KBAL Kimball International Inc

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

First Quarter FY 2020

• Net sales growth of 3.8%, including a 1.7% organic growth contribution, driven by continued solid performance from our National and Kimball Hospitality brands, partially offset by a decline in our Kimball brand on an organic basis
• Order decline of 3.6% on a difficult comparison of 17.8% growth in the prior year
• Operating income margin of 7.5%, or 9.8% on an adjusted basis, an increase of 200 basis points, driven by gross margin improvement of 100 basis points and a 160 basis point reduction in selling and administrative expenses
• Transformation savings of $5.6M realized during the quarter
• Net income of $11.4 million, an increase of 5%
• Record adjusted EBITDA of $23.8 million, an increase of 23.9%, and adjusted EBITDA margin of 11.8%, an increase of 190 basis points
• Diluted EPS of $0.31 or $0.40 on an adjusted basis, an increase of 29.0% on an adjusted basis compared to $0.31 a year ago

Kimball International CEO Kristie Juster commented, “I am extremely pleased with the improvement in earnings this quarter.  Our first quarter performance gives us confidence that we are gaining traction in both our sustaining gross margin improvement and our ability to transform to a more efficient model.  We do expect our revenues to ramp in the back half of the year as our investments start to take hold against specific growth initiatives.”

Ms. Juster continued, “Our revenue performance was mixed in the first quarter with industry leading metrics in healthcare and hospitality offset by the Kimball brand realignment strategy as well as comping double digit year over year performance.  As we start our transformation journey, we are focused on gating our growth investments as we gain confidence in our cost savings projects.  We are confident that fiscal year 2020 will position us well to deliver our long-term plan.”

Overview

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

• Consolidated net sales increased 3.8%, or 1.7% on an organic basis. Sales growth benefited from new ancillary products within National, healthcare products within Kimball, and custom business within Kimball Hospitality. Sales growth was partially offset by a decline within the Kimball brand as we realign our selling resources to higher growth areas.

• Four of the six product verticals reported sales growth led by an 18% increase in the healthcare vertical as the Company continued its strategy to invest in growth within this vertical. The government vertical experienced 9% growth on strong state government shipments. The hospitality vertical also grew 8% despite facing a prior year increase of 43%. Commercial vertical sales decreased 2% due to the decline in our Kimball brand.

• Sales of new office products, defined as those introduced in the last three years, increased 19% over the prior year first quarter. New product sales were approximately 30% of total office sales compared to 25% in the prior year period. The National brand is fueling the growth on a 48% growth in new products with much of this development focused on ancillary products.

• Orders during the quarter decreased 3.6% on a difficult comparison to 17.8% growth in the prior year. On a two-year stacked basis, orders are up 14.2%. The hospitality vertical orders declined 16% against a prior year comparison of 48%, which included four large projects. The commercial vertical orders declined 13% against strong growth of 24% in prior-year period as well as softness within the Kimball brand. Order growth within finance, education, government, and healthcare verticals partially offset these declines.

• Gross profit margin of 34.9% increased 100 basis points from the prior year.  Increased product pricing and the savings realized from our transformation plan were partially offset by unfavorable sales mix shift. The David Edward acquisition also negatively impacted our gross profit by 50 basis points in the first quarter, as expected, and will continue to in the short-term until productivity improvements and synergies are fully realized.

• Selling and administrative expenses of $50.9 million, or 25.2% of net sales, decreased 160 basis points or $1.3 million compared to the prior year.  Lower costs during the quarter compared to the prior year included benefit from the transformation plan of $1.3 million, reduced CEO transition costs of $0.9 million, reduced employee benefit cost of $0.7 million, offset by the prior year gain on sale of assets of $1.1 million and David Edward acquisition related cost of $0.8 million. The reduction in selling and administrative expenses was achieved while investing $1.0 million in growth initiatives related to our Kimball International Connect strategy. On an adjusted basis, selling and administrative dollars were flat year over year. We expect the investment in growth initiatives to increase during the remainder of the fiscal year which will partially offset the savings we expect to achieve from the transformation plan in future quarters.

• Restructuring expenses of $4.4 million were incurred related to the continuing execution of the transformation plan, primarily for lease-related impairment charges and employee transition costs. Total estimated restructuring expenses for the transformation plan are expected to be between $8.0 to $9.0 million.

• Our effective tax rate was 27.4% during the quarter compared to 24.4% in the prior year period. The increase was primarily driven by a prior year state tax provision adjustment. We continue to expect our fiscal year tax rate to be within a range of 25% to 28%.

• Operating cash flow totaled $11.1 million compared to $7.1 million in the prior year, an increase of 55%. The increase was primarily driven by higher net income, excluding non-cash impairment expenses. Capital expenditures during the quarter were $7.4 million, and we returned $2.9 million to shareholders in the form of dividends.

• As of September 30, 2019, the Company’s cash, cash equivalents, and short-term investments totaled $106.4 million, up $0.1 million since June 30, 2019.

• In October, subsequent to the end of our first quarter, we replaced our $30 million credit facility with a 5-year $75 million credit facility. The increase in size provides us additional liquidity to execute our strategy and invest in growth, both organically and inorganically.

Fiscal Year 2020 – 2022 Financial Targets

• Organic sales growth: 4.0% to 7.0% CAGR
• Adjusted EBITDA: 150 to 250 basis points improvement
• Adjusted EPS: 10% to 15% CAGR

Non-GAAP Financial Measures

This press release contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s financial performance that excludes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States in the statement of income, statement of comprehensive income, balance sheet, or statement of cash flows of the Company. The non-GAAP financial measures used within this release are (1) organic net sales; (2) adjusted selling and administrative expense; (3) adjusted EBITDA; (4) adjusted operating income; (5) adjusted net income; and (6) adjusted diluted earnings per share. Adjusted operating income, adjusted net income, and adjusted diluted earnings per share each exclude restructuring expense and CEO transition costs from the GAAP income measure. Adjusted selling and administrative expense excludes market value adjustments related to the SERP liability and CEO transition costs from the GAAP income measure.  Additionally, adjusted operating income excludes market value adjustments related to the SERP liability. Organic net sales are defined as net sales excluding acquisition-related sales, and Adjusted EBITDA is defined as net income before interest expense, income taxes, depreciation expense, amortization expense, restructuring expense, and CEO transition costs. A reconciliation of the reported GAAP numbers to the non-GAAP financial measures is included in the Reconciliation of Non-GAAP Financial Measures table below. Management believes that organic net sales is useful to investors to aid in identifying underlying trends in our business and facilitating comparisons of our sales performance with prior periods. Management believes that Adjusted EBITDA and other metrics excluding restructuring expense, CEO transition expenses, and market value adjustments related to the SERP liability are useful measurements to assist investors in comparing our performance over various reporting periods on a consistent basis by removing from operating results the impact of items that do not reflect our core operating performance.

The orders received metric is a key performance indicator used to evaluate general sales trends and develop future operating plans. Orders received represent firm orders placed by our customers during the current quarter which are expected to be recognized as revenue during current or future quarters. The orders received metric is not intended to be presented as an alternative measure of revenue recognized in accordance with GAAP.

Return on Invested Capital is a key performance indicator calculated 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 current maturities of long-term debt plus long-term debt less cash, cash equivalents, and short-term investments.

Forward-Looking Statements

Certain statements contained within this release are considered forward-looking under the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties including, but not limited to, the risk that any projections or guidance, including revenues, margins, earnings, or any other financial results are not realized, adverse changes in the global economic conditions, the impact of changes in tariffs, increased global competition, significant reduction in customer order patterns, loss of key suppliers, loss of or significant volume reductions from key contract customers, 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 the Company are contained in the Company’s Form 10-K filing for the fiscal year ended June 30, 2019 and other filings with the Securities and Exchange Commission.

A webcast of the live conference call may be accessed by visiting Kimball International’s Investor Relations website at www.ir.kimballinternational.com.

For those unable to participate in the live webcast, the call will be archived at www.ir.kimballinternational.com within two hours of the conclusion of the live call.

About Kimball International, Inc.

For over 65 years, Kimball International has created design driven furnishings that 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, David Edward, and D’style by Kimball Hospitality. Our values and high integrity are demonstrated daily by living our Purpose and Guiding Principles that establish us as an employer of choice. We build success by growing long-term relationships with customers, employees, suppliers, shareholders, and the communities in which we operate. In fiscal year 2019, the Company generated $768 million in revenue and employed over 3,000 people. To learn more about Kimball International, Inc. (KBAL), visit www.kimballinternational.com.

Financial highlights for the first quarter ended September 30, 2019 are as follows:

Contact:Dennis GerberInvestor Relations812-482-8619Dennis.Gerber@kimballinternational.com

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