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 DecemberMarch 31, 20172023
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) |
|
| | | | | | | |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark 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 (Do not check if a smaller reporting company) 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
The number of shares outstanding of the Registrant’s common stock as of January 22, 2018May 1, 2023 was:
Class A Common Stock - 279,533166,789 shares
Class B Common Stock - 37,205,20936,250,961 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, 2023 | | June 30, 2022 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 18,768 | | | $ | 10,934 | |
| | | |
Receivables, net of allowances of $911 and $1,041, respectively | 49,543 | | | 79,301 | |
Inventories | 89,633 | | | 97,969 | |
Prepaid expenses and other current assets | 15,706 | | | 30,937 | |
| | | |
Total current assets | 173,650 | | | 219,141 | |
Property and equipment, net of accumulated depreciation of $192,129 and $188,530, respectively | 96,740 | | | 96,970 | |
Right-of-use operating lease assets | 17,338 | | | 12,839 | |
Goodwill | 11,160 | | | 47,844 | |
Other intangible assets, net of accumulated amortization of $53,552 and $54,553, respectively | 51,250 | | | 54,767 | |
Deferred tax assets | 18,219 | | | 14,472 | |
Other assets | 14,442 | | | 15,245 | |
Total Assets | $ | 382,799 | | | $ | 461,278 | |
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current Liabilities: | | | |
| | | |
Current maturities of long-term debt | $ | — | | | $ | 33 | |
Accounts payable | 46,755 | | | 70,936 | |
Customer deposits | 27,011 | | | 29,706 | |
Current portion of operating lease liability | 5,768 | | | 6,096 | |
Dividends payable | 3,786 | | | 3,623 | |
| | | |
Accrued expenses | 39,525 | | | 41,088 | |
Total current liabilities | 122,845 | | | 151,482 | |
Long-Term Liabilities: | | | |
Long-term debt, less current maturities | 50,000 | | | 68,046 | |
| | | |
Long-term operating lease liability | 16,285 | | | 12,150 | |
Other long-term liabilities | 14,163 | | | 16,064 | |
Total long-term liabilities | 80,448 | | | 96,260 | |
Shareholders’ Equity: | | | |
Common stock-par value $0.05 per share: | | | |
Class A - Shares authorized: 50,000,000 Shares issued: 167,000 for both periods | 8 | | | 8 | |
Class B - Shares authorized: 100,000,000 Shares issued: 42,856,000 for both periods | 2,143 | | | 2,143 | |
Additional paid-in capital | 8,889 | | | 6,304 | |
Retained earnings | 235,891 | | | 269,833 | |
Accumulated other comprehensive income | 3,883 | | | 3,766 | |
Less: Treasury stock, at cost, 6,615,000 shares and 6,179,000 shares, respectively | (71,308) | | | (68,518) | |
Total Shareholders’ Equity | 179,506 | | | 213,536 | |
Total Liabilities and Shareholders’ Equity | $ | 382,799 | | | $ | 461,278 | |
|
| | | | | | | |
| (Unaudited) | | |
|
| December 31, 2017 | | June 30, 2017 |
ASSETS | |
| | |
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Current Assets: | |
| | |
|
Cash and cash equivalents | $ | 41,852 |
| | $ | 62,882 |
|
Short-term investments | 37,720 |
| | 35,683 |
|
Receivables, net of allowances of $1,228 and $1,626, respectively | 53,140 |
| | 53,909 |
|
Inventories | 38,861 |
| | 38,062 |
|
Prepaid expenses and other current assets | 19,627 |
| | 8,050 |
|
Assets held for sale | 67 |
| | 4,223 |
|
Total current assets | 191,267 |
| | 202,809 |
|
Property and Equipment, net of accumulated depreciation of $177,740 and $182,803, respectively | 80,904 |
| | 80,069 |
|
Goodwill | 8,559 |
| | — |
|
Other Intangible Assets, net of accumulated amortization of $35,894 and $35,148, respectively | 13,328 |
| | 2,932 |
|
Deferred Tax Assets | 9,350 |
| | 14,487 |
|
Other Assets | 13,997 |
| | 13,450 |
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Total Assets | $ | 317,405 |
| | $ | 313,747 |
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| | | |
LIABILITIES AND SHARE OWNERS’ EQUITY | | | |
Current Liabilities: | | | |
Current maturities of long-term debt | $ | 24 |
| | $ | 27 |
|
Accounts payable | 42,271 |
| | 44,730 |
|
Customer deposits | 28,236 |
| | 20,516 |
|
Sale-leaseback financing obligation | — |
| | 3,752 |
|
Dividends payable | 2,721 |
| | 2,296 |
|
Accrued expenses | 38,312 |
| | 49,018 |
|
Total current liabilities | 111,564 |
| | 120,339 |
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Other Liabilities: | | | |
Long-term debt, less current maturities | 161 |
| | 184 |
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Other | 17,907 |
| | 17,020 |
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Total other liabilities | 18,068 |
| | 17,204 |
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Share Owners’ Equity: | | | |
Common stock-par value $0.05 per share: | | | |
Class A - Shares authorized: 50,000,000 Shares issued: 280,000 for both periods | 14 |
| | 14 |
|
Class B - Shares authorized: 100,000,000 Shares issued: 42,745,000 and 42,744,000, respectively | 2,137 |
| | 2,137 |
|
Additional paid-in capital | 1,566 |
| | 2,971 |
|
Retained earnings | 239,354 |
| | 230,763 |
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Accumulated other comprehensive income | 1,327 |
| | 1,115 |
|
Less: Treasury stock, at cost, 5,549,000 shares and 5,726,000 shares, respectively | (56,625 | ) | | (60,796 | ) |
Total Share Owners’ Equity | 187,773 |
| | 176,204 |
|
Total Liabilities and Share Owners’ Equity | $ | 317,405 |
| | $ | 313,747 |
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KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Amounts in Thousands, Except for Per Share Data)
| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
| 2023 | | 2022 | | 2023 | | 2022 |
Net Sales | $ | 166,184 | | | $ | 180,918 | | | $ | 526,942 | | | $ | 488,931 | |
Cost of Sales | 103,705 | | | 125,782 | | | 338,712 | | | 338,254 | |
Gross Profit | 62,479 | | | 55,136 | | | 188,230 | | | 150,677 | |
Selling and Administrative Expenses | 57,508 | | | 48,783 | | | 167,710 | | | 150,863 | |
Other General (Income) Expense | — | | | (4,523) | | | — | | | (4,523) | |
Contingent Earn-out (Gain) Loss | — | | | 2,150 | | | (3,160) | | | (15,750) | |
Restructuring Expense | 793 | | | 1,730 | | | 2,842 | | | 4,195 | |
Goodwill Impairment | — | | | — | | | 36,684 | | | 34,118 | |
Operating Income (Loss) | 4,178 | | | 6,996 | | | (15,846) | | | (18,226) | |
Other Income (Expense): | | | | | | | |
Interest income | 165 | | | 25 | | | 354 | | | 77 | |
Interest expense | (668) | | | (390) | | | (2,045) | | | (922) | |
| | | | | | | |
Non-operating income (expense), net | 625 | | | (870) | | | 805 | | | (347) | |
Other income (expense), net | 122 | | | (1,235) | | | (886) | | | (1,192) | |
Income (Loss) Before Taxes on Income | 4,300 | | | 5,761 | | | (16,732) | | | (19,418) | |
Provision (Benefit) for Income Taxes | (1,391) | | | (534) | | | 7,084 | | | 650 | |
Net Income (Loss) | $ | 5,691 | | | $ | 6,295 | | | $ | (23,816) | | | $ | (20,068) | |
| | | | | | | |
Earnings (Loss) Per Share of Common Stock: | | | | | | | |
Basic Earnings (Loss) Per Share | $ | 0.16 | | | $ | 0.17 | | | $ | (0.65) | | | $ | (0.55) | |
Diluted Earnings (Loss) Per Share | $ | 0.15 | | | $ | 0.17 | | | $ | (0.65) | | | $ | (0.55) | |
| | | | | | | |
Class A and B Common Stock: | | | | | | | |
Average Number of Shares Outstanding - Basic | 36,404 | | | 36,795 | | | 36,566 | | | 36,788 | |
Average Number of Shares Outstanding - Diluted | 36,912 | | | 37,061 | | | 36,566 | | | 36,788 | |
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| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Six Months Ended |
| December 31 | | December 31 |
| 2017 | | 2016 | | 2017 | | 2016 |
Net Sales | $ | 173,674 |
| | $ | 169,887 |
| | $ | 343,191 |
| | $ | 344,883 |
|
Cost of Sales | 119,738 |
| | 114,129 |
| | 229,666 |
| | 230,438 |
|
Gross Profit | 53,936 |
| | 55,758 |
| | 113,525 |
| | 114,445 |
|
Selling and Administrative Expenses | 41,931 |
| | 42,728 |
| | 85,563 |
| | 85,955 |
|
Restructuring Gain | — |
| | — |
| | — |
| | (1,832 | ) |
Operating Income | 12,005 |
| | 13,030 |
| | 27,962 |
| | 30,322 |
|
Other Income (Expense): | | | | | | | |
Interest income | 234 |
| | 99 |
| | 468 |
| | 209 |
|
Interest expense | (74 | ) | | (5 | ) | | (105 | ) | | (10 | ) |
Non-operating income (expense), net | 263 |
| | (84 | ) | | 549 |
| | 208 |
|
Other income (expense), net | 423 |
| | 10 |
| | 912 |
| | 407 |
|
Income Before Taxes on Income | 12,428 |
| | 13,040 |
| | 28,874 |
| | 30,729 |
|
Provision for Income Taxes | 5,050 |
| | 4,323 |
| | 10,539 |
| | 11,014 |
|
Net Income | $ | 7,378 |
| | $ | 8,717 |
| | $ | 18,335 |
| | $ | 19,715 |
|
| | | | | | | |
Earnings Per Share of Common Stock: | |
| | |
| | | | |
Basic Earnings Per Share | $ | 0.20 |
| | $ | 0.23 |
| | $ | 0.49 |
| | $ | 0.53 |
|
Diluted Earnings Per Share | $ | 0.20 |
| | $ | 0.23 |
| | $ | 0.49 |
| | $ | 0.52 |
|
| | | | | | | |
Dividends Per Share of Common Stock | $ | 0.07 |
| | $ | 0.06 |
| | $ | 0.14 |
| | $ | 0.12 |
|
| | | | | | | |
Class A and B Common Stock: | | | | | | | |
Average Number of Shares Outstanding - Basic | 37,476 |
| | 37,234 |
| | 37,452 |
| | 37,421 |
|
Average Number of Shares Outstanding - Diluted | 37,736 |
| | 37,605 |
| | 37,775 |
| | 37,917 |
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KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Three Months Ended |
| March 31, 2023 | | March 31, 2022 |
(Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
Net income (loss) | | | | | $ | 5,691 | | | | | | | $ | 6,295 | |
Other comprehensive income (loss): | | | | | | | | | | | |
| | | | | | | | | | | |
Postemployment severance actuarial change | 156 | | | (40) | | | 116 | | | 251 | | | (66) | | | 185 | |
Unrealized gain (loss) on interest rate swap | (145) | | | 37 | | | (108) | | | 1,345 | | | (347) | | | 998 | |
Reclassification to (earnings) loss: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Amortization of actuarial change | (161) | | | 42 | | | (119) | | | (129) | | | 34 | | | (95) | |
Interest rate swap | (381) | | | 98 | | | (283) | | | 62 | | | (16) | | | 46 | |
Other comprehensive income (loss) | $ | (531) | | | $ | 137 | | | $ | (394) | | | $ | 1,529 | | | $ | (395) | | | $ | 1,134 | |
Total comprehensive income (loss) | | | | | $ | 5,297 | | | | | | | $ | 7,429 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Nine Months Ended | | Nine Months Ended |
| March 31, 2023 | | March 31, 2022 |
(Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
Net income (loss) | | | | | $ | (23,816) | | | | | | | $ | (20,068) | |
Other comprehensive income (loss): | | | | | | | | | | | |
| | | | | | | | | | | |
Postemployment severance actuarial change | 529 | | | (136) | | | 393 | | | 814 | | | (211) | | | 603 | |
Unrealized gain (loss) on interest rate swap | 920 | | | (237) | | | 683 | | | 1,446 | | | (373) | | | 1,073 | |
Reclassification to (earnings) loss: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Amortization of actuarial change | (493) | | | 127 | | | (366) | | | (399) | | | 103 | | | (296) | |
Interest rate swap | (798) | | | 205 | | | (593) | | | 195 | | | (50) | | | 145 | |
Other comprehensive income (loss) | $ | 158 | | | $ | (41) | | | $ | 117 | | | $ | 2,056 | | | $ | (531) | | | $ | 1,525 | |
Total comprehensive income (loss) | | | | | $ | (23,699) | | | | | | | $ | (18,543) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| December 31, 2017 | | December 31, 2016 |
(Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
Net income | | | | | $ | 7,378 |
| | | | | | $ | 8,717 |
|
Other comprehensive income (loss): | | | | | | | | | | | |
Available-for-sale securities | $ | (44 | ) | | $ | 17 |
| | $ | (27 | ) | | $ | (9 | ) | | $ | 4 |
| | $ | (5 | ) |
Postemployment severance actuarial change | 239 |
| | (84 | ) | | 155 |
| | 207 |
| | (81 | ) | | 126 |
|
Reclassification to (earnings) loss: | | | | | | | | | | | |
Available-for-sale securities | 3 |
| | (1 | ) | | 2 |
| | — |
| | — |
| | — |
|
Amortization of actuarial change | (66 | ) | | 17 |
| | (49 | ) | | (143 | ) | | 56 |
| | (87 | ) |
Other comprehensive income (loss) | $ | 132 |
| | $ | (51 | ) | | $ | 81 |
| | $ | 55 |
| | $ | (21 | ) | | $ | 34 |
|
Total comprehensive income | | | | | $ | 7,459 |
| | | | | | $ | 8,751 |
|
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| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Six Months Ended | | Six Months Ended |
| December 31, 2017 | | December 31, 2016 |
(Unaudited) | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
Net income | | | | | $ | 18,335 |
| | | | | | $ | 19,715 |
|
Other comprehensive income (loss): | | | | | | | | | | | |
Available-for-sale securities | $ | (30 | ) | | $ | 12 |
| | $ | (18 | ) | | $ | (32 | ) | | $ | 13 |
| | $ | (19 | ) |
Postemployment severance actuarial change | 506 |
| | (188 | ) | | 318 |
| | 450 |
| | (175 | ) | | 275 |
|
Reclassification to (earnings) loss: | | | | | | | | | | | |
Available-for-sale securities | 3 |
| | (1 | ) | | 2 |
| | — |
| | — |
| | — |
|
Amortization of actuarial change | (133 | ) | | 43 |
| | (90 | ) | | (288 | ) | | 112 |
| | (176 | ) |
Other comprehensive income (loss) | $ | 346 |
| | $ | (134 | ) | | $ | 212 |
| | $ | 130 |
| | $ | (50 | ) | | $ | 80 |
|
Total comprehensive income | | | | | $ | 18,547 |
| | | | | | $ | 19,795 |
|
KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
| | | | | | | | | | | |
| (Unaudited) |
| Nine Months Ended |
| March 31 |
| 2023 | | 2022 |
Cash Flows From Operating Activities: | | | |
Net loss | $ | (23,816) | | | $ | (20,068) | |
Adjustments to reconcile net loss to net cash (used for) provided by operating activities: | | |
Depreciation | 11,160 | | | 10,820 | |
Amortization | 6,682 | | | 7,212 | |
Loss on sales of assets | (13) | | | (4,537) | |
| | | |
Restructuring and asset impairment charges | 1,661 | | | 1,527 | |
Deferred income tax and other deferred charges | (3,787) | | | 95 | |
Goodwill impairment | 36,684 | | | 34,118 | |
Stock-based compensation | 3,703 | | | 3,708 | |
Change in earn-out liability | (3,160) | | | (15,750) | |
Other, net | (35) | | | (2,528) | |
Change in operating assets and liabilities: | | | |
Receivables | 29,731 | | | (12,847) | |
Inventories | 8,021 | | | (29,254) | |
Prepaid expenses and other current assets | 14,418 | | | (7,928) | |
Accounts payable | (21,191) | | | 27,600 | |
Customer deposits | (2,695) | | | 3,157 | |
Accrued expenses | (1,397) | | | (1,927) | |
Net cash provided by (used for) operating activities | 55,966 | | | (6,602) | |
Cash Flows From Investing Activities: | | | |
Capital expenditures | (13,658) | | | (12,869) | |
Proceeds from sales of assets | 354 | | | 5,498 | |
| | | |
Purchases of capitalized software | (3,423) | | | (2,925) | |
| | | |
| | | |
Other, net | 128 | | | (50) | |
Net cash used for investing activities | (16,599) | | | (10,346) | |
Cash Flows From Financing Activities: | | | |
Proceeds from revolving credit facility | 106,000 | | | 45,000 | |
Payments on revolving credit facility | (124,000) | | | (27,000) | |
Repayments of long-term debt | (79) | | | (30) | |
| | | |
Dividends paid to shareholders | (9,903) | | | (9,925) | |
Repurchases of Common Stock | (3,900) | | | (2,447) | |
Repurchase of employee shares for tax withholding | (223) | | | (590) | |
Net cash (used for) provided by financing activities | (32,105) | | | 5,008 | |
| | | |
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash (1) | 7,262 | | | (11,940) | |
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period (1) | 11,996 | | | 25,727 | |
Cash, Cash Equivalents, and Restricted Cash at End of Period (1) | $ | 19,258 | | | $ | 13,787 | |
Supplemental Disclosure of Cash Flow Information | | | |
| | | |
| | | |
Cash paid (refunded) during the period for: | | | |
Income taxes | $ | 4,439 | | | $ | (99) | |
Interest expense | $ | 2,002 | | | $ | 862 | |
|
| | | | | | | |
| (Unaudited) |
| Six Months Ended |
| December 31 |
| 2017 | | 2016 |
Cash Flows From Operating Activities: | | | |
Net income | $ | 18,335 |
| | $ | 19,715 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 7,542 |
| | 7,905 |
|
Gain on sales of assets | (2,153 | ) | | (2,083 | ) |
Deferred income tax and other deferred charges | 5,369 |
| | (1,827 | ) |
Stock-based compensation | 2,511 |
| | 3,277 |
|
Other, net | 729 |
| | (821 | ) |
Change in operating assets and liabilities: | | | |
Receivables | 2,172 |
| | 4,025 |
|
Inventories | 656 |
| | (125 | ) |
Prepaid expenses and other current assets | (8,892 | ) | | 1,286 |
|
Accounts payable | (1,938 | ) | | (439 | ) |
Customer deposits | 4,529 |
| | 2,393 |
|
Accrued expenses | (13,478 | ) | | (1,201 | ) |
Net cash provided by operating activities | 15,382 |
| | 32,105 |
|
Cash Flows From Investing Activities: | | | |
Capital expenditures | (11,722 | ) | | (5,583 | ) |
Proceeds from sales of assets | 5,630 |
| | 11,655 |
|
Cash paid upon acquisition | (17,800 | ) | | — |
|
Purchases of capitalized software | (423 | ) | | (339 | ) |
Purchases of available-for-sale securities | (18,902 | ) | | (19,698 | ) |
Maturities of available-for-sale securities | 16,477 |
| | 746 |
|
Other, net | (582 | ) | | (965 | ) |
Net cash used for investing activities | (27,322 | ) | | (14,184 | ) |
Cash Flows From Financing Activities: | | | |
Net change in capital leases and long-term debt | (26 | ) | | (25 | ) |
Dividends paid to Share Owners | (4,857 | ) | | (4,315 | ) |
Repurchases of Common Stock | (1,781 | ) | | (6,524 | ) |
Repurchase of employee shares for tax withholding | (2,426 | ) | | (1,167 | ) |
Net cash used for financing activities | (9,090 | ) | | (12,031 | ) |
Net (Decrease) Increase in Cash and Cash Equivalents | (21,030 | ) | | 5,890 |
|
Cash and Cash Equivalents at Beginning of Period | 62,882 |
| | 47,576 |
|
Cash and Cash Equivalents at End of Period | $ | 41,852 |
| | $ | 53,466 |
|
Supplemental Disclosure of Cash Flow Information | | | |
Cash paid during the period for: | | | |
Income taxes | $ | 13,139 |
| | $ | 13,096 |
|
Interest expense | $ | 105 |
| | $ | 10 |
|
(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. The restricted cash included in other assets on the balance sheet represents 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. In addition, the restricted cash balance for periods June 30, 2022 and prior included cash held in escrow for repayment of the Payment Protection Program loan that Poppin, Inc. obtained prior to its acquisition and amounts pledged as collateral for a long-term financing arrangement as contractually required by a lender and the restriction lapsed when the related debt was paid. | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in Thousands) | March 31, 2023 | | June 30, 2022 | | March 31, 2022 | | June 30, 2021 |
Cash and Cash Equivalents | $ | 18,768 | | | $ | 10,934 | | | $ | 12,726 | | | $ | 24,336 | |
Restricted cash included in Other Assets | 490 | | | 1,062 | | | 1,061 | | | 1,391 | |
Total Cash, Cash Equivalents, and Restricted Cash at end of period | $ | 19,258 | | | $ | 11,996 | | | $ | 13,787 | | | $ | 25,727 | |
KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in Thousands, Except for Share and Per Share Data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Treasury Stock | | Total Shareholders’ Equity |
Three months ended March 31, 2023 (Unaudited) | Class A | | Class B | |
Amounts at December 31, 2022 | $ | 8 | | | $ | 2,143 | | | $ | 7,805 | | | $ | 233,556 | | | $ | 4,277 | | | $ | (70,588) | | | $ | 177,201 | |
Net income (loss) | | | | | | | 5,691 | | | | | | | 5,691 | |
Other comprehensive income (loss) | | | | | | | | | (394) | | | | | (394) | |
Issuance of non-restricted stock (18,000 shares) | | | | | (110) | | | | | | | 110 | | | — | |
| | | | | | | | | | | | | |
Compensation expense related to stock compensation plans | | | | | 1,194 | | | | | | | | | 1,194 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Repurchase of Common Stock (116,000 shares) | | | | | | | | | | | (830) | | | (830) | |
Dividends declared ($0.09 per share) | | | | | | | (3,356) | | | | | | | (3,356) | |
Amounts at March 31, 2023 | $ | 8 | | | $ | 2,143 | | | $ | 8,889 | | | $ | 235,891 | | | $ | 3,883 | | | $ | (71,308) | | | $ | 179,506 | |
| | | | | | | | | | | | | |
Three months ended March 31, 2022 (Unaudited) | | | | | | | | | | | | | |
Amounts at December 31, 2021 | $ | 9 | | | $ | 2,142 | | | $ | 6,015 | | | $ | 265,924 | | | $ | 2,371 | | | $ | (69,797) | | | $ | 206,664 | |
Net income (loss) | | | | | | | 6,295 | | | | | | | 6,295 | |
Other comprehensive income (loss) | | | | | | | | | 1,134 | | | | | 1,134 | |
Issuance of non-restricted stock (12,000 shares) | | | | | 7 | | | | | | | 158 | | | 165 | |
| | | | | | | | | | | | | |
Compensation expense related to stock compensation plans | | | | | 1,153 | | | | | | | | | 1,153 | |
| | | | | | | | | | | | | |
Restricted stock units issuance (9,000 shares) | | | | | (150) | | | | | | | 122 | | | (28) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Dividends declared ($0.09 per share) | | | | | | | (3,383) | | | | | | | (3,383) | |
Amounts at March 31, 2022 | $ | 9 | | | $ | 2,142 | | | $ | 7,025 | | | $ | 268,836 | | | $ | 3,505 | | | $ | (69,517) | | | $ | 212,000 | |
| | | | | | | | | | | | | |
Nine months ended March 31, 2023 (Unaudited) | | | | | | | | | | | | | |
Amounts at June 30, 2022 | $ | 8 | | | $ | 2,143 | | | $ | 6,304 | | | $ | 269,833 | | | $ | 3,766 | | | $ | (68,518) | | | $ | 213,536 | |
Net income (loss) | | | | | | | (23,816) | | | | | | | (23,816) | |
Other comprehensive income (loss) | | | | | | | | | 117 | | | | | 117 | |
Issuance of non-restricted shares (57,000 shares) | | | | | (484) | | | | | | | 525 | | | 41 | |
Conversion of Class A to Class B common stock (1,000 shares) | — | | | — | | | | | | | | | | | — | |
Compensation expense related to stock incentive plans | | | | | 3,703 | | | | | | | | | 3,703 | |
| | | | | | | | | | | | | |
Restricted stock units issuance (50,000 shares) | | | | | (634) | | | | | | | 472 | | | (162) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Repurchase of Common Stock (543,000 shares) | | | | | | | | | | | (3,787) | | | (3,787) | |
Dividends declared ($0.27 per share) | | | | | | | (10,126) | | | | | | | (10,126) | |
Amounts at March 31, 2023 | $ | 8 | | | $ | 2,143 | | | $ | 8,889 | | | $ | 235,891 | | | $ | 3,883 | | | $ | (71,308) | | | $ | 179,506 | |
| | | | | | | | | | | | | |
Nine months ended March 31, 2022 (Unaudited) | | | | | | | | | | | | | |
Amounts at June 30, 2021 | $ | 9 | | | $ | 2,142 | | | $ | 5,298 | | | $ | 299,034 | | | $ | 1,980 | | | $ | (68,793) | | | $ | 239,670 | |
Net income (loss) | | | | | | | (20,068) | | | | | | | (20,068) | |
Other comprehensive income (loss) | | | | | | | | | 1,525 | | | | | 1,525 | |
Issuance of non-restricted shares (30,000 shares) | | | | | (235) | | | | | | | 397 | | | 162 | |
Conversion of Class A to Class B common stock (7,000 shares) | — | | | — | | | | | | | | | | | — | |
Compensation expense related to stock incentive plans | | | | | 3,708 | | | | | | | | | 3,708 | |
| | | | | | | | | | | | | |
Restricted stock units issuance (87,000 shares) | | | | | (1,642) | | | | | | | 1,136 | | | (506) | |
Relative total shareholder return performance units issuance (5,000 shares) | | | | | (104) | | | | | | | 72 | | | (32) | |
| | | | | | | | | | | | | |
Repurchase of Common Stock (196,000 shares) | | | | | | | | | | | (2,329) | | | (2,329) | |
Dividends declared ($0.27 per share) | | | | | | | (10,130) | | | | | | | (10,130) | |
Amounts at March 31, 2022 | $ | 9 | | | $ | 2,142 | | | $ | 7,025 | | | $ | 268,836 | | | $ | 3,505 | | | $ | (69,517) | | | $ | 212,000 | |
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 Reclassification:
We combined the Long-term earn-out liability line with the Other long-term liabilities line on our June 30, 2022 balance sheet as the balance no longer requires separate presentation. Note 2. Recent Accounting Pronouncements and Supplemental Information
Recently AdoptedIssued Accounting Pronouncements:Pronouncements Not Yet Adopted:
In January 2017,October 2021, the Financial Accounting Standards Board (“FASB”) issued guidance on simplifying the testaccounting for goodwill impairment by eliminating the requirementcontract assets and contract liabilities, related to estimate the implied fair value of a reporting unit from the goodwill impairment test. Under the guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unitrevenue contracts with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective prospectively for our first quarter of fiscal year 2021 financial statements with early adoption permitted. In conjunction with our recent acquisition, we early adopted the guidance in our second quarter of fiscal year 2018 and the guidance did not have a material effect on our consolidated financial statements.
In January 2017, the FASB issued guidance which revises the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted and the amendments can be applied to transactions occurring before the guidance was issued as long as the applicable financial statements have not been issued. In conjunction with our recent acquisition, we early adopted the guidance in our second quarter of fiscal year 2018 and the guidance did not have a material effect on our consolidated financial statements.
In August 2016, the FASB issued guidance that clarifies and provides specific guidance on eight cash flow classification issues that are not addressed by current GAAP. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows, including how to classify contingent consideration payments made aftercustomers, during a business combination which will impactby the presentationacquiring business entity. The acquirer is to measure the contract asset and contract liability as of future earn-out payments for our recent acquisition.the acquisition date as if the acquirer had originated the contracts. This is a departure from the current practice under U.S. GAAP of recognizing contract assets and contract liabilities at fair value as of the acquisition date. The guidance iswill be effective for our first quarter of fiscal year 2019 with early adoption permitted. We early adopted the guidance in our second quarter of fiscal year 2018 and the guidance did not have a material effect on our consolidated financial statements.
In July 2015, the FASB issued guidance on simplifying the measurement of inventory which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Inventory within the scope of this update is required to be measured at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The guidance does not impact inventory measured on a last-in, first-out (“LIFO”) basis. The guidance was adopted prospectively in our first quarter of fiscal year 2018 and did not2024, though early adoption is permitted. Management is unable to predict whether the adoption of this guidance will have a material effectimpact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted:
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted and will be applied prospectively to an award modified on or after the adoption date. We do not expect the adoption to have a material effect on our consolidated financial statements.
In March 2017, the FASB issued guidance that will shorten the amortization period for certain callable debt securities held at a premium to the earliest call date. This guidance does not require an accounting change for securities held at a discount. This guidance is to be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted. We have not yet determined the effect of this guidance on our consolidated financial statements.
In March 2017, the FASB issued guidance that requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic benefit cost in operating expenses, which will impact the presentation of our postemployment benefit plan. The guidance also allows only the service cost component to be eligible for capitalization. Employers are required to present all other components of net benefit cost separate from the service costs and disclose the line item in which the components of net benefit cost other than the service cost are included. Retrospective application of the change in the statement of income presentation is required, while the change in capitalization of the service cost is to be applied prospectively. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted. We have not yet determined the effect of this guidance on our consolidated financial statements.
In February 2017, the FASB issued guidance that clarifies the scope of guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. This new guidance is meant to clarify the scope of the original guidance that was issued in connection with the guidance relating to the recognition of revenue from contracts with customers, as defined below, which addresses recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted, and we are required to adopt concurrent with the adoption of the guidance on recognition of revenue from contracts with customers. We are reviewing the impact of this rule but have not yet determined the effect of this guidance on our consolidated financial statements.
In November 2016, the FASB issued guidance which requires an entity to include in their cash and cash equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted, and is required to be applied using a retrospective transition method to each prior reporting period. We do not expect the adoption to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued guidance on the measurement of credit losses on financial instruments. Under the guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The guidance is also intended to reduce the complexity by decreasing the number of credit impairment models that entities use to account for debt instruments. 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 consolidated financial statements.
In February 2016, the FASB issued guidance that revises the accounting for leases. The guidance is intended to improve financial reporting of leasing transactions by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Leases will continue to be classified as either operating or finance leases, with the classification affecting the pattern of expense recognition in the statement of income. The guidance will also require additional disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted, and is required to be applied using a modified retrospective approach to each prior reporting period. We are currently evaluating the impact of this guidance, but have not yet determined the effect on our consolidated financial statements.
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 is effective prospectively for our first quarter of fiscal year 2019 financial statements with early adoption allowed on certain provisions. We are currently evaluating the impact of this guidance, but have not yet determined the effect on our consolidated financial statements.
In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. To achieve this core principle, the guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance addresses several areas including transfer of control, contracts with multiple performance obligations, and costs to
obtain and fulfill contracts. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB decided to defer the effective date for this new revenue standard by one year, which will make the guidance effective for our first quarter of fiscal year 2019 financial statements using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients; or (ii) adoption with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures. In March 2016, the FASB issued additional guidance which further clarifies assessing whether an entity is a principal or an agent in a revenue transaction, and impacts whether an entity reports revenue on a gross or net basis; in April 2016, the FASB issued additional guidance that addresses identifying performance obligations and implementing licensing guidance; and in May 2016, the FASB issued additional guidance that clarifies collectability, noncash consideration, and other transition issues. The amendments have the same effective date and transition requirements as the new revenue standard.
We have completed a preliminary review of the impact of the new revenue standard and expect the primary change to be the reclassification of certain items on the statement of income. For contracts involving products that are sold directly to end customers, currently any fees paid to dealer agents facilitating the sale are netted against revenue. Under the new standard, fees paid to dealer agents will be recognized as a selling expense. In addition, any commissions or fees paid to third-party purchasing organizations will be recognized as a selling expense rather than being netted against revenue. Although the result of these changes will be an increase in net sales and an increase in selling expenses, these changes will have no impact to operating income dollars, but will reduce operating income as a percent of net sales. The new standard will also require several less significant changes including classifying the reserve for returns and allowance as a liability rather than a contra-receivable, recognizing a recovery asset for potential product returns, and capitalizing costs to obtain and fulfill sales contracts. The new standard will also require significantly more disclosure than is required under current rules. We continue to evaluate the impact that will result from adoption of the new standard, and we are in the process of implementing changes to our business processes, systems, and internal controls to support recognition and disclosure under the new standard. We expect to adopt the standard at the beginning of our fiscal year 2019 using the full retrospective approach which, upon adoption, will adjust fiscal years 2017 and 2018 to provide comparable financial reporting for these periods.
Goodwill and Other Intangible Assets:
Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Goodwill is assigned to and the fair value is tested at the reporting unit level. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test. We comparetest which compares the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. IfUnder the quantitative assessment, if the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date. Duringdate and reporting unit specific scenarios weighted on probability of outcome.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, and determination of our weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. While we have historically performed goodwill impairment testing annually during the second fiscal quarter, changes in circumstances may require interim assessments of the carrying amounts of our reporting units relative to their fair values.
In connection with our annual goodwill impairment test and the preparation of our financial statements, we assessed goodwill at the reporting unit level for impairment during our second quarter of fiscal year 2023 and based on our analysis our Poppin
reporting unit had a carrying amount that exceeded its fair value. Lower revenue and earnings growth projections in the Poppin reporting unit drove the decline in the fair value of the reporting unit. As a result, we recorded a goodwill impairment loss of $36.7 million during the second quarter of fiscal year 2018 no goodwill impairment was recognized.
During the second quarter of fiscal year 2018, we acquired $8.6 million2023, as further discussed in goodwill from the acquisition of D’style, Inc. See Note 312 - AcquisitionsFair Value of Notes to Condensed Consolidated Financial Statements for more information on this acquisition.of Operations. | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
The changes in the carrying amount of goodwill are summarized as follows: |
(Amounts in Thousands) | | Gross Goodwill | | Accumulated Impairment | | Net Carrying Amount |
June 30, 2021 | | $ | 83,695 | | | $ | (1,733) | | | $ | 81,962 | |
Additions / (Impairments) | | — | | | (34,118) | | | (34,118) | |
June 30, 2022 | | 83,695 | | | (35,851) | | | 47,844 | |
Additions / (Impairment) | | — | | | (36,684) | | | (36,684) | |
March 31, 2023 | | $ | 83,695 | | | $ | (72,535) | | | $ | 11,160 | |
Other Intangible Assets reported on the Condensed Consolidated Balance Sheets consist of capitalized software, product rights, customer relationships, trade names, acquired technology, patents and trademarks, 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. As a result of the downward revision in the forecasted operations of Poppin, management identified that a triggering event had occurred, indicating that certain long-lived assets may not be recoverable. The intangible assets of the Poppin reporting unit were assessed for recoverability during the second quarter of fiscal year 2023, and the recoverability assessment indicated no impairment.
A summary of other intangible assets subject to amortization is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | June 30, 2022 |
(Amounts in Thousands) | Cost | | Accumulated Amortization | | Net Value | | Cost | | Accumulated Amortization | | Net Value |
Capitalized Software | $ | 48,778 | | | $ | 36,766 | | | $ | 12,012 | | | $ | 46,246 | | | $ | 35,521 | | | $ | 10,725 | |
Customer Relationships | 12,000 | | | 4,746 | | | 7,254 | | | 19,050 | | | 10,518 | | | 8,532 | |
Trade Names | 36,570 | | | 9,554 | | | 27,016 | | | 36,570 | | | 6,811 | | | 29,759 | |
Acquired Technology | 7,000 | | | 2,316 | | | 4,684 | | | 7,000 | | | 1,563 | | | 5,437 | |
Patents and Trademarks | 354 | | | 70 | | | 284 | | | 354 | | | 47 | | | 307 | |
Non-Compete Agreements | 100 | | | 100 | | | — | | | 100 | | | 93 | | | 7 | |
Other Intangible Assets | $ | 104,802 | | | $ | 53,552 | | | $ | 51,250 | | | $ | 109,320 | | | $ | 54,553 | | | $ | 54,767 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | June 30, 2017 |
(Amounts in Thousands) | Cost | | Accumulated Amortization | | Net Value | | Cost | | Accumulated Amortization | | Net Value |
Capitalized Software | $ | 38,340 |
| | $ | 35,563 |
| | $ | 2,777 |
| | $ | 37,918 |
| | $ | 34,986 |
| | $ | 2,932 |
|
Product Rights | 162 |
| | 162 |
| | — |
| | 162 |
| | 162 |
| | — |
|
Customer Relationships | 7,050 |
| | 106 |
| | 6,944 |
| | — |
| | — |
| | — |
|
Trade Names | 3,570 |
| | 60 |
| | 3,510 |
| | — |
| | — |
| | — |
|
Non-Compete Agreements | 100 |
| | 3 |
| | 97 |
| | — |
| | — |
| | — |
|
Other Intangible Assets | $ | 49,222 |
| | $ | 35,894 |
| | $ | 13,328 |
| | $ | 38,080 |
| | $ | 35,148 |
| | $ | 2,932 |
|
Amortization expense related to otherA summary of the useful lives of intangible assets was, in thousands, $451 and $746 during the quarter and year-to-date period ended December 31, 2017, respectively, and was, in thousands, $282 and $518 during the quarter and year-to-date period ended December 31, 2016, respectively. Amortization expense in future periodssubject to amortization is expected to be, in thousands, $1,011 for the remainder of fiscal year 2018, and $1,826, $1,872, $1,504, and $1,230 in the four years ending June 30, 2022, and $5,885 thereafter. The estimated useful life of internal-use software ranges from 2 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.as follows: | | | | | | | | |
| | Years |
Capitalized Software | | 2 to 13 |
Customer Relationships | | 10 |
Trade Names | | 10 |
Acquired Technology | | 7 |
Patents | | 14 |
Trademarks | | 15 |
Non-Compete Agreements | | 5 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense incurred and future expected expenses related to intangible assets were: |
| Three months ended | | Nine Months Ended | | | | | | | | | | | | | |
| March 31 | | March 31 | | Remainder | | Future Fiscal Years |
(Amounts in Thousands) | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
Amortization Expense | $ | 2,268 | | | $ | 2,358 | | | $ | 6,682 | | | $ | 7,212 | | | | $ | 2,911 | | | $ | 9,857 | | | $ | 9,638 | | | $ | 9,043 | | | $ | 6,299 | | | $ | 13,502 | |
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.
Product rights to produceTrade names, non-compete agreements, acquired technology, patents and sell certain products, trade names, and non-compete agreementstrademarks are amortized on a straight-line basis over their estimated useful lives. Capitalized customerCustomer relationships are amortized based on estimated attrition raterates of customers. We have no intangible assets with indefinite useful lives which are not subject to amortization.
Notes ReceivableOther General (Income) Expense:
Other General (Income) Expense for the three and Trade Accounts Receivable:
Notes receivable and trade accounts receivable are recorded per the termsnine months ended March 31, 2022, includes a gain of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.
Our policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable includes 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$4.5 million related 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.sale of a warehouse.
Non-operating Income (Expense), net:
The non-operatingNon-operating income (expense), net line item includesand expense include the impact of such items as fair value adjustments on Supplemental Employee Retirement Plan (“SERP”) investments, amortization of actuarial income, foreign currency rate movements, investment gain or loss, non-production rent income, 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) | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
Gain (Loss) on SERP Investments | $ | 613 | | | $ | (887) | | | $ | 773 | | | $ | (300) | |
| | | | | | | |
| | | | | | | |
Other | 12 | | | 17 | | | 32 | | | (47) | |
Non-operating income, net | $ | 625 | | | $ | (870) | | | $ | 805 | | | $ | (347) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31 | | December 31 |
(Amounts in Thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Foreign Currency Loss | $ | (29 | ) | | $ | (8 | ) | | $ | (12 | ) | | $ | (15 | ) |
Gain on Supplemental Employee Retirement Plan Investments | 413 |
| | 29 |
| | 764 |
| | 396 |
|
Other | (121 | ) | | (105 | ) | | (203 | ) | | (173 | ) |
Non-operating income (expense), net | $ | 263 |
| | $ | (84 | ) | | $ | 549 |
| | $ | 208 |
|
Note 3. AcquisitionRestructuring
DuringWe recognized pre-tax restructuring expense of $0.8 million and $2.8 million in the second quarter of fiscal year 2018, we acquired the assets of D’style, Inc., headquartered in Chula Vista, California. This acquisition expands our reach into hospitality public space areasthree and adds an attractive product portfolio of solutionsnine months ended March 31, 2023, and recognized $1.7 million and $4.2 million for the residentialthree and nine months ended March 31, 2022.
We utilized available market through the acquired Allan Copley Designs brand. These offerings enable usprices and management estimates to take advantage of the trend where hospitality, residential and commercial designs are merging. In addition, the acquisition includes Diseños de Estilo in Tijuana, Mexico, another member of the D’style group which manufactures exclusively for D’style, strengthening our North American manufacturing footprint and serving as a distribution channel to the Mexico and Latin America hospitality markets. The acquisition purchase price totaled $20.0 million, inclusive of an expected $2.2 million earn-out, which is contingent based upon fiscal year 2018 and 2019 D’style, Inc. operating income compared to a predetermined target for each fiscal year. As of the acquisition datedetermine the fair value of impaired assets. Restructuring is included in the earn-outRestructuring Expense line item on our Condensed Consolidated Statements of Operations.
Transformation Restructuring Plan:
Current actions under our transformation restructuring plan are focused on activities such as the streamlining of manufacturing facilities, the consolidation of showrooms, and the closure of our manufacturing facility in Tijuana, Mexico which was $1.7 million.completed during the year-to-date period of fiscal year 2023. This phase of the transformation restructuring plan began in the first quarter of our fiscal year 2021, and we expect a substantial majority of the restructuring actions to be completed by the end of fiscal year 2023.
This phase of the transformation restructuring plan is expected to generate annualized pre-tax savings of approximately $20.0 million when it is fully implemented. We currently estimate this phase of the transformation restructuring plan will incur total pre-tax restructuring charges of approximately $22.7 million, with approximately $0.5 million expected to be recorded in remainder of fiscal year 2023. The purchase pricerestructuring charges are expected to consist of approximately $7.8 million for severance and other employee-related costs, approximately $5.8 million for facility costs, and approximately $9.1 million for lease and other asset impairment. Approximately 60% of the total cost estimate is subjectexpected to certain post-closing working capital adjustments.be cash expense.
A summary of the charges recorded in connection with the second phase of the transformation restructuring plan is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | Charges Incurred to Date |
| March 31 | | March 31 | |
(Amounts in Thousands) | 2023 | | 2022 | | 2023 | | 2022 | |
Cash-related restructuring charges: | | | | | | | | | |
Severance and other employee related costs | $ | 183 | | | $ | 539 | | | $ | 657 | | | $ | 772 | | | $ | 7,492 | |
Facility exit costs and other cash charges | 295 | | | 1,006 | | | 1,591 | | | 1,896 | | | 5,539 | |
Total cash-related restructuring charges | $ | 478 | | | $ | 1,545 | | | $ | 2,248 | | | $ | 2,668 | | | $ | 13,031 | |
Non-cash charges: | | | | | | | | | |
Impairment of assets and accelerated depreciation | 315 | | | 185 | | | 594 | | | 1,527 | | | 9,125 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total charges | $ | 793 | | | $ | 1,730 | | | $ | 2,842 | | | $ | 4,195 | | | $ | 22,156 | |
A summary of the preliminary purchase price allocationcurrent period activity in accrued restructuring related to the second phase of the transformation restructuring plan is as follows:
| | | | | | | | | | | |
(Amounts in Thousands) | Severance and other employee related costs | | | | | | |
Balance at June 30, 2022 | $ | 974 | | | | | | | |
Additions charged to expense | 634 | | | | | | | |
Cash payments charged against reserve | (1,561) | | | | | | | |
Non-cash adjustments | (47) | | | | | | | |
Balance at March 31, 2023 | $ | — | | | | | | | |
Note 4. Revenue
Disaggregation of Revenue
The following table provides information about revenue by operating segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
(Amounts in Millions) | 2023 | | 2022 | | 2023 | | 2022 |
Workplace & Health | $ | 124.3 | | | $ | 129.1 | | | $ | 408.3 | | | $ | 366.4 | |
Hospitality | 28.9 | | | 34.5 | | | 76.3 | | | 76.4 | |
eBusiness | 12.9 | | | 17.3 | | | 42.3 | | | 46.1 | |
Total Net Sales | $ | 166.1 | | | $ | 180.9 | | | $ | 526.9 | | | $ | 488.9 | |
For the three and nine months ended March 31, 2022, the Workplace and Health categories have been combined based on our reassessment of disaggregation of revenue based on our current method of evaluating our business.
|
| | | | |
Purchase Price Allocation | | |
(Amounts in Thousands) | | |
Assets: | | |
Receivables | | $ | 1,467 |
|
Inventories | | 1,455 |
|
Prepaid expenses and other current assets | | 1,120 |
|
Net property and equipment | | 184 |
|
Goodwill | | 8,559 |
|
Other intangible assets | | 10,720 |
|
Deferred tax assets | | 303 |
|
| | $ | 23,808 |
|
| | |
Liabilities: | | |
Accounts payable | | $ | 804 |
|
Customer deposits | | 3,191 |
|
Accrued expenses | | 333 |
|
| | $ | 4,328 |
|
| | $ | 19,480 |
|
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.
|
| | | | |
Consideration | | |
(Amounts in Thousands) | | |
Cash | | $ | 17,800 |
|
Contingent earn-out — fair value at acquisition date | | 1,680 |
|
Fair value of total consideration | | $ | 19,480 |
|
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. Customer deposits are typically utilized within a year of the receipt of the deposit. The operating resultsamount of this acquisition arerevenue recognized during the nine months ended March 31, 2023 that was included in the June 30, 2022 customer deposit balance was $28.8 million.
Note 5. Leases
Our operating lease portfolio is primarily comprised of showrooms, which expire at various dates through fiscal year 2033. We have no financing leases. Certain operating lease agreements include rental payments adjusted periodically for inflationary indices. Additionally, some leases include options to renew or terminate the leases which can be exercised at our consolidated financial statements beginning on November 6, 2017. For bothdiscretion. Lease terms include the quarter and year-to-date periods ended December 31, 2017, net sales and net income related to D’style were $2.8 million and less than $0.1 million, respectively. Direct costsnoncancellable portion of the acquisition duringunderlying leases along with any reasonably certain lease periods associated with available renewal periods.
Certain leases have terms that are dependent upon the quarteroccurrence of events, activities, or circumstances in lease agreements and year-to-date periods ended December 31, 2017, of approximately $0.4 millionincur variable lease expense driven by warehouse square footage utilized, property taxes assessed, and $0.7 million, respectively, were expensedother non-lease component charges. Variable lease expense is presented as incurred and were included on the Selling and Administrative Expenses line ofoperating expense in our Condensed Consolidated Statements of Income. An immaterial amountOperations in the same line item as expense arising from fixed lease payments for operating leases. For all classes of goodwill isassets, we do not deductible for tax purposes, while the tax deductible portion is deductible over 15 years. Goodwill is primarily attributable to the anticipated revenue and supply chain synergies expectedseparate non-lease components of a contract from the lease components to which they relate. We do not recognize a right-of-use asset or lease liability for short-term leases that have a lease term of twelve months or less.
The components of our lease expenses are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
(Amounts in Millions) | 2023 | | 2022 | | 2023 | | 2022 |
Operating lease expense | $ | 1.4 | | | $ | 1.2 | | | $ | 3.9 | | | $ | 3.6 | |
| | | | | | | |
Variable lease expense | 1.7 | | | 1.1 | | | 5.4 | | | 2.8 | |
Total lease expense | $ | 3.1 | | | $ | 2.3 | | | $ | 9.3 | | | $ | 6.4 | |
Right-of-use assets for operating leases are tested for impairment in the same manner as long-lived assets used in operations of the combined company. See as explained in Note 212 - Recent Accounting Pronouncements and Supplemental InformationFair Value of Notes to Condensed Consolidated Financial Statements. During the first nine months of fiscal year 2023 we had $0.3 million of right-of-use asset and associated leasehold improvement impairments, and for the first nine months of fiscal year 2022 we recorded $0.7 million of right-of-use asset and associated leasehold improvement impairments. The impairment charges are included in the Restructuring Expense line item on our Condensed Consolidated Statements for more information on goodwillof Operations.
Supplemental cash flow and other intangible assets. information related to leases are as follows: | | | | | | | | | | | |
| Nine Months Ended |
| March 31 |
(Amounts in Millions) | 2023 | | 2022 |
Cash flow information: | | | |
Operating lease payments impacting lease liability | $ | 4.7 | | | $ | 5.8 | |
Non-cash impact of obtaining new right-of-use assets | $ | 8.3 | | | $ | 6.3 | |
| | | |
| As of |
| March 31 |
| 2023 | | 2022 |
Other information: | | | |
Weighted-average remaining term (in years) | 5.7 | | 4.8 |
Weighted-average discount rate | 5.2 | % | | 4.4 | % |
The purchase price allocation is provisional pending final valuations and purchase accounting adjustments, which were not finalfollowing table summarizes the future minimum lease payments as of DecemberMarch 31, 2017. We utilized management estimates2023: | | | | | |
| Fiscal Year Ended |
(Amounts in Millions) | June 30 (1) |
2023 | $ | 1.5 | |
2024 | 6.2 | |
2025 | 4.8 | |
2026 | 3.6 | |
2027 | 2.9 | |
Thereafter | 6.8 | |
Total lease payments | $ | 25.8 | |
Less interest | 3.7 | |
Present value of lease liabilities | $ | 22.1 | |
(1) Lease payments include options to extend lease terms that are reasonably certain of being exercised. The payments exclude legally binding minimum lease payments for leases signed but not yet commenced. At March 31,2023, we have an additional operating lease that has not yet commenced for which we will record both right-of-use assets and consultation with an independent third-party valuation firmlease liabilities of $3.9 million. The lease is expected to assistcommence in the valuation process.
Note 4. Income Taxes
Our secondour fourth quarter of fiscal year 2018 results2023 with a lease term of operations includedapproximately 12 years.
During the impactthird quarter of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”), which was signed into law on December 22, 2017. The Tax Reform reduced federal corporate income tax rates and changed numerous other provisions. As we have a June 30 fiscal year-end, the lower corporate federal income tax rate will be phased in, resulting in a U.S. federal statutory tax rate of 28.1% for our fiscal year ending June 30, 2018, and 21%2023, we subleased a formerly used showroom which through fiscal year 2026 will generate total sublease income of $1.6 million.
Note 6. Earnings Per Share
Basic earnings per share are based on the weighted average number of shares outstanding during the period. Diluted earnings per share are based on the weighted average number of shares outstanding plus the assumed issuance of common shares for subsequent fiscal years. The quarter and six months ended December 31, 2017 included approximately $1.6 million year-to-date in reduced income tax expense to reflect federal taxes at the lower blended effective tax rate. The benefits of the lower rateall potentially dilutive securities.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
(Amounts in Thousands, Except for Per Share Data) | 2023 | | 2022 | | 2023 | | 2022 |
Net Income (Loss) | $ | 5,691 | | | $ | 6,295 | | | $ | (23,816) | | | $ | (20,068) | |
| | | | | | | |
Average Shares Outstanding for Basic EPS Calculation | 36,404 | | | 36,795 | | | 36,566 | | | 36,788 | |
Dilutive Effect of Average Outstanding Compensation Awards | 508 | | | 266 | | | — | | | — | |
Average Shares Outstanding for Diluted EPS Calculation | 36,912 | | | 37,061 | | | 36,566 | | | 36,788 | |
| | | | | | | |
Basic Earnings (Loss) Per Share | $ | 0.16 | | | $ | 0.17 | | | $ | (0.65) | | | $ | (0.55) | |
Diluted Earnings (Loss) Per Share | $ | 0.15 | | | $ | 0.17 | | | $ | (0.65) | | | $ | (0.55) | |
All stock compensation awards were more than offset by a one-time discrete $2.0 million unfavorable impactantidilutive as a result of applying the new lower federal income tax rates to our net deferred tax assets.
The changes included inlosses for the Tax Reform are broadyear-to-date periods ended March 31, 2023 and complex. The final transition impacts ofMarch 31, 2022. For the Tax Reform may differyear-to-date period ended March 31, 2023, 851,000 average restricted stock units, 130,000 average relative total shareholder return awards, and 117,000 average performance unit awards were excluded from the above estimate, due to, among other things, changes in interpretations ofdilutive calculation. For the Tax Reform, any legislative action to address questions that arise because ofyear-to-date period ended March 31, 2022, 753,000 average restricted stock units and 173,000 average relative total shareholder return awards were excluded from the Tax Reform, any changes in accounting standards for income taxes or related interpretations in response to the Tax Reform, or any updates or changes to estimates we have utilized to calculate the transition impacts. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30, 2018.dilutive calculation.
Note 7. Income Taxes
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 40.6% and 36.5%, respectively,rates for the three and sixnine months ended DecemberMarch 31, 2017, impacted by2023 were negative tax rates of (32.3%) and (42.3%), respectively, which were lower than the additional income25.7% combined federal and state statutory tax expenserate primarily due to the Tax Reform.book versus tax treatment of nondeductible goodwill impairment (67.1% negative year-to-date impact), earn-out valuation adjustments (5.9% positive year-to-date impact), and non-deductible merger costs (7.0% negative year-to-date impact). Our effective tax rate was 33.2% and 35.8%, respectively,rates for the three and sixnine months ended DecemberMarch 31, 2016,2022 were negative tax rates of (9.3%) and (3.3%), respectively, which were also lower than the 25.7% combined federal and state statutory tax rate primarily asdue to the domestic manufacturing deduction impacted thebook versus tax rates.treatment of nondeductible goodwill impairment (61.3% negative year-to-date impact) and earn-out valuation adjustments (28.3% positive year-to-date impact).
Note 5.8. Inventories
Inventory components were as follows:
|
| | | | | | | |
(Amounts in Thousands) | December 31, 2017 | | June 30, 2017 |
Finished products | $ | 24,440 |
| | $ | 24,537 |
|
Work-in-process | 1,274 |
| | 1,346 |
|
Raw materials | 26,802 |
| | 25,368 |
|
Total FIFO inventory | 52,516 |
| | 51,251 |
|
LIFO reserve | (13,655 | ) | | (13,189 | ) |
Total inventory | $ | 38,861 |
| | $ | 38,062 |
|
| | | | | | | | | | | |
(Amounts in Thousands) | March 31, 2023 | | June 30, 2022 |
Finished products | $ | 63,272 | | | $ | 66,890 | |
Work-in-process | 1,562 | | | 1,974 | |
Raw materials | 47,887 | | | 52,878 | |
Total FIFO inventory | 112,721 | | | 121,742 | |
LIFO reserve | (23,088) | | | (23,773) | |
Total inventory | $ | 89,633 | | | $ | 97,969 | |
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. LIFO impact including the effect of changes in quantities, price levels, and inventory liquidations during the three and nine-month periods ended March 31, 2023 were income of $0.4 million and $0.7 million, respectively and during the three and nine-month periods ended March 31, 2022 were expense of $1.6 million and $5.3 million, respectively. The earnings impact of LIFO inventory liquidations during the three and six-monthnine-month periods ended DecemberMarch 31, 20172023 were income of $1.4 million and 2016 was immaterial.
Note 6. Accumulated Other Comprehensive Income
During$1.6 million, respectively and during the three monthsand nine-month periods ended DecemberMarch 31, 2017 and 2016, the changes in the balances2022 were income of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:$1.6 million which was more than offset by LIFO expense resulting from inflation.
|
| | | | | | | | | | | | |
Accumulated Other Comprehensive Income | | | | | | |
(Amounts in Thousands) | | Unrealized Investment Gain (Loss) | | Postemployment Benefits Net Actuarial Gain (Loss) | | Accumulated Other Comprehensive Income |
Balance at September 30, 2017 | | $ | (12 | ) | | $ | 1,258 |
| | $ | 1,246 |
|
Other comprehensive income (loss) before reclassifications | | (27 | ) | | 155 |
| | 128 |
|
Reclassification to (earnings) loss | | 2 |
| | (49 | ) | | (47 | ) |
Net current-period other comprehensive income (loss) | | (25 | ) | | 106 |
| | 81 |
|
Balance at December 31, 2017 | | $ | (37 | ) | | $ | 1,364 |
| | $ | 1,327 |
|
| | | | | | |
Balance at September 30, 2016 | | $ | (14 | ) | | $ | 1,371 |
| | $ | 1,357 |
|
Other comprehensive income (loss) before reclassifications | | (5 | ) | | 126 |
| | 121 |
|
Reclassification to (earnings) loss | | — |
| | (87 | ) | | (87 | ) |
Net current-period other comprehensive income (loss) | | (5 | ) | | 39 |
| | 34 |
|
Balance at December 31, 2016 | | $ | (19 | ) | | $ | 1,410 |
| | $ | 1,391 |
|
During the six months ended December 31, 2017 and 2016, 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) | | Accumulated Other Comprehensive Income |
Balance at June 30, 2017 | | $ | (21 | ) | | $ | 1,136 |
| | $ | 1,115 |
|
Other comprehensive income (loss) before reclassifications | | (18 | ) | | 318 |
| | 300 |
|
Reclassification to (earnings) loss | | 2 |
| | (90 | ) | | (88 | ) |
Net current-period other comprehensive income (loss) | | (16 | ) | | 228 |
| | 212 |
|
Balance at December 31, 2017 | | $ | (37 | ) | | $ | 1,364 |
| | $ | 1,327 |
|
| | | | | | |
Balance at June 30, 2016 | | $ | — |
| | $ | 1,311 |
| | $ | 1,311 |
|
Other comprehensive income (loss) before reclassifications | | (19 | ) | | 275 |
| | 256 |
|
Reclassification to (earnings) loss | | — |
| | (176 | ) | | (176 | ) |
Net current-period other comprehensive income (loss) | | (19 | ) | | 99 |
| | 80 |
|
Balance at December 31, 2016 | | $ | (19 | ) | | $ | 1,410 |
| | $ | 1,391 |
|
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 | | Six Months Ended | | Affected Line Item in the Condensed Consolidated Statements of Income |
| December 31, | | December 31, | |
(Amounts in Thousands) | | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | | |
Realized Investment Gain (Loss) on available-for-sale securities (1) | | $ | (3 | ) | | $ | — |
| | (3 | ) | | $ | — |
| | Non-operating income (expense), net |
| | 1 |
| | — |
| | 1 |
| | — |
| | Benefit (Provision) for Income Taxes |
| | (2 | ) | | — |
| | (2 | ) | | — |
| | Net Income |
| | | | | | | | | | |
Postemployment Benefits amortization of actuarial gain (2) | | $ | 43 |
| | $ | 91 |
| | $ | 87 |
| | $ | 183 |
| | Cost of Sales |
| | 23 |
| | 52 |
| | 46 |
| | 105 |
| | Selling and Administrative Expenses |
| | (17 | ) | | (56 | ) | | (43 | ) | | (112 | ) | | Benefit (Provision) for Income Taxes |
| | 49 |
| | 87 |
| | 90 |
| | 176 |
| | Net Income |
| | | | | | | | | | |
Total Reclassifications for the Period | | $ | 47 |
| | $ | 87 |
| | $ | 88 |
| | $ | 176 |
| | Net Income |
Amounts in parentheses indicate reductions to income.
(1) See Note 11 - Investments of Notes to Condensed Consolidated Financial Statements for further information on available-for-sale securities.
Note 7.9. Accumulated Other Comprehensive Income
During the three months ended March 31, 2023 and 2022, 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) | | | | | | | Postemployment Benefits Net Actuarial Gain (Loss) | | Interest Rate Swap Gain (Loss) | | Accumulated Other Comprehensive Income |
Balance at December 31, 2022 | | | | | | | $ | 2,321 | | | $ | 1,956 | | | $ | 4,277 | |
Other comprehensive income (loss) before reclassifications | | | | | | | 116 | | | (108) | | | 8 | |
Reclassification to (earnings) loss | | | | | | | (119) | | | (283) | | | (402) | |
Net current-period other comprehensive income (loss) | | | | | | | (3) | | | (391) | | | (394) | |
Balance at March 31, 2023 | | | | | | | $ | 2,318 | | | $ | 1,565 | | | $ | 3,883 | |
| | | | | | | | | | | |
Balance at December 31, 2021 | | | | | | | $ | 2,197 | | | $ | 174 | | | $ | 2,371 | |
Other comprehensive income (loss) before reclassifications | | | | | | | 185 | | | 998 | | | 1,183 | |
Reclassification to (earnings) loss | | | | | | | (95) | | | 46 | | | (49) | |
Net current-period other comprehensive income (loss) | | | | | | | 90 | | | 1,044 | | | 1,134 | |
Balance at March 31, 2022 | | | | | | | $ | 2,287 | | | $ | 1,218 | | | $ | 3,505 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
During the nine months ended March 31, 2023 and 2022, 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) | | | | | | | Postemployment Benefits Net Actuarial Gain (Loss) | | Interest Rate Swap Gain (Loss) | | Accumulated Other Comprehensive Income |
Balance at June 30, 2022 | | | | | | | $ | 2,291 | | | $ | 1,475 | | | $ | 3,766 | |
Other comprehensive income (loss) before reclassifications | | | | | | | 393 | | | 683 | | | 1,076 | |
Reclassification to (earnings) loss | | | | | | | (366) | | | (593) | | | (959) | |
Net current-period other comprehensive income (loss) | | | | | | | 27 | | | 90 | | | 117 | |
Balance at March 31, 2023 | | | | | | | $ | 2,318 | | | $ | 1,565 | | | $ | 3,883 | |
| | | | | | | | | | | |
Balance at June 30, 2021 | | | | | | | $ | 1,980 | | | $ | — | | | $ | 1,980 | |
Other comprehensive income (loss) before reclassifications | | | | | | | 603 | | | 1,073 | | | 1,676 | |
Reclassification to (earnings) loss | | | | | | | (296) | | | 145 | | | (151) | |
Net current-period other comprehensive income (loss) | | | | | | | 307 | | | 1,218 | | | 1,525 | |
Balance at March 31, 2022 | | | | | | | $ | 2,287 | | | $ | 1,218 | | | $ | 3,505 | |
| | | | | | | | | | | |
The following reclassifications were made from Accumulated Other Comprehensive Income to the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassifications from Accumulated Other Comprehensive Income | | Three Months Ended | | Nine Months Ended | | Affected Line Item in the Condensed Consolidated Statements of Operations |
| March 31 | | March 31 | |
(Amounts in Thousands) | | 2023 | | 2022 | | 2023 | | 2022 | |
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| | | | | | | | | | |
| | | | | | | | | | |
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Postemployment Benefits Amortization of Actuarial Gain | | $ | 161 | | | $ | 129 | | | $ | 493 | | | $ | 399 | | | Non-operating income (expense), net |
| | (42) | | | (34) | | | (127) | | | (103) | | | Benefit (Provision) for Income Taxes |
| | $ | 119 | | | $ | 95 | | | $ | 366 | | | $ | 296 | | | Net Income (Loss) |
| | | | | | | | | | |
Interest Rate Swap Gain (Loss) | | $ | 381 | | | $ | (62) | | | $ | 798 | | | $ | (195) | | | Interest expense |
| | (98) | | | 16 | | | (205) | | | 50 | | | Benefit (Provision) for Income Taxes |
| | $ | 283 | | | $ | (46) | | | $ | 593 | | | $ | (145) | | | Net Income (Loss) |
| | | | | | | | | | |
Total Reclassifications for the Period | | $ | 402 | | | $ | 49 | | | $ | 959 | | | $ | 151 | | | Net Income (Loss) |
Amounts in parentheses indicate reductions to income.
Note 10. Long-Term Debt and Revolving Credit Facility
Short-term borrowings and long-term debt consisted of the following obligations: | | | | | | | | | | | |
(Amounts in Thousands) | March 31, 2023 | | June 30, 2022 |
Long-term debt under revolving credit facility due December 2025; 6.33% variable interest rate at March 31, 2023 | $ | 50,000 | | | $ | 68,000 | |
| | | |
Other debt matured August 2022; 9.25% fixed interest rate | — | | | 79 | |
| | | |
Total Debt | $ | 50,000 | | | $ | 68,079 | |
| | | |
| | | |
As of March 31, 2023 we had a $125.0 million revolving credit facility with a maturity date of December 2025 that allowed for both issuances of letters of credit and cash borrowings. We also have an option to request an increase of the amount available for borrowing to $200.0 million, subject to participating banks’ consent. The revolving loans under the Credit Agreement could consist of, at our election, advances in U.S. dollars or advances in any other currency that was agreed to by the lenders. The proceeds of the loans are to be used for general corporate purposes including acquisitions. A portion of the revolving credit facility, not to exceed $10.0 million of the principal amount, was available for the issuance of letters of credit. At March 31, 2023, we had $1.8 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. Total availability to borrow under the revolving credit facility was $73.2 million at March 31, 2023. The commitment fee on the unused portion of principal amount of the revolving credit facility is payable at a rate that ranges from 20 to 30 basis points per annum as determined by our ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
During the second quarter of fiscal year 2023, we entered into a Third Amendment to Amended and Restated Credit Agreement which provides, among other items, amendments to the Credit Agreement to extend the maturity date of the Credit Facility from October 24, 2024 to December 21, 2025, and establish SOFR (“Secured Overnight Financial Rate”) as a pricing benchmark for dollar borrowings in replacement of LIBOR.
We were in compliance with all debt covenants of the revolving credit facility during the nine-month period ended March 31, 2023.
We have an interest rate swap agreement with a bank with a notional value of $40.0 million. The interest rate swap became effective in July 2021 and is accounted for using hedge accounting. See Note 14 - Derivative Instruments of Notes to Condensed Consolidated Statements of Operations for information regarding modification of our swap agreement which occurred during January 2023. 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 DecemberMarch 31, 2017,2023, we had a maximum financial exposure from unused standby letters of credit totaling $1.2$1.8 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 one performance bond totaling $0.5 million as of December 31, 2017.
We are not aware of circumstances that would require us to perform under these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our consolidated financial statements.Condensed Consolidated Financial Statements. Accordingly, no liability has been recorded as of DecemberMarch 31, 20172023 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. The product warranty liability is included on the Accrued Expenses and Other lines of our Condensed Consolidated Balance Sheets.
Changes in the product warranty accrual for the sixnine months ended DecemberMarch 31, 20172023 and 20162022 were as follows: | | | | | | | | | | | |
| Nine Months Ended |
| March 31 |
(Amounts in Thousands) | 2023 | | 2022 |
Product Warranty Liability at the beginning of the period | $ | 2,530 | | | $ | 2,861 | |
Additions to warranty accrual (including changes in estimates) | 4,284 | | | 882 | |
Settlements made (in cash or in kind) | (3,186) | | | (1,510) | |
Product Warranty Liability at the end of the period | $ | 3,628 | | | $ | 2,233 | |
|
| | | | | | | |
| Six Months Ended |
| December 31 |
(Amounts in Thousands) | 2017 | | 2016 |
Product Warranty Liability at the beginning of the period | $ | 1,992 |
| | $ | 2,351 |
|
Additions to warranty accrual (including changes in estimates) | 839 |
| | 294 |
|
Settlements made (in cash or in kind) | (478 | ) | | (628 | ) |
Product Warranty Liability at the end of the period | $ | 2,353 |
| | $ | 2,017 |
|
Other Contingency:
The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting.
In March 2016, in connection with a renewal of one of our contracts, we became aware of noncompliance and inaccuracies in our General Services Administration (“GSA”) subcontractor reporting. Accordingly, we retained outside legal counsel to assist in conducting an internal review of our reporting practices, and we self-reported the matter and the results of the internal review to the GSA. We have promptly responded to inquiries from the GSA since our initial reporting, have met with government officials as requested on two occasions, and intend to cooperate fully with any further inquiries or investigations. While we are not able to reasonably estimate the future financial impact, if any, of the possible sanctions at this time, any of them could, if imposed, have a material adverse impact on our business, future financial position, results of operations, or cash flows. The timing of the government’s review and determination of any outcome of these matters is uncertain. We have incurred, and will continue to incur, legal and related costs in connection with our internal review and the government’s response to this matter. During the first six months of fiscal year 2018, sales related to our GSA contracts were approximately 8.8% of our consolidated sales, with one contract accounting for approximately 6.0% of our consolidated sales and the other contract accounting for approximately 2.8% of our consolidated sales.
Note 8. Restructuring
During the three months ended September 30, 2016, we completed our capacity utilization restructuring plan which included the consolidation of our metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and the reduction of our Company plane fleet from two jets to one. We recognized a pre-tax restructuring gain of $1.8 million in the three months ended September 30, 2016 which included a gain on the sale of the Post Falls facility. During the three and six months ended December 31, 2017, and the three months ended December 31, 2016, we recognized no restructuring expense as the restructuring plan was complete. Restructuring activity is included in the Restructuring Gain line item on our Condensed Consolidated Statements of Income.
Note 9. Assets Held for Sale
At December 31, 2017, land located in Jasper, Indiana totaling less than $0.1 million was classified as held for sale. At June 30, 2017, our fleet of over-the-road tractors and trailers which had been outsourced and a small parcel of land located in Jasper, Indiana totaling $4.2 million were classified as held for sale. During the first quarter of fiscal year 2018, we sold substantially all of our over-the-road tractors and trailers and the small parcel of land and recognized a pre-tax gain of $0.4 million as the $4.6 million selling price exceeded the book value net of selling costs. During the second quarter of fiscal year 2018, we sold the remainder of our over-the-road tractors and trailers for proceeds of $0.1 million which approximated net book value.
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 levelLevel 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 levelLevel 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 no transfers between these levels during the sixnine months ended DecemberMarch 31, 2017. 2023 and 2022.
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, 2017.
We hold a total investment of $2.0 million in a privately-held company, consisting of $0.5 million in non-marketable equity securities and $1.5 million in stock warrants. The investment in non-marketable equity securities is classified as a level 3 financial asset and is accounted for using the cost method, 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 11 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the investment in non-marketable equity securities, and Note 12 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information regarding the investment in stock warrants.2022.In connection with the acquisition of D’style,Poppin, we valued long-livedentered into an earn-out arrangement with remaining contingent payments up to $45.0 million based on revenue and intangible assets at their estimated fair values at the acquisition date. The fair value estimates were based upon assumptions relatedprofitability milestones achieved through June 30, 2024. We do not currently expect to the future cash flows and discount rates utilizing currently available information, and in some cases, valuation results from independent valuation specialists (Level 3 determinationhave any earn-out payments under this arrangement, therefore our contingent earn-out liability as of fair value). Subsequent to the acquisition, we determineMarch 31, 2023 was zero. As of June 30, 2022 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 suchthe contingent earn-out liability was $3.2 million. The liability is carried at fair value estimates are lower than the carrying valuesand is classified in Level 3 of the assets.fair value hierarchy and is included in Other long-term liabilities line on our Condensed Consolidated Balance Sheet. During the three and nine months ended March 31, 2023, the recurring revaluation to fair value resulted in a gain of $0.0 million and $3.2 million, respectively. During the three and nine months ended March 31, 2022, the recurring revaluation to fair value resulted in a loss of $2.2 million and a gain of $15.8 million, respectively.
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 |
| | | | |
| | | | |
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: Government agency securities | | 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. 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. The value of the stock warrants fluctuates primarily in relation to the value of the privately-held company's underlying securities. |
Derivative Asset: Interest Rate Swap | | 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 DecemberMarch 31, 20172023 and June 30, 2017,2022, 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, 2023 |
(Amounts in Thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: Money market funds | $ | 15,846 | | | $ | — | | | $ | — | | | $ | 15,846 | |
| | | | | | | |
Derivatives: Interest rate swap contract | — | | | 2,108 | | | — | | | 2,108 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Trading Securities: Mutual funds in nonqualified SERP | 10,848 | | | — | | | — | | | 10,848 | |
Derivatives: Stock warrants | — | | | — | | | 1,500 | | | 1,500 | |
Total assets at fair value | $ | 26,694 | | | $ | 2,108 | | | $ | 1,500 | | | $ | 30,302 | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
| June 30, 2022 |
(Amounts in Thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: Money market funds | $ | 5,508 | | | $ | — | | | $ | — | | | $ | 5,508 | |
| | | | | | | |
Derivatives: Interest rate swap contract | — | | | 1,986 | | | — | | | 1,986 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Trading Securities: Mutual funds in nonqualified SERP | 10,517 | | | — | | | — | | | 10,517 | |
Derivatives: Stock warrants | — | | | — | | | 1,500 | | | 1,500 | |
Total assets at fair value | $ | 16,025 | | | $ | 1,986 | | | $ | 1,500 | | | $ | 19,511 | |
Liabilities | | | | | | | |
| | | | | | | |
Contingent earn-out liability | — | | | — | | | 3,160 | | | 3,160 | |
Total liabilities at fair value | $ | — | | | $ | — | | | $ | 3,160 | | | $ | 3,160 | |
|
| | | | | | | | | | | | | | | |
(Amounts in Thousands) | December 31, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: Money market funds | $ | 7,032 |
| | $ | — |
| | $ | — |
| | $ | 7,032 |
|
Cash equivalents: Commercial paper | — |
| | 21,468 |
| | — |
| | 21,468 |
|
Available-for-sale securities: Secondary market certificates of deposit | — |
| | 11,752 |
| | — |
| | 11,752 |
|
Available-for-sale securities: Municipal bonds | — |
| | 22,775 |
| | — |
| | 22,775 |
|
Available-for-sale securities: Government agencies | — |
| | 3,193 |
| | — |
| | 3,193 |
|
Trading Securities: Mutual funds in nonqualified SERP | 12,428 |
| | — |
| | — |
| | 12,428 |
|
Derivatives: Stock warrants | — |
| | — |
| | 1,500 |
| | 1,500 |
|
Total assets at fair value | $ | 19,460 |
| | $ | 59,188 |
| | $ | 1,500 |
| | $ | 80,148 |
|
Liabilities | |
| | |
| | |
| | |
|
Contingent earn-out liability | $ | — |
| | $ | — |
| | $ | 1,680 |
| | $ | 1,680 |
|
Total liabilities at fair value | $ | — |
| | $ | — |
| | $ | 1,680 |
| | $ | 1,680 |
|
| |
| | |
| | |
| | |
|
(Amounts in Thousands) | June 30, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: Money market funds | $ | 30,383 |
| | $ | — |
| | $ | — |
| | $ | 30,383 |
|
Cash equivalents: Commercial paper | — |
| | 29,102 |
| | — |
| | 29,102 |
|
Available-for-sale securities: Secondary market certificates of deposit | — |
| | 10,336 |
| | — |
| | 10,336 |
|
Available-for-sale securities: Municipal bonds | — |
| | 22,154 |
| | — |
| | 22,154 |
|
Available-for-sale securities: Government agencies | — |
| | 3,193 |
| | — |
| | 3,193 |
|
Trading Securities: Mutual funds in nonqualified SERP | 11,194 |
| | — |
| | — |
| | 11,194 |
|
Derivatives: Stock warrants | — |
| | — |
| | 1,500 |
| | 1,500 |
|
Total assets at fair value | $ | 41,577 |
| | $ | 64,785 |
| | $ | 1,500 |
| | $ | 107,862 |
|
Non-Recurring Fair Value Measurements: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 investmentCertain assets are offset bymeasured at fair value on a SERP liability which representsnon-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 Right of Use Lease Assets and Related Asset Groups | | 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. |
Impairment of Goodwill | | 3 | | Income - Based on a valuation model that determines fair value based on estimated discounted future cash flows of each reporting unit, requiring the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, future market conditions and discount rates that capture the risk associated with future cash flows. |
During the year-to-date periods of fiscal year 2023 and 2022, we recorded $0.3 million and $0.7 million, respectively, of right-of-use asset and associated leasehold improvement impairment resulting from our obligation to distribute SERP funds to participants. See Note 11 - Investmentstransformation restructuring plan. The impairment loss is included as a component of Notes to the Restructuring Expense line item on our Condensed Consolidated Financial Statements for further information regardingof Operations. The asset groups used to calculate impairment included the SERP.right-of-use lease assets, leasehold improvements, and lease liabilities.
During the year-to-date periods of fiscal years 2023 and 2022, we recorded $36.7 million and $34.1 million, respectively, of goodwill impairment related to our Poppin business. No goodwill remains on the Poppin reporting unit.
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 riskrisk. |
Non-marketable equityEquity securities (cost-method investments, which carry shares at cost exceptwithout readily determinable fair value | | 3 | | Cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the eventidentical or a similar investment of impairment) | | 3 | | Cost Method, withthe same issuer. Impairment Recognized Using a Market-Based Valuation Technique - See the explanation below the table regarding the method used to periodically estimate the fair value of cost-method investments.is assessed qualitatively. |
Long-term debt (carried at amortized cost) | | 3 | | Income - Price estimated using a discounted cash flow analysis based on quoted long-term debt market rates, taking into account Kimball International’s non-performance risk |
The investment in non-marketable equity securities is accounted for using the cost method because we do not have the ability to exercise significant influence over the operating and financial policies of the investee. On a periodic basis, but no less frequently than quarterly, these investments are 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 cost-method investment exceeds its fair value would be recorded as an impairment loss.
The carrying value of our cash deposit accounts, trade accounts receivable, trade accounts payable, customer deposits, and dividends payable approximates fair value due to thetheir relatively short maturity and immaterial non-performance risk.
Note 11. Investments
Investment Portfolio:
Our investment portfolio as of December 31, 2017 and June 30, 2017 was comprised of municipal bonds, certificates of deposit purchased in the secondary market, and government agency securities. Municipal bonds include general obligation bonds and revenue bonds, some of which are pre-refunded. Government agency securities represent callable debt securities of a U.S. government sponsored agency. Our investment policy dictates that municipal bonds and government 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 Based upon variable interest rates currently 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, 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):
|
| | | | | | | | | | | |
| December 31, 2017 |
(Amounts in Thousands) | Certificates of Deposit | | Municipal Bonds | | Government Agency Securities |
Within one year | $ | 8,499 |
| | $ | 20,366 |
| | $ | 1,996 |
|
After one year through two years | 3,253 |
| | 2,409 |
| | 1,197 |
|
Total Fair Value | $ | 11,752 |
| | $ | 22,775 |
| | $ | 3,193 |
|
All investments are classified as available-for-sale securities which are recorded at fair value. See Note 10 - Fair Value of Notes to Condensed Consolidated Financial Statements for more information onCompany, the fair value of available-for-sale securities. Theour debt approximates the carrying value.
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 Share Owners’ Equity.
|
| | | | | | | | | | | |
| December 31, 2017 |
(Amounts in Thousands) | Certificates of Deposit | | Municipal Bonds | | Government Agency Securities |
Amortized cost basis | $ | 11,752 |
| | $ | 22,829 |
| | $ | 3,200 |
|
Unrealized holding gains | — |
| | — |
| | — |
|
Unrealized holding losses | — |
| | (54 | ) | | (7 | ) |
Fair Value | $ | 11,752 |
| | $ | 22,775 |
| | $ | 3,193 |
|
| | | | | |
| June 30, 2017 |
(Amounts in Thousands) | Certificates of Deposit | | Municipal Bonds | | Government Agency Securities |
Amortized cost basis | $ | 10,334 |
| | $ | 22,183 |
| | $ | 3,200 |
|
Unrealized holding gains | 2 |
| | — |
| | — |
|
Unrealized holding losses | — |
| | (29 | ) | | (7 | ) |
Fair Value | $ | 10,336 |
| | $ | 22,154 |
| | $ | 3,193 |
|
An immaterial amount of investments were in a continuous unrealized loss position as of December 31, 2017. Realized gains and losses as a result of sales in the three and six months ended December 31, 2017 and December 31, 2016 were also immaterial.Note 13. Investments
Supplemental Employee Retirement Plan Investments:
We maintain a self-directed supplemental employee retirement plan (“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) category.section of the Condensed Consolidated Statements of Operations. 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) for the sixnine months ended DecemberMarch 31, 20172023 and 20162022 were, in thousands, $486millions, $0.4 and $99,$(1.3), respectively.
SERP asset and liability balances were as follows: | | | | | | | | | | | |
(Amounts in Thousands) | March 31, 2023 | | June 30, 2022 |
SERP investments - current asset | $ | 3,244 | | | $ | 3,284 | |
SERP investments - other long-term asset | 7,604 | | | 7,233 | |
Total SERP investments | $ | 10,848 | | | $ | 10,517 | |
| | | |
SERP obligation - current liability | $ | 3,244 | | | $ | 3,284 | |
SERP obligation - other long-term liability | 7,604 | | | 7,233 | |
Total SERP obligation | $ | 10,848 | | | $ | 10,517 | |
Equity securities without readily determinable fair value: |
| | | | | | | |
(Amounts in Thousands) | December 31, 2017 | | June 30, 2017 |
SERP investments - current asset | $ | 2,822 |
| | $ | 1,259 |
|
SERP investments - other long-term asset | 9,606 |
| | 9,935 |
|
Total SERP investments | $ | 12,428 |
| | $ | 11,194 |
|
| | | |
SERP obligation - current liability | $ | 2,822 |
| | $ | 1,259 |
|
SERP obligation - other long-term liability | 9,606 |
| | 9,935 |
|
Total SERP obligation | $ | 12,428 |
| | $ | 11,194 |
|
Non-marketable equity securities:
We hold a total investment of $2.0 million in a privately-held company, including $0.5 million in non-marketable equity securities.securities without readily determinable fair value. The investment in non-marketable 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 of 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. Derivative Instruments
Stock Warrants:
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 December 31, 2017, the change in fair value of the stock warrants was not significant. See Note 10 - Fair Value of Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities.Note 13. 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 | | Six Months Ended |
| December 31 | | December 31 |
(Amounts in Thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 131 |
| | $ | 113 |
| | $ | 266 |
| | $ | 232 |
|
Interest cost | 21 |
| | 14 |
| | 42 |
| | 29 |
|
Amortization of actuarial income | (66 | ) | | (143 | ) | | (133 | ) | | (288 | ) |
Net periodic benefit cost (income) | $ | 86 |
| | $ | (16 | ) | | $ | 175 |
| | $ | (27 | ) |
The benefit cost (income) in the above table includes only normal recurring levels of severance activity, as estimated using an actuarial method. Unusual or non-recurring severance actions are not estimable using actuarial methods and are expensed in accordance with the applicable U.S. GAAP.
Note 14. Stock Compensation Plan
Stock-based compensation expense during the quarter and year-to-date period ended December 31, 2017, was $1.0 million and $2.5 million, respectively, and during the quarter and year-to-date period ended December 31, 2016, was $1.5 million and $3.3 million, respectively. The total income tax benefit for stock compensation arrangements during the quarter and year-to-date period ended December 31, 2017, was $0.3 million and $1.4 million, respectively, and during the quarter and year-to-date period ended December 31, 2016, was $0.6 million and $1.3 million, respectively. The first quarter of fiscal year 2018 included $0.6 million of excess tax benefits from stock awards vesting.
During fiscal year 2018, the following stock compensation was awarded to officers and other key employees and to members of the Board of Directors who are not employees. Awards granted through October were under the Amended and Restated 2003 Stock Option and Incentive Plan, while awards granted during November were under the 2017 Stock Incentive Plan, which was approved by share owners at the October 31, 2017 annual share owners meeting. For more information on stock compensation awards, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
|
| | | | | | | | | |
Type of Award | | Quarter Awarded | | Shares or Units | | Grant Date Fair Value (5) |
Annual Performance Shares (1) | | 1st Quarter | | 55,839 |
| |
| $16.52 |
|
Annual Performance Shares (1) | | 2nd Quarter | | 4,830 |
| | $17.63 - $19.73 |
|
Relative Total Shareholder Return Awards (2) | | 1st Quarter | | 26,167 |
| |
| $21.21 |
|
Restricted Share Units (3) | | 1st Quarter | | 51,211 |
| |
| $16.76 |
|
Restricted Share Units (3) | | 2nd Quarter | | 7,005 |
| | $17.91 - $18.11 |
|
Unrestricted Shares (4) | | 1st Quarter | | 10,055 |
| |
| $16.97 |
|
Unrestricted Shares (4) | | 2nd Quarter | | 9,237 |
| | $19.29 - $20.72 |
|
(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 equity during fiscal year 2018, 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 121,338. Annual performance shares vest on June 30, 2018.(2) Performance units were awarded to key officers under the Company’s Relative Total Shareholder Return program. Vesting occurs at June 30, 2020. 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 52,334.
(3) Restricted share units were awarded to officers and key employees. Vesting occurs at June 30, 2018 and June 30, 2020. Upon vesting, the outstanding number of restricted share units and the value of dividends accumulated over the vesting period are converted to shares of common stock.
(4) Unrestricted shares were awarded to non-employee members of the Board of Directors 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 is 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. 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 share units and unrestricted shares was based on the stock price at the date of the award.
Note 15. 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 non-marketable equity securities and stock warrants, and notes receivable related to independent dealership financing.
The non-marketable equity securities and stock warrants were valued at $0.5 million and $1.5 million, respectively, at both December 31, 2017 and June 30, 2017 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 10 - Fair Value of Notes to Condensed Consolidated Financial Statements.The carrying value of the notes receivable for independent dealership financing were $0.7 million and $0.4 million as of December 31, 2017 and June 30, 2017, respectively, and were included on the Receivables and Other Assets line of our Condensed Consolidated Balance Sheets.
We have no 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 December 31, 2017.
Note 16. 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 December 31, 2017 and June 30, 2017, we had no material past due outstanding notes receivable.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2017 | | As of June 30, 2017 |
(Amounts in Thousands) | Unpaid Balance | | Related Allowance | | Receivable Net of Allowance | | Unpaid Balance | | Related Allowance | | Receivable Net of Allowance |
Independent Dealership Financing | $ | 671 |
| | $ | — |
| | $ | 671 |
| | $ | 433 |
| | $ | — |
| | $ | 433 |
|
Other Notes Receivable | 132 |
| | 126 |
| | 6 |
| | 138 |
| | 126 |
| | 12 |
|
Total | $ | 803 |
| | $ | 126 |
| | $ | 677 |
| | $ | 571 |
| | $ | 126 |
| | $ | 445 |
|
Note 17. Earnings Per Share14. Derivative Instruments
BasicInterest Rate Swap:
We are subject to interest rate risk related to the revolving credit facility and we historically have entered into interest rate swap agreements to manage this exposure. During the third quarter of fiscal year 2023, we modified our interest rate swap agreement from a LIBOR benchmark interest rate to a SOFR benchmark interest rate to align with the rate in our Third Amendment to Amended and Restated Credit Agreement that we entered into during December 2022. The interest rate swap agreements are designated as cash flow hedges that qualify for hedge accounting under the hypothetical derivative method. Fair value adjustments are recorded as a component of Accumulated Other Comprehensive Income (“AOCI”), net of tax in the Condensed Consolidated Balance Sheets. Balances in AOCI are reclassified into earnings when transactions related to the underlying risk are settled. As of March 31, 2023 we held an interest rate swap with a notional value totaling $40.0 million and a weighted average SOFR fixed rate of 0.901%.
At March 31, 2023, our interest rate swap was recorded at fair value in current assets and non-current assets at $1.4 million and $0.7 million, respectively. At June 30, 2022, our interest rate swap was recorded in current assets and non-current assets at $0.9 million and $1.1 million, respectively.
The pre-tax balance of interest rate swap gains in AOCI as of March 31, 2023 was $2.1 million. See Note 9 - Accumulated Other Comprehensive Income of Notes to Condensed Consolidated Financial Statements for information regarding activity recorded as a component of AOCI during the three and nine months ended March 31, 2023. As of March 31, 2023, we have $1.4 million of interest rate swap gains recorded in AOCI which are expected to be reclassified into earnings within the next twelve months.
Stock Warrants:
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, 2023, the change in fair value of the stock warrants was not significant. See Note 12 - Fair Value of Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities. Note 15. Stock Compensation
Stock-based compensation expense during the quarter and year-to-date periods ended March 31, 2023, was $1.2 million and $3.7 million, respectively, and during the quarter and year-to-date periods ended March 31, 2022, was $1.1 million and $3.7 million, respectively. The total income tax benefit for stock compensation arrangements during the quarter and year-to-date periods ended
March 31, 2023, was $0.3 million and $0.8 million, respectively, and during the quarter and year-to-date periods ended March 31, 2022, was $0.3 million and $0.9 million, respectively.
During fiscal year 2023, 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, 2022. | | | | | | | | | | | | | | | | | | | | | | | | | | |
Type of Award | | Quarter Awarded | | Targeted Shares or Units | | Grant Date Fair Value (4) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Performance Units (1) | | 1st Quarter | | 152,034 | | | $7.33 |
Performance Units (1) | | 2nd Quarter | | 6,160 | | | $6.52 |
Restricted Stock Units (2) | | 1st Quarter | | 379,087 | | | $7.83 |
Restricted Stock Units (2) | | 2nd Quarter | | 10,415 | | | $6.59 | - | $7.39 |
| | | | | | | | |
Unrestricted Shares (3) | | 1st Quarter | | 21,318 | | | $7.77 |
Unrestricted Shares (3) | | 2nd Quarter | | 17,940 | | | $7.41 |
Unrestricted Shares (3) | | 3rd Quarter | | 17,238 | | | $7.56 |
| | | | | | | | |
(1) Performance units were awarded to key officers. Vesting occurs at June 30, 2025. Participants will earn from 0% to 200% of the target award depending upon the compound annual growth rate of Kimball International’s adjusted earnings per share at the end of the performance period. The maximum number of units that can be issued under these awards is 316,388.
(2) Restricted stock units were awarded to officers and key employees. Vesting occurs at June 30, 2023 and June 30, 2025. Upon vesting, the outstanding number of restricted stock units and the value of dividends accumulated over the vesting period are converted to shares of common stock.
(3) Unrestricted shares were awarded to non-employee members of the Board of Directors as consideration for service to Kimball International and do not have vesting periods, holding periods, restrictions on sale, or other restrictions.
(4) The grant date fair value of the performance units was based on the weighted averagestock 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 performance units. The grant date fair value of the restricted stock units and unrestricted shares was based on the stock price at the date of the award.
Note 16. Planned Merger
On March 7, 2023, Kimball entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Kimball, HNI Corporation, an Iowa corporation (“HNI”), and Ozark Merger Sub, Inc., an Indiana corporation and a wholly-owned subsidiary of HNI (“Merger Sub”). The Merger Agreement provides that, among other things and subject to the terms and conditions of the Merger Agreement, (a) Merger Sub will be merged with and into Kimball (the “Merger”), with Kimball surviving the Merger as a wholly-owned subsidiary of HNI, and (b) at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.05 per share, of Kimball (“Kimball Common Stock”) outstanding immediately prior to the Effective Time, other than shares exercising dissenters’ rights, shares held by Kimball as treasury stock, shares held by HNI or any subsidiary of Kimball or HNI, and restricted stock units with respect to shares of Kimball Common Stock, will be converted into the right to receive (i) $9.00 in cash (the “Cash Consideration”) and (ii) 0.1301 shares of common stock of HNI, par value $1.00 per share (“HNI Common Stock”) (together with the Cash Consideration, the “Merger Consideration”).\
The Merger Agreement provides that outstanding Kimball equity awards will be treated as follows at the effective time of the Merger: (a) each outstanding award of Kimball restricted stock units that is not subject to performance vesting conditions will cease to represent an award with respect to Kimball Common Stock and thereafter constitute a restricted stock unit award, on the same terms and conditions (including vesting and forfeiture, but subject to accelerated vesting upon termination of employment without cause), with respect to a number of shares of HNI Common Stock, determined by multiplying (i) each share of Kimball Common Stock subject to such Kimball restricted stock unit award by (ii) the sum of (A) 0.1301 (the “Exchange Ratio”) and (B) the quotient of the sum of the Cash Consideration plus the dividend equivalents accrued thereon, divided by the volume weighted average price per share of HNI Common Stock on the New York Stock Exchange for the ten consecutive trading days ending the two trading days prior to the closing of the Merger as reported by Bloomberg, L.P. (such price, the “Parent Share Price”); and (b) with respect to each outstanding duringaward of Kimball restricted stock units subject to performance-based vesting, (i) if such vesting is based on relative total shareholder return, the period. Dilutedaward will vest at a pro rata portion of the target amount based on the portion of the performance cycle then completed, and (ii) if such vesting is based on earnings per share, are basedthe award will vest at the target
amount, and, in each such case of performance-based vesting restricted stock units, the full award will automatically be cancelled and converted into the right to receive from HNI (shortly following the effective time of the Merger), in respect of each share of Kimball Common Stock subject to the vested portion of such cancelled award, an amount of cash (without any interest thereon and subject to applicable withholding taxes), equal to the sum of (i) the Cash Consideration, plus (ii) the Parent Share Price multiplied by the Exchange Ratio. However, if the Effective Time occurs prior to June 30, 2023, the tranche of each award of Kimball restricted stock units that is not subject to performance vesting conditions and that is scheduled to vest on June 30, 2023 will, at the weighted average numberEffective Time, vest and be cancelled and converted into the right to receive from HNI (shortly following the Effective Time), in respect of shares outstandingeach share of Kimball Common Stock subject to such vesting tranche, an amount of cash (without any interest thereon and subject to applicable withholding taxes) equal to the sum of (A) the Cash Consideration plus the assumed issuance of common shares for all potentially dilutive securities.dividend equivalents that have accrued thereon, and (B) the Parent Share Price multiplied by the Exchange Ratio.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31 | | December 31 |
(Amounts in Thousands, Except for Per Share Data) | 2017 | | 2016 | | 2017 | | 2016 |
Net Income | $ | 7,378 |
| | $ | 8,717 |
| | $ | 18,335 |
| | $ | 19,715 |
|
| | | | | | | |
Average Shares Outstanding for Basic EPS Calculation | 37,476 |
| | 37,234 |
| | 37,452 |
| | 37,421 |
|
Dilutive Effect of Average Outstanding Compensation Awards | 260 |
| | 371 |
| | 323 |
| | 496 |
|
Average Shares Outstanding for Diluted EPS Calculation | 37,736 |
| | 37,605 |
| | 37,775 |
| | 37,917 |
|
| | | | | | | |
Basic Earnings Per Share | $ | 0.20 |
| | $ | 0.23 |
| | $ | 0.49 |
| | $ | 0.53 |
|
Diluted Earnings Per Share | $ | 0.20 |
| | $ | 0.23 |
| | $ | 0.49 |
| | $ | 0.52 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Kimball International Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) creates design driven, innovativeis a leading omnichannel commercial furnishings sold throughcompany with deep expertise in the Workplace, Health, and Hospitality markets. We combine our bold entrepreneurial spirit, a history of craftsmanship and today’s design-driven thinking alongside a commitment to our culture of caring and lasting connections with our customers, shareholders, employees, and communities. For over 70 years, our brands have seized opportunities to customize solutions into personalized experiences, turning ordinary spaces into meaningful places. Our family of brands:brands includes Kimball, National, Etc., Interwoven, Poppin, Kimball Hospitality, and Kimball Hospitality. Our diverse portfolio offers solutions for the workplace, learning, healing, and hospitality environments. Dedicated to our Guiding Principles, our values and integrity are evidenced by public recognition as a highly trusted company and an employer of choice. “We Build Success” by establishing long-term relationships with customers, employees, suppliers, share owners 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 November 2017 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 4.6% for calendar year 2018. The forecast for two of the leading indicators for the hospitality furniture market (January 2018 PwC Hospitality Directions U.S. report) for calendar year 2018 includes a projected increase in RevPAR (Revenue Per Available Room) of 2.7% and a slight increase in occupancy levels which continue to hover near peak levels.
D’style.
Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
| |
• | On November 6, 2017, we successfully completed the acquisition of privately-held D’style, Inc., which has administrative and sales offices in Chula Vista, California and has a manufacturing location in Tijuana, Mexico. The acquisition expands our hospitality offerings to public spaces beyond guest rooms and provides new mixed material manufacturing capabilities. D’style was purchased for $20.0 million, inclusive of a $2.2 million contingent earn-out. The purchase price is subject to certain post-closing working capital adjustments. See Note 3 - Acquisition of Notes to Condensed Consolidated Financial Statements for additional information regarding income taxes. |
Our•On March 8, 2023 we jointly announced the acquisition of Kimball International, Inc. by HNI Corporation. The transaction is expected to close by mid-calendar year 2023, subject to the approval of Company shareholders and the satisfaction of other customary closing conditions.
•Operating Environment - While we are mindful of the challenging macroeconomic environment and heightened recessionary risks, through our focused set of strategic choices we are successfully delivering in-demand products and solutions to end markets and geographies with higher growth, resiliency and favorable return-to-office dynamics.
•Goodwill Impairment - During our second quarter ended December 31, 2022, we recorded goodwill impairment of $36.7 million as the carrying value of Poppin exceeded its fair value as of the October 31, 2022 testing date. No goodwill remains on the Poppin goodwill reporting unit.
•Transformation Restructuring Plan - Current year actions under our transformation restructuring plan are focused on activities such as the streamlining of manufacturing facilities, the consolidation of showrooms, and the closure of our manufacturing facility in Tijuana, Mexico which was completed during the first quarter of fiscal year 2018 results of operations included the impact2023. This phase of the enactmenttransformation restructuring plan began in the first quarter of the Tax Cuts and Jobs Act (“Tax Reform”), which was signed into law on December 22, 2017. The Tax Reform reduced federal corporate income tax rates and changed numerous other provisions. As we have a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ending June 30, 2018,2021, and 21% for subsequent fiscal years. The quarter and six months ended December 31, 2017 included approximately $1.6 million year-to-date in reduced income tax expense to reflect federal taxes at the lower blended effective tax rate. The benefitswe expect a substantial majority of the lower rate were more than offset by a one-time discrete $2.0 million unfavorable impact as a result of applying the new lower federal income tax ratesrestructuring actions to our net deferred tax assets. The changes included in the Tax Reform are broad and complex. The final transition impacts of the Tax Reform may differ from the above estimate, due to, among other things, changes in interpretations of the Tax Reform, any legislative action to address questions that arise because of the Tax Reform, any changes in accounting standards for income taxes or related interpretations in response to the Tax Reform, or any updates or changes to estimates we have utilized to calculate the transition impacts. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustmentsbe completed by the end of our current fiscal year ending June 30, 2018. We expect2023. In addition to the lower statutory tax ratesavings already generated from the first phase of the transformation restructuring plan, the efforts of this second phase of the transformation restructuring plan are expected to generate significantly lower tax expenseannualized pre-tax savings of approximately $20.0 million when it is fully implemented. See Note 3 - Restructuring of Notes to Condensed Consolidated Financial Statements in future periods which will be partially offset by the lossItem 1 of certain credits and loss of the deductibility of certain expenses.this Form 10-Q for additional information. During the latter portion of our fiscal year 2017 we sold a facility in Indiana which housed the education center for dealer and employee training, a research and development center, and a product showroom for proceeds of $3.8 million. We were leasing a portion of the facility back to facilitate the short-term transition of those functions to other existing Indiana locations. The sale of the facility did not qualify for sale-leaseback accounting during fiscal year 2017, and thus the $1.7 million pre-tax gain on the sale was not recognized in selling and administrative expenses until our second quarter of fiscal year 2018.
The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting. In March 2016, in connection with a renewal of one of our two contracts with the General Services Administration (“GSA”), we became aware of noncompliance and inaccuracies in our GSA subcontractor reporting. Accordingly, we retained outside legal counsel to assist in conducting an internal review of our reporting practices, and we self-reported the matter and the results of the internal review to the GSA. We have promptly responded to inquiries from the GSA since our initial reporting, have met with government officials as requested on two occasions, and intend to cooperate fully with any further inquiries or investigations. We cannot reasonably predict the outcome of a government investigation at this time. During the first six months of fiscal year 2018, sales related to our GSA contracts were approximately 8.8% of our consolidated sales, with one contract accounting for approximately 6.0% of our consolidated sales and the other contract accounting for approximately 2.8% of our consolidated sales.
•Due to the contract and project nature of furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business, which in turn impactimpacts 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.
The impact of higher commodity prices is expected to intensify as pricing pressure from our vendors increases. We continue to focus on continuous improvement initiatives to help offset these cost increases.
Despite a moderate economic outlook, uncertainty of the long-term impact of tax reform, trade agreements, tariffs, and the healthcare market could pose a threat to our future growth if companies reduce capital spending in response to the uncertainty.
•We expect to continue to invest in capital expenditures prudently, including potential acquisitions,particularly for projects that wouldwill enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
We have a strong focus on cost control and closely monitor market changes and our liquidity in order to proactively adjust our operating costs, discretionary capital spending, and dividend levels as needed. Managing working capital in conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of our Annual Cash Incentive plan is that it is linked to our Company-wide and business unit performance which is designed to adjust compensation expense as profits change.
•We continue to maintain a strong balance sheet. Our short-term liquidity available, represented as cash and cash equivalents and short-term investments plus the unused amount of our revolving credit facility, was $108.4$92.0 million at DecemberMarch 31, 2017.2023.
Financial Overview
|
| | | | | | | | | | | | | | | | | | | | | |
| At or for the Three Months Ended | | | | For the Six Months Ended | | |
| December 31 | | | | December 31 | | |
(Amounts in Millions) | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Net Sales | $ | 173.7 |
| | $ | 169.9 |
| | 2 | % | | $ | 343.2 |
| | $ | 344.9 |
| | — | % |
Gross Profit | 53.9 |
| | 55.8 |
| | (3 | %) | | 113.5 |
| | 114.4 |
| | (1 | %) |
Selling and Administrative Expenses | 41.9 |
| | 42.7 |
| | (2 | %) | | 85.6 |
| | 86.0 |
| | — | % |
Restructuring Gain | — |
| | — |
| |
|
| | — |
| | (1.8 | ) | | |
Operating Income | 12.0 |
| | 13.0 |
| | (8 | %) | | 28.0 |
| | 30.3 |
| | (8 | %) |
Operating Income % | 6.9 | % | | 7.7 | % | |
|
| | 8.1 | % | | 8.8 | % | |
|
|
Adjusted Operating Income * | $ | 12.0 |
| | $ | 13.0 |
| | (8 | %) | | $ | 28.0 |
| | $ | 28.5 |
| | (2 | %) |
Adjusted Operating Income % * | 6.9 | % | | 7.7 | % | | | | 8.1 | % | | 8.3 | % | | |
Net Income | $ | 7.4 |
| | $ | 8.7 |
| | (15 | %) | | $ | 18.3 |
| | $ | 19.7 |
| | (7 | %) |
Adjusted Net Income * | 7.4 |
| | 8.7 |
| | (15 | %) | | 18.3 |
| | 18.6 |
| | (1 | %) |
Diluted Earnings Per Share | $ | 0.20 |
| | $ | 0.23 |
| | | | $ | 0.49 |
| | $ | 0.52 |
| | |
Adjusted Diluted Earnings Per Share * | $ | 0.20 |
| | $ | 0.23 |
| | | | $ | 0.49 |
| | $ | 0.49 |
| | |
Open Orders | $ | 131.6 |
| | $ | 122.2 |
| | 8 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At or for the Three Months Ended | | | | For the Nine Months Ended | | |
| March 31 | | | | March 31 | | |
(Amounts in Millions, Except for Per Share Data) | 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change |
Net Sales | $ | 166.1 | | | $ | 180.9 | | | (8 | %) | | $ | 526.9 | | | $ | 488.9 | | | 8 | % |
| | | | | | | | | | | |
Gross Profit | 62.5 | | | 55.1 | | | 13 | % | | 188.2 | | | 150.7 | | | 25 | % |
Gross Profit % | 37.6 | % | | 30.5 | % | | | | 35.7 | % | | 30.8 | % | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Selling and Administrative Expenses | 57.5 | | | 48.8 | | | 18 | % | | 167.7 | | | 150.9 | | | 11 | % |
Other General (Income) Expense | — | | | (4.5) | | | | | — | | | (4.5) | | | |
Contingent Earn-out (Gain) Loss | — | | | 2.2 | | | | | (3.2) | | | (15.8) | | | |
Restructuring Expense | 0.8 | | | 1.7 | | | | | 2.8 | | | 4.2 | | | |
Goodwill Impairment | — | | | — | | | | | 36.7 | | | 34.1 | | | |
Operating Income (Loss) | 4.2 | | | 7.0 | | | (40 | %) | | (15.8) | | | (18.2) | | | 13 | % |
Operating Income (Loss) % | 2.5 | % | | 3.9 | % | | | | (3.0 | %) | | (3.7 | %) | | |
Adjusted Operating Income (Loss) * | $ | 10.9 | | | $ | 7.1 | | | 54 | % | | $ | 29.7 | | | $ | 7.3 | | | 306 | % |
Adjusted Operating Income (Loss) % * | 6.6 | % | | 3.9 | % | | | | 5.6 | % | | 1.5 | % | | |
Net Income (Loss) | $ | 5.7 | | | $ | 6.3 | | | (10 | %) | | $ | (23.8) | | | $ | (20.1) | | | (19 | %) |
Net Income (Loss) as a Percentage of Net Sales | 3.4 | % | | 3.5 | % | | | | (4.5 | %) | | (4.1 | %) | | |
Adjusted Net Income (Loss) * | 11.2 | | | 7.6 | | | 48 | % | | $ | 19.0 | | | $ | 3.8 | | | 395 | % |
Diluted Earnings (Loss) Per Share | $ | 0.15 | | | $ | 0.17 | | | (12 | %) | | $ | (0.65) | | | $ | (0.55) | | | (18 | %) |
Adjusted Diluted Earnings (Loss) Per Share* | $ | 0.30 | | | $ | 0.21 | | | 43 | % | | $ | 0.52 | | | $ | 0.11 | | | 373 | % |
Return on Invested Capital ** | 28.6 | % | | 14.1 | % | | | | 25.1 | % | | 5.2 | % | | |
Adjusted EBITDA * | $ | 15.4 | | | $ | 11.5 | | | 34 | % | | $ | 43.0 | | | $ | 20.5 | | | 110 | % |
Adjusted EBITDA % * | 9.3 | % | | 6.4 | % | | | | 8.2 | % | | 4.2 | % | | |
Order Backlog ** | $ | 134.5 | | | $ | 178.5 | | | (25 | %) | | | | | | |
* Items indicated represent Non-GAAP (Generally Accepted Accounting Principles) measurements.
** Items indicated represent Key Performance Indicators.
See the “Non-GAAP Financial Measures”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) | 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change |
Workplace | $ | 112.0 | | | $ | 119.8 | | | (7 | %) | | $ | 368.3 | | | $ | 336.3 | | | 10 | % |
Health | 25.2 | | | 26.6 | | | (5 | %) | | 82.3 | | | 76.2 | | | 8 | % |
Hospitality | 28.9 | | | 34.5 | | | (16 | %) | | 76.3 | | | 76.4 | | | — | % |
Total Net Sales | $ | 166.1 | | | $ | 180.9 | | | (8 | %) | | $ | 526.9 | | | $ | 488.9 | | | 8 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
Net Sales by End Vertical Market | | | | | | | | | | | |
| Three Months Ended |
| |
| Six Months Ended |
| |
| December 31 |
| |
| December 31 |
| |
(Amounts in Millions) | 2017 | | 2016 |
| % Change |
| 2017 | | 2016 |
| % Change |
Commercial | $ | 48.6 |
| | $ | 51.7 |
| | (6 | %) | | $ | 99.4 |
| | $ | 100.7 |
| | (1 | %) |
Education | 16.6 |
|
| 14.6 |
|
| 14 | % |
| 47.1 |
|
| 41.2 |
|
| 14 | % |
Finance | 17.6 |
|
| 16.7 |
|
| 5 | % |
| 30.7 |
|
| 33.5 |
|
| (8 | %) |
Government | 21.4 |
|
| 17.9 |
|
| 20 | % |
| 46.2 |
|
| 36.2 |
|
| 28 | % |
Healthcare | 23.1 |
|
| 27.1 |
|
| (15 | %) |
| 43.1 |
|
| 52.5 |
|
| (18 | %) |
Hospitality | 46.4 |
|
| 41.9 |
|
| 11 | % |
| 76.7 |
|
| 80.8 |
|
| (5 | %) |
Total Net Sales | $ | 173.7 |
|
| $ | 169.9 |
|
| 2 | % |
| $ | 343.2 |
|
| $ | 344.9 |
|
| — | % |
Second quarter fiscal year 2018 consolidated net sales were $173.7 million compared to second quarter fiscal year 2017 net sales of $169.9 million, or a 2% increase driven by price increases net of higher discounting and $2.8 million of net sales resulting from the D’style acquisition. Inclusive of the D’style net sales of $2.8 million, net sales for the six-month period ended December 31, 2017 of $343.2 million were flat compared to net sales of $344.9 million for the six-month period ended December 31, 2016 as decreased volume exceeded price increases net of higher discounting.
During our second quarter of fiscal year 2018 we redefined our verticalOur Workplace end market reporting to better reflect the end markets that we serve. The largest shifts among vertical markets were sales to certain government-affiliated medical facilities, which were previously classified in the government vertical market and are now classified in the healthcare vertical market. Prior period information was estimated to reflect the new vertical market definitions on a comparable basis.
For both the second quarter and year-to-date period of fiscal year 2018 compared to the same periods of fiscal year 2017, increasedincludes sales to the government vertical market are attributable to higher state and local government sales. In addition, thecommercial, financial, government, and education vertical market sales increases were aided by heightened focus on these vertical markets. For the secondmarkets and eBusiness. The revenue of Poppin is included in eBusiness.
Third quarter of fiscal year 20182023 consolidated net sales decreased $14.8 million, or (8%) compared to the secondthird quarter of fiscal year 2017, the acquisition2022 net sales driven by lower volume in all our markets which were partially offset by increased pricing of the D’style businessworkplace and increases in organic non-custom business drove an increase in the hospitality vertical market sales to a record quarterly level. Hospitalityhealthcare products. Consolidated net sales for the year-to-date period of fiscal year 20182023 increased 8% compared to the same year-to-date
period ofin fiscal year 2017 declined due to both custom2022 driven by increased pricing of workplace and non-customhealth products. Each of our end market sales reductions,levels can fluctuate depending on overall demand and continued customer requests to delay shipments. Uncertainty is causing delays and reductionsmix of projects in spending in the healthcare vertical market. The other commercial vertical market was negatively impacted by timing of large projects.a given period.
Open ordersOrder backlog at DecemberMarch 31, 2017 increased 8%2023 decreased $44.0 million, or 25%, when compared to the open orderbacklog level as of DecemberMarch 31, 2016 as hospitality furniture2022 driven by softening demand which drove declines in workplace and health order backlog increased primarily duerates in the quarter ended March 31, 2023. In addition, our manufacturing lead times have improved from the elevated levels experienced in the prior year which allowed us to the D’style acquisition. Openfulfill orders quicker thus also reducing our backlog. Backlog at a point in time may not be indicative of future sales trends.
In the second quarter of fiscal year 2018 we recorded net income of $7.4 million and diluted earnings per share of $0.20, and in the second quarter of fiscal year 2017 we recorded net income of $8.7 million and diluted earnings per share of $0.23. In the first six months of fiscal year 2018 we recorded net income of $18.3 million and diluted earnings per share of $0.49. In the first six months of fiscal year 2017 we recorded net income of $19.7 million and diluted earnings per share of $0.52, inclusive of $1.1 million or $0.03 per diluted share, of after-tax restructuring gain driven by the sale of the Idaho facility. Excluding the nonrecurring gain, adjusted net income for the first six months of fiscal year 2017 was $18.6 million, or $0.49 per diluted share.
Gross profit as a percent of net sales decreased 170increased 710 basis points into 37.6% for the secondthird quarter of fiscal year 2018 compared to2023 from 30.5% for the secondthird quarter of fiscal year 2017.2022. The declineincreased third quarter gross profit as a percent of net sales was driven by a shift in sales mixprice increases, the impact of LIFO accounting which generated income during the current year compared to lower margin product, freight cost increases, higher discounting, and an increaseexpense in the LIFO inventory reserve, which were partially offset by price increasesprior year, and the additional margin contributed by D’style.savings realized from our operational excellence initiatives. Gross profit as a percent of net sales decreased 10increased 490 basis points into 35.7% for the first six monthsyear-to-date period of fiscal year 2018 compared to2023 from 30.8% for the first six monthsyear-to-date period of fiscal year 20172022. The increased year to date gross profit as increased pricing and lower employee benefit expenses such as healthcare more than offset a shift in sales mix to lower margin product, freight cost increases, higher discounting, and an increase in the LIFO inventory reserve.
As a percent of net sales sellingwas driven by price increases, the impact of LIFO accounting which generated income during the current year compared to expense in the prior year, and savings realized from our operational excellence initiatives which more than offset inflationary pressure on materials, increased freight costs, and other manufacturing expense increases. The prior year-to-date gross profit also included the costs associated with the one-time COVID vaccine incentive which did not repeat in the current year.
Selling and administrative (“S&A”) expenses in the third quarter of fiscal year 2023 compared to the third quarter of fiscal year 2022 increased $8.7 million and increased 770 basis points as a percent of net sales. S&A expenses in the year-to-date period of fiscal year 2023 compared to the year-to-date period of fiscal year 2022 increased $16.8 million and increased 110 basis points as a percent of net sales. Increased S&A expenses in the third quarter and year-to-date period were driven by HNI merger costs of $3.9 million and increased incentive compensation costs, which were partially offset by lower healthcare expenses. In addition, our S&A expenses in the year-to-date period of fiscal year 2023 included increased salary expense driven by inflation, increased advertising and marketing expense, and higher warranty expense.
During the third quarter and year-to-date period of fiscal year 2022 we recorded S&A expenses related to the normal revaluation to fair value of our Supplemental Employee Retirement Plan (“SERP”) liability while we recorded income related to SERP in the prior year periods. The impact from the change in the SERP liability that was recognized in S&A 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.
We recognized pre-tax restructuring expense of $0.8 million and $2.8 million for the three and nine months ended March 31, 2023 and $1.7 million and $4.2 million for the three and nine months ended March 31, 2022. See Note 3 - Restructuring of Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information. In connection with our annual goodwill impairment test, we assessed goodwill at the reporting unit level for impairment during our second quarter ended December 31, 2022 and based on our analysis determined our Poppin reporting unit had carrying value in excess of the calculated fair value. The decline in the fair value of the reporting unit was driven by revised sales and profitability forecasts primarily attributable to changes in demand due to uncertainty in the macroeconomic environment. As a result, we recorded a pre-tax, non-cash charge to reduce the carrying value of goodwill by $36.7 million during the second quarter of fiscal year 2018 compared to2023. During the second quarter ended December 31, 2021, we also recorded a pre-tax, non-cash charge to reduce the carrying value of goodwill by $34.1 million primarily attributable to changes in demand due to the ongoing COVID-19 pandemic and supply chain constraints. We recorded non-cash pre-tax contingent earn-out benefit during the year-to-date periods of fiscal year 2017 decreased 90 basis points2023 and 2022 of $3.2 million and $15.8 million, respectively, which partially offset the goodwill impairment, as total expenses decreased 1.9%, driven bythere is a $1.7lower likelihood of Poppin achieving targeted milestones during the earn-out period.
Other General (Income) Expense consisted of a $4.5 million pre-tax gain on the sale of an administrative building and lower incentive compensation, partially offset by increases in salaries and additional costs related toa warehouse during the D’style acquisition including amortization of acquired intangibles and acquisition expenses. For the first six monthsthird quarter of fiscal year 2018 compared to the first six months of fiscal year 2017, as a percent of net sales, selling and administrative expenses increased 10 basis points as total expenses decreased 0.5%. The $1.7 million pre-tax gain on the sale of the education center and showroom, and lower incentive compensation costs were offset by higher marketing expenditures to grow the business, higher salary expense, and additional costs related to the D’style acquisition including amortization of acquired intangibles and acquisition expenses.2022.
Other Income (Expense) consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
(Amounts in Thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Interest Income | $ | 165 | | | $ | 25 | | | $ | 354 | | | $ | 77 | |
Interest Expense | (668) | | | (390) | | | (2,045) | | | (922) | |
| | | | | | | |
Gain on Supplemental Employee Retirement Plan Investments | 613 | | | (887) | | | 773 | | | (300) | |
| | | | | | | |
| | | | | | | |
Other | 12 | | | 17 | | | 32 | | | (47) | |
Other Income (Expense), net | $ | 122 | | | $ | (1,235) | | | $ | (886) | | | $ | (1,192) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31 | | December 31 |
(Amounts in Thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Interest Income | $ | 234 |
| | $ | 99 |
| | $ | 468 |
| | $ | 209 |
|
Interest Expense | (74 | ) | | (5 | ) | | (105 | ) | | (10 | ) |
Foreign Currency Loss | (29 | ) | | (8 | ) | | (12 | ) | | (15 | ) |
Gain on Supplemental Employee Retirement Plan Investments | 413 |
| | 29 |
| | 764 |
| | 396 |
|
Other | (121 | ) | | (105 | ) | | (203 | ) | | (173 | ) |
Other Income (Expense), net | $ | 423 |
| | $ | 10 |
| | $ | 912 |
| | $ | 407 |
|
Our second quarter of fiscal year 2018 results of operations included the impact of the enactment of the Tax Reform, which was signed into law on December 22, 2017. The Tax Reform reduced federal corporate income tax rates and changed numerous other provisions. As we have a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. The quarter and six months ended December 31, 2017 included approximately $1.6 million year-to-date in reduced income tax expense to reflect federal taxes at the lower blended effective tax rate. The benefits of the lower rate were more than offset by a one-time discrete $2.0 million unfavorable impact as a result of applying the new lower federal income tax rates to our net deferred tax assets.
The changes included in the Tax Reform are broad and complex. The final transition impacts of the Tax Reform may differ from the above estimate, due to, among other things, changes in interpretations of the Tax Reform, any legislative action to address questions that arise because of the Tax Reform, any changes in accounting standards for income taxes or related interpretations in response to the Tax Reform, or any updates or changes to estimates we have utilized to calculate the transition impacts. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30, 2018.
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 40.6% and 36.5%, respectively, for the three and sixnine months ended DecemberMarch 31, 2017, impacted by2023 were negative tax rates of (32.3%) and (42.3%), respectively, which were lower than the additional incomecombined federal and state statutory tax expenserate primarily due to the Tax Reform.book versus tax treatment of nondeductible goodwill impairment and nondeductible merger costs which were partially offset by the positive impact of earn-out valuation adjustments. Our effective tax rate was 33.2% and 35.8%, respectively, for the three and sixnine months ended DecemberMarch 31, 2016, primarily as2022 were negative tax rates of (9.3%) and (3.3%), respectively, driven by the domestic manufacturing deduction impacted thebook versus tax rates.treatment of nondeductible goodwill impairment and earn-out valuation adjustments.
Comparing the balance sheet as of DecemberMarch 31, 20172023 to June 30, 2017, we recorded goodwill of $8.6 million2022, our accounts receivable decreased due to the lower sales levels and intangible assets of $10.7 million resulting fromalso several larger projects were finalized and the acquisition of D’style.payment was received. Our prepaid expense and other current assets line increased due to a prepayment of estimated income taxes for the fiscal year. Our customer deposits line increased due to higher hospitality customer deposits partiallyexpenses decline was driven by the acquisition. Our accrued expenses line decreased as our accrued cash incentive compensation related to our fiscal year 2017 performance was paid outreceipt of prepaid inventory in transit. As uncertainty in the first half of fiscal year 2018.macroeconomic environment was impacting customer order patterns, we revised our Poppin sales growth expectations and during our second quarter ended December 31, 2022, recognized a goodwill impairment charge which reduced our goodwill balance. Our accounts payable balance has declined as we have decelerated inventory purchases. Our long-term debt declined as we paid down our borrowings.
Liquidity and Capital Resources
Our total cash position which is comprised of cash,and cash equivalents and short-term investments decreased to $79.6was $18.8 million at DecemberMarch 31, 2017 from $98.62023 and $10.9 million at June 30, 2017, primarily due to $17.82022. Our total debt was $50.0 million at March 31, 2023 and $68.1 million at June 30, 2022. During the first nine months of fiscal year 2023, cash outflow for the D’style acquisition,flows provided by operations of $56.0 million more than offset capital expenditures including capitalized software of $12.1$17.1 million, and the return of capital to share ownersshareholders in the form of dividends which totaled $9.9 million and stock repurchases and dividends totaling $6.6 million, which more than offset $15.4 million of cash flows from operations during the first six months of fiscal year 2018.totaled $3.9 million.
Working capital at DecemberMarch 31, 2017 was $79.7 million compared to working capital of $82.5 million at2023 and June 30, 2017.2022 was $50.8 million and $67.7 million, respectively. The current ratio was 1.71.4 at both DecemberMarch 31, 20172023 and June 30, 2017.2022.
Our short-term liquidity available, represented as cash and cash equivalents and short-term investments plus the unused amount of our revolving credit facility, totaled $108.4$92.0 million at DecemberMarch 31, 2017.2023. At DecemberMarch 31, 2017,2023, we had $1.2$1.8 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. We had no$50.0 million and $68.0 million of borrowings on our revolving credit facility borrowings outstanding as of Decemberat March 31, 2017 or2023 and June 30, 2017.
During fiscal year 2017 we sold an administrative building in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom for proceeds of $3.8 million. We were leasing a portion of2022, respectively. Total availability to borrow under the credit facility back to facilitate the short-term transition of those functions to other existing Indiana locations. The sale of the facility did not qualify for sale-leaseback accounting thus the book value of the building remained on the property and equipment line of our Consolidated Balance Sheets as June 30, 2017, and the related sale-leaseback financing obligation was a current liability on our Consolidated Balance Sheets as June 30, 2017. In addition, since the sale of the facility did not qualify for sale-leaseback accounting during fiscal year 2017, the $1.7totaled $73.2 million pre-tax gain on the sale was not recognized in selling and administrative expenses until our second quarter of fiscal year 2018.at March 31, 2023.
Cash Flows
The following table reflects the major categories of cash flows for the first sixnine months of fiscal years 20182023 and 2017. |
| | | | | | | | |
| | Six Months Ended |
| | December 31 |
(Amounts in thousands) | | 2017 | | 2016 |
Net cash provided by operating activities | | $ | 15,382 |
| | $ | 32,105 |
|
Net cash used for investing activities | | $ | (27,322 | ) | | $ | (14,184 | ) |
Net cash used for financing activities | | $ | (9,090 | ) | | $ | (12,031 | ) |
2022. | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | March 31 |
(Amounts in Thousands) | | 2023 | | 2022 |
Net cash provided by (used for) operating activities | | $ | 55,966 | | | $ | (6,602) | |
Net cash used for investing activities | | $ | (16,599) | | | $ | (10,346) | |
Net cash (used for) provided by financing activities | | $ | (32,105) | | | $ | 5,008 | |
Cash Flows from Operating Activities
For the first sixnine months of fiscal year 20182023 net cash provided by operating activities was $15.4$56.0 million fueled by $18.3 millioninclusive of net income whileloss of $23.8 million which included goodwill impairment of $36.7 million. In the first sixnine months of fiscal year 20172022 net cash provided by used for
operating activities was $32.1$6.6 million inclusive of $19.7a net loss of $20.1 million which included $34.1 million of net income.goodwill impairment and $15.8 million of contingent earn-out liability gains. Changes in working capital balances used $17.0provided $26.9 million of cash in the first sixnine months of fiscal year 20182023 and provided $5.9used $21.2 million of cash in the first sixnine months of fiscal year 2017.2022.
The $17.0 million usage of cash from changes in working capital balances in the first six months of fiscal year 2018 was primarily due to a reduction in our accrued expenses balance as our accrued cash incentive compensation and the retirement profit sharing contribution which are both related to our fiscal year 2017 performance were paid out. Also contributing was a prepayment of estimated income taxes for fiscal year 2018 which are included in the prepaid expenses and other current assets line. The $5.9$26.9 million of cash provided by changes in working capital balances in the first sixnine months of fiscal year 20172023 was primarily due todriven by a reduction$29.7 million decrease in receivables as several larger projects were finalized and the payment was received coupled with a decline in sales, and a $14.4 million decrease in prepaid expenses and other current assets as prepaid in-transit inventory was received which were partially offset by a $21.2 million decline in our accounts receivable balancepayable as we decelerated inventory purchases.
The $21.2 million of cash used by changes in working capital balances in the first nine months of fiscal year 2022 was driven by a $29.3 million increase in inventory and a $12.8 million increase in receivables which were partially offset by a $27.6 million increase in accounts payable. The inventory, receivables, and accounts payable increases were due to fluctuationsthe increased net sales and associated increase in sales.material purchases and production to fulfill our order backlog and to cushion against supply chain disruptions.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for the six-month periodnine-month periods ended DecemberMarch 31, 2017 was 282023 and March 31, 2022were 31 and 32 days, compared to 27 days for the six-month period ended December 31, 2016.respectively. We define DSO as the average of monthly trade accounts and notes receivable divided by an average day’s net sales. Our Production Days Supply on Hand (“PDSOH”) of inventory measure for the six-month periodnine-month periods ended DecemberMarch 31, 2017 decreased2023 and March 31, 2022 were 99 and 72 days, respectively. The increase in PDSOH was driven by increases in average inventory levels outpacing the sales ramp up with the majority of the inventory increase related to 46 days from 47 days from the six-month period ended December 31, 2016.made-to-stock inventory in our eBusiness segment. We define PDSOH as the average of the monthly grossnet inventory divided by an average day’s cost of sales.
Cash Flows from Investing Activities
During the first six months of fiscal year 2018, we invested $18.9 million in available-for-sale securities, and $16.5 million matured. During the first six months of fiscal year 2017, we invested $19.7 million in available-for-sale securities, and $0.7 million matured. Our short-term investments included municipal bonds, certificates of deposit purchased in the secondary market, and government agency securities. During the first six months of fiscal year 2018, we had a cash outflow of $17.8 million for the D’style acquisition. During the first sixnine months of fiscal years 20182023 and 2017, we received proceeds from the sale of assets net of selling expenses of $5.62022, our capital investments totaled $17.1 million and $11.7$15.8 million, respectively, the majority of which relates to the sale of our fleet of over-the-road tractorsrespectively. The current and trailers during the first six months of fiscalprior year 2018 and the majority of which relates to the sale of our Idaho facility during the first six months of fiscal year 2017. During the first six months of fiscal years 2018 and 2017, we reinvested $12.1 million and $5.9 million, respectively, into capital investments for the future. The capital investments during the first six months of the current year were primarily for facility improvements such as renovations to our corporate headquarters and showrooms, and variousinclude manufacturing equipment upgrades to increase automation in production facilities, which is expected to yield future benefits. The capital investments during the first six monthsconstruction of the prior year were primarily for showroom renovationsa warehouse, software upgrades, and various manufacturing equipment, and replacements of tractors and trailers in our fleet.
facility improvements.
Cash Flows from Financing Activities
During the nine months ended March 31, 2023, we had proceeds from borrowings on our revolving credit facility of $106.0 million and during the same period we repaid $124.0 million on our revolving credit facility. During the nine months ended March 31, 2022 we had proceeds from borrowings on our credit facility of $45.0 million and repaid $27.0 million on our revolving credit facility. We paid dividends of $4.9 million and $4.3$9.9 million in both the six-monthnine-month periods ended DecemberMarch 31, 20172023 and DecemberMarch 31, 2016, respectively.2022. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. During the first six months of fiscal years 2018 and 2017, weWe repurchased shares pursuant to a previously announced sharestock repurchase program, which drove cash outflow of $1.8$3.9 million and $6.5$2.4 million in the year-to-date periods of fiscal year 2023 and 2022, respectively. Future debt payments may be paid out of cash flows from operations or from future refinancing of our debt.
Revolving Credit Facility
We maintainDuring the second quarter of fiscal year 2023, we entered into a $30Third Amendment to Amended and Restated Credit Agreement which provides, among other items, amendments to the Credit Agreement to extend the maturity date of the Credit Facility from October 24, 2024 to December 21, 2025, and establish SOFR (“Secured Overnight Financing Rate”) as a pricing benchmark for dollar borrowings in replacement of LIBOR.
As of March 31, 2023 we had a $125.0 million revolving credit facility with a maturity date of October 2019December 2025 that allowsallowed for both issuances of letters of credit and cash borrowings. This facility providesWe also have an option to request an increase of the amount available for borrowing to $55$200.0 million, subject to participating banks’ consent. The loans under the Credit Agreement could consist of, at our request, subjectelection, advances in U.S. dollars or advances in any other currency that was agreed to by the consentlenders. The proceeds are to be used for general corporate purposes including acquisitions. A portion of the participating banks.revolving credit facility, not to exceed $10 million of the principal amount, was available for the issuance of letters of credit. At DecemberMarch 31, 2017,2023, we had $1.2$1.8 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. At both DecemberMarch 31, 20172023 and June 30, 2017,2022, we had no$50.0 million and $68.0 million, respectively, in borrowings outstanding.
The revolving credit facility requires us to comply with certain debt covenants, the most significant of which areis the adjusted leverage ratio and the fixed chargeinterest coverage ratio. The adjusted leverage ratio is defined as (a) consolidated total indebtedness minus unencumbered U.S. cash on hand in the U.S.equivalents in excess of $15,000,000 provided that the maximum subtraction does not exceed
$35,000,000 to (b) adjusted consolidated EBITDA, determined as of the end of each of our fiscal quarters for the then most recently ended four fiscal quarters, and mayto not be greater than 3.03.00 to 1.0.1.00. The fixed chargeinterest coverage ratio, is defined asfor any period, of (a) the sum of (i) consolidatedConsolidated EBITDA minus (ii) 50% of depreciation expense, minus (iii) taxes paid, minus (iv) dividends and distributions paid,for such period to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii)cash interest expense for such period, calculated on a consolidated basis in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), determined as of the end of each of our fiscal quartersGAAP for the trailing four fiscal quartersquarter period then ending, and mayto not be less than 1.103.00 to 1.00. We were in compliance with all debt covenants of the revolving credit facility during the six-monthnine-month period ended DecemberMarch 31, 2017.2023.
The table below compares the adjusted leverage ratio and fixed chargethe interest coverage ratio with the limits specified in the credit agreement.
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| | | | | | | | | |
| | At or For the Period Ended | | Limit As Specified in | | |
Covenant | | December 31, 2017 | | Credit Agreement | | Excess |
Adjusted Leverage Ratio | | (0.37 | ) | | 3.00 |
| | 3.37 |
|
Fixed Charge Coverage Ratio | | 237.33 |
| | 1.10 |
| | 236.23 |
|
| | | | | | | | | | | | | | | | | | | | |
| | At or For the Period Ended | | Limit As Specified in | | |
Covenant | | March 31, 2023 | | Credit Agreement | | Excess |
Adjusted Leverage Ratio | | 0.84 | | | ≤ 3.00 | | 2.16 | |
Interest Coverage Ratio | | 22.00 | | | ≥ 3.00 | | 19.00 | |
Future Liquidity
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 revolving credit facility will be sufficient to fund future dividends and meet our working capital and other operating needs for at least the next 12twelve months. During the secondOur Board of Directors declared quarterly dividends of $0.09 per share for payment during April of our fourth quarter of fiscal year 2018,2023. Future cash dividends are subject to approval by our Board of Directors declared a quarterly dividend of $0.07 per share, toand may be paid during our third quarteradjusted as business needs or market conditions change.
During the remainder of fiscal year 2018. We will continue to evaluate market conditions in determining future share repurchases. During fiscal year 20182023 we expect to ramp up investmentsinvest approximately $8 million in capital expenditures, particularly for projects such as our headquarters renovation, showroom renovations, machinery and equipment upgrades and automation, software, and showroom related expenses. As of March 31, 2023, there have been no material changes to our short-term and long-term contractual obligations as discussed 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, 2022 outside the ordinary course of business. We are also assessing the potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.of selling unused parcels of land.
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, lack of availability of raw material components in the supply chain, a decline in demand for our products, the impactlack of changes in tariffs,availability or cost of manufacturing labor, loss of key contract customers, including government subcontract customers, or potential fines and penalties that may result from the government’s review of our GSA subcontractor reporting, and other unforeseen circumstances. In particular, should demand for our products decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted.
Non-GAAP Financial Measures and Other Key Performance Indicators
This Management’s Discussion and Analysis (“MD&A”) contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with U.S. GAAP in the United States in the statements of income,operations, 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) include:
•adjusted operating income (loss), defined as operating income (loss) excluding restructuring; (2) HNI merger-related charges, restructuring expenses, goodwill impairment, a gain on sale of a warehouse, market valuation adjustments related to our SERP liability, Poppin acquisition-related amortization and inventory valuation adjustments, contingent earn-out gain or loss, and COVID vaccine incentive costs;
•adjusted operating income (loss) percentage, defined as adjusted operating income as a percentage of net sales;
•adjusted net income (loss), defined as net income (loss) excluding restructuring;HNI merger-related charges, restructuring expenses, goodwill impairment, a gain on sale of a warehouse, Poppin acquisition-related amortization and (3) inventory valuation adjustments, contingent earn-out gain or loss, and COVID vaccine incentive costs;
•adjusted diluted earnings (loss) per share, defined as diluted earnings (loss) per share excluding restructuring. HNI merger-related charges, restructuring expenses, goodwill impairment, a gain on sale of a warehouse, Poppin acquisition-related amortization and inventory valuation adjustments, contingent earn-out gain or loss, and COVID vaccine incentive costs;
•adjusted EBITDA, defined as earnings before interest, statutory income tax impacts for taxable after-tax measures, depreciation, and amortization and excluding HNI merger-related charges, restructuring expenses, goodwill impairment, a gain on sale of a warehouse, Poppin acquisition-related inventory valuation adjustments, contingent earn-out gain or loss, and COVID vaccine incentive costs; and
•adjusted EBITDA percentage, defined as adjusted EBITDA as a percentage of net sales.
Reconciliations of the reported GAAP numbers to these non-GAAP financial measures are included in the tabletables below. No restructuring was incurred, and therefore the non-GAAP reconciliations are not shown for the second quarters of fiscal years 2018 and 2017. Management believes it is useful for investors to understand how its core operations performed without gains or expenses incurred in executing its restructuring plans. Excluding these amounts allows investorsand to be able to meaningfully trend, analyze and benchmark the performance ofhow our core operations.operations performed without market value adjustments related to our SERP liability, without HNI merger-related charges, without expenses incurred in executing our transformation restructuring plan, without goodwill impairment costs, without gain on sale of a warehouse, without Poppin acquisition-related costs, and without COVID vaccine incentive costs. Many of our internal performance measures that management uses to make certain operating decisions exclude these gains/expenses to enable meaningful trending of core operating metrics. These non-GAAP financial measures should not be viewed as an alternative to the GAAP measures and are presented as supplemental information.
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Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators | | | | | | |
(Amounts in Thousands, Except for Per Share Data) | | | | | | | |
| | | | | | | |
Adjusted Operating Income (Loss) | Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
| 2023 | | 2022 | | 2023 | | 2022 |
Operating Income (Loss), as reported | $ | 4,178 | | | $ | 6,996 | | | $ | (15,846) | | | $ | (18,226) | |
Add: Pre-tax HNI Merger-related charges | 3,853 | | | — | | | 3,853 | | | — | |
Add: Pre-tax Restructuring Expense | 793 | | | 1,730 | | | 2,842 | | | 4,195 | |
Add: Pre-tax Goodwill Impairment | — | | | — | | | 36,684 | | | 34,118 | |
Add: Pre-tax Other General (Income) Expense(1) | — | | | (4,523) | | | — | | | (4,523) | |
Add: Pre-tax Expense Adjustment to SERP Liability | 613 | | | (887) | | | 773 | | | (300) | |
Add: Pre-tax Poppin Acquisition-related Amortization | 1,502 | | | 1,610 | | | 4,506 | | | 4,830 | |
Add: Pre-tax Poppin Acquisition-related Inventory Valuation Adjustment | — | | | 48 | | | — | | | 253 | |
Add: Pre-tax Contingent Earn-Out (Gain) Loss | — | | | 2,150 | | | (3,160) | | | (15,750) | |
Add: Pre-tax COVID Vaccine Incentive | — | | | — | | | — | | | 2,709 | |
Adjusted Operating Income | $ | 10,939 | | | $ | 7,124 | | | $ | 29,652 | | | $ | 7,306 | |
Net Sales | $ | 166,184 | | | $ | 180,918 | | | $ | 526,942 | | | $ | 488,931 | |
Adjusted Operating Income % | 6.6 | % | | 3.9 | % | | 5.6 | % | | 1.5 | % |
|
| | | | | | | |
Reconciliation of Non-GAAP Financial Measures | | | |
(Amounts in Thousands, Except for Per Share Data) | | | |
| Six Months Ended |
| December 31 |
| 2017 | | 2016 |
Operating Income | $ | 27,962 |
| | $ | 30,322 |
|
Pre-tax Restructuring Gain | — |
| | (1,832 | ) |
Adjusted Operating Income | $ | 27,962 |
| | $ | 28,490 |
|
Net Sales | $ | 343,191 |
| | $ | 344,883 |
|
Adjusted Operating Income % | 8.1 | % | | 8.3 | % |
| | | |
Net Income | $ | 18,335 |
| | $ | 19,715 |
|
Pre-tax Restructuring Gain | — |
| | (1,832 | ) |
Tax on Restructuring | — |
| | 713 |
|
After-tax Restructuring Gain | — |
| | (1,119 | ) |
Adjusted Net Income | $ | 18,335 |
| | $ | 18,596 |
|
| | | |
Diluted Earnings Per Share | $ | 0.49 |
| | $ | 0.52 |
|
Impact of Restructuring Gain | 0.00 |
| | (0.03 | ) |
Adjusted Diluted Earnings Per Share | $ | 0.49 |
| | $ | 0.49 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
Adjusted Net Income (Loss) | Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
| 2023 | | 2022 | | 2023 | | 2022 |
Net Income (Loss), as reported | $ | 5,691 | | | $ | 6,295 | | | $ | (23,816) | | | $ | (20,068) | |
Pre-tax HNI Merger-related charges | 3,853 | | | — | | | 3,853 | | | — | |
Tax on HNI Merger-related charges | — | | | — | | | — | | | — | |
Add: HNI Merger-related charges | 3,853 | | | — | | | 3,853 | | | — | |
Pre-tax Restructuring Expense | 793 | | | 1,730 | | | 2,842 | | | 4,195 | |
Tax on Restructuring Expense | (204) | | | (445) | | | (731) | | | (1,079) | |
Add: After-tax Restructuring Expense | 589 | | | 1,285 | | | 2,111 | | | 3,116 | |
Pre-tax Goodwill Impairment | — | | | — | | | 36,684 | | | 34,118 | |
Tax on Goodwill Impairment | — | | | — | | | — | | | — | |
Add: After-tax Goodwill Impairment | — | | | — | | | 36,684 | | | 34,118 | |
Pre-tax Other General (Income) Expense(1) | — | | | (4,523) | | | — | | | (4,523) | |
Tax on Other General (Income) Expense | — | | | 1,164 | | | — | | | 1,164 | |
Add: After-tax Other General (Income) Expense | — | | | (3,359) | | | — | | | (3,359) | |
Pre-tax Poppin Acquisition-related Amortization | 1,502 | | | 1,610 | | | 4,506 | | | 4,830 | |
Tax on Poppin Acquisition-related Amortization | (387) | | | (414) | | | (1,160) | | | (1,243) | |
Add: After-tax Poppin Acquisition-related Amortization | 1,115 | | | 1,196 | | | 3,346 | | | 3,587 | |
Pre-tax Poppin Acquisition-related Inventory Valuation Adjustment | — | | | 48 | | | — | | | 253 | |
Tax on Poppin Acquisition-related Inventory Valuation Adjustment | — | | | (12) | | | — | | | (65) | |
Add: After-tax Poppin Acquisition-related Inventory Adjustment | — | | | 36 | | | — | | | 188 | |
Pre-tax Contingent Earn-Out (Gain) Loss | — | | | 2,150 | | | (3,160) | | | (15,750) | |
Tax on Contingent Earn-Out (Gain) Loss | — | | | — | | | — | | | — | |
Add: After-tax Contingent Earn-Out (Gain) Loss | — | | | 2,150 | | | (3,160) | | | (15,750) | |
Pre-tax COVID Vaccine Incentive | — | | | — | | | — | | | 2,709 | |
Tax on COVID Vaccine Incentive | — | | | — | | | — | | | (697) | |
Add: After-tax COVID Vaccine Incentive | — | | | — | | | — | | | 2,012 | |
Adjusted Net Income | $ | 11,248 | | | $ | 7,603 | | | $ | 19,018 | | | $ | 3,844 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Adjusted Diluted Earnings (Loss) Per Share | Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
| 2023 | | 2022 | | 2023 | | 2022 |
Diluted Earnings (Loss) Per Share, as reported | $ | 0.15 | | | $ | 0.17 | | | $ | (0.65) | | | $ | (0.55) | |
Add: After-tax HNI Merger-related charges | 0.11 | | | — | | | 0.11 | | | — | |
Add: After-tax Restructuring Expense | 0.01 | | | 0.04 | | | 0.06 | | | 0.09 | |
Add: After-tax Goodwill Impairment | — | | | — | | | 1.00 | | | 0.93 | |
Add: After-tax Other General (Income) Expense(1) | — | | | (0.09) | | | — | | | (0.09) | |
Add: After-tax Poppin Acquisition-related Amortization | 0.03 | | | 0.03 | | | 0.09 | | | 0.10 | |
Add: After-tax Poppin Acquisition-related Inventory Adjustment | — | | | — | | | — | | | 0.01 | |
Add: After-tax Contingent Earn-Out (Gain) Loss | — | | | 0.06 | | | (0.09) | | | (0.43) | |
Add: COVID Vaccine Incentive | — | | | — | | | — | | | 0.05 | |
Adjusted Diluted Earnings Per Share | $ | 0.30 | | | $ | 0.21 | | | $ | 0.52 | | | $ | 0.11 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| March 31 | | March 31 |
| 2023 | | 2022 | | 2023 | | 2022 |
Net Income (Loss) | $ | 5,691 | | | $ | 6,295 | | | $ | (23,816) | | | $ | (20,068) | |
Provision for Income Taxes | (1,391) | | | (534) | | | 7,084 | | | 650 | |
Income (Loss) Before Taxes on Income | 4,300 | | | 5,761 | | | (16,732) | | | (19,418) | |
| | | | | | | |
| | | | | | | |
Interest Expense | 668 | | | 390 | | | 2,045 | | | 922 | |
Interest Income | (165) | | | (25) | | | (354) | | | (77) | |
Depreciation | 3,720 | | | 3,635 | | | 11,160 | | | 10,820 | |
Amortization | 2,268 | | | 2,358 | | | 6,682 | | | 7,212 | |
Pre-tax HNI Merger-related charges | 3,853 | | | — | | | 3,853 | | | — | |
Pre-tax Restructuring Expense | 793 | | | 1,730 | | | 2,842 | | | 4,195 | |
Pre-Tax Goodwill Impairment | — | | | — | | | 36,684 | | | 34,118 | |
Pre-tax Other General (Income) Expense(1) | — | | | (4,523) | | | — | | | (4,523) | |
Pre-tax Poppin Acquisition-related Inventory Valuation Adjustment | — | | | 48 | | | — | | | 253 | |
Pre-tax Contingent Earn-Out (Gain) Loss | — | | | 2,150 | | | (3,160) | | | (15,750) | |
Pre-tax COVID Vaccine Incentive | — | | | — | | | — | | | 2,709 | |
Adjusted EBITDA | $ | 15,437 | | | $ | 11,524 | | | $ | 43,020 | | | $ | 20,461 | |
| | | | | | | |
Net Income (Loss) % | 3.4 | % | | 3.5 | % | | (4.5 | %) | | (4.1 | %) |
Adjusted EBITDA % | 9.3 | % | | 6.4 | % | | 8.2 | % | | 4.2 | % |
(1) Third quarter fiscal year 2022 Other General (Income) Expense consists of a gain realized on the sale of a warehouse totaling $4.5 million on a pre-tax basis and $3.4 million on an after-tax basis.
The open ordersorder backlog metric is a key performance indicator representing firm orders placed by our customers which have not yet been fulfilled and are expected to be recognized as revenue during future quarters. The timing of shipments can vary, but generally openthe backlog of orders areis expected to ship within a twelve-monthsix-month period.
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 basedReturn 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 basedInvested Capital is a key performance indicator calculated as: [(Earnings Before Interest, Taxes, Amortization, HNI Merger-related charges, Restructuring Expense, Goodwill Impairment, a Gain on historical evidence. The investment in stock warrants and non-marketable equity securitiesSale of a privately-held company are classifiedWarehouse, Acquisition-related Inventory Valuation Adjustments, Contingent Earn-out Gain or Loss, and COVID Vaccine Incentive costs ) multiplied by (1 minus Effective Tax Rate)] divided by (Total Shareholders’ Equity plus Net Debt). Net Debt is defined as level 3 financial assets. The stock warrants are accounted for as a derivative instrument valued on a recurring basis considering the pricingcurrent maturities of recent purchases or sales of the investment as well as positivelong-term debt plus long-term debt less cash, cash equivalents, and negative qualitative evidence, while the non-marketable equity securities are accounted for as a cost-method investment which carries the securities at cost, except in the event of impairment. 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.short-term investments.
See Note 10 - Fair Value of 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, 2017.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to standby letters of credit, a performance bond, and operating leases entered into in the normal course of business. These arrangements do not have a material current effect and are not reasonably likely to have a material future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. See Note 7 - Commitments and Contingent Liabilities of Notes to Condensed Consolidated Financial Statements for more information on the standby letters of credit and the performance bond. We do not have material exposures to trading activities of non-exchange traded contracts.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 statementsCondensed 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 statementsCondensed 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, 2017.2022. During the first sixnine months of fiscal 2018,year 2023, there were no material changes in the accounting policies and assumptions previously disclosed.
New Accounting Standards
Forward-Looking Statements
Certain statements containedThis communication contains “forward-looking statements” within this document are considered forward-looking under the Privatemeaning of Section 27A of the Securities Litigation Reform Act of 1995. The1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, which involve inherent risks and uncertainties. Any statements may beabout HNI’s, Kimball’s or the combined company’s plans, objectives, expectations, strategies, beliefs, or future performance or events constitute forward-looking statements. Such statements are identified by the use ofas those that include words or phrases such as “believes,” “anticipates,” “expects,” “intends,“anticipates,” “plans,” “projects,“trend,” “estimates,“objective,” “forecasts,“continue,” “seeks,or similar expressions or future or conditional verbs such as “will,” “likely,“would,” “future,“should,” “could,” “might,” “may,” “might,” “should,” “would,” “will,” andor similar expressions. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates, and other important factors that change over time and could cause actual results to differ materially from any results, performance, or events expressed or implied by such forward-looking statements. Such forward-looking statements include but are not limited to statements about the benefits of the business combination transaction between HNI and Kimball (the “Transaction”), including future financial and operating results, the combined company’s plans, objectives, expectations and intentions, and other statements that are not historical facts.
These forward-looking statements are subject to risks and uncertainties including, but not limitedthat may cause actual results to uncertainties relateddiffer materially from those projected. In addition to factors previously disclosed in HNI’s and Kimball’s reports filed with the U.S. Securities and Exchange Commission (the “SEC”) and those identified elsewhere in this document, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: the occurrence of any event, change, or other circumstance that could give rise to the future impactright of federal tax reform,one or both of the parties to terminate the definitive merger agreement between HNI and Kimball; the outcome of any legal proceedings that may be instituted against HNI or Kimball; the possibility that the Transaction does not close when expected or at all because required regulatory, shareholder, or other approvals and other conditions to closing are not received or satisfied on a governmental reviewtimely basis or at all (and the risk that such approvals may result in the imposition of our subcontractor reporting practices, adverseconditions that could adversely affect the combined company or the expected benefits of the Transaction); the risk that the benefits from the Transaction may not be fully realized or may take longer to realize than expected, including as a result of changes in, or problems arising from, general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which HNI and Kimball operate; the ability to promptly and effectively integrate the businesses of HNI and Kimball; the possibility that the Transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; reputational risk and potential adverse reactions of HNI’s or Kimball’s customers, employees or other business partners, including those resulting from the announcement or completion of the Transaction; the dilution caused by HNI’s issuance of additional shares of its capital stock in connection with the Transaction; the diversion of management’s attention and time from ongoing business operations and opportunities on merger-related matters; and the impact of the global economic conditions, increased global competition, significant reduction in customer order patterns, lossCOVID-19 pandemic on HNI’s or Kimball’s businesses, the ability to complete the Transaction or any of key customers or suppliers, financial stabilitythe other foregoing risks.
These factors are not necessarily all of key customers and suppliers, relationships with strategic customers and product distributors, availability or cost of raw materials and components, increased competitive pricing pressures reflecting
excess industry capacities, changes in the regulatory environment, or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effectcause HNI’s, Kimball’s or the combined company’s actual results, performance, or achievements to differ materially from those expressed in or implied by any of the forward-looking statements. Other unknown or unpredictable factors also could harm HNI’s, Kimball’s or the combined company’s results.
All forward-looking statements attributable to HNI, Kimball, or the combined company, or persons acting on HNI’s or Kimball’s behalf, are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made and HNI and Kimball do not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future performance ofevents, changes in assumptions, or changes in other factors affecting forward-looking statements, except to the extent required by applicable law. If HNI or Kimball International areupdate one or more forward-looking statements, no inference should be drawn that HNI or Kimball will make additional updates with respect to those or other forward-looking statements. Further information regarding HNI, Kimball and factors which could affect the forward-looking statements contained herein can be found in ourHNI’s Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, and its other filings with the SEC, and in Kimball’s Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, and its other filings with the SEC.
No Offer or Solicitation
This communication is for informational purposes only and is not an offer to purchase, nor a solicitation of an offer to sell, subscribe for or buy any securities, nor the fiscal year ended June 30, 2017.solicitation of any vote or approval in any jurisdiction pursuant to the proposed transactions or otherwise, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in contravention of applicable law. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
Additional Information About the Transaction and Where to Find It
In connection with the Transaction, HNI filed with the SEC a Registration Statement on Form S-4 on April 17, 2023 (as amended on April 19, 2023) to register the shares of HNI capital stock to be issued in connection with the Transaction. The Registration Statement includes a proxy statement of Kimball that also constitutes a prospectus of HNI. On April 27, 2023, the registration statement was declared effective by the SEC, and on April 28, 2023 HNI filed the definitive joint proxy statement/prospectus, and Kimball filed the definitive proxy statement, in connection with the proposed transaction with the SEC. Kimball commenced mailing the definitive proxy statement to its shareholders on April 28, 2023.
INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT ON FORM S-4 AND THE JOINT PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT ON FORM S-4, AS WELL AS ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC IN CONNECTION WITH THE TRANSACTION OR INCORPORATED BY REFERENCE INTO THE JOINT PROXY STATEMENT/PROSPECTUS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION REGARDING HNI, KIMBALL, THE TRANSACTION AND RELATED MATTERS.
Investors and security holders may obtain free copies of these documents and other documents filed with the SEC by HNI or Kimball through the website maintained by the SEC at http://www.sec.gov or from HNI at its website, www.hnicorp.com, or from Kimball at its website, www.kimballinternational.com.
Participants in the Solicitation
HNI, Kimball, and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of Kimball in connection with the Transaction under the rules of the SEC. Information about the interests of the directors and executive officers of HNI and Kimball and other persons who may be deemed to be participants in the solicitation of shareholders of Kimball in connection with the Transaction and a description of their direct and indirect interests, by security holdings or otherwise, will be included in the joint proxy statement/prospectus related to the Transaction, which will be filed with the SEC. Additional information about HNI, the directors and executive officers of HNI and their ownership of HNI common stock is also set forth in the definitive proxy statement for HNI’s 2023 Annual Meeting of Shareholders, as filed with the SEC on Schedule 14A on March 21, 2023, and other documents subsequently filed by HNI with the SEC. Additional information about Kimball, the directors and executive officers of Kimball and their ownership of Kimball common stock can also be found in Kimball’s definitive proxy statement in connection with its 2022 Annual Meeting of Shareholders, as filed with the SEC on September 7, 2022, and other documents subsequently filed by Kimball with the SEC. Free copies of these documents may be obtained as described above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We hold an investment portfolio of available-for-sale securities, comprised of municipal bonds, certificates of deposit purchasedare exposed to market risk with respect to commodity price fluctuations for components used in the secondary market,manufacture of our products, primarily related to wood and government agency securities. As of December 31, 2017, the fair value of the investment portfolio was $37.7 million. Our investment policy dictates that municipal bondswood-related components, steel, aluminum, foam, and government agency securities must be investment grade quality, and all certificates of depositplastics. These components are FDIC insured. These securities are fixed income instruments and will decline in value if market interest rates increase. A hypothetical 100 basis point increase in an annual period in market interest rates from levels at December 31, 2017 would cause the fair value of these investments to declineimpacted by an immaterial amount. Further information on investments is provided in Note 11 - Investments of Notes to Condensed Consolidated Financial Statements. We also hold a total investment of $2.0 million in a privately-held company, consisting of $0.5 million in non-marketable equity securities and $1.5 million in stock warrants. The fair value of the investment may fluctuate due to eventsglobal pricing pressures, general economic conditions, and changes in circumstances, buttariff rates. We strive to offset increases in the cost of these materials through supplier negotiations, global sourcing initiatives, and product re-engineering and parts standardization. We are also exposed to fluctuations in transportation costs, which vary based upon freight carrier capacity and fuel prices. Transportation costs are managed by optimizing logistics and supply chain planning.
During fiscal year 2023, we have incurred no impairmentexperienced market price increases in certain commodities and transportation costs. Also, during fiscal year 2022, we entered into an interest rate swap agreement with a notional value of $40.0 million to mitigate the six months ended December 31, 2017.
interest rate risk related to our variable rate borrowings on our revolving line of credit. There have been no material changes to other market risks, including commodity riskforeign exchange rate risks and foreign currencyequity rate risk, 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, 2017.2022.
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 DecemberMarch 31, 2017,2023, 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 DecemberMarch 31, 20172023 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
There have been no additional material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022, except as follows:
Risks Related to the Merger
The merger is subject to conditions, some or all of which may not be satisfied, or completed on a timely basis, if at all. Failure to complete the merger in a timely manner or at all could have adverse effects on Kimball.
The completion of the merger is subject to a number of conditions, including, among others, the approval by Kimball shareholders of the adoption of the merger agreement, which make the completion and timing of the merger uncertain.
If the merger is not completed, Kimball’s ongoing business, financial condition, financial results and stock price may be materially adversely affected. Without realizing any of the benefits of having completed the merger, Kimball will be subject to a number of risks, including the following:
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• | the market price of Kimball common stock could decline to the extent that the current market price reflects a market assumption that the transaction will be completed; |
• | Kimball could owe a termination fee of $15,768,265 to HNI under certain circumstances relating to Kimball’s entry into an agreement for an alternative acquisition, a change in the recommendation of the Kimball Board with respect to the merger, or a breach by Kimball of certain provisions of the merger agreement such that the closing conditions in the merger agreement would not be satisfied; |
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• | if the merger agreement is terminated and the Kimball board of directors (the “Kimball Board”) seeks another business combination, Kimball shareholders cannot be certain that Kimball will be able to find a party willing to enter into a transaction on terms equivalent to or more attractive than the terms that the other party has agreed to in the merger agreement; |
• | time and resources committed by Kimball’s management to matters relating to the merger could otherwise have been devoted to pursuing other beneficial opportunities; |
• | Kimball may experience negative reactions from the financial markets or from their customers, suppliers or employees; |
• | Kimball will be required to pay their respective costs relating to the merger, such as legal, accounting, financial advisory and printing fees, whether or not the merger is completed; and |
• | litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against Kimball to perform it obligations pursuant to the merger agreement.
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The materialization of any of these risks could adversely impact Kimball’s ongoing business, financial condition, financial results and stock price. Similarly, delays in the completion of the merger could, among other things, result in additional transaction costs, loss of revenue or other negative effects associated with uncertainty about completion of the merger.
The merger agreement contains provisions that limit Kimball’s ability to pursue alternatives to the merger, could discourage a potential competing acquiror of Kimball from making a favorable alternative transaction proposal and, in specified circumstances, could require Kimball to pay a termination fee to HNI.
The merger agreement contains certain provisions that restrict Kimball’s ability to solicit, discuss or enter into an agreement with respect to an acquisition proposal for Kimball. The Kimball Board is subject to restrictions on withdrawing, qualifying or modifying its recommendation to Kimball shareholders in favor of the merger and certain other related restrictions. In addition, HNI generally has an opportunity to offer to modify the terms of the transactions contemplated by the merger agreement in response to any third-party alternative acquisition proposal before the Kimball Board may withdraw or qualify its recommendation with respect to the merger-related proposal or otherwise terminate the merger agreement.
In some circumstances relating to Kimball’s entry into an agreement for an alternative transaction or a change in the recommendation of the Kimball Board with respect to the merger, upon termination of the merger agreement, Kimball will be required to pay a termination fee of $15,768,265 to HNI.
These provisions could discourage a potential third-party acquiror or merger partner that might have an interest in acquiring all or a significant portion of Kimball or pursuing an alternative transaction from considering or proposing such a transaction, even if it were prepared to pay consideration with a higher per share cash or market value than the per share cash or market value proposed to be received or realized in the merger. In particular, the termination fee, if applicable, could result in a potential third-party acquiror or merger partner proposing to pay a lower price to Kimball shareholders than it might otherwise have proposed to pay absent such a fee.
The merger consideration, including the exchange ratio, is fixed and will not be adjusted in the event of any change in either HNI’s or Kimball’s stock price. As such, Kimball shareholders cannot be sure of the value of the stock consideration they will receive in exchange for their shares of Kimball common stock in connection with the merger.
Upon completion of the merger, each share of Kimball common stock will be converted into the right to receive $9.00 in cash (as such amount of cash may potentially be adjusted in accordance with the terms of the merger agreement), without interest, and 0.1301 (as such amount may potentially be adjusted in accordance with the terms of the merger agreement) of a validly issued, fully paid and non-assessable share of HNI common stock. The foregoing exchange ratio is fixed and will not be adjusted to reflect changes in the stock price of either HNI or Kimball before the merger is complete. Due to the fixed exchange ratio, fluctuations in the price of HNI common stock will drive corresponding changes in the value of the merger consideration payable to each Kimball shareholder. As a result, changes in the price of HNI common stock prior to the completion of the merger will affect the market value that Kimball shareholders will become entitled to receive on the date of the closing of the merger. Stock price changes may result from a variety of factors (many of which are beyond HNI’s or Kimball’s control), including changes in HNI’s or Kimball’s respective business, operations and prospects.
The price of HNI common stock has fluctuated since the date the merger agreement, and may continue to change through the date of the special meeting and the date the merger is completed (which might be a significant period of time after the special meeting). These variations could result from changes in the business, operations or prospects of HNI or Kimball prior to or following the completion of the merger, regulatory considerations, general market and economic conditions and other factors both within and beyond the control of HNI or Kimball. At the time of the special meeting, Kimball shareholders will not know with certainty the value of the shares of HNI common stock that they will receive upon completion of the merger. Neither HNI nor Kimball is permitted to terminate the merger agreement solely because of changes in the market price of either company’s common stock.
Each party is subject to business uncertainties and contractual restrictions while the proposed merger is pending, which could adversely affect each party’s business and operations.
In connection with the pendency of the merger, it is possible that some customers, suppliers and other persons with whom HNI or Kimball has a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with HNI or Kimball, as the case may be, as a result of the merger or otherwise. Under the terms of the merger agreement, each of HNI and Kimball is subject to certain restrictions on the conduct of its respective business prior to completing the merger, which may adversely affect HNI’s ability to acquire assets or Kimball’s ability to execute certain of its business strategies, including, with respect to Kimball, the ability in certain cases to enter into or amend contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures.
Risks Relating to HNI After Completion of the Merger
HNI may not achieve the intended benefits of the merger, and the merger may disrupt its current plans or operations.
There can be no assurance that HNI will be able to successfully integrate Kimball’s assets or otherwise realize the expected benefits of the potential transaction (including operating and other cost synergies). Difficulties in integrating Kimball into HNI may result in HNI performing differently than expected, in operational challenges, in the failure to realize anticipated run-rate cost synergies and efficiencies in the expected time frame or at all, or in the difficulty or failure of utilizing available U.S. tax attributes, in which case the merger may not be accretive to earnings per share, may not improve HNI’s balance sheet position, may not enhance HNI’s ability to deliver and may not generate additional free cash flow due to reduced cash tax payments. The integration of the two companies may result in material challenges, including the diversion of HNI’s management’s attention from ongoing business concerns; retaining key management and other employees; retaining or attracting business and operational relationships; the possibility of faulty assumptions underlying expectations regarding the integration process and associated expenses; consolidating corporate and administrative infrastructures and eliminating duplicative operations; coordinating geographically separate organizations; unanticipated issues in integrating information technology, communications and other systems; as well as potential unknown liabilities, unforeseen expenses relating to integration, or delays associated with the acquisition.
The future results of HNI after the completion of the merger may be adversely impacted if HNI does not effectively manage its expanded operations following the completion of the merger.
Following the completion of the merger, the size of HNI’s business will be significantly larger than the current size of either HNI’s or Kimball’s respective businesses. HNI’s ability to successfully manage this expanded business will depend, in part, upon HNI’s management’s ability to design and implement strategic initiatives that address not only the integration of two independent stand-alone companies, but also the increased scale and scope of the combined business with its associated increased costs and complexity. There can be no assurances that the combined company will be successful or that it will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the merger.
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.February 7, 2019. 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. At DecemberMarch 31, 2017, 1.72023, 1.4 million shares remained available under the repurchase program.
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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, 2023) | | 110,686 | | | $ | 7.14 | | | 110,686 | | | 1,406,849 | |
Month #2 (February 1-February 28, 2023) | | 5,303 | | | $ | 7.46 | | | 5,303 | | | 1,401,546 | |
Month #3 (March 1-March 31, 2023) | | — | | | $ | — | | | — | | | 1,401,546 | |
Total | | 115,989 | | | $ | 7.15 | | | 115,989 | | | |
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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 (October 1-October 31, 2017) | | — |
| | $ | — |
| | — |
| | 1,652,709 |
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Month #2 (November 1-November 30, 2017) | | 2,050 |
| | $ | 17.00 |
| | 2,050 |
| | 1,650,659 |
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Month #3 (December 1-December 31, 2017) | | — |
| | $ | — |
| | — |
| | 1,650,659 |
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Total | | 2,050 |
| | $ | 17.00 |
| | 2,050 |
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Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
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101.INS101 | The following materials from Kimball International, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023 are formatted in Inline XBRL Instance Document |
| (eXtensible Business Reporting Language) and filed electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Income; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Shareholders’ Equity; and (vi) Notes to Condensed Consolidated Financial Statements |
101.SCH104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, formatted in Inline XBRL Taxonomy Extension Schema Documentand contained in Exhibit 101 |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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.
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| | KIMBALL INTERNATIONAL, INC. |
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| | KIMBALL INTERNATIONAL, INC. |
| By: | /s/ KRISTINE L. JUSTER |
| By: | /s/ ROBERT F. SCHNEIDER |
| | Robert F. SchneiderKristine L. Juster
Chief Executive Officer |
| | February 1, 2018May 8, 2023 |
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| By: | /s/ MICHELLE R. SCHROEDER |
| | |
| By: | /s/ TIMOTHY J. WOLFE |
| | Michelle R. Schroeder
Vice President,Timothy J. Wolfe
Chief Financial Officer |
| | February 1, 2018May 8, 2023 |