Strong EPS Growth Driven by Transformation Savings of $7.2 Million
Modest Revenue Growth Despite COVID-19 Shipment Delays of Approximately $18 million
Strong Balance Sheet Provides Financial Flexibility
Eight Manufacturing Facilities Currently Operating, up from Four in Late March
Kimball International, Inc. (NASDAQ: KBAL) today announced results for the quarter ended March 31, 2020.
Selected Financial Highlights:
Third Quarter FY 2020
- Net sales increased 0.5% to $178.2 million
- Operating income margin of 7.9%, or 7.5% on an adjusted basis
- Net income of $9.5 million, increased 19%
- Adjusted EBITDA of $17.5 million, increased 21%, and adjusted EBITDA margin of 9.8%, increased 160 basis points
- Diluted EPS of $0.25, or $0.27 on an adjusted basis, an increase of 23% compared to $0.22 a year ago
- Return on Invested Capital (ROIC) of 29.4%
- Backlog of $187.0 million
Kimball International CEO Kristie Juster commented, “I am very pleased with the continued success of our transformation program designed to generate sales growth, while yielding significant cost savings. Despite the impact of COVID-19-related order pushouts and the temporary shutdown of our facilities, third quarter sales were led by year-on-year growth in our Commercial market and the healthcare and educational verticals in our Institutional market. Even with the impact of COVID-19 on our revenues, we achieved 23% growth in adjusted earnings per share and 21% growth in adjusted EBITDA, representing significant operating leverage driven by transformation cost savings and increased prices on selected product lines. Additionally, we continued to experience strong demand for our innovative new workplace products, which increased to 29% of total Commercial and Institutional sales, up from 27% last year.
“Kimball International has a rich history of banding together in difficult times, and I am proud of the tremendous efforts of our employees and leadership team to achieve a high level of response to the COVID-19 pandemic within a very short time. At the onset of this health crisis, we took swift action to proactively safeguard and support our people, activate business continuity plans to minimize impacts to our customers and continue the rigorous financial management of our business. By the end of March, we had curtailed our business operations to four facilities and shifted our focus to prioritize critically needed healthcare industry products by launching a family of quickship products for facilities serving the COVID-19 crisis. By the end of April, we increased the number of facilities in operation to eight out of the 10 that comprise our U.S. manufacturing footprint, which has reduced our lead-times on incoming orders and provides us with the ability to accommodate additional volumes.
“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 in our Hospitality vertical, which represents approximately 25% of our revenue. This trend has continued, along with a slowdown in order flow in all three markets. Fortunately, our backlog was $187.0 million at the end of the third quarter, of which over $100 million is anticipated to ship in the fourth quarter, and we expect to continue to benefit from our transformation cost savings initiatives in this year’s fourth quarter.”
Overview
Third Quarter Fiscal 2020 Results
Consolidated net sales were $178.2 million, up 0.5% from $177.4 million in the year ago quarter. Delays in shipments due to temporary production halts and delivery push-outs totaled approximately $18 million during the quarter. Gross margin expanded to 34.0% due to cost savings and selected product price increases. Selling and administrative expenses of $45.6 million declined $1.9 million compared to the prior year, decreasing to 25.6% of net sales. Adjusted selling and administrative expenses were $47.2 million or 26.5% of net sales, compared to $46.2 million or 26.1% of net sales in last year’s third quarter. Net income increased 19% to $9.5 million, and GAAP earnings per diluted share were $0.25, up 14% from the $0.22 reported in the fiscal 2019 third quarter. Adjusted earnings per share, which excludes restructuring charges, increased 23% to $0.27 compared to $0.22 last year. Adjusted EBITDA increased 21% to $17.5 million, and adjusted EBITDA margin expanded 160 basis points to 9.8%.
The Company ended the third quarter in a strong financial position, with $90.3 million in cash and short-term investments, minimal debt and $73.4 million in available credit lines, providing the resources to weather this crisis and continue to invest to support future growth. Capital expenditures during the quarter were $5.6 million, most of which related to manufacturing equipment upgrades to increase automation and facility upgrades, and the Company returned $5.1 million to shareholders in the form of dividends and share repurchases.
Net Sales by End Market
Institutional – Institutional market revenue increased 4% despite the impact of COVID-19 to sales near the end of the quarter. Growth in this important vertical was driven by strength in healthcare, education and state and local government agencies.
Commercial – Commercial revenue grew 5% against a pre-COVID-19 backdrop of economic and business strength with particular strength in the financial end market driven by our capability to deliver custom solutions.
Hospitality – The decline in revenue from hospitality customers reflected projects deferred in response to the COVID-19 pandemic, but there have been only minimal project cancellations. We are working closely with our customers in this vertical to accommodate their extended delivery requirements.
Summary and Outlook
“It is difficult to predict the duration of the COVID-19 pandemic and its impact on our customers, our suppliers and our business. Given this lack of visibility, we believe it is prudent to suspend our long-term financial targets until economic conditions become clearer. That said, Kimball International has entered this crisis with a strong balance sheet and a lean and nimble operating model thanks to our transformation program. Additionally, we have taken actions to further reduce costs and preserve cash to address the uncertain economic environment, including reducing our planned fourth quarter capital expenditures by 50%, curtailing discretionary spending, and suspending our share buyback activity. We are closely monitoring the situation and evaluating other actions to take if warranted.
“Our customer end markets are well diversified, and we have significant manufacturing agility, enabling us to efficiently shift production to those products in higher demand. Once the economy recovers, we are confident that Kimball International has the structure in place to achieve consistent mid-single-digit revenue growth and to grow adjusted EBITDA and EPS at a faster rate than sales.
“Looking ahead, we believe that this health crisis will cause major changes in the workplace environment that will provide opportunities for Kimball International to gain market share, leveraging our investments in innovation, flexible manufacturing and rapid time-to-market. Our current line-up is heavily weighted toward products that enable us to retrofit and redesign a new post-COVID-19 workplace that will accommodate an increase in teleworking and the social distancing requirements of the future,” Ms. Juster concluded.
The full text of Kimball International’s 3Q20 earnings release, including all tables, and an archived replay of the company’s May 6 conference call may be accessed via its Investor Relations website at www.ir.kimballinternational.com.
About Kimball International, Inc.
For 70 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, 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 http://www.kimballinternational.com.