $ | 2,607 | | | $ | 264,267 | | | $ | 1,861 | | | $ | (70,015) | | | $ | 200,871 | |
Net income | | | | | | | 7,954 | | | | | | | 7,954 | |
Other comprehensive income (loss) | | | | | | | | | 20 | | | | | 20 | |
Issuance of non-restricted stock (11,000 shares) | | | | | (138) | | | | | | | 138 | | | — | |
| | | | | | | | | | | | | |
Compensation expense related to stock compensation plans | | | | | 1,121 | | | | | | | | | 1,121 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Repurchase of Common Stock (100 shares) | | | | | | | | | | | (2) | | | (2) | |
Dividends declared ($0.08 per share) | | | | | | | (2,967) | | | | | | | (2,967) | |
Amounts at March 31, 2019 | $ | 13 | | | $ | 2,138 | | | $ | 3,590 | | | $ | 269,254 | | | $ | 1,881 | | | $ | (69,879) | | | $ | 206,997 | |
| | | | | | | | | | | | | |
Nine months ended March 31, 2020 (Unaudited) | | | | | | | | | | | | | |
Amounts at June 30, 2019 | $ | 12 | | | $ | 2,139 | | | $ | 3,570 | | | $ | 277,391 | | | $ | 1,937 | | | $ | (68,559) | | | $ | 216,490 | |
Net income | | | | | | | 31,874 | | | | | | | 31,874 | |
Other comprehensive income (loss) | | | | | | | | | 213 | | | | | 213 | |
Issuance of non-restricted stock (21,000 shares) | | | | | (281) | | | | | | | 281 | | | — | |
Conversion of Class A to Class B common stock (58,000 shares) | (2) | | | 2 | | | (21) | | | | | | | 21 | | — | |
Compensation expense related to stock incentive plans | | | | | 4,395 | | | | | | | | | 4,395 | |
Performance share issuance (67,000 shares) | | | | | (1,391) | | | | | | | 879 | | | (512) | |
Restricted share units issuance (15,000 shares) | | | | | (327) | | | | | | | 202 | | | (125) | |
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 ($0.27 per share) | | | | | | | (10,071) | | | | | | | (10,071) | |
Amounts at March 31, 2020 | $ | 10 | | | $ | 2,141 | | | $ | 4,311 | | | $ | 299,194 | | | $ | 2,150 | | | $ | (69,556) | | | $ | 238,250 | |
| | | | | | | | | | | | | |
Nine months ended March 31, 2019 (Unaudited) | | | | | | | | | | | | | |
Amounts at June 30, 2018 | $ | 13 | | | $ | 2,138 | | | $ | 1,881 | | | $ | 249,945 | | | $ | 1,816 | | | $ | (62,769) | | | $ | 193,024 | |
Net income | | | | | | | 28,235 | | | | | | | 28,235 | |
Other comprehensive income (loss) | | | | | | | | | 65 | | | | | 65 | |
Issuance of non-restricted stock (32,000 shares) | | | | | (426) | | | | | | | 414 | | | (12) | |
Conversion of Class A to Class B common stock (7,000 shares) | — | | | — | | | | | | | | | | | | — | |
Compensation expense related to stock incentive plans | | | | | 4,749 | | | | | | | | | 4,749 | |
Performance share issuance (81,000 shares) | | | | | (1,709) | | | | | | | | 1,057 | | | (652) | |
Restricted share units issuance (15,000 shares) | | | | | (382) | | | | | | | 201 | | | (181) | |
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 ($0.24 per share) | | | | | | | (8,926) | | | | | | | (8,926) | |
Amounts at March 31, 2019 | $ | 13 | | | $ | 2,138 | | | $ | 3,590 | | | $ | 269,254 | | | $ | 1,881 | | | $ | (69,879) | | | $ | 206,997 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Shareowners’ Equity |
Three months ended March 31, 2019 (Unaudited) | Class A | | Class B | |
Amounts at December 31, 2018 | $ | 13 |
| | $ | 2,138 |
| | $ | 2,607 |
| | $ | 264,267 |
| | $ | 1,861 |
| | $ | (70,015 | ) | | $ | 200,871 |
|
Net income | | | | | | | 7,954 |
| | | | | | 7,954 |
|
Other comprehensive income (loss) | | | | | | | | | 20 |
| | | | 20 |
|
Issuance of non-restricted stock (11,000 shares) | | | | | (138 | ) | | | | | | 138 |
| | — |
|
Compensation expense related to stock incentive plans | | | | | 1,121 |
| | | | | | | | 1,121 |
|
Repurchase of Common Stock | | | | | | | | | | | (2 | ) | | (2 | ) |
Dividends declared ($0.08 per share) | | | | | | | (2,967 | ) | | | | | | (2,967 | ) |
Amounts at March 31, 2019 | $ | 13 |
| | $ | 2,138 |
| | $ | 3,590 |
| | $ | 269,254 |
| | $ | 1,881 |
| | $ | (69,879 | ) | | $ | 206,997 |
|
| | | | | | | | | | | | | |
Three months ended March 31, 2018 (Unaudited) | | | | | | | | | | | | | |
Amounts at December 31, 2017 | $ | 14 |
| | $ | 2,137 |
| | $ | 1,566 |
| | $ | 239,354 |
| | $ | 1,327 |
| | $ | (56,625 | ) | | $ | 187,773 |
|
Net income | | | | | | | 5,850 |
| | | | | | 5,850 |
|
Other comprehensive income (loss) | | | | | | | | | 15 |
| | | | 15 |
|
Issuance of non-restricted stock (10,000 shares) | | | | | (120 | ) | | | | | | 121 |
| | 1 |
|
Conversion of Class A to Class B common stock (13,000 shares) | (1 | ) | | 1 |
| | | | | | | | | | — |
|
Compensation expense related to stock incentive plans | | | | | 815 |
| | | | | | | | 815 |
|
Performance share issuance | | | | | | | (1 | ) | | | | | | (1 | ) |
Repurchase of Common Stock (398,000 shares) | | | | | | | | | | | (6,639 | ) | | (6,639 | ) |
Dividends declared ($0.07 per share) | | | | | | | (2,612 | ) | | | | | | (2,612 | ) |
Amounts at March 31, 2018 | $ | 13 |
| | $ | 2,138 |
| | $ | 2,261 |
| | $ | 242,591 |
| | $ | 1,342 |
| | $ | (63,143 | ) | | $ | 185,202 |
|
| | | | | | | | | | | | | |
Nine months ended March 31, 2019 (Unaudited) | | | | | | | | | | | | | |
Amounts at June 30, 2018 | $ | 13 |
| | $ | 2,138 |
| | $ | 1,881 |
| | $ | 249,945 |
| | $ | 1,816 |
| | $ | (62,769 | ) | | $ | 193,024 |
|
Net income | | | | | | | 28,235 |
| | | | | | 28,235 |
|
Other comprehensive income (loss) | | | | | | | | | 65 |
| | | | 65 |
|
Issuance of non-restricted stock (32,000 shares) | | | | | (426 | ) | | | | | | 414 |
| | (12 | ) |
Conversion of Class A to Class B common stock (7,000 shares) | — |
| | — |
| | | | | | | | | | — |
|
Compensation expense related to stock incentive plans | | | | | 4,749 |
| | | | | | | | 4,749 |
|
Performance share issuance (81,000 shares) | | | | | (1,709 | ) | | | | | | 1,057 |
| | (652 | ) |
Restricted share units issuance (15,000 shares) | | | | | (382 | ) | | | | | | 201 |
| | (181 | ) |
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 ($0.24 per share) | | | | | | | (8,926 | ) | | | | | | (8,926 | ) |
Amounts at March 31, 2019 | $ | 13 |
| | $ | 2,138 |
| | $ | 3,590 |
| | $ | 269,254 |
| | $ | 1,881 |
| | $ | (69,879 | ) | | $ | 206,997 |
|
| | | | | | | | | | | | | |
Nine months ended March 31, 2018 (Unaudited) | | | | | | | | | | | | | |
Amounts at June 30, 2017 | $ | 14 |
| | $ | 2,137 |
| | $ | 2,971 |
| | $ | 230,763 |
| | $ | 1,115 |
| | $ | (60,796 | ) | | $ | 176,204 |
|
Net income | | | | | | | 24,185 |
| | | | | | 24,185 |
|
Other comprehensive income (loss) | | | | | | | | | 227 |
| | | | 227 |
|
Issuance of non-restricted stock (29,000 shares) | | | | | (492 | ) | | | | | | 494 |
| | 2 |
|
Conversion of Class A to Class B common stock (14,000 shares) | (1 | ) | | 1 |
| | | | | | | | | | — |
|
Compensation expense related to stock incentive plans | | | | | 3,326 |
| | | | | | | | 3,326 |
|
Performance share issuance (226,000 shares) | | | | | (2,261 | ) | | (4,463 | ) | | | | 4,622 |
| | (2,102 | ) |
Relative total shareholder return performance units issuance (38,000 shares) | | | | | (1,283 | ) | | | | | | 957 |
| | (326 | ) |
Repurchase of Common Stock (505,000 shares) | | | | | | | | | | | (8,420 | ) | | (8,420 | ) |
Dividends declared ($0.21 per share) | | | | | | | (7,894 | ) | | | | | | (7,894 | ) |
Amounts at March 31, 2018 | $ | 13 |
| | $ | 2,138 |
| | $ | 2,261 |
| | $ | 242,591 |
| | $ | 1,342 |
| | $ | (63,143 | ) | | $ | 185,202 |
|
KIMBALL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Kimball International, Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) have been prepared in accordance with the instructions to Form 10-Q. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. Intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.
Prior Period Reclassifications
Our prior period financial statements were recast for the full retrospective adoption of guidance Additionally, based on the recognition of revenue from contracts with customers. Certain prior period amounts on the Condensed Consolidated Statements of Cash Flows have also been recast to incorporate restricted cash flowsduration and restricted cash balances, as a resultseverity of the retrospective adoptioncurrent global situation involving the COVID-19 pandemic, including but not limited to the length of new accounting guidance.the various government orders requiring temporary suspension of non-essential business operations, duration of limits on travel, and the speed of the recovery of economic conditions globally, the extent to which COVID-19 will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted.
Note 2. Recent Accounting Pronouncements and Supplemental Information
Recently Adopted Accounting Pronouncements:
In August 2018, the Securities and Exchange Commission adopted disclosure and simplification amendments which update certain disclosure requirements that were redundant, duplicative, overlapping, outdated, or superseded. The amendments require a shareowners’ equity statement provided in interim financial statements or in a note. The adoption resulted in the addition of an interim Condensed Consolidated Statements of Shareowners’ Equity.
In June 2018,March 2017, the Financial Accounting Standards Board (“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 it may not be adopted earlier than our adoption of the new revenue standard. We early adopted the guidance in our first quarter of fiscal year 2019 in advance of the October 2018 retirement of our former Chief Executive Officer and Chairman of the Board of Directors, who will have stock compensation awards vesting after his retirement. The adoption did not have a material effect on our condensed 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 was adopted during our first quarter of fiscal year 2019 and was applied prospectively to awards modified on or after the adoption date. The adoption of the guidance did not have a material effect on our condensed 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 periodic benefit cost separate from the service costs and disclose the line item in which the components of Net periodic benefit cost other than the service cost are included. Due to the immaterial amounts in prior periods we did not apply the rule retrospectively. The guidance was adopted during our first quarter of fiscal year 2019 and did not have a material effect on our condensed 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 was adopted during our first quarter of fiscal year 2019 concurrently with the adoption of the guidance on recognition of revenue from contracts with customers. The adoption of this guidance did not have a material impact on our condensed 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 was adopted during our first quarter of fiscal year 2019 and was applied retrospectively to each prior reporting period. The guidance resulted in certain prior period amounts being reclassified to conform with the current period presentation, including the addition of restricted cash to cash and cash equivalents on the Condensed Consolidated Statements of Cash Flows.
In January 2016, the FASB issued guidance which is intended 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 was adopted during our first quarter of fiscal year 2019 and did not have a material effect on our condensed 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 made the guidance effective for our first quarter of fiscal year 2019 financial statements using either of two acceptable adoption methods: (i) full 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 clarified assessing whether an entity is a principal or an agent in a revenue transaction, and impacted whether an entity reports revenue on a gross or net basis; in April 2016, the FASB issued additional guidance that addressed identifying performance obligations and implementing licensing guidance; and in May 2016, the FASB issued additional guidance that clarified collectability, noncash consideration, and other transition issues. The amendments had the same effective date and transition requirements as the new revenue standard. We adopted the standard at the beginning of fiscal year 2019 using the full retrospective approach which required that we recast prior year comparative periods to provide comparable financial reporting for all reported fiscal years. All changes required by the new standard, including accounting policies, controls, and disclosures, have been identified and implemented as of the beginning of fiscal 2019. We applied the transition practical expedient related to remaining performance obligations for reporting periods presented before the date of initial application. See Note 4 - Revenue in the Notes to Condensed Consolidated Financial Statements for more information on revenue recognition.Recently Issued Accounting Pronouncements Not Yet Adopted:
In August 2018, the FASB issued guidance on a customer’s accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The guidance is effective for our first quarter of fiscal year 2021 with early adoption permitted. Entities can choose to adopt the guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. We have not yet determined the effect of this guidance on our condensed consolidated financial statements.
In August 2018, the FASB issued guidance to add, remove, and clarify disclosure requirements related to defined pension benefit and other postretirement plans. The guidance is effective for our first quarter of fiscal year 2021 with early adoption permitted and should be applied retrospectively. We have not yet determined the effect of this guidance on our condensed consolidated financial statements.
In August 2018, the FASB issued guidance which changes the fair value measurement disclosure requirements. The guidance modifies 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 is effective for our first quarter of fiscal year 2021 with early adoption permitted and should be applied retrospectively except for certain disclosures. We have not yet determined the effect of this guidance on our condensed 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 recorded directly to retained earnings as of the beginning of the period of adoption. The guidance iswas effective for our first quarter of fiscal year 2020 with early2020. The adoption permitted. Wedid not have not yet determined thea material effect of this guidance on our condensed 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. The guidance is effective for our first quarter of fiscal year 2021 with early adoption in our fiscal year 2020 permitted. We have not yet determined the effect of this guidance on our condensed 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 requirerequires 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 condensed consolidated financial statements. In March 2019, the FASB issued clarifying guidance regarding interim transition disclosures. TheWe adopted this lease guidance is effective foras of the beginning of our first quarter of fiscal year 2020 with early adoption permitted.2020. We have assessed our portfolio of leases and compiled a central repository of active leases. We are also evaluating key policy elections under the standard which we will use to develop an internal policy to address the new standard requirements. While we continue to assess the impact on our accounting policies, internal control processes, and related disclosures required under the new guidance, we will be required to recordleases, recording a right-of-use asset and a lease liability for all leases with a lease term of greater than twelve months. All changes required by the new standard, including accounting policies, controls, and disclosures, have been identified and implemented. See Note 6 - Leases in the Notes to Condensed Consolidated Financial Statements for additional information. Recently Issued Accounting Pronouncements Not Yet Adopted:
In August 2018, the FASB issued guidance on a customer’s accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The guidance is effective for our first quarter of fiscal year 2021 with early adoption permitted. Entities can choose to adopt the guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. We do not expect the adoption to have a material effect on our condensed consolidated financial statements.
In August 2018, the FASB issued guidance which changes the fair value measurement disclosure requirements. The guidance modifies 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 is effective for our first quarter of fiscal year 2021 with early adoption permitted and should be applied retrospectively except for certain disclosures. We have not yet determined the effect of this standardguidance on our condensed 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 materially affect our consolidated net income. These conclusions could change as we continuereduce the complexity by decreasing the number of credit impairment models that entities use to evaluateaccount for debt instruments. In May 2019, the FASB amended the new standard or ifto 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 for our lease portfolio changes.first quarter of fiscal year 2021 with early adoption in our fiscal year 2020 permitted. We anticipate electing certainhave not yet determined the effect of the available practical expedients, including the transition option, upon adoptionthis guidance on July 1, 2019.our condensed consolidated financial statements.
Goodwill and Other Intangible Assets:
Our most recently completed goodwill impairment analyses, which was completed during our second quarter of fiscal year 2020, indicated significant excess fair values over carrying values across the different reporting units. We do not currently consider the COVID-19 pandemic to be a triggering event to accelerate our annual goodwill impairment analysis. During the quarter and year-to-date period ended March 31, 2020, 0 goodwill or intangible asset impairment was recognized.
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 which compares the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. 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. 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 the quarter and year-to-date period endedAs of March 31, 2020and June 30, 2019 noour goodwill impairment was recognized.totaled $11.2 million.
During fiscal year 2019, we recorded $2.1 million in goodwill from the acquisition of David Edward. During fiscal year 2018, we recorded $8.8 million and $10.7 million, respectively, in goodwill and other intangible assets from the acquisition of D’style, Inc. (“D’style”). We recorded an additional $0.2 million of goodwill during fiscal year 2019 as a result of a working capital adjustment related to the acquisition of D’style. See Note 3 - Acquisition in the Notes to Condensed Consolidated Financial Statements for more information on this acquisition.
Other Intangible Assets reported on the Condensed Consolidated Balance Sheets consist of capitalized software, product rights, customer relationships, trade names, and non-compete agreements. 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. A summary of intangible assets subject to amortization is as follows: | | | March 31, 2019 | | June 30, 2018 | | March 31, 2020 | | | June 30, 2019 | |
(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 | $ | 39,239 |
| | $ | 36,590 |
| | $ | 2,649 |
| | $ | 38,482 |
| | $ | 35,922 |
| | $ | 2,560 |
| Capitalized Software | $ | 42,617 | | | $ | 37,426 | | | $ | 5,191 | | | $ | 39,708 | | | $ | 36,662 | | | $ | 3,046 | |
Product Rights | — |
| | — |
| | — |
| | 162 |
| | 162 |
| | — |
| |
| Customer Relationships | 7,050 |
| | 878 |
| | 6,172 |
| | 7,050 |
| | 422 |
| | 6,628 |
| Customer Relationships | 7,050 | | | 1,661 | | | 5,389 | | | 7,050 | | | 1,030 | | | 6,020 | |
Trade Names | 3,570 |
| | 506 |
| | 3,064 |
| | 3,570 |
| | 238 |
| | 3,332 |
| Trade Names | 3,570 | | | 863 | | | 2,707 | | | 3,570 | | | 595 | | | 2,975 | |
Non-Compete Agreements | 100 |
| | 28 |
| | 72 |
| | 100 |
| | 13 |
| | 87 |
| Non-Compete Agreements | 100 | | | 48 | | | 52 | | | 100 | | | 33 | | | 67 | |
Other Intangible Assets | $ | 49,959 |
| | $ | 38,002 |
| | $ | 11,957 |
| | $ | 49,364 |
| | $ | 36,757 |
| | $ | 12,607 |
| Other Intangible Assets | $ | 53,337 | | | $ | 39,998 | | | $ | 13,339 | | | $ | 50,428 | | | $ | 38,320 | | | $ | 12,108 | |
Amortization expense related to intangible assets was, in thousands, $639 and $1,707 during the quarter and year-to-date period ended March 31, 2020, and $496 and $1,455 during the quarter and year-to-date period ended March 31, 2019, and was, in thousands, $534 and $1,280 during the quarter and year-to-date period ended March 31, 2018.2019. Amortization expense in future periods is expected to be, in thousands, $512$680 for the remainder of fiscal year 2019,2020, and $2,052, $1,668, $1,300,$2,506, $2,039, $1,637, and $1,056$1,404 in the four years ending June 30, 2023,2024, and $5,369$5,073 thereafter. The estimated useful life of capitalized software ranges from 32 to 10 years. The amortization period for customer relationship intangible assets is 20 years. The estimated useful life of trade names is 10 years. The estimated useful life of non-compete agreements is 5 years.
Capitalized 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 re-engineering costs are expensed in the period in which they are incurred.
Trade names and non-compete agreements are amortized on a straight-line basis over their estimated useful lives. Capitalized customer relationships are amortized based on estimated attrition rates of customers. We have no0 intangible assets with indefinite useful lives which are not subject to amortization.
Notes Receivable and Trade Accounts Receivable:
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 nonaccrualnon accrual 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 analysis of 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.
Non-operating Income (Expense), net:
The non-operating income (expense), net line item includes the impact of such items as fair value adjustments on Supplemental Employee Retirement Plan (“SERP”) investments, amortization of actuarial income, foreign currency rate movements, investment gain or loss, bank charges, 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.
Components of the Non-operating income (expense), net line, were:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| March 31 | | | | March 31 | | |
(Amounts in Thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Gain (Loss) on SERP Investments | | $ | (1,784) | | | $ | 1,032 | | | $ | (1,010) | | | $ | 306 | |
| | | | | | | |
| | | | | | | |
Other | (294) | | | (62) | | | (350) | | | (235) | |
Non-operating income (expense), net | | $ | (2,078) | | | $ | 970 | | | $ | (1,360) | | | $ | 71 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
(Amounts in Thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Gain (Loss) on SERP Investments | $ | 1,032 |
| | $ | (8 | ) | | $ | 306 |
| | $ | 756 |
|
Other | (62 | ) | | (197 | ) | | (235 | ) | | (412 | ) |
Non-operating income (expense), net | $ | 970 |
| | $ | (205 | ) | | $ | 71 |
| | $ | 344 |
|
Note 3. AcquisitionRestructuring
Transformation Restructuring Plan:
In June 2019, we announced a transformation restructuring plan that is expected to optimize resources for future growth, improve efficiency, and build capabilities across our organization. We believe the transformation restructuring plan will establish a more cost-efficient structure to better align our operations with our long-term strategic goals. The transformation restructuring plan includes the following:
•Our overall manufacturing facility footprint is being reviewed 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 will be consolidating the David Edward production facility in Red Lion, Pennsylvania into our Baltimore, Maryland facility near the end of our fiscal year 2020 and are evaluating our production capabilities and capacity across our organization to identify additional opportunities.
•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 and recognized impairment of the leases and associated leasehold improvements.
The efforts are expected to generate annualized pre-tax savings of approximately $10.0 million when the transformation restructuring plan is fully implemented. We estimate that pre-tax restructuring charges incurred through the end of fiscal year 2020 will be approximately $9.0 million to $10.0 million. The restructuring charges are expected to consist of approximately $3.7 million to $4.0 million for severance and other employee-related costs, $2.5 million to $3.0 million for facility exit and other costs, and $2.8 million to $3.0 million for asset impairment. Approximately 65% of the total cost estimate is expected to be cash expense.
A summary of the charges recorded in connection with the Transformation Restructuring Plan is as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | Charges incurred to date |
(Amounts in Thousands) | March 31, 2020 | | March 31, 2020 | | |
Cash-related restructuring charges: | | | | | |
Severance and other employee related costs | $ | 203 | | | $ | 2,194 | | | $ | 2,857 | |
Facility exit costs and other cash charges | 424 | | | 1,416 | | | 1,619 | |
Total cash-related restructuring charges | $ | 627 | | | $ | 3,610 | | | $ | 4,476 | |
Non-cash charges: | | | | | |
Transition stock compensation | 9 | | | 663 | | | 734 | |
Impairment of assets | 132 | | | 2,190 | | | 2,190 | |
Other non-cash charges | 50 | | | 101 | | | 101 | |
| | | | | |
Total non-cash charges | $ | 191 | | | $ | 2,954 | | | $ | 3,025 | |
Total charges | $ | 818 | | | $ | 6,564 | | | $ | 7,501 | |
A summary of the current period activity in accrued restructuring related to the Transformation Restructuring Plan is as follows:
| | | | | | | | | | | | | | | | | | | |
(Amounts in Thousands) | Severance and other employee related costs | | | | Facility exit and other costs | | Total |
Balance at June 30, 2019 | $ | 619 | | | | | $ | 203 | | | $ | 822 | |
Additions charged to expense | 2,535 | | | | | 379 | | | 2,914 | |
Cash payments charged against reserve | (2,683) | | | | | (582) | | | (3,265) | |
Non-cash adjustments | (160) | | | | | — | | | (160) | |
Balance at March 31, 2020 | $ | 311 | | | | | $ | — | | | $ | 311 | |
To date, we have recognized $7.5 million of restructuring costs related to the Transformation Restructuring Plan. We expect this restructuring plan to be complete by June 30, 2020, but this timing may be impacted by the COVID-19 pandemic. It is currently estimated that this plan will incur an additional $1.5 million to $2.5 million of future restructuring charges.
We utilized available market prices and management estimates to determine the fair value of impaired assets. Restructuring is included in the Restructuring Expense line item on our Condensed Consolidated Statements of Income.
Note 4. Acquisition
On October 26, 2018, we acquired substantially all the assets and assumed certain specified limited liabilities of David Edward headquartered in Baltimore, Maryland. David Edward is a premier designer and manufacturer of contract furniture, sold in the healthcare, corporate, education, and premium hospitality markets. David Edward sells primarily in the North American and Middle Eastern markets. David Edward’s products are generally specified by architects and designers, represented through a network of independent representatives, and sold through authorized furniture dealerships. The David Edward product portfolio consists of classic and contemporary designs, focused primarily in the seating, tables, and ancillary furniture categories. In conjunction with the asset acquisition, we leased the two existing David Edward production facilities in Baltimore, Maryland and Red Lion, Pennsylvania. The acquisition purchase price totaled $4.9 million. The purchase price is subject to certain post-closing working capital adjustments.
A summary of the preliminary purchase price allocation is as follows:
|
| | | | |
Purchase Price Allocation | | |
(Amounts in Thousands) | | |
Assets: | | |
Receivables | | $ | 330 |
|
Inventories | | 2,768 |
|
Prepaid expenses and other current assets | | 284 |
|
Net property and equipment | | 934 |
|
Goodwill | | 2,103 |
|
| | $ | 6,419 |
|
Liabilities: | | |
Accounts payable | | $ | 1,447 |
|
Accrued expenses | | 122 |
|
| | $ | 1,569 |
|
| | $ | 4,850 |
|
The operating results of this acquisition are includeddid not change from the amounts disclosed in our condensed consolidated financial statements beginningAnnual Report on October 26, 2018. ForForm 10-K for 2019 and is final.
We will be consolidating the quarter ended March 31, 2019, net sales and net loss related to David Edward were $3.4 million and $0.6 million, respectively. Forproduction facility in Red Lion, Pennsylvania into our Baltimore, Maryland facility near the year-to-date period ended March 31, 2019, net sales and net loss related to David Edward were $6.0 million and $1.0 million, respectively. Direct costs of the acquisition during the year-to-date period ended March 31, 2019, of approximately $0.5 million, were expensed as incurred and were included on the Selling and Administrative Expenses lineend of our Condensed Consolidated Statements of Income. There were no acquisition costs during the quarter ended March 31, 2019.
Goodwill is primarily attributable to the anticipated revenue and supply chain synergies expected from the operations of the combined company. For tax purposes, goodwill is tax deductible over 15 years. See Note 2 - Recent Accounting Pronouncements and Supplemental Information in the Notes to Condensed Consolidated Financial Statements for more information on goodwill. The following summarizes our goodwill activity: |
| | | | |
Goodwill related to David Edward Acquisition | | |
(Amounts in Thousands) | | |
Goodwill - June 30, 2018 | | $ | — |
|
Goodwill - at acquisition date | | 1,960 |
|
Adjustments to purchase price allocation | | 143 |
|
Goodwill - March 31, 2019 | | $ | 2,103 |
|
The purchase price allocation is provisional pending final valuations and purchase accounting adjustments, which were not final as of March 31, 2019. We utilized management estimates to assist in the valuation process.
D’style
On November 6, 2017, we acquired certain assets of D’style and all of the capital stock of Diseños de Estilo S.A. de C.V. headquartered in Tijuana, Mexico, a member of the D’style group which manufactures exclusively for D’style, strengthening our North American manufacturing footprint. The purchase price allocation is final as of March 31, 2019. During the quarter ended March 31, 2019, the fair value of the contingent earn-out liability was adjusted to $0.2 million relating to an adjustment of the contingent earn-out liability that is based upon fiscal year 2019 D’style, Inc. operating income compared to a predetermined target.2020 as part of our Transformation Restructuring Plan.
Note 4.5. Revenue
At the beginning of fiscal year 2019, we adopted new accounting guidance on the recognition of revenue from contracts with customers using the full retrospective approach and adjusted fiscal year 2018 to provide comparable financial reporting for all reported fiscal years. The primary impact of the new revenue standard was a reclassification of certain items on the statement of income. For contracts involving products that are sold directly to end customers, fees paid to dealer agents for facilitating the sale and performing certain services are recognized as either cost of sales or selling expense rather than being netted against revenue. In addition, any commissions or fees paid to third-party purchasing organizations are recognized as a selling expense rather than being netted against revenue. The result of these changes was increases in net sales, cost of sales, and selling expenses. On a net basis these changes had no impact to operating income dollars but did reduce operating income as a percent of net sales. The new standard also required 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 sales contracts. There was no cumulative effect of adopting the standard at the date of initial application in retained earnings.
The following tables present the effects of the adoption of the new standard on prior period financial statements:
|
| | | | | | | | | | | |
Impact to Condensed Consolidated Statements of Income |
| Three Months Ended March 31, 2018 |
(Amounts in Thousands) | As Originally Reported | | Adoption of New Revenue Standard | | As Adjusted |
Net Sales | $ | 157,897 |
| | $ | 3,000 |
| | $ | 160,897 |
|
Cost of Sales | 110,142 |
| | 791 |
| | 110,933 |
|
Gross Profit | 47,755 |
| | 2,209 |
| | 49,964 |
|
Selling and Administrative Expenses | 39,245 |
| | 2,209 |
| | 41,454 |
|
Operating Income | 8,510 |
| | — |
| | 8,510 |
|
Operating Income as of Percent of Net Sales | 5.4 | % | | | | 5.3 | % |
| | | | | |
| Nine Months Ended March 31, 2018 |
(Amounts in Thousands) | As Originally Reported | | Adoption of New Revenue Standard | | As Adjusted |
Net Sales | $ | 501,088 |
| | $ | 13,783 |
| | $ | 514,871 |
|
Cost of Sales | 339,808 |
| | 3,672 |
| | 343,480 |
|
Gross Profit | 161,280 |
| | 10,111 |
| | 171,391 |
|
Selling and Administrative Expenses | 124,808 |
| | 10,111 |
| | 134,919 |
|
Operating Income | 36,472 |
| | — |
| | 36,472 |
|
Operating Income as of Percent of Net Sales | 7.3 | % | | | | 7.1 | % |
|
| | | | | | | | | | | |
Impact to Condensed Consolidated Balance Sheet |
| As of June 30, 2018 |
(Amounts in Thousands) | As Originally Reported | | Adoption of New Revenue Standard | | As Adjusted |
Receivables, net of allowances | $ | 60,984 |
| | $ | 1,292 |
| | $ | 62,276 |
|
Accrued Expenses | 49,294 |
| | 1,292 |
| | 50,586 |
|
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 8 - Commitments and Contingent Liabilities in the Notes to Condensed Consolidated Financial Statements for additional information on warranty obligations.Disaggregation of Revenue
The following table provides information about revenue by vertical market:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | Nine Months Ended | | | | |
| March 31, | | | | | | March 31, | | | | |
(Amounts in Millions) | 2020 | | 2019 | | | | 2020 | | 2019 | | |
Institutional | $ | 63.5 | | | $ | 61.3 | | | | | $ | 215.7 | | | $ | 202.8 | | | |
Commercial | 71.0 | | | 67.8 | | | | | 216.0 | | | 224.3 | | | |
Hospitality | 43.7 | | | 48.3 | | | | | 140.1 | | | 145.4 | | | |
Total Net Sales | $ | 178.2 | | | $ | 177.4 | | | | | $ | 571.8 | | | $ | 572.5 | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | March 31 | | March 31 |
(Amounts in Millions) | | 2019 |
| 2018 | | 2019 | | 2018 |
Commercial | | $ | 50.9 |
| | $ | 50.2 |
| | $ | 171.1 |
| | $ | 151.8 |
|
Education | | 13.5 |
| | 12.7 |
| | 66.2 |
| | 61.8 |
|
Finance | | 16.9 |
| | 17.8 |
| | 53.2 |
| | 48.9 |
|
Government | | 19.1 |
| | 17.6 |
| | 55.0 |
| | 68.9 |
|
Healthcare | | 28.7 |
| | 19.5 |
| | 81.6 |
| | 63.7 |
|
Hospitality | | 48.3 |
| | 43.1 |
| | 145.4 |
| | 119.8 |
|
Total Net Sales | | $ | 177.4 |
| | $ | 160.9 |
| | $ | 572.5 |
| | $ | 514.9 |
|
Our Institutional market includes sales to the healthcare, education and government verticals. Our Commercial market includes sales to the commercial and financial verticals.We report revenue under a single aggregated reportable segment consisting of three 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 Condensed 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. During the three and nine months ended March 31, 2019, impairment losses on doubtful accounts receivable were $0.0 million and $0.4 million, respectively. During both the three and nine months ended March 31, 2018, impairment losses (income) on doubtful accounts receivable were $(0.1) million.
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 Condensed Consolidated Balance Sheets. Changes in the customer deposits during the nine months ended March 31, 2019 are as follows:
|
| | | |
(Amounts in Millions) | Customer Deposits |
Balance as of June 30, 2018 | $ | 21.3 |
|
Increases due to deposits received, net of other adjustments | 92.0 |
|
Revenue recognized | (85.7 | ) |
Balance as of March 31, 2019 | $ | 27.6 |
|
Customer deposits are typically utilized within a year of the receipt of the deposit. The amount of revenue recognized during the three and nine months ended March 31, 20192020 that was included in the June 30, 20182019 customer deposit balance was $0.0$24.5 million.
Note 6. Leases
At the beginning of our fiscal year 2020, we adopted new accounting guidance (“ASC 842”) regarding leases on a prospective basis. This guidance requires lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The effects of the initial application did not result in a cumulative adjustment to retained earnings. We recognize lease liabilities 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. Variable lease expense associated with our leases is dependent upon the occurrence of events, activities, or circumstances in lease agreements, such as warehouse square footage utilized, property taxes assessed, and other non-lease component charges. Variable lease expense is presented as operating expense in our Condensed Consolidated Statements of Income and Comprehensive Income in the same line item as expense arising from fixed lease payments for operating 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 2028. We have 0 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. 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.
The components of our lease expenses are as follows:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(Amounts in Millions) | March 31, 2020 | | March 31, 2020 |
Operating lease expense | $ | 0.9 | | | $ | 2.5 | |
| | | |
Variable lease expense | 0.6 | | | 1.8 | |
Total lease expense | $ | 1.5 | | | $ | 4.3 | |
Right-of-use assets for operating leases are tested for impairment in the same manner as long-lived assets used in operations. During the first quarter of fiscal year 2020, we recorded $2.2 million of right-of-use asset and $20.9 million, respectively.associated leasehold improvement impairment resulting from ceasing use of four furniture showrooms after the implementation of ASC 842 as part of our transformation restructuring plan. The amount of revenue recognized during the three and nine months ended March 31, 2018 that wasimpairment is included in the June 30, 2017 customer deposit balance was $1.0 million and $20.2 million, respectively.
Additionally, funds paid to certain independent dealers in exchange for their multi-year commitment to market and sellRestructuring Expense line item on our product represent costs of obtaining contracts. These incremental costs of obtaining contracts are capitalized to the extent we expect to recover them in the Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018, with $0.2 million and $0.3 million, respectively, reported in Prepaid Expenses and Other Current Assets and $0.2 million and $0.3 million, respectively, reported in Other Assets. The capitalized costs are amortized over the term of the contract. Amortization expense
recognized in Selling and Administrative Expenses was $0.1 million and $0.2 million for the three and nine months ended March 31, 2019, and $0.0 million and $0.2 million for the three and nine months ended March 31, 2018.
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 three and nine months ended March 31, 2019 and 2018, 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 Condensed 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 taxesSupplemental cash flow and other similar taxes we collect concurrent with revenue-producing activities. Therefore, we present revenue netinformation related to leases are as follows:
| | | | | |
| Nine Months Ended |
(Amounts in Millions) | March 31, 2020 |
Cash flow information: | |
Operating lease payments impacting lease liability | $ | 3.6 | |
Leased assets obtained in exchange for operating lease liabilities | $ | 2.1 | |
| |
| |
| As of |
(Amounts in Millions) | March 31, 2020 |
Other information: | |
Weighted-average remaining term (in years) | 6.1 |
Weighted-average discount rate | 4.7 | % |
The following table summarizes the future minimum lease payments as of sales taxes and similar revenue-based taxes.March 31, 2020:
For incremental costs | | | | | |
| Fiscal Year Ended |
(Amounts in Millions) | June 30 (1) |
2020 | $ | 1.1 | |
2021 | 4.9 | |
2022 | 4.7 | |
2023 | 4.1 | |
2024 | 3.4 | |
Thereafter | 7.0 | |
Total lease payments | $ | 25.2 | |
Less interest | 3.2 | |
Present value of lease liabilities | $ | 22.0 | |
(1) Lease payments include options to extend lease terms that are reasonably certain of obtainingbeing exercised. The payments exclude legally binding minimum lease payments for leases signed but not yet commenced.
The following table summarizes the future minimum lease payments as of June 30, 2019 before adoption of ASC 842:
| | | | | |
| Fiscal Year Ended |
(Amounts in Millions) | June 30 |
2020 | $ | 4.6 | |
2021 | 4.2 | |
2022 | 4.1 | |
2023 | 3.6 | |
2024 | 2.5 | |
Thereafter | 3.8 | |
Total lease payments | $ | 22.8 | |
Practical Expedients Elected
We elected the following practical expedients as a result of adopting ASC 842:
•We elected not to separate non-lease components of a contract wefrom the lease components to which they relate for all classes of lease assets.
•We elected athe package of practical expedientexpedients available for transition which permits an entityallowed us not to reassess (1) whether any expired or existing contracts contain leases, (2) the classification of the leases as operating or finance and (3) the amount of initial direct costs associated with the leases.
•We elected that our date of initial application be the beginning of our period of adoption which was July 1, 2019.
•We elected not to recognize incremental costsa right-of-use asset or lease liability for short-term leases that have a lease term of twelve months or less.
•We elected not to obtainassess whether land easements that were not previously accounted for as leases are or contain a contract as an expense when incurred iflease.
•We did not elect to use hindsight in determining the amortization period is less than one year. This election had an immaterial effect on our condensed consolidated financial statements.lease term and in assessing the likelihood that a lessee purchase option will be exercised.
For significant financing components, we elected a practical expedient which allows an entity to recognize the promised amount of consideration without adjusting for the time value of money if the contract has a duration of one year or less, or if the reason the contract extended beyond one year is because the timing of delivery of the product is at the customer’s discretion. As our contracts typically are less than one year in length and do not have significant financing components, we have not presented revenue on a present value basis.
Note 5.7. 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| March 31 | | | | March 31 | | |
(Amounts in Thousands, Except for Per Share Data) | | 2020 | | 2019 | | 2020 | | 2019 |
Net Income | | $ | 9,451 | | | $ | 7,954 | | | $ | 31,874 | | | $ | 28,235 | |
| | | | | | | |
Average Shares Outstanding for Basic EPS Calculation | | 36,813 | | | 36,712 | | | 36,890 | | | 36,871 | |
Dilutive Effect of Average Outstanding Compensation Awards | | 276 | | | 197 | | | 344 | | | 389 | |
Average Shares Outstanding for Diluted EPS Calculation | | 37,089 | | | 36,909 | | | 37,234 | | | 37,260 | |
| | | | | | | |
Basic Earnings Per Share | | $ | 0.26 | | | $ | 0.22 | | | $ | 0.86 | | | $ | 0.77 | |
Diluted Earnings Per Share | | $ | 0.25 | | | $ | 0.22 | | | $ | 0.86 | | | $ | 0.76 | |
Note 8. Income Taxes
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 blended U.S. federal statutory tax rate of 28.1% for our fiscal year ended June 30, 2018, and 21% for fiscal year 2019. Prior to the effective date of the Tax Act, the U.S. federal statutory tax rate was 35%.
In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur. Our effective tax rate was 23.5% for the three months ended March 31, 2020, which was less than the combined federal and state statutory tax rate primarily due to the R&D tax credit. Our effective tax rate was 26.7% for the nine months ended March 31, 2020, which approximated the combined federal and state statutory rate. Our effective tax rate was 24.1% and 24.7%, respectively, for the three and nine and months ended March 31, 2019, which was less than the combined federal and state statutory tax rate in part due to the R&D tax credit. Our effective tax rate was 31.2% and 35.3%, respectively, for the three and nine months ended March 31, 2018.
Note 6.9. Inventories
Inventory components were as follows:
| | (Amounts in Thousands) | March 31, 2019 | | June 30, 2018 | (Amounts in Thousands) | March 31, 2020 | | June 30, 2019 |
Finished products | $ | 24,776 |
| | $ | 23,756 |
| Finished products | $ | 28,160 | | | $ | 26,304 | |
Work-in-process | 2,764 |
| | 1,378 |
| Work-in-process | 1,875 | | | 2,455 | |
Raw materials | 33,910 |
| | 29,158 |
| Raw materials | 37,007 | | | 34,335 | |
Total FIFO inventory | 61,450 |
| | 54,292 |
| Total FIFO inventory | 67,042 | | | 63,094 | |
LIFO reserve, net | (16,310 | ) | | (14,783 | ) | LIFO reserve, net | (16,332) | | | (16,282) | |
Total inventory | $ | 45,140 |
| | $ | 39,509 |
| Total inventory | $ | 50,710 | | | $ | 46,812 | |
For interim reporting, LIFO inventories are computed based on quantities as of the end of the quarter and interim changes in price levels. Changes in quantities and price levels are reflected in the interim financial statements in the period in which they occur, except in cases where LIFO inventory liquidations are expected to be reinstated by fiscal year end. The earnings impact of LIFO inventory liquidations during the three and nine month periods ended March 31, 20192020 and 20182019 was immaterial. Our FIFO inventory increased from June 30, 2018 to March 31, 2019 in large part as a result of the David Edward acquisition.
15
Note 7. Accumulated Other Comprehensive Income
During the three months ended March 31, 2019 and 2018, the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows: |
| | | | | | | | | | | | | | | | |
Accumulated Other Comprehensive Income | | | | | | |
(Amounts in Thousands) | | Unrealized Investment Gain (Loss) | | Postemployment Benefits Net Actuarial Gain (Loss) | | Derivative Gain (Loss) | | Accumulated Other Comprehensive Income |
Balance at December 31, 2018 | | $ | (20 | ) | | $ | 1,881 |
| | $ | — |
| | $ | 1,861 |
|
Other comprehensive income (loss) before reclassifications | | 20 |
| | 74 |
| | — |
| | 94 |
|
Reclassification to (earnings) loss | | — |
| | (74 | ) | | — |
| | (74 | ) |
Net current-period other comprehensive income (loss) | | 20 |
| | — |
| | — |
| | 20 |
|
Balance at March 31, 2019 | | $ | — |
| | $ | 1,881 |
| | $ | — |
| | $ | 1,881 |
|
| | | | | | | | |
Balance at December 31, 2017 | | $ | (37 | ) | | $ | 1,364 |
| | $ | — |
| | $ | 1,327 |
|
Other comprehensive income (loss) before reclassifications | | (4 | ) | | 57 |
| | — |
| | 53 |
|
Reclassification to (earnings) loss | | 1 |
| | (39 | ) | | — |
| | (38 | ) |
Net current-period other comprehensive income (loss) | | (3 | ) | | 18 |
| | — |
| | 15 |
|
Balance at March 31, 2018 | | $ | (40 | ) | | $ | 1,382 |
| | $ | — |
| | $ | 1,342 |
|
During the nine months ended March 31, 2019 and 2018, the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:
|
| | | | | | | | | | | | | | | | |
| | | | | | | | |
Accumulated Other Comprehensive Income | | | | | | |
(Amounts in Thousands) | | Unrealized Investment Gain (Loss) | | Postemployment Benefits Net Actuarial Gain (Loss) | | Derivative Gain (Loss) | | Accumulated Other Comprehensive Income |
Balance at June 30, 2018 | | $ | (31 | ) | | $ | 1,854 |
| | $ | (7 | ) | | $ | 1,816 |
|
Other comprehensive income (loss) before reclassifications | | 31 |
| | 251 |
| | (9 | ) | | 273 |
|
Reclassification to (earnings) loss | | — |
| | (224 | ) | | 16 |
| | (208 | ) |
Net current-period other comprehensive income (loss) | | 31 |
| | 27 |
| | 7 |
| | 65 |
|
Balance at March 31, 2019 | | $ | — |
| | $ | 1,881 |
| | $ | — |
| | $ | 1,881 |
|
| | | | | | | | |
Balance at June 30, 2017 | | $ | (21 | ) | | $ | 1,136 |
| | $ | — |
| | $ | 1,115 |
|
Other comprehensive income (loss) before reclassifications | | (22 | ) | | 375 |
| | — |
| | 353 |
|
Reclassification to (earnings) loss | | 3 |
| | (129 | ) | | — |
| | (126 | ) |
Net current-period other comprehensive income (loss) | | (19 | ) | | 246 |
| | — |
| | 227 |
|
Balance at March 31, 2018 | | $ | (40 | ) | | $ | 1,382 |
| | $ | — |
| | $ | 1,342 |
|
The following reclassifications were made from Accumulated Other Comprehensive Income to the Condensed Consolidated Statements of Income:
|
| | | | | | | | | | | | | | | | | | |
Reclassifications from Accumulated Other Comprehensive Income | | Three Months Ended | | Nine Months Ended | | Affected Line Item in the Condensed Consolidated Statements of Income |
| March 31, | | March 31, | |
(Amounts in Thousands) | | 2019 | | 2018 | | 2019 | | 2018 | |
Realized Investment Gain (Loss) on available-for-sale securities (1) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | (4 | ) | | Non-operating income (expense), net |
| | — |
| | — |
| | — |
| | 1 |
| | Benefit (Provision) for Income Taxes |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | (3 | ) | | Net Income |
| | | | | | | | | | |
Postemployment Benefits amortization of actuarial gain (2) | | $ | — |
| | $ | 37 |
| | $ | — |
| | $ | 124 |
| | Cost of Sales |
| | — |
| | 21 |
| | — |
| | 67 |
| | Selling and Administrative Expenses |
| | 100 |
| | — |
| | 302 |
| | — |
| | Non-operating income (expense), net |
| | (26 | ) | | (19 | ) | | (78 | ) | | (62 | ) | | Benefit (Provision) for Income Taxes |
| | $ | 74 |
| | $ | 39 |
| | $ | 224 |
| | $ | 129 |
| | Net Income |
| | | | | | | | | | |
Derivative Gain (Loss) (3) | | $ | — |
| | $ | — |
| | $ | (21 | ) | | $ | — |
| | Non-operating income (expense), net |
| | — |
| | — |
| | 5 |
| | — |
| | Benefit (Provision) for Income Taxes |
| | $ | — |
| | $ | — |
| | $ | (16 | ) | | $ | — |
| | Net Income |
| | | | | | | | | | |
Total Reclassifications for the Period | | $ | 74 |
| | $ | 38 |
| | $ | 208 |
| | $ | 126 |
| | Net Income |
Amounts in parentheses indicate reductions to income.
(1) See Note 11 - Investments in the Notes to Condensed Consolidated Financial Statements for further information on available-for-sale securities.
Note 8.10. Accumulated Other Comprehensive Income
During the three months ended March 31, 2020 and 2019, the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated Other Comprehensive Income | | | | | | | | | | | |
(Amounts in Thousands) | | | | | Unrealized Investment Gain (Loss) | | Postemployment Benefits Net Actuarial Gain (Loss) | | Derivative Gain (Loss) | | Accumulated Other Comprehensive Income |
Balance at December 31, 2019 | | | | | $ | 8 | | | $ | 2,112 | | | $ | — | | | $ | 2,120 | |
Other comprehensive income (loss) before reclassifications | | | | | 2 | | | 89 | | | — | | | 91 | |
Reclassification to (earnings) loss | | | | | — | | | (61) | | | — | | | (61) | |
Net current-period other comprehensive income (loss) | | | | | 2 | | | 28 | | | — | | | 30 | |
Balance at March 31, 2020 | | | | | $ | 10 | | | $ | 2,140 | | | $ | — | | | $ | 2,150 | |
| | | | | | | | | | | |
Balance at December 31, 2018 | | | | | $ | (20) | | | $ | 1,881 | | | $ | — | | | $ | 1,861 | |
Other comprehensive income (loss) before reclassifications | | | | | 20 | | | 74 | | | — | | | 94 | |
Reclassification to (earnings) loss | | | | | — | | | (74) | | | — | | | (74) | |
Net current-period other comprehensive income (loss) | | | | | 20 | | | — | | | — | | | 20 | |
Balance at March 31, 2019 | | | | | $ | — | | | $ | 1,881 | | | $ | — | | | $ | 1,881 | |
During the nine months ended March 31, 2020 and 2019, the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated Other Comprehensive Income | | | | | | | | | | | |
(Amounts in Thousands) | | | | | Unrealized Investment Gain (Loss) | | Postemployment Benefits Net Actuarial Gain (Loss) | | Derivative Gain (Loss) | | Accumulated Other Comprehensive Income |
Balance at June 30, 2019 | | | | | $ | 23 | | | $ | 1,914 | | | $ | — | | | $ | 1,937 | |
Other comprehensive income (loss) before reclassifications | | | | | (13) | | | 419 | | | — | | | 406 | |
Reclassification to (earnings) loss | | | | | — | | | (193) | | | — | | | (193) | |
Net current-period other comprehensive income (loss) | | | | | (13) | | | 226 | | | — | | | 213 | |
Balance at March 31, 2020 | | | | | $ | 10 | | | $ | 2,140 | | | $ | — | | | $ | 2,150 | |
| | | | | | | | | | | |
Balance at June 30, 2018 | | | | | $ | (31) | | | $ | 1,854 | | | $ | (7) | | | $ | 1,816 | |
Other comprehensive income (loss) before reclassifications | | | | | 31 | | | 251 | | | (9) | | | 273 | |
Reclassification to (earnings) loss | | | | | — | | | (224) | | | 16 | | | (208) | |
Net current-period other comprehensive income (loss) | | | | | 31 | | | 27 | | | 7 | | | 65 | |
Balance at March 31, 2019 | | | | | $ | — | | | $ | 1,881 | | | $ | — | | | $ | 1,881 | |
The following reclassifications were made from Accumulated Other Comprehensive Income to the Condensed Consolidated Statements of Income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassifications from Accumulated Other Comprehensive Income | | Three Months Ended | | | | Nine Months Ended | | | | Affected Line Item in the Condensed Consolidated Statements of Income |
| | March 31, | | | | March 31, | | | | |
(Amounts in Thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Postemployment Benefits Amortization of Actuarial Gain (1) | | $ | 82 | | | $ | 100 | | | $ | 260 | | | $ | 302 | | | Non-operating income (expense), net |
| | (21) | | | (26) | | | (67) | | | (78) | | | Benefit (Provision) for Income Taxes |
| | $ | 61 | | | $ | 74 | | | $ | 193 | | | $ | 224 | | | Net Income |
| | | | | | | | | | |
Derivative Gain (Loss) | | $ | — | | | $ | — | | | $ | — | | | $ | (21) | | | Non-operating income (expense), net |
| | — | | | — | | | — | | | 5 | | | Benefit (Provision) for Income Taxes |
| | $ | — | | | $ | — | | | $ | — | | | $ | (16) | | | Net Income |
| | | | | | | | | | |
Total Reclassifications for the Period | | $ | 61 | | | $ | 74 | | | $ | 193 | | | $ | 208 | | | Net Income |
Amounts in parentheses indicate reductions to income.
Note 11. Commitments and Contingent Liabilities
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. As of March 31, 2019,2020, we had a maximum financial exposure from unused standby letters of credit totaling $1.5$1.6 million.
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 $5.4 million as of March 31, 2020.
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 condensed consolidated financial statements. Accordingly, no0 liability has been recorded as of March 31, 20192020 with respect to the standby letters of credit. 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.
Changes in the product warranty accrual for the nine months ended March 31, 20192020 and 20182019 were as follows:
| | | | | | | | | | | |
| Nine Months Ended | | |
| March 31 | | |
(Amounts in Thousands) | 2020 | | 2019 |
Product Warranty Liability at the beginning of the period | $ | 2,238 | | | $ | 2,294 | |
Additions to warranty accrual (including changes in estimates) | 3,318 | | | 420 | |
Settlements made (in cash or in kind) | (2,356) | | | (797) | |
Product Warranty Liability at the end of the period | $ | 3,200 | | | $ | 1,917 | |
|
| | | | | | | |
| Nine Months Ended |
| March 31 |
(Amounts in Thousands) | 2019 | | 2018 |
Product Warranty Liability at the beginning of the period | $ | 2,294 |
| | $ | 1,992 |
|
Additions to warranty accrual (including changes in estimates) | 420 |
| | 1,043 |
|
Settlements made (in cash or in kind) | (797 | ) | | (773 | ) |
Product Warranty Liability at the end of the period | $ | 1,917 |
| | $ | 2,262 |
|
Note 9. 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.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
(Amounts in Thousands, Except for Per Share Data) | 2019 | | 2018 | | 2019 | | 2018 |
Net Income | $ | 7,954 |
| | $ | 5,850 |
| | $ | 28,235 |
| | $ | 24,185 |
|
| | | | | | | |
Average Shares Outstanding for Basic EPS Calculation | 36,712 |
| | 37,259 |
| | 36,871 |
| | 37,388 |
|
Dilutive Effect of Average Outstanding Compensation Awards | 197 |
| | 280 |
| | 389 |
| | 325 |
|
Average Shares Outstanding for Diluted EPS Calculation | 36,909 |
| | 37,539 |
| | 37,260 |
| | 37,713 |
|
| | | | | | | |
Basic Earnings Per Share | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.77 |
| | $ | 0.65 |
|
Diluted Earnings Per Share | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.76 |
| | $ | 0.64 |
|
Note 10.12. Fair Value
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:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
•Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Our policy is to recognize transfers between these levels as of the end of each quarterly reporting period. There were no0 transfers between these levels during the nine months ended March 31, 2019.2020. There were also no changes in the inputs or valuation techniques used to measure fair values compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.2019.
We hold a total investment of $2.0 million in a privately-held company, consisting of $0.5 million in equity securities without readily determinable fair value and $1.5 million in stock warrants. The investment in equity securities without readily determinable fair value is classified as a Level 3 financial asset, as explained in the Financial Instruments Not Carried At Fair Value section below. The investment in stock warrants is also classified as a Level 3 financial asset and is accounted for as a derivative instrument valued on a recurring basis, as explained in the Financial Instruments Recognized at Fair Value section
below. See Note 1113 - Investments in the Notes to Condensed Consolidated Financial Statements for further information regarding the investment in equity securities without readily determinable fair value, and Note 1214 - Derivative Instruments in the Notes to Condensed Consolidated Financial Statements for further information regarding the investment in stock warrants. NoNaN purchases or sales of Level 3 assets occurred during the nine months ended March 31, 2019.2020. Related to the prior year acquisition of D'style, we determine the fair value of our long-lived and intangible assets on a non-recurring basis in connection with our periodic evaluations of such assets for potential impairment and record impairment charges when such fair value estimates are lower than the carrying values of the assets. The fair value of the contingent earn-out liability as of June 30, 2018 of $1.1 million was reduced to $0.7 million as of September 30, 2018 due to payment of $0.4 million for the earn-out relating to fiscal year 2018. During the quarter ended March 31, 2019, the fair value of the contingent earn-out liability was adjusted to $0.2 million, and we recognized $0.3 million of income within Selling and Administrative Expense which was partially offset by Interest Expense. The adjustment was attributable to fiscal year 2019 D’style operating income compared to a predetermined target for the fiscal year.
Financial Instruments Recognized at Fair Value:
The following methods and assumptions were used to measure fair value:
|
| | | | | | | | | | | | | |
Financial Instrument | | Level | | Valuation Technique/Inputs Used |
Cash Equivalents: Money market funds | | 1 | | Market - Quoted market prices |
Cash Equivalents: Commercial paper | | 2 | | Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information. |
Available-for-sale securities: Secondary market certificates of deposit | | 2 | | Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information. |
Available-for-sale securities: Municipal bonds | | 2 | | Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information. |
Available-for-sale securities: U.S. Treasury and federal agencies | | 2 | | Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information. |
Trading securities: Mutual funds held in nonqualified SERP | | 1 | | Market - Quoted market prices |
Derivative Assets: Stock warrants | | 3 | | Market - The privately-held company is currently in an early stage of start-up.a start-up phase. The pricing of recent purchases or sales of the investment are considered, if any, as well as positive and negative qualitative evidence, in the assessment of fair value. |
Derivative Liability: Foreign exchange contracts | | 2 | | Market - Based on observable market inputs using standard calculations, such as time value, forward interest rate yield curves, and current spot rates adjusted for Kimball International's non-performance risk. |
Contingent earn-out liability | | 3 | | Income - Based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the acquisition and a discount rate that captures the risk associated with the liability. |
Recurring Fair Value Measurements:
As of March 31, 20192020 and June 30, 2018,2019, the fair values of financial assets that are measured at fair value on a recurring basis using the market or income approach are categorized as follows: | | | | March 31, 2020 | |
(Amounts in Thousands) | | (Amounts in Thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | Assets | | | | | | | |
Cash equivalents: Money market funds | | Cash equivalents: Money market funds | $ | 69,027 | | | $ | — | | | $ | — | | | $ | 69,027 | |
Cash equivalents: Commercial paper | | Cash equivalents: Commercial paper | — | | | 7,192 | | | — | | | 7,192 | |
| Available-for-sale securities: Secondary market certificates of deposit | | Available-for-sale securities: Secondary market certificates of deposit | — | | | 6,220 | | | — | | | 6,220 | |
| Available-for-sale securities: U.S. Treasury and federal agencies | | Available-for-sale securities: U.S. Treasury and federal agencies | — | | | 7,438 | | | — | | | 7,438 | |
Trading Securities: Mutual funds in nonqualified SERP | | Trading Securities: Mutual funds in nonqualified SERP | 10,591 | | | — | | | — | | | 10,591 | |
Derivatives: Stock warrants | | Derivatives: Stock warrants | — | | | — | | | 1,500 | | | 1,500 | |
Total assets at fair value | | Total assets at fair value | $ | 79,618 | | | $ | 20,850 | | | $ | 1,500 | | | $ | 101,968 | |
| | | | | | | | | | | | | | |
| | March 31, 2019 | | June 30, 2019 | |
(Amounts in Thousands) | Level 1 | | Level 2 | | Level 3 | | Total | (Amounts in Thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | Assets | | | | | | | |
Cash equivalents: Money market funds | $ | 21,954 |
| | $ | — |
| | $ | — |
| | $ | 21,954 |
| Cash equivalents: Money market funds | $ | 40,016 | | | $ | — | | | $ | — | | | $ | 40,016 | |
Cash equivalents: Commercial paper | — |
| | 25,055 |
| | — |
| | 25,055 |
| Cash equivalents: Commercial paper | — | | | 29,408 | | | — | | | 29,408 | |
| Available-for-sale securities: Secondary market certificates of deposit | — |
| | 13,637 |
| | — |
| | 13,637 |
| Available-for-sale securities: Secondary market certificates of deposit | — | | | 11,230 | | | — | | | 11,230 | |
Available-for-sale securities: Municipal bonds | — |
| | 2,445 |
| | — |
| | 2,445 |
| Available-for-sale securities: Municipal bonds | — | | | 1,922 | | | — | | | 1,922 | |
Available-for-sale securities: U.S. Treasury and federal agencies | — |
| | 25,739 |
| | — |
| | 25,739 |
| Available-for-sale securities: U.S. Treasury and federal agencies | — | | | 19,919 | | | — | | | 19,919 | |
Trading Securities: Mutual funds in nonqualified SERP | 12,505 |
| | — |
| | — |
| | 12,505 |
| Trading Securities: Mutual funds in nonqualified SERP | 11,774 | | | — | | | — | | | 11,774 | |
Derivatives: Stock warrants | — |
| | — |
| | 1,500 |
| | 1,500 |
| Derivatives: Stock warrants | — | | | — | | | 1,500 | | | 1,500 | |
Total assets at fair value | $ | 34,459 |
| | $ | 66,876 |
| | $ | 1,500 |
| | $ | 102,835 |
| Total assets at fair value | $ | 51,790 | | | $ | 62,479 | | | $ | 1,500 | | | $ | 115,769 | |
Liabilities | |
| | |
| | |
| | |
| Liabilities | | | | | | | | | | | |
| Contingent earn-out liability | — |
| | — |
| | 156 |
| | 156 |
| Contingent earn-out liability | — | | | — | | | 360 | | | 360 | |
Total liabilities at fair value | $ | — |
| | $ | — |
| | $ | 156 |
| | $ | 156 |
| Total liabilities at fair value | $ | — | | | $ | — | | | $ | 360 | | | $ | 360 | |
| |
| | |
| | |
| | |
| |
| June 30, 2018 | |
(Amounts in Thousands) | Level 1 | | Level 2 | | Level 3 | | Total | |
Assets | | | | | | | | |
Cash equivalents: Money market funds | $ | 24,407 |
| | $ | — |
| | $ | — |
| | $ | 24,407 |
| |
Cash equivalents: Commercial paper | — |
| | 25,918 |
| | — |
| | 25,918 |
| |
Available-for-sale securities: Secondary market certificates of deposit | — |
| | 11,850 |
| | — |
| | 11,850 |
| |
Available-for-sale securities: Municipal bonds | — |
| | 16,508 |
| | — |
| | 16,508 |
| |
Available-for-sale securities: U.S. Treasury and federal agencies | — |
| | 6,249 |
| | — |
| | 6,249 |
| |
Trading Securities: Mutual funds in nonqualified SERP | 12,114 |
| | — |
| | — |
| | 12,114 |
| |
Derivatives: Stock warrants | — |
| | — |
| | 1,500 |
| | 1,500 |
| |
Total assets at fair value | $ | 36,521 |
| | $ | 60,525 |
| | $ | 1,500 |
| | $ | 98,546 |
| |
Liabilities | |
| | |
| | |
| | |
| |
Derivatives: Foreign exchange contracts | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | 10 |
| |
Contingent earn-out liability | — |
| | — |
| | 1,056 |
| | 1,056 |
| |
Total liabilities at fair value | $ | — |
| | $ | 10 |
| | $ | 1,056 |
| | $ | 1,066 |
| |
The fair value of the contingent earn-out liability as of June 30, 2019 of $0.4 million was paid out during the quarter ended September 30, 2019, relating to fiscal year 2019 performance of D’style, an acquired business.
The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, target date funds, a bond fund, and a money market fund. The SERP investment assets are offset by a SERP liability which represents our obligation to distribute SERP funds to participants. See Note 1113 - Investments in the Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.
Non-Recurring Fair Value Measurements:
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.
| | | | | | | | | | | | | | |
Non-recurring Fair Value Adjustment | | Level | | Valuation Technique/Inputs Used |
Impairment of Leases | | 3 | | Income - Based on a valuation model that measures the present value of remaining lease payments less estimated sublease income at a discount rate that captures the risk associated with the future cash flows.
|
During the first quarter of fiscal year 2020, due to ceasing use of four showrooms related to the Transformation Restructuring Plan, we recognized an impairment loss of $2.2 million to reduce the related asset groups to fair value. The impairment loss is included as a component of the Restructuring Expense line item on our Condensed Consolidated Statements of Income. The asset groups used to calculate impairment included the right-of-use lease assets, leasehold improvements, and lease liabilities.
Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include the following: |
| | | | | | | | | | | | | |
Financial Instrument | | Level | | Valuation Technique/Inputs Used |
Notes receivable | | 2 | | Market - Price approximated based on the assumed collection of receivables in the normal course of business, taking into account the customer’s non-performance risk. |
Equity securities without readily determinable fair value | | 3 | | Cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Impairment is assessed qualitatively. |
| | | | |
On a periodic basis, but no less frequently than quarterly, the investment in equity securities without readily determinable fair value is qualitatively assessed for impairment when there are events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. If a significant adverse effect on the fair value of the investment were to occur and was deemed to be other-than-temporary, the fair value of the investment would be estimated, and the amount by which the carrying value of the investment exceeds its fair value would be recorded as an impairment loss. See Note 1113 - Investments in the Notes to Condensed Consolidated Financial Statements for the carrying amount of this investment. 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.
Note 11.13. Investments
Investment Portfolio:
Our investment portfolio consistshas consisted 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, and certain of these securities are callable. Our investment policy dictates that municipal bonds, U.S. Treasury and federal agency securities must be investment grade quality. Our 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. All certificates of deposit are FDIC insured.
Our investment portfolio is available for use in current operations,operations; therefore, investments are recorded within Current Assets in the Condensed Consolidated Balance Sheets. The contractual maturities of our investment portfolio were as follows (maturity dates for municipal bonds are based on pre-refunded dates and maturity dates for government agency securities are based on the first available call date, if applicable):
| | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | |
(Amounts in Thousands) | Certificates of Deposit | | Municipal Bonds | | U.S. Treasury and Federal Agencies |
Within one year | $ | 5,720 | | | $ | — | | | $ | 7,438 | |
After one year through two years | 500 | | | — | | | — | |
Total Fair Value | $ | 6,220 | | | $ | — | | | $ | 7,438 | |
|
| | | | | | | | | | | |
| March 31, 2019 |
(Amounts in Thousands) | Certificates of Deposit | | Municipal Bonds | | U.S. Treasury and Federal Agencies |
Within one year | $ | 9,172 |
| | $ | 2,445 |
| | $ | 23,335 |
|
After one year through two years | 4,465 |
| | — |
| | 2,404 |
|
Total Fair Value | $ | 13,637 |
| | $ | 2,445 |
| | $ | 25,739 |
|
All investments are classified as available-for-sale securities which are recorded at fair value. See Note 1012 - Fair Value in the Notes to Condensed Consolidated Financial Statements for more information on the fair value of available-for-sale securities. The amortized cost basis reflects the original purchase price, with discounts and premiums amortized over the life of the available-for-sale securities. 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. | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | |
(Amounts in Thousands) | Certificates of Deposit | | Municipal Bonds | | U.S. Treasury and Federal Agencies |
Amortized cost basis | $ | 6,220 | | | $ | — | | | $ | 7,423 | |
Unrealized holding gains | — | | | — | | | 15 | |
Unrealized holding losses | — | | | — | | | — | |
Fair Value | $ | 6,220 | | | $ | — | | | $ | 7,438 | |
| | | | | |
| June 30, 2019 | | | | |
(Amounts in Thousands) | Certificates of Deposit | | Municipal Bonds | | U.S. Treasury and Federal Agencies |
Amortized cost basis | $ | 11,230 | | | $ | 1,921 | | | $ | 19,888 | |
Unrealized holding gains | — | | | 1 | | | 31 | |
Unrealized holding losses | — | | | — | | | — | |
Fair Value | $ | 11,230 | | | $ | 1,922 | | | $ | 19,919 | |
|
| | | | | | | | | | | |
| March 31, 2019 |
(Amounts in Thousands) | Certificates of Deposit | | Municipal Bonds | | U.S. Treasury and Federal Agencies |
Amortized cost basis | $ | 13,637 |
| | $ | 2,446 |
| | $ | 25,737 |
|
Unrealized holding gains | — |
| | — |
| | 7 |
|
Unrealized holding losses | — |
| | (1 | ) | | (5 | ) |
Fair Value | $ | 13,637 |
| | $ | 2,445 |
| | $ | 25,739 |
|
| | | | | |
| June 30, 2018 |
(Amounts in Thousands) | Certificates of Deposit | | Municipal Bonds | | U.S. Treasury and Federal Agencies |
Amortized cost basis | $ | 11,850 |
| | $ | 16,532 |
| | $ | 6,266 |
|
Unrealized holding gains | — |
| | — |
| | — |
|
Unrealized holding losses | — |
| | (24 | ) | | (17 | ) |
Fair Value | $ | 11,850 |
| | $ | 16,508 |
| | $ | 6,249 |
|
An immaterial amount ofNaN investments were in a continuous unrealized loss position for greater than twelve months as of March 31, 2019. Realized2020. There were 0 realized gains andor losses as a result of sales in the three and nine months ended March 31, 20192020 and March 31, 2018 were also immaterial.2019.
Supplemental Employee Retirement Plan Investments:
We maintain a self-directed supplemental employee retirement plan (“SERP”)SERP in which executive employees are eligible to participate. The SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. We recognize SERP investment assets on the Condensed Consolidated Balance Sheets at current fair value. A SERP liability of the same amount is recorded on the Condensed Consolidated Balance Sheets representing an obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income in the Other Income (Expense) section of the Condensed Consolidated Statements of Income. Adjustments made to revalue the SERP liability are also recognized in income or expense as selling and administrative expenses and offset valuation adjustments on SERP investment assets. Net unrealized holding gains (losses)losses for the nine months ended March 31, 20192020 and 20182019 were, in thousands, $(104)$1,569 and $450,$104, respectively.
SERP asset and liability balances were as follows:
| | (Amounts in Thousands) | March 31, 2019 | | June 30, 2018 | (Amounts in Thousands) | March 31, 2020 | | June 30, 2019 |
SERP investments - current asset | $ | 3,409 |
| | $ | 3,868 |
| SERP investments - current asset | $ | 2,878 | | | $ | 3,087 | |
SERP investments - other long-term asset | 9,096 |
| | 8,246 |
| SERP investments - other long-term asset | 7,713 | | | 8,687 | |
Total SERP investments | $ | 12,505 |
| | $ | 12,114 |
| Total SERP investments | $ | 10,591 | | | $ | 11,774 | |
| | | | | | | |
SERP obligation - current liability | $ | 3,409 |
| | $ | 3,868 |
| SERP obligation - current liability | $ | 2,878 | | | $ | 3,087 | |
SERP obligation - other long-term liability | 9,096 |
| | 8,246 |
| SERP obligation - other long-term liability | 7,713 | | | 8,687 | |
Total SERP obligation | $ | 12,505 |
| | $ | 12,114 |
| Total SERP obligation | $ | 10,591 | | | $ | 11,774 | |
Equity securities without readily determinable fair value:
We hold a total investment of $2.0 million in a privately-held company, including $0.5 million in equity securities without readily determinable fair value. The investment in equity securities without readily determinable fair value is included in the Other Assets line of the Condensed Consolidated Balance Sheets. See Note 1012 - Fair Value in the Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities. We do not hold a majority voting interest and are not the variable interest primary beneficiary of the privately-held company, thus consolidation is not required.
Note 12.14. Derivative Instruments
We hold a total investment of $2.0 million in a privately-held company, including $1.5 million in stock warrants. The investment in stock warrants is accounted for as a derivative instrument and is included in the Other Assets line of the Condensed Consolidated Balance Sheets. The stock warrants are convertible into equity shares of the privately-held company upon achieving certain milestones. The value of the stock warrants will fluctuate primarily in relation to the value of the privately-held company's underlying securities, either providing an appreciation in value or potentially expiring with no value. During the quarter ended March 31, 2019,2020, the change in fair value of the stock warrants was not significant. See Note 1012 - Fair Value in the Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities. Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets are presented below. All foreign exchange contracts were settled as of the quarter ended March 31, 2019.
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| | | | | | | | | | | | | | | | | | | | |
Fair Values of Derivative Instruments on the Condensed Consolidated Balance Sheets | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | | | Fair Value As of | | | | Fair Value As of |
(Amounts in Thousands) | | Balance Sheet Location | | March 31 2019 | | June 30 2018 | | Balance Sheet Location | | March 31 2019 | | June 30 2018 |
Derivatives designated as hedging instruments: | | | | | | | | | | |
Foreign exchange contracts | | | | | | | | Accrued expenses | | $ | — |
| | $ | 10 |
|
| | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Stock warrants | | Other Assets | | $ | 1,500 |
| | $ | 1,500 |
| | | | | | |
Total derivatives | | $ | 1,500 |
| | $ | 1,500 |
| | | | $ | — |
| | $ | 10 |
|
Note 13.15. Postemployment Benefits
Our domestic employees participate in severance plans which provide severance benefits to eligible employees meeting the plans’ qualifications, primarily for involuntary termination without cause.
The components of net periodic postemployment benefit cost applicable to our severance plans were as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | Nine Months Ended | |
| March 31 | | March 31 | | March 31 | | | March 31 | |
(Amounts in Thousands) | 2019 | | 2018 | | 2019 | | 2018 | (Amounts in Thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | 126 |
| | $ | 132 |
| | $ | 379 |
| | $ | 398 |
| Service cost | $ | 120 | | | $ | 126 | | | $ | 365 | | | $ | 379 | |
Interest cost | 23 |
| | 20 |
| | 70 |
| | 62 |
| Interest cost | 19 | | | 23 | | | 56 | | | 70 | |
| Amortization of actuarial income | (100 | ) | | (58 | ) | | (302 | ) | | (191 | ) | Amortization of actuarial income | (82) | | | (100) | | | (260) | | | (302) | |
Net periodic benefit cost | $ | 49 |
| | $ | 94 |
| | $ | 147 |
| | $ | 269 |
| Net periodic benefit cost | $ | 57 | | | $ | 49 | | | $ | 161 | | | $ | 147 | |
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 restructuring actions, are not estimable using actuarial methods and are expensed in accordance with the applicable U.S. GAAP.
During fiscal year 2019, we reported service cost in the Cost of Sales and Selling and Administrative Expenses lines of the Condensed Consolidated Statement of Income, interest cost in the Interest Expense line, and amortization of actuarial income in the Non-Operating income (expense), net line. During fiscal year 2018, all costs were recognized in the Cost of Sales and Selling and Administrative Expenses lines and were not segregated between the operating and non-operating sections of the Condensed Consolidated Statement of Income because the impact was immaterial.
Note 14.16. Stock Compensation
Stock-based compensation expense during the quarter and year-to-date period ended March 31, 2019,2020 was $1.1$1.3 million and $4.7$4.5 million, respectively, and during the quarter and year-to-date period ended March 31, 2018,2019, was $0.8$1.1 million and $3.3$4.7 million, respectively. The total income tax benefit for stock compensation arrangements during the quarter and year-to-date period ended
March 31, 2019,2020, was $0.3$0.4 million and $1.2 million, respectively, and during the quarter and year-to-date period ended March 31, 2018,2019, was $0.3 million and $1.7$1.2 million, respectively. Included in the income tax benefit for the year-to-date period ended March 31, 2018 was a $0.6 million benefit for excess tax benefits from the vesting of stock awards, while the year-to-date period ended March 31, 2019, had an immaterial amount of excess tax benefits.
During fiscal year 2019,2020, the following stock compensation was awarded to officers and other key employees and to members of the Board of Directors who are not employees. All awards were granted under the 2017 Stock Incentive Plan. For more information on stock compensation awards, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.2019.
| | Type of Award | | Quarter Awarded | | Shares or Units | | Grant Date Fair Value (5) | Type of Award | | Quarter Awarded | | Targeted Shares or Units | | Grant Date Fair Value (5) | |
Annual Performance Shares (1) | | 1st Quarter | | 34,176 |
| | $16.12 | Annual Performance Shares (1) | | 1st Quarter | | 34,305 | | | $16.85 | - | | $16.93 |
| Annual Performance Shares (1) | | 2nd Quarter | | 23,889 |
| | $16.15 | - | $16.17 | Annual Performance Shares (1) | | 3rd Quarter | | 1,085 | | | $18.43 | - | | $20.28 |
Annual Performance Shares (1) | | 3rd Quarter | | 234 |
| | $14.93 | |
Relative Total Shareholder Return Awards (2) | | 1st Quarter | | 9,703 |
| | $21.16 | |
Relative Total Shareholder Return Awards (2) | | 2nd Quarter | | 60,754 |
| | $21.46 | - | $21.49 | |
Relative Total Shareholder Return Performance Units (2) | | Relative Total Shareholder Return Performance Units (2) | | 1st Quarter | | 28,080 | | | $21.25 | |
Relative Total Shareholder Return Performance Units (2) | | Relative Total Shareholder Return Performance Units (2) | | 3rd Quarter | | 7,190 | | | $18.08 | - | | $19.76 |
Restricted Stock Units (3) | | 1st Quarter | | 170,686 |
| | $15.99 | - | $16.39 | Restricted Stock Units (3) | | 1st Quarter | | 188,588 | | | $16.85 | - | $17.24 |
Restricted Stock Units (3) | | 2nd Quarter | | 138,844 |
| | $16.46 | - | $16.48 | Restricted Stock Units (3) | | 2nd Quarter | | 2,500 | | | $20.46 | |
Restricted Stock Units (3) | | 3rd Quarter | | 9,291 |
| | $15.24 | Restricted Stock Units (3) | | 3rd Quarter | | 22,933 | | | $18.78 | - | $20.63 |
Unrestricted Shares (4) | | 1st Quarter | | 12,318 |
| | $16.39 | Unrestricted Shares (4) | | 1st Quarter | | 9,091 | | | $17.19 | |
Unrestricted Shares (4) | | 2nd Quarter | | 9,522 |
| | $16.48 | - | $16.49 | Unrestricted Shares (4) | | 2nd Quarter | | 6,321 | | | $19.18 | |
Unrestricted Shares (4) | | 3rd Quarter | | 10,498 |
| | $14.44 | Unrestricted Shares (4) | | 3rd Quarter | | 5,985 | | | $20.66 | |
|
(1) Annual performance shares were awarded to officers and other key employees. The number of annual performance shares to be issued will be dependent upon the Company’s return on invested capital during fiscal year 2019,2020, with a percentage payout ranging from 0% to 200% of the target number set forth above. The maximum number of shares that can be issued under these awards is 116,598.70,780. Annual performance shares vest on June 30, 2019.2020.
(2) Performance units were awarded to key officers under the Company’s Relative Total Shareholder Return program. Vesting occurs at June 30, 20202021 and June 30, 2021.2022. Participants 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. The maximum number of units that can be issued under these awards is 140,914.70,540.
(3) Restricted stock units were awarded to officers and key employees. Also, in connection with the redesign of the Company’s annual cash incentive plan certain employees were awarded time-based retention and performance-based transition units. The number of performance-based transition units to be issued will be dependent upon the Company’s EBITDA during fiscal year 2020, with a percentage payout ranging from 0% to 100% of the target. The maximum number of units that can be issued under the performance-based transition awards is 35,598. The Company also awarded performance-based transformation units that will earn from 0% to 100% of the target award depending upon the Company’s reduction of operating costs and EBITDA during fiscal year 2020. The maximum number of units that can be issued under the performance-based transformation award is 2,165. Vesting occurs at June 30, 2019,2020, June 30, 2020,2021, and June 30, 2021. Upon vesting, the outstanding number of restricted stock units and the value of dividends accumulated2022. Dividends accumulate over the vesting period are converted to shares of common stock.for all awards except the time-based retention and performance-based transition awards.
(4) Unrestricted shares were awarded to non-employee members of the Board of Directors and key employees as consideration for service to Kimball International and do not have vesting periods, holding periods, restrictions on sale, or other restrictions.
(5) The grant date fair value of annual performance shares isand restricted stock units that do not receive dividends was based on the stock price at the date of the award, reduced by the present value of dividends normally paid over the vesting period which are not payable on outstanding annual performance share awards or certain restricted stock unit awards. The grant date fair value of the Relative Total Shareholder Return awards was calculated using a Monte Carlo simulation. This valuation technique includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends. The grant date fair value of the restricted sharestock units that receive dividends and unrestricted shares was based on the stock price at the date of the award.
Note 15.17. Variable Interest Entities
Our involvement with variable interest entities (“VIEs”) is limited to situations in which we are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the VIE’s economic performance. Thus, consolidation is not required. Our involvement with VIEs consists of an investment in a privately-held company consisting of equity securities without readily determinable fair value and stock warrants and notes receivable related to independent dealership financing.
The equity securities without readily determinable fair value and stock warrants were valued at $0.5 million and $1.5 million, respectively, at both March 31, 20192020 and June 30, 20182019 and were included in the Other Assets line of the Condensed Consolidated Balance Sheets. For more information related to our investment in the privately-held company, see Note 1012 - Fair Value in the Notes to Condensed Consolidated Financial Statements. The carrying value of the notes receivable for independent dealership financing were $0.9 million at March 31, 2020 and $1.0 million net of a $0.1 million allowance, and $0.6 million, net of a $0.1 million allowance as of March 31,at June 30, 2019 and June 30, 2018, respectively, and werewas included on the Receivables and Other Assets lines of our Condensed Consolidated Balance Sheets.
We have no0 obligation to provide additional funding to the VIEs, and thus our exposure and risk of loss related to the VIEs is limited to the carrying value of the investment and notes receivable. Financial support provided by Kimball International to the VIEs was limited to the items discussed above during the quarter ended March 31, 2019.2020.
Note 16.18. Credit Quality and Allowance for Credit Losses of Notes Receivable
We monitor credit quality and associated risks of notes receivable on an individual basis based on criteria such as financial stability of the party and collection experience in conjunction with general economic and market conditions. As of March 31, 20192020 and June 30, 2018,2019, we had no0 material past due outstanding notes receivable.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2020 | | | | | | As of June 30, 2019 | | | | |
(Amounts in Thousands) | Unpaid Balance | | Related Allowance | | Receivable Net of Allowance | | Unpaid Balance | | Related Allowance | | Receivable Net of Allowance |
Independent Dealership Financing | $ | 923 | | | $ | — | | | $ | 923 | | | $ | 1,010 | | | $ | — | | | $ | 1,010 | |
Other Notes Receivable | 363 | | | 363 | | | — | | | 122 | | | 122 | | | — | |
Total | $ | 1,286 | | | $ | 363 | | | $ | 923 | | | $ | 1,132 | | | $ | 122 | | | $ | 1,010 | |
Note 19. Subsequent Event
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2019 | | As of June 30, 2018 |
(Amounts in Thousands) | Unpaid Balance | | Related Allowance | | Receivable Net of Allowance | | Unpaid Balance | | Related Allowance | | Receivable Net of Allowance |
Independent Dealership Financing | $ | 1,099 |
| | $ | 88 |
| | $ | 1,011 |
| | $ | 666 |
| | $ | 50 |
| | $ | 616 |
|
Other Notes Receivable | 173 |
| | 173 |
| | — |
| | 183 |
| | 183 |
| | — |
|
Total | $ | 1,272 |
| | $ | 261 |
| | $ | 1,011 |
| | $ | 849 |
| | $ | 233 |
| | $ | 616 |
|
Impacts of COVID-19 Pandemic
Subsequent to March 31, 2020, the COVID-19 pandemic has escalated and is adversely impacting our financial performance thus far for the quarter ended June 30, 2020 and is expected to continue to have an adverse impact as we navigate through this crisis. In addition, the market price of our Class B Common Stock has experienced a significant decline in connection with overall stock market trends related to the global economic impact of the COVID-19 pandemic. The potential impacts from COVID-19 and the decline in our stock price could be considered triggering events that may require us to perform impairment assessments of leases, goodwill and other intangible assets. We will evaluate these considerations in our fourth quarter ending June 30, 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
For 70 years, Kimball International, Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) creates designhas created design- driven innovative furnishings soldthat have helped our customers shape spaces into places, bringing possibility to life by enabling collaboration, discovery, wellness and relaxation. We go to market through our family of brands: Kimball, National, Kimball Hospitality, and D’style by Kimball Hospitality. Our diverse portfolio offers solutions for the workplace, learning, healing, and hospitality environments. Our values and integrity are demonstrated daily by living our Guiding Principlespurpose and creating a culture of caring,guiding 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.
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 as of January 2019 for the North American commercial furniture market, which they define as including office, education, and healthcare furniture products, projects a year-over-year increase of 3.3% for calendar year 2019. The forecast for two of the leading indicators for the hospitality furniture market (January 2019 PwC Hospitality Directions U.S. report) includes a projected increase in RevPAR (Revenue Per Available Room) of 2.3% for calendar year 2019, while occupancy which has been hovering at peak levels is forecasted to decrease 0.4% in calendar year 2019.
Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
On October 23, 2018, the Board of Directors (“Board”) appointed Kristine L. Juster as the Chief Executive Officer of the Company effective November 1, 2018 to succeed Robert F. Schneider who retired as Chief Executive Officer and Chairman of the Board on October 31, 2018, as previously announced. Ms. Juster served as an independent member of the Board since April 2016 and was a member of the Audit Committee. Ms. Juster served for over 20 years as a Global Executive at Newell Brands, Inc., a leading global consumer goods and commercial products company (“Newell”), until her retirement in April 2018. During her tenure at Newell, Ms. Juster served as President of the Global Writing Segment from May 2014 until her retirement in April 2018, as President of Newell’s Baby and Parent Segment from November 2011 to April 2014, and in other roles of increasing responsibility since joining Newell in 1995, including serving as President of Newell’s Home Décor Segment and President of Newell’s Culinary Lifestyles Segment. Throughout her career, Ms. Juster drove significant growth•COVID-19 -The COVID-19 pandemic adversely impacted our financial performance for the businesses she led through brand innovation, distribution channel expansion including e-commerce,quarter ended March 31, 2020, and is expected to have a global mindset. Ms. Juster has a proven track record of scaling growth strategies, while preserving the core values that are critical to the long-term sustainability of a business.
Productivity and lean initiatives are projected to result in $10 million of cost savings incontinuing adverse impact beyond our fiscal year 2019 compared2020 as we navigate through this crisis. The duration and severity of the impact of COVID-19 cannot be estimated at this time. While we cannot determine the precise impact of the COVID-19 outbreak on our third quarter results, we estimate that the delays in shipments of our products due to temporary production halts and delivery push-outs totaled approximately $18 million. Our dealers and suppliers are also
experiencing similar negative impacts from the COVID-19 pandemic. Additional impacts to our business resulting from the COVID-19 outbreak include, but are not limited to, the prior year. These initiatives include investmentsfollowing:
•We initially responded in equipmentlate March to shelter-in-place and automation atsimilar government orders as mandated by temporarily closing non-essential manufacturing, distribution, and showroom locations and implementing a remote working program for professional staff, including video conferencing capabilities. As we serve the healthcare industry and the federal government, four of our productionten facilities continued to improve production flowoperate to provide these essential products. We prioritized healthcare products by launching a family of quickship products for facilities serving the COVID-19 crisis. As government mandates lifted in late April and increase efficiency, improvementsearly May, we increased the number of facilities in transportationoperation to eight out of the ten that comprise our U.S. manufacturing footprint, which has reduced our lead-times on incoming orders and warehousing processes,provides us with the ability to accommodate additional volumes and to also serve our commercial and other various lean initiatives across all areasinstitutional markets.
��Order rates in the third quarter increased at a mid-single digit rate, led by our Institutional and Hospitality markets, but by the second half of March, we began to see a significant number of COVID-19-related order and shipment push-outs requested by our customers in our Hospitality vertical, which represents approximately 25% of our Company.revenue. This trend has continued, along with a slowdown in order flow in all three markets, thus far in our fourth quarter of fiscal 2020.
| |
• | On October 26, 2018, we acquired substantially all the assets and assumed certain specified limited liabilities of David Edward headquartered in Baltimore, Maryland. David Edward is a premier designer and manufacturer of contract furniture, sold in the healthcare, corporate, education, and premium hospitality markets. David Edward sells primarily in the North American and Middle Eastern markets. David Edward’s products are generally specified by architects and designers, represented through a network of independent representatives, and sold through authorized furniture dealerships. The David Edward product portfolio consists of classic and contemporary designs, focused primarily in the seating, tables, and ancillary furniture categories. In conjunction with the asset acquisition, we leased the two existing David Edward production facilities in Baltimore, Maryland and Red Lion, Pennsylvania. See Note 3 - Acquisition in the Notes to Condensed Consolidated Financial Statements for additional information. |
| |
• | 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. See Note 3 - Acquisition in the Notes to Condensed Consolidated Financial Statements for additional information. |
On December 22, 2017,•The safety and health of our employees is most important, thus we have implemented new safety measures, such as domestic and international travel restrictions, work-from-home practices for professional staff, extensive cleaning protocols, social distancing on the Tax Cutsmanufacturing floor, and Jobs Act (“Tax Act”) was signed into law. The Tax Actutilization of personal protective equipment for employees who are unable to work remotely.
•In response to the decline in revenue, we are focusing on cost control and 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 and changed numerousstrategic initiatives. Managing working capital in conjunction with fluctuating demand levels is likewise key. While the impact of COVID-19 is anticipated to impact our future 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 credit facility will be sufficient to meet our working capital and other provisions. Because operating needs for at least the next 12 months.
•‘Kimball International hasConnect’ 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. We believe this strategy will result in enhanced shareholder value over the long term. 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 unveiled our new purpose to our employees on May 9, 2019 and are investing in our training, technology and systems to remain an employer of choice and a great place to work.
•Build Our Capabilities: We 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 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 healthcare and e-commerce, and driving commercial excellence. We believe by being our customers’ first choice for shaping places that bring collaboration, discovery, wellness and relaxation to life, we will capture greater market share.
•Transformation Restructuring Plan - In June 30 2019, we announced a transformation restructuring plan that is expected to optimize resources for future growth, improve efficiency, and build capabilities across our organization. We believe the transformation restructuring plan will establish a more cost-efficient structure to better align our operations with our long-term strategic goals. The efforts are expected to generate annualized pre-tax savings of approximately $10.0 million when the transformation restructuring plan is fully implemented. We estimate pre-tax restructuring charges incurred through the end of
fiscal year-end,year 2020 will be approximately $9.0 million to $10.0 million. The transformation restructuring plan includes the lower corporate income tax rate was phasedfollowing:
•Our overall manufacturing facility footprint is being reviewed to reduce excess capacity and gain efficiencies by centralizing manufacturing operations. We have ceased operations at a leased seating manufacturing facility in resultingMartinsville, Virginia, will be consolidating a David Edward production facility in a U.S. statutory federal tax rateRed Lion, Pennsylvania into our Baltimore, Maryland facility near the end of 28.1% for our fiscal year ended June 30, 2018. 2020, and are evaluating our production capabilities and capacity across our organization to identify additional opportunities.
•The statutory federal tax ratecreation of center-led functions for finance, human resources, information technology and legal functions is 21% forresulting in the standardization of processes and the elimination of duplication. In addition, we centralized our supply chain efforts to maximize supplier value and are driving more efficient practices and operations within our logistics function.
•Kimball brand selling resources were realigned to higher-growth markets. We also ceased use of our four leased furniture showrooms across our brands during the first quarter of fiscal year 20192020 and subsequent years. The changes includedrecognized impairment of the lease and associated leasehold improvements.
•On October 26, 2018, we acquired substantially all of the assets and assumed certain specified limited liabilities of David Edward Furniture, Inc. (“David Edward”), which is headquartered in Baltimore, Maryland. David Edward is a premier designer and manufacturer of contract furniture, sold in the Tax Acthealthcare, corporate, education, and premium hospitality markets. David Edward products are broadgenerally specified by architects and complex.sold primarily in the North American market. The David Edward product portfolio consists of classic and contemporary designs, focused primarily in the seating, tables, and ancillary furniture categories. In conjunction with the asset acquisition, we leased two existing David Edward production facilities in Baltimore, Maryland and Red Lion, Pennsylvania. As part of our transformation restructuring plan we will be consolidating the David Edward production facility in Red Lion, Pennsylvania into the Baltimore, Maryland facility. Our focus is on investing in new equipment and a redesigned layout in Baltimore that will allow us to substantially increase capacity, improve efficiency, reduce lead times, deliver on the high design, high quality products, and expand our Kimball Health Portfolio.
Commodity•With the current decline in the economy, we expect commodity prices are expected to remain moderate, butand we will continue to be exposed to fluctuationfluctuations in transportation costs, which vary based upon freight carrier capacity and fuel prices. We utilize both steel and aluminum in our products, most of which is sourced domestically. The U.S. originally imposed tariffs of 25% on steel and 10% on aluminum imported from several countries effective June 2018. The government expanded its list of products subject to tariffs to include furniture products, parts, and components at a 10% rate effective September 2018. The U.S. government continues2018, increasing to evaluate the ongoing need for tariffs, and if further tariffs are assessed the landed cost of our products could increase materially, which would reduce our net income if we are unable to mitigate the additional cost.a 25% rate effective June 2019. We are actively strivingworked 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.
On February 4, 2019, we received notification from the U.S. General Services Administration Office of Inspector General (“GSA OIG”) in response to our self-reporting in 2016 of subcontractor reporting noncompliance and inaccuracies. The GSA OIG Contractor Reporting Program reviewed the information we provided and has determined that the government’s interest is sufficiently protected and the review of the matter against Kimball International has been terminated.
•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,albeit at a reduced level than we had planned, 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, cash equivalents, and short-term investments plus the unused amount of our credit facility, was $119.8$163.7 million at March 31, 2019.2020.
Financial Overview
Our fiscal year 2018 results have been recast to reflect the impact of the adoption of guidance on the recognition of revenue from contracts with customers using a full retrospective transition method.
| | | At or for the Three Months Ended | | | | For the Nine Months Ended | | | | At or for the Three Months Ended | | | | | For the Nine Months Ended | | | |
| March 31 | | | | March 31 | | | | March 31 | | | | | March 31 | | | |
(Amounts in Millions) | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change | (Amounts in Millions) | 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change |
Net Sales | $ | 177.4 |
| | $ | 160.9 |
| | 10 | % | | $ | 572.5 |
| | $ | 514.9 |
| | 11 | % | Net Sales | $ | 178.2 | | | $ | 177.4 | | | 0.5 | % | | $ | 571.8 | | | $ | 572.5 | | | (0.1 | %) |
Organic Net Sales* | | Organic Net Sales* | 178.2 | | | 177.4 | | | 0.5 | % | | 567.8 | | | 572.5 | | | (0.8 | %) |
Gross Profit | 56.6 |
| | 50.0 |
| | 13 | % | | 187.4 |
| | 171.4 |
| | 9 | % | Gross Profit | 60.5 | | | 56.6 | | | 7 | % | | 196.2 | | | 187.4 | | | 5 | % |
Selling and Administrative Expenses | 47.5 |
| | 41.5 |
| | 15 | % | | 151.2 |
| | 134.9 |
| | 12 | % | Selling and Administrative Expenses | 45.6 | | | 47.5 | | | (4 | %) | | 146.2 | | | 151.2 | | | (3 | %) |
Restructuring Expense | | Restructuring Expense | 0.8 | | | — | | | 6.6 | | | — | | |
Operating Income | 9.1 |
| | 8.5 |
| | 6 | % | | 36.2 |
| | 36.5 |
| | (1 | %) | Operating Income | 14.1 | | | 9.1 | | | 55 | % | | 43.4 | | | 36.2 | | | 20 | % |
Operating Income % | 5.1 | % | | 5.3 | % | |
|
| | 6.3 | % | | 7.1 | % | |
|
| Operating Income % | 7.9 | % | | 5.1 | % | | 7.6 | % | | 6.3 | % | |
Adjusted Operating Income * | $ | 10.3 |
| | $ | 8.5 |
| | 22 | % | | $ | 38.4 |
| | $ | 37.2 |
| | 3 | % | Adjusted Operating Income * | $ | 13.3 | | | $ | 10.3 | | | 28 | % | | $ | 49.5 | | | $ | 38.4 | | | 29 | % |
Adjusted Operating Income % ** | 5.8 | % | | 5.3 | % | | | | 6.7 | % | | 7.2 | % | | | |
Adjusted Operating Income % * | | Adjusted Operating Income % * | 7.5 | % | | 5.8 | % | | 8.7 | % | | 6.7 | % | |
Net Income | $ | 8.0 |
| | $ | 5.9 |
| | 36 | % | | $ | 28.2 |
| | $ | 24.2 |
| | 17 | % | Net Income | $ | 9.5 | | | $ | 8.0 | | | 19 | % | | $ | 31.9 | | | $ | 28.2 | | | 13 | % |
Net Income as a Percentage of Net Sales | | Net Income as a Percentage of Net Sales | 5.3 | % | | 4.5 | % | | 5.6 | % | | 4.9 | % | |
Adjusted Net Income * | 8.1 |
| | 5.9 |
| | 39 | % | | 29.6 |
| | 24.2 |
| | 22 | % | Adjusted Net Income * | $ | 10.2 | | | $ | 8.1 | | | 25 | % | | $ | 37.1 | | | $ | 29.6 | | | 26 | % |
Diluted Earnings Per Share | $ | 0.22 |
| | $ | 0.16 |
| | | | $ | 0.76 |
| | $ | 0.64 |
| | | Diluted Earnings Per Share | $ | 0.25 | | | $ | 0.22 | | | $ | 0.86 | | | $ | 0.76 | | |
Adjusted Diluted Earnings Per Share * | $ | 0.22 |
| | $ | 0.16 |
| | | | $ | 0.79 |
| | $ | 0.64 |
| | | Adjusted Diluted Earnings Per Share * | $ | 0.27 | | | $ | 0.22 | | | | | $ | 1.00 | | | $ | 0.79 | | |
Return on Invested Capital ** | | Return on Invested Capital ** | 29.4 | % | | 27.7 | % | | 38.5 | % | | 35.8 | % | |
Adjusted EBITDA * | $ | 14.5 |
| | $ | 12.3 |
| | 18 | % | | $ | 50.7 |
| | $ | 48.3 |
| | 5 | % | Adjusted EBITDA * | $ | 17.5 | | | $ | 14.5 | | | 21 | % | | $ | 62.2 | | | $ | 50.7 | | | 23 | % |
Open Orders ** | $ | 149.2 |
| | $ | 129.0 |
| | 16 | % | | | | | | | |
Adjusted EBITDA as a Percentage of Net Sales * | | Adjusted EBITDA as a Percentage of Net Sales * | 9.8 | % | | 8.2 | % | | 10.9 | % | | 8.8 | % | |
Order Backlog ** | | Order Backlog ** | $ | 187.0 | | | $ | 149.2 | | | 25 | % | |
* Items indicated represent Non-GAAP (Generally Accepted Accounting Principles) measurements for fiscal year 2019.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 | | | | | | | | | | | |
| Three Months Ended | | | | | | Nine Months Ended | | | | |
| March 31 | | | | | | March 31 | | | | |
(Amounts in Millions) | 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change |
Institutional | $ | 63.5 | | | $ | 61.3 | | | 4 | % | | $ | 215.7 | | | $ | 202.8 | | | 6 | % |
Commercial | 71.0 | | | 67.8 | | | 5 | % | | 216.0 | | | 224.3 | | | (4 | %) |
Hospitality | 43.7 | | | 48.3 | | | (10 | %) | | 140.1 | | | 145.4 | | | (4 | %) |
Total Net Sales | $ | 178.2 | | | $ | 177.4 | | | 0.5 | % | | $ | 571.8 | | | $ | 572.5 | | | (0.1 | %) |
|
| | | | | | | | | | | | | | | | | | | | | |
Net Sales by End Vertical Market | | | | | | | | | | | |
| Three Months Ended |
| |
| Nine Months Ended |
| |
| March 31 |
| |
| March 31 |
| |
(Amounts in Millions) | 2019 | | 2018 |
| % Change |
| 2019 | | 2018 |
| % Change |
Commercial | $ | 50.9 |
| | $ | 50.2 |
| | 1 | % | | $ | 171.1 |
| | $ | 151.8 |
| | 13 | % |
Education | 13.5 |
|
| 12.7 |
|
| 6 | % |
| 66.2 |
|
| 61.8 |
|
| 7 | % |
Finance | 16.9 |
|
| 17.8 |
|
| (5 | %) |
| 53.2 |
|
| 48.9 |
|
| 9 | % |
Government | 19.1 |
|
| 17.6 |
|
| 9 | % |
| 55.0 |
|
| 68.9 |
|
| (20 | %) |
Healthcare | 28.7 |
|
| 19.5 |
|
| 47 | % |
| 81.6 |
|
| 63.7 |
|
| 28 | % |
Hospitality | 48.3 |
|
| 43.1 |
|
| 12 | % |
| 145.4 |
|
| 119.8 |
|
| 21 | % |
Total Net Sales | $ | 177.4 |
|
| $ | 160.9 |
|
| 10 | % |
| $ | 572.5 |
|
| $ | 514.9 |
|
| 11 | % |
Our Institutional end market includes sales to the healthcare, education and government vertical markets. Our Commercial end market includes sales to the commercial and financial vertical markets.Third quarter fiscal year 20192020 consolidated net sales were $177.4of $178.2 million increased 0.5% compared to third quarter fiscal year 20182019 net sales of $160.9$177.4 million, or a 10% increase including $3.4 million of netas price increases across all three markets and higher volume in our commercial market and the healthcare and education verticals in our institutional market offset lower sales resulting from the David Edward acquisition.in our hospitality market. The increasehigher volume in organicour commercial market was due to sales was primarilyto several large financial institutions driven by both volume and increased prices. Net sales for the nine-month period ended March 31, 2019 of $572.5 million increased 11% comparedour capability to net sales of $514.9 million for the nine-month period ended March 31, 2018 primarily driven by volume and to lesser extent by increased prices.deliver custom solutions that enhance their brand experience. The David Edward acquisition contributed $6.0 million of net sales for the year-to-date period ended March 31, 2019.
Key explanatory comments for our sales by vertical market for the third quarter and year-to-date period of fiscal year 2019 compared to the third quarter and year-to-date period of fiscal year 2018 follow:
Sales growth to the healthcare vertical marketsales increase was driven by our continued strategic focus in this marketplace which included aligning resources, building relationships, and introducing new healthcare products. The healthcareproducts in this market which continues to show stability and growth.
We continue to see strength in the hospitality industry driving Our increased sales in both custom and non-custom projects driven by our marketing campaigns. The D’style acquisition also contributed to the year-to-date sales increase.
New products and continued development of our strategic relationships drove the higher sales in the commercial vertical market.
Our sales to the finance vertical market increased for the year-to-date period as large financial institutions continue to update their office environments.
Our sales to the education vertical market increasedwere driven by multiple larger university projects. The
hospitality vertical experienced decreased sales of both custom and non-custom products as hospitality projects were deferred in response to the COVID-19 pandemic. We estimate that delays in shipments of our products due to continued focus on target accountstemporary production halts and were positively impacted early indelivery push-outs totaled approximately $18 million during our fiscal year as the timing of the normal education buying season was delayed and deferred sales into our first quarter.
Government vertical market sales increased in the third quarter on higher federal governmentof fiscal 2020.
Net sales and declined infor the year to datenine-month period ended March 31, 2020 of $571.8 million were approximately flat with net sales of $572.5 million for the nine-month period ended March 31, 2019. For the year-to-date period, organic net sales decreased $4.7 million, or 0.8% primarily due to decreased federal government sales as we shipped fewer large projectsvolume declines in the current year.our commercial and hospitality markets, which were partially offset by higher volume in all verticals within our institutional market and price increases in all three markets.
Each of our vertical market sales levels can fluctuate depending on the mix of projects in a given period.
Open ordersOrder backlog at March 31, 20192020 increased 16%25%, or 14% on an organic basis, when compared to the open orderbacklog level as of March 31, 2018 due to2019 with increases in both the hospitality furniture order backlog and office furniture order backlog. The office furniture ordereach of our three markets. Our backlog increase was primarily due to organic increases whilelargely driven by shipment date delays by our customers and product availability delays, both driven by the David Edward order backlog contributed to a lesser extent. Open ordersCOVID-19 pandemic impact. Backlog at a point in time may not be indicative of future sales trends.
In the third quarter of fiscal year 2019 we recorded net income of $8.0 million, or diluted earnings per share of $0.22, inclusive of after-tax CEO transition costs of $0.2 million, or less than $0.01 diluted earnings per share. In the third quarter of fiscal year 2018 we recorded net income of $5.9 million and diluted earnings per share of $0.16. Excluding the CEO transition costs, adjusted net income for the third quarter of fiscal year 2019 was $8.1 million, or $0.22 per diluted share. In the first nine months of fiscal year 2019 we recorded net income of $28.2 million and diluted earnings per share of $0.76, inclusive of $1.3 million, or $0.03 per diluted share, of after-tax CEO transition costs. Excluding the CEO transition costs, our adjusted net income for the first nine
months of fiscal year 2019 improved to $29.6 million, or $0.79 per diluted share, compared to net income for the first nine months of fiscal year 2018 of $24.2 million, or $0.64 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 80210 basis points and 160 basis points in the third quarter and year-to-date periods of fiscal year 20192020 compared to the third quarter and year-to-date periods of fiscal year 2018. Increased2019. Both the third quarter and year-to-date periods were positively impacted by increased product pricing and the savings realized from our cost reduction initiatives, the leverage gained on higher sales volumes, and favorable sales mixtransformation plan which were partially offset by commodity cost increases. The David Edward acquisition also negatively impacted our gross profit in the third quarter, as expected,tariff expenses and will continue to in the short-term until productivity improvements and synergies are realized. Gross profit as a percent of net sales decreased 60 basis points in the first nine months of fiscal year 2019 compared to the first nine months of fiscal year 2018. Increased product pricing, the savings realized from our cost reduction initiatives, and the leverage gained on higher sales volumes were more than offset by increases in transportation, commodity and tariff costs and the negative impact of David Edward on gross margin.employee healthcare expenses.
Selling and administrative expenses in the third quarter of fiscal year 20192020 compared to the third quarter of fiscal year 20182019 decreased 4% in absolute dollars, and as a percent of net sales increased 100decreased 120 basis points, and increased 15%points. The decrease in absolute dollars. Contributing to the third quarter fiscal year 2019 increased selling and administrative expense was $0.3 million of CEO transition costs. In addition, the selling and administrative expense increase was driven by higher commission expense related to the higher sales levels, higher salary, retirement, and incentive compensation expenses, strategic growth investments, and the incremental selling and administrative expenses ofwas driven by the David Edward operations.
savings benefit related to the transformation plan, lower sales commissions, and lower Supplemental Employee Retirement Plan (“SERP”) expense which were partially offset by higher salary expense to support growth and bad debt expense. For the first nine months of fiscal year 2019ended March 31, 2020 compared to the first nine monthssame period of fiscalthe prior year, 2018,selling and administrative expenses decreased 3% in absolute dollars and as a percent of net sales decreased 80 basis points. The reduction in selling and administrative expenses increased 20 basis points. In absolute dollars, selling and administrative expenses inwas driven by the first nine months of fiscal year 2019 comparedsavings benefit related to the same period of fiscal year 2018 increased 12% primarily due to thetransformation plan, lower SERP expense, lower commissions, and lower CEO transition costs,expense which were partially offset by higher salary expense, higher retirementemployee healthcare expenses, and incentive compensation costs as a result of higher earnings levels, and higher commission expense resulting from the higher sales levels. In addition, the prior year included a $1.0 million higher gain on the sale of assets thanwhich did not repeat in the current year-to-date period.year.
Also contributing to the higher selling and administrative expenses were unfavorable variances within selling and administrative expenses of $1.0 million for the third quarter and a $0.5 million favorable variance for the year-to-date period of fiscal year 2019 compared toThe decreased SERP expense in the third quarter and year-to-date period of fiscal year 2018 related toended March 31, 2020 resulted from the normal revaluation to fair value of our Supplemental Employee Retirement Plan (“SERP”)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.
Other Income (Expense) consistedIn June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. The transformation restructuring plan has established a more cost-efficient structure to better align our operations with our long-term strategic goals. We recognized pre-tax restructuring expense of $0.8 million and $6.6 million in the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
(Amounts in Thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Interest Income | $ | 492 |
| | $ | 258 |
| | $ | 1,339 |
| | $ | 726 |
|
Interest Expense | (40 | ) | | (55 | ) | | (146 | ) | | (160 | ) |
Gain (Loss) on Supplemental Employee Retirement Plan Investments | 1,032 |
| | (8 | ) | | 306 |
| | 756 |
|
Other | (62 | ) | | (197 | ) | | (235 | ) | | (412 | ) |
Other Income (Expense), net | $ | 1,422 |
| | $ | (2 | ) | | $ | 1,264 |
| | $ | 910 |
|
Our third quarter and year-to-date period of fiscal year
2019 results of operations included2020, respectively, related to our transformation restructuring plan. See Note 3 - Restructuring in the impactNotes to Condensed Consolidated Financial Statements for additional information.Other Income (Expense) consisted 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 ended June 30, 2018, and 21% for our fiscal year 2019 and subsequent fiscal years. Our nine months ended March 31, 2018 included approximately $2.0 million year-to-date in reduced income tax expense to reflect federal taxes on taxable income at the lower blended effective tax rate, offset by a fiscal year-to-date discrete tax impact of $1.9 million expense as a result of applying the new lower federal income tax rates to our net deferred tax assets. The third quarter fiscal year 2018 tax impact was approximately $0.4 million income to reflect federal taxes on current year taxable income at the lower blended effective tax rate, and $0.1 million income as a result of adjusting deferred tax assets to lower federal tax rates.following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| March 31 | | | | March 31 | | |
(Amounts in Thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Interest Income | $ | 386 | | | $ | 492 | | | $ | 1,482 | | | $ | 1,339 | |
Interest Expense | (21) | | | (40) | | | (65) | | | (146) | |
| | | | | | | |
Gain (Loss) on Supplemental Employee Retirement Plan Investments | (1,784) | | | 1,032 | | | (1,010) | | | 306 | |
| | | | | | | |
| | | | | | | |
Other | (294) | | | (62) | | | (350) | | | (235) | |
Other Income (Expense), net | $ | (1,713) | | | $ | 1,422 | | | $ | 57 | | | $ | 1,264 | |
Our effective tax rate of 24.1% and 24.7%was 23.5% for the three and nine months ended March 31, 2019, respectively,2020 and was lesslower than the combined federal and state statutory tax rate in partprimarily due to the R&D tax credit. Our effective tax rate was 31.2%26.7% for the nine months ended March 31, 2020, which approximated the combined federal and 35.3%state statutory rate. Our effective tax rate was 24.1% and 24.7%, respectively, for the three and nine months ended March 31, 2018.2019 which was less than the combined federal and state statutory rate in part due to the R&D tax credit.
Comparing the balance sheet as of March 31, 2020 to June 30, 2019, our accounts payable balance declined as we processed payments on the last day of March. Our accrued expenses line decreased in part due to the pay out of our company retirement contribution and accrued cash incentive compensation related to our fiscal year 2019 performance. The right-of-use operating lease assets and current and long-term operating lease liabilities lines are the result of implementing ASC 842 as of the beginning of our fiscal year 2020. See Note 6 - Leases in the Notes to Condensed Consolidated Financial Statements for additional information.
Liquidity and Capital Resources
Our total cash, cash equivalents, and short-term investments, increased to $91.3was $90.3 million at March 31, 2019 from $87.32020 and $106.3 million at June 30, 2018, primarily due to $42.7 million of cash2019. Cash flows from operations whichof $17.4 million were partiallymore than offset by capital expenditures, including capitalized software, of $16.4 million, the acquisition of David Edward for $4.9$19.1 million and the return of capital to shareownersshareholders in the form of dividends totaling $9.6 million and stock repurchases and dividends totaling $17.6of $3.0 million during the first nine months of fiscal year 2019.2020.
Working capital at March 31, 20192020 and June 30, 20182019 was $87.1$112.7 million and $85.1$96.5 million, respectively. The current ratio was 2.0 and 1.7 at both March 31, 20192020 and June 30, 2018.2019, respectively.
Our short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of our credit facility, totaled $119.8$163.7 million at March 31, 2019.2020. At March 31, 2019,2020, we had $1.5$1.6 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. We had no credit facility borrowings outstanding as of March 31, 20192020 or June 30, 2018.2019.
Cash Flows
The following table reflects the major categories of cash flows for the first nine months of fiscal years 20192020 and 2018.2019. | | | | | | | | | | | Nine Months Ended | |
| | Nine Months Ended | | March 31 | |
| | March 31 | |
(Amounts in thousands) | | 2019 | | 2018 | |
(Amounts in Thousands) | | (Amounts in Thousands) | | 2020 | | 2019 |
Net cash provided by operating activities | | $ | 42,680 |
| | $ | 26,399 |
| Net cash provided by operating activities | | $ | 17,368 | | | $ | 42,680 | |
Net cash used for investing activities | | $ | (27,186 | ) | | $ | (31,224 | ) | Net cash used for investing activities | | $ | (312) | | | $ | (27,186) | |
Net cash used for financing activities | | $ | (18,688 | ) | | $ | (18,053 | ) | Net cash used for financing activities | | $ | (13,612) | | | $ | (18,688) | |
Cash Flows from Operating Activities
For the first nine months of fiscal year 2020 net cash provided by operating activities was $17.4 million fueled by $31.9 million of net income while the first nine months of fiscal year 2019 net cash provided by operating activities was $42.7 million fueled byinclusive of $28.2 million of net income whileincome. Changes in working capital balances used $37.0 million of cash in the first nine months of fiscal year 2018 net cash provided by operating activities was $26.4 million inclusive of $24.2 million of net income.
Changes in working capital balances2020 and provided $4.2 million of cash in the first nine months of fiscal year 2019. Changes
The $37.0 million usage of cash from changes in working capital balances used $16.4 million of cash in the first nine months of fiscal year 2018 and2020 was primarily due todriven by a reduction in our accrued expenses balance as our accruedthe cash incentive compensation and the retirement profit sharing contribution which were both related to our fiscal year 20172019 performance were paid out. Also contributing was a prepaymentout during the year to date period of estimated income taxes for fiscal year 2018 which are included in the prepaid expenses2020 and other current assets line. These cash outflows were partially offset by a reduction in our accounts receivable balanceaccrued customer incentives as programs were altered due to COVID-19. In addition, accounts payable declined as we processed payments on the seasonally lower sales in our third quarter.last day of March.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for the nine-month periods ended March 31, 20192020 and March 31, 20182019were 2831 and 2728 days, respectively. Our accounts receivables increase was driven by a change in our customer standard discount terms which resulted in delayed receipt of payments and by slower payments from our government vertical. We define DSO as the average of monthly accounts and notes receivable divided by an average day’s net sales. Our Production Days Supply on Hand (“PDSOH”) of inventory measure for the nine-month periods ended March 31, 20192020 and March 31, 20182019 were 4447 and 4344 days, respectively. The inventory increase was in support of new product launches and raw material inventory increases in conjunction with our production slowdown in the latter portion of our third quarter of fiscal year 2020 related to the COVID-19 pandemic. We define PDSOH as the average of the monthly net inventory divided by an average day’s cost of sales.
Cash Flows from Investing Activities
During the first nine months of fiscal year 2020, we invested $25.0 million in available-for-sale securities, and $44.5 million matured. During the first nine months of fiscal year 2019, we invested $39.8 million in available-for-sale securities, and $32.6 million matured. During the first nine months of fiscal year 2018, we invested $33.8 million in available-for-sale securities, and $30.7 million matured. Our short-term investments included municipal bonds, certificates of deposit purchased in the secondary market, and U.S. Treasury and federal agency securities. During the first nine months of fiscal yearyears 2020 and 2019, we had a cash outflow of $4.9 million for the David Edward acquisition and during the first nine months of fiscal year 2018 we had cash outflow of $17.8 million for the D’style acquisition. During the first nine months of fiscal years 2019 and 2018, we received proceeds from the sale of assets net of selling expenses of $1.3reinvested $19.1 million and $5.7 million, respectively, the majority of which relates to the sale of Internet protocol addresses in fiscal year 2019 and the majority of which relates to the sale of our fleet of over-the-road tractors and trailers in fiscal year 2018. During the first nine months of fiscal years 2019 and 2018, we reinvested $16.4 million and $15.8 million, respectively, into capital investments for the future. The capital investments in both the current and prior year 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 which is expected to yield future benefits. During the first nine months of fiscal year 2019 we had a cash outflow of $4.9 million for the David Edward acquisition and we received proceeds from the sale of assets net of selling expenses of $1.3 million of which the majority relates to the sale of Internet protocol addresses.
Cash Flows from Financing Activities
We paid dividends of $8.5$9.6 million and $7.5$8.5 million in the nine-month periods ended March 31, 20192020 and March 31, 2018,2019, respectively. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. During the first nine months of fiscal years 20192020 and 2018,2019, we repurchased shares pursuant to a previously announced stock repurchase program which drove cash outflow of $9.1$3.0 million and $8.1$9.1 million, respectively.
Credit Facility
We maintain a $30$75 million credit facility with a maturity date of October 20192024 that allows 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$150 million, subject to participating banks’ consent. The revolving loans under the Credit Agreement may consist of, at our request, subjectelection, advances in U.S. dollars or advances in any other currency that is agreed to by the consentlenders. The proceeds of the participating banks.revolving loans are to be used for general corporate purposes including acquisitions. A portion of the credit facility, not to exceed $10 million of the principal amount, will be available for the issuance of letters of credit. At March 31, 2019,2020, we had $1.5$1.6 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. At both March 31, 20192020 and June 30, 2018,2019, we had no borrowings outstanding.
The credit facility requires us to comply with certain debt covenants, the most significant of which are the adjusted leverage ratio and the fixed charge coverage ratio. The adjusted leverage ratio is defined as (a) consolidated total indebtedness minus unencumbered U.S. cash equivalents on hand in the U.S. 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 our fiscal quarters for the then most recently ended four fiscal quarters, and may not be greater than 3.0 to 1.0. The fixed charge coverage ratio is defined as (a) the sum of (i) consolidated EBITDA, minus (ii) 50% of depreciation expense, minus (iii) taxes paid, minus (iv) dividends and distributions paid, minus if the Adjusted Leverage Ratio is greater than 1.00 to 1.00 for the then most recently ended four fiscal quarter period, repurchase of Equity Interests to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii) interest expense, calculated on a consolidated basis in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”),GAAP, determined as of the end of each of our fiscal quarters for the trailing four fiscal quarters then ending, and may not be less than 1.10 to 1.00. We were in compliance with all debt covenants of the credit facility during the nine-month period ended March 31, 2019.2020.
The table below compares the adjusted leverage ratio and the fixed charge 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 | | March 31, 2019 | | Credit Agreement | | Excess | Covenant | | March 31, 2020 | | Credit Agreement | | Excess |
Adjusted Leverage Ratio | | (0.47 | ) | | 3.00 |
| | 3.47 |
| Adjusted Leverage Ratio | | (0.13) | | | 3.00 | | | 3.13 | |
Fixed Charge Coverage Ratio | | 173.94 |
| | 1.10 |
| | 172.84 |
| Fixed Charge Coverage Ratio | | 556.67 | | | 1.10 | | | 555.57 | |
Future Liquidity
WeWhile we expect the impact of COVID-19 will impact our future 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 credit facility will be sufficient to fund future dividends and meet our working capital and other operating needs for at least the next 12 months. During the third quarter of fiscal year 2019,2020, our Board of Directors declared a quarterly dividend of $0.08$0.09 per share, to be paid during our fourth quarter of fiscal year 2019. We will continue2020. Future cash dividends are subject to evaluateapproval by our Board of Directors and may be adjusted as
business needs or market conditions in determining futurechange. We have suspended our share repurchases. Atrepurchase activity, which had at March 31, 2019, 2.72020, 2.5 million shares remained available underfor repurchase. During the repurchase program. Duringremainder of fiscal year 20192020 we expect to continue investments in capital expenditures, albeit at a reduced level than we had planned, particularly for projects such as our headquarters renovation, showroom renovations, machinery and equipment upgrades and
automation, and 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 products, loss of key contract customers, 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 MeasuresIndicators
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 the acquisition-related net sales during the periods for which there were no sales related to such acquisition in the comparable period; (2) adjusted operating income, defined as operating income excluding restructuring expenses, CEO transition costs, and market value adjustments related to theour SERP liability; (2)(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 expenses and CEO transition costs; (3)(5) adjusted diluted earnings per share, defined as diluted earnings per share excluding restructuring expenses and CEO transition costs; and (4)(6) adjusted EBITDA, defined as earnings before interest, taxes, depreciation, and amortization and excluding restructuring expenses and CEO transition costs.costs; 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 table below. Management believes it is useful for investors to understand how its core operations performed without expenses incurred for the CEO transition and market value adjustments related to the SERP liability. Excluding these amounts allows investorsbe able to meaningfully trend, analyze and benchmark the performance ofhow our core operations.operations performed without market value adjustments related to our SERP liability or expenses incurred in executing our transformation restructuring plan or our CEO transition. Many of our internal performance measures that management uses to make certain operating decisions exclude these 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 Compared to the Prior Year | | | Nine Months Ended |
| | | March 31, |
| | | 2020 |
Net Sales, as reported | | | $ | 571,790 | |
Less: David Edward acquisition net sales (1) | | | 3,980 | |
Organic Net Sales | | | $ | 567,810 | |
| | | |
(1) Represents David Edward net sales for our fiscal year 2020 first quarter as the acquisition date was October 26, 2018 thus, we did not own David Edward during our first quarter of fiscal year 2019. | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Adjusted Operating Income | | Adjusted Operating Income | Three Months Ended | | | Nine Months Ended | |
| | | March 31 | | | March 31 | |
| | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2020 | | 2019 |
Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators | | | |
| | | | | | |
| Three Months Ended | | Nine Months Ended | |
| March 31 | | March 31 | |
(Amounts in Thousands, Except for Per Share Data) | 2019 | | 2018 | | 2019 | | 2018 | |
Operating Income | $ | 9,053 |
| | $ | 8,510 |
| | $ | 36,245 |
| | $ | 36,472 |
| |
Pre-tax Expense (Income) Adjustment to SERP Liability | 1,032 |
| | (8 | ) | | 306 |
| | 756 |
| |
Pre-tax CEO Transition Costs | 252 |
| | — |
| | 1,809 |
| | — |
| |
Operating Income, as reported | | Operating Income, as reported | $ | 14,070 | | | $ | 9,053 | | | $ | 43,402 | | | $ | 36,245 | |
Add: Pre-tax Restructuring Expense | | Add: Pre-tax Restructuring Expense | 818 | | | — | | | 6,564 | | | — | |
Add: Pre-tax Expense Adjustment to SERP Liability | | Add: Pre-tax Expense Adjustment to SERP Liability | (1,784) | | | 1,032 | | | (1,010) | | | 306 | |
Add: Pre-tax CEO Transition Costs | | Add: Pre-tax CEO Transition Costs | 175 | | | 252 | | | 525 | | | 1,809 | |
Adjusted Operating Income | $ | 10,337 |
| | $ | 8,502 |
| | $ | 38,360 |
| | $ | 37,228 |
| Adjusted Operating Income | $ | 13,279 | | | $ | 10,337 | | | $ | 49,481 | | | $ | 38,360 | |
Net Sales | $ | 177,369 |
| | $ | 160,897 |
| | $ | 572,500 |
| | $ | 514,871 |
| Net Sales | $ | 178,174 | | | $ | 177,369 | | | $ | 571,790 | | | $ | 572,500 | |
Adjusted Operating Income % | 5.8 | % | | 5.3 | % | | 6.7 | % | | 7.2 | % | Adjusted Operating Income % | 7.5 | % | | 5.8 | % | | 8.7 | % | | 6.7 | % |
| | | | | | | | |
Net Income | $ | 7,954 |
| | $ | 5,850 |
| | $ | 28,235 |
| | $ | 24,185 |
| |
| Adjusted Net Income | | Adjusted Net Income | Three Months Ended | | | Nine Months Ended | |
| | | March 31 | | | March 31 | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
Net Income, as reported | | Net Income, as reported | $ | 9,451 | | | $ | 7,954 | | | $ | 31,874 | | | $ | 28,235 | |
Pre-tax CEO Transition Costs | 252 |
| | — |
| | 1,809 |
| | — |
| Pre-tax CEO Transition Costs | 175 | | | 252 | | | 525 | | | 1,809 | |
Tax on CEO Transition Costs | (65 | ) | | — |
| | (466 | ) | | — |
| Tax on CEO Transition Costs | (45) | | | (65) | | | (135) | | | (466) | |
After-tax CEO Transition Costs | 187 |
| | — |
| | 1,343 |
| | — |
| |
Add: After-tax CEO Transition Costs | | Add: After-tax CEO Transition Costs | 130 | | | 187 | | | 390 | | | 1,343 | |
Pre-tax Restructuring Expense | | Pre-tax Restructuring Expense | 818 | | | — | | | 6,564 | | | — | |
Tax on Restructuring Expense | | Tax on Restructuring Expense | (211) | | | — | | | (1,690) | | | — | |
Add: After-tax Restructuring Expense | | Add: After-tax Restructuring Expense | 607 | | | — | | | 4,874 | | | — | |
Adjusted Net Income | $ | 8,141 |
| | $ | 5,850 |
| | $ | 29,578 |
| | $ | 24,185 |
| Adjusted Net Income | $ | 10,188 | | | $ | 8,141 | | | $ | 37,138 | | | $ | 29,578 | |
| | | | | | | | | | | | | | | |
Diluted Earnings Per Share | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.76 |
| | $ | 0.64 |
| |
After-tax CEO Transition Costs | — |
| | — |
| | 0.03 |
| | — |
| |
| Adjusted Diluted Earnings Per Share | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.79 |
| | $ | 0.64 |
| Adjusted Diluted Earnings Per Share | Three Months Ended | | | Nine Months Ended | |
| | | March 31 | | | March 31 | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
Diluted Earnings Per Share, as reported | | Diluted Earnings Per Share, as reported | $ | 0.25 | | | $ | 0.22 | | | $ | 0.86 | | | $ | 0.76 | |
Add: After-tax CEO Transition Costs | | Add: After-tax CEO Transition Costs | — | | | — | | | 0.01 | | | 0.03 | |
Add: After-tax Restructuring Expense | | Add: After-tax Restructuring Expense | 0.02 | | | — | | | 0.13 | | | — | |
Adjusted Diluted Earnings Per Share | | Adjusted Diluted Earnings Per Share | $ | 0.27 | | | $ | 0.22 | | | $ | 1.00 | | | $ | 0.79 | |
| Earnings Before Interest, Taxes, Depreciation, and Amortization excluding Restructuring Expense and CEO Transition Costs (“Adjusted EBITDA”) | | Earnings Before Interest, Taxes, Depreciation, and Amortization excluding Restructuring Expense and CEO Transition Costs (“Adjusted EBITDA”) | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | | | | | | | | | | | | | | | March 31, | | | March 31, | |
Earnings Before Interest, Taxes, Depreciation, and Amortization excluding CEO Transition Costs (“Adjusted EBITDA”) | | | |
| Three Months Ended | | Nine Months Ended | | 2020 | | 2019 | | 2020 | | 2019 |
| March 31, | | March 31, | |
(Amounts in Thousands) | 2019 | | 2018 | | 2019 | | 2018 | |
Net Income | $ | 7,954 |
| | $ | 5,850 |
| | $ | 28,235 |
| | $ | 24,185 |
| Net Income | $ | 9,451 | | | $ | 7,954 | | | $ | 31,874 | | | $ | 28,235 | |
Provision for Income Taxes | 2,521 |
| | 2,658 |
| | 9,274 |
| | 13,197 |
| Provision for Income Taxes | 2,906 | | | 2,521 | | | 11,585 | | | 9,274 | |
Income Before Taxes on Income | 10,475 |
| | 8,508 |
| | 37,509 |
| | 37,382 |
| Income Before Taxes on Income | 12,357 | | | 10,475 | | | 43,459 | | | 37,509 | |
| Interest Expense | 40 |
| | 55 |
| | 146 |
| | 160 |
| Interest Expense | 21 | | | 40 | | | 65 | | | 146 | |
Interest Income | (492 | ) | | (258 | ) | | (1,339 | ) | | (726 | ) | Interest Income | (386) | | | (492) | | | (1,482) | | | (1,339) | |
Depreciation and Amortization | 4,212 |
| | 3,970 |
| | 12,532 |
| | 11,512 |
| |
Depreciation | | Depreciation | 3,861 | | | 3,716 | | | 11,337 | | | 11,077 | |
Amortization | | Amortization | 639 | | | 496 | | | 1,707 | | | 1,455 | |
Pre-tax CEO Transition Costs | 252 |
| | — |
| | 1,809 |
| | — |
| Pre-tax CEO Transition Costs | 175 | | | 252 | | | 525 | | | 1,809 | |
Pre-tax Restructuring Expense | | Pre-tax Restructuring Expense | 818 | | | — | | | 6,564 | | | — | |
Adjusted EBITDA | $ | 14,487 |
| | $ | 12,275 |
| | $ | 50,657 |
| | $ | 48,328 |
| Adjusted EBITDA | $ | 17,485 | | | $ | 14,487 | | | $ | 62,175 | | | $ | 50,657 | |
Net Sales | | Net Sales | $ | 178,174 | | | $ | 177,369 | | | $ | 571,790 | | | $ | 572,500 | |
Net Income as a Percentage of Net Sales | | Net Income as a Percentage of Net Sales | 5.3 | % | | 4.5 | % | | 5.6 | % | | 4.9 | % |
Adjusted EBITDA as a Percentage of Net Sales | | Adjusted EBITDA as a Percentage of Net Sales | 9.8 | % | | 8.2 | % | | 10.9 | % | | 8.8 | % |
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-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, and CEO Transition Costs) 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
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 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 of the investment as well as positive and negative qualitative evidence, while the equity securities without readily determinable fair value are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The contingent earn-out liability is classified as a Level 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 acquisition and a discount rate that captures the risk associated with the liability.
See Note 1012 - Fair Value in the Notes to Condensed Consolidated Financial Statements for additional information. Contractual Obligations
There have been no material changes outside the ordinary course of business to our summary of contractual obligations under the caption, “Contractual Obligations” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.2019.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to standby letters of credit and operating leases entered into in the normal course of business.performance bonds. 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 811 - Commitments and Contingent Liabilities in the Notes to Condensed Consolidated Financial Statements for more information on the standby letters of credit. We do not have material exposures to trading activities of non-exchange traded contracts. The preceding statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Certain factors could cause actual results to differ materially from forward-looking statements.
Critical Accounting Policies
Our condensed 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 condensed consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. Management continually reviews the accounting policies and financial information disclosures. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.2019. During the first nine months of fiscal year 2019,2020, there were no material changes in the accounting policies and assumptions previously disclosed other than our Revenue Recognition policy which is described below.disclosed.
Revenue recognition - Effective at the beginning of fiscal year 2019, we adopted guidance on the recognition of revenue from contracts with customers, using a full retrospective method. Under the new guidance, 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 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 either at the shipping point or destination, and is obligated to pay for the product. Shipping and handling activities are recognized as fulfillment activities and are expensed at the time revenue is recognized. We recognize sales net of applicable sales taxes and 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, based on estimated product returns and price concessions. The reserve for returns and allowances is recorded in Accrued Expenses on the Condensed Consolidated Balance Sheets, and the expense is recorded as a reduction of Net Sales in the Condensed 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 Condensed Consolidated Balance Sheets, and the expense is recorded in Selling and Administrative Expenses in the Condensed Consolidated Statements of Income.
New Accounting Standards
Forward-Looking Statements
Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. The statements maygenerally can be identified by the use of words such as “believes,or phrases, including, but not limited to “intend,” “anticipates,“anticipate,” “expects,“believe,” “intends,“estimate,” “plans,“project,” “projects,“target,” “estimates,“plan,” “forecasts,“expect,” “seeks,“setting up,” “likely,“beginning to,” “future,” “may,” “might,“will,” “should,” “would,” “will,“resume,” andor similar expressions. TheseWe caution that forward-looking statements are subject to known and unknown risks and uncertainties that may cause the Company’s actual future results and performance to differ materially from expected results, including, but not limited to, the impact of COVID-19 on our business, disruptions in our supply chain including any impact of COVID-19 on cost and availability, adverse changes in the global economic conditions, the impact of changes in tariffs, increased global competition, significant reductionsuccessful execution of our transformation restructuring plan, the impact of changes in customer order patterns, loss of key suppliers,the regulatory environment, the loss of or significant volume reductions from key contract customers, the financial stability of key customers and suppliers, relationships with strategic customers and product distributors, availability or cost of raw materials and components, changes in the regulatory environment, or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of Kimball International are contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.
2019 and in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market 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, and plastics. These components are impacted by global pricing pressures and general economic conditions. The U.S. originally imposed tariffs of 25% on steel and 10% on aluminum imported from several countries effective June 2018. The government expanded its list of products subject to tariffs to include furniture products, parts, and components at a 10% rate effective September 2018. The U.S. government continues2018, increasing to evaluate the ongoing need for tariffs, and if further tariffs are assessed the landed cost of our products could increase materially, which would reduce our net income if we are unablea 25% rate effective June 2019. We worked to mitigate the additional cost. We are actively striving topartially 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. We are also exposed to fluctuation in transportation costs which vary based upon freight carrier capacity and fuel prices. Transportation costs are managed by optimizing logistics and supply chain planning and increasing prices on our products.
There have been no material changes to other market risks, including interest rate and foreign exchange rate risks, from the information disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.2019.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures.
We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed as of March 31, 2019,2020, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
(b)Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2020 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes in the Company's risk factors from those set forth in the Company's Annual Report on Form 10-K for the year ended June 30, 2019, except for the following additional risk factor, which supplements, and should be considered in conjunction with, the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2019:
The COVID-19 pandemic has had, and is expected to continue to 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 could also disrupt our supply chains, including temporary reductions or pauses in operations at many of our and our suppliers’ manufacturing and distribution locations around the world. In addition, some of our customers have been unable to receive product shipments and, thus, have delayed delivery dates on existing orders. New order rates have also slowed in all three markets. We adopted new accounting guidance onestimate that the recognitiondelays in shipments of revenue from contracts with customers at the beginningour products due to temporary production halts and delivery push-outs totaled approximately $18 million during our third quarter of fiscal year 2019. As a result, we implemented changes required by the new standard, including accounting policies, internal controls over financial reporting, and disclosure controls,2020, and we implemented new processesexpect that our revenues and procedurescash balances will continue to be negatively impacted while the impact of COVID-19 continues. Our dealers and Enterprise Resource Planning system changessuppliers are also experiencing similar negative impacts from the COVID-19 pandemic. In order to providepreserve cash during this period of time, we have reduced spending on discretionary expenditures and strategic initiatives, which may have a material impact on our growth strategies in the information required byfuture.
The economic impacts of the new guidance.
COVID-19 pandemic have had, or are likely to have, a negative impact on many of our customers, particularly those in the hospitality market and, thus, may negatively affect our future revenues and increase credit risk. The severity of the impact on our business will depend in part on the length of the various government orders requiring temporary suspension of non-essential business operations, duration of limits on travel, and the speed of the recovery of economic conditions globally, all of which are highly uncertain and out of our control. The duration and severity of the impact on our business, our industry and the global economy are not yet known and could have an adverse impact on our financial condition, results of operations, or cash flows.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
A share repurchase program authorized by the Board of Directors was announced on August 11, 2015. The program allows for the repurchase of up to two million shares of common stock and will remain in effect until all shares authorized have been repurchased. On February 7, 2019 an additional two million shares of common stock were authorized by the Board of Directors for repurchase. At March 31, 2019,2020, approximately 2.72.5 million shares remained available under the repurchase program.program, but we have temporarily suspended share repurchases as a result of the COVID-19 pandemic.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
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 (January 1-January 31, 2020) | | 81,028 | | | $ | 20.53 | | | 81,028 | | | 2,508,185 | |
Month #2 (February 1-February 29, 2020) | | — | | | $ | — | | | — | | | 2,508,185 | |
Month #3 (March 1-March 31, 2020) | | — | | | $ | — | | | — | | | 2,508,185 | |
Total | | 81,028 | | | $ | 20.53 | | | 81,028 | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | |
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 (January 1-January 31, 2019) | | 100 |
| | $ | 13.52 |
| | 100 |
| | 2,654,314 |
|
Month #2 (February 1-February 28, 2019) | | — |
| | $ | — |
| | — |
| | 2,654,314 |
|
Month #3 (March 1-March 31, 2019) | | — |
| | $ | — |
| | — |
| | 2,654,314 |
|
Total | | 100 |
| | $ | 13.52 |
| | 100 |
| | |
Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
| |
101.INS | XBRL Instance Document |
| |
101.SCH | XBRL Taxonomy Extension Schema Document |
| |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
3(b) Restated By-laws of the Company101.INS Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 The cover page from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, formatted in Inline XBRL and contained in Exhibit 101
SIGNATURES
Pursuant to the requirements 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.
|
| | | | | | | |
| | KIMBALL INTERNATIONAL, INC. |
| | |
| By: | /s/ KRISTINE L. JUSTER |
| | Kristine L. Juster Chief Executive Officer |
| | May 8, 201911, 2020 |
| | |
| | |
| By: | /s/ MICHELLE R. SCHROEDER |
| | Michelle R. Schroeder Executive Vice President, Chief Financial Officer |
| | May 8, 201911, 2020 |