KIMBALL INTERNATIONAL, INC. Business Overview
Kimball International (the "Company," "Kimball International ," "we," "us," or "our") is a leading omnichannel commercial furnishings company 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 includes Kimball, National, Etc., Interwoven,Kimball Hospitality , D'style andPoppin .
Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
•COVID-19 and Operational Impacts - While inflationary pressures and supply chain disruptions continued to increase production costs, higher volumes and the benefit of increased prices together with our ongoing cost-out initiatives enabled us to record improved earnings in our third quarter of fiscal year 2022. We continue to believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our revolving credit facility will be sufficient to meet our working capital and other operating needs for at least the next twelve months. The following are key uncertainties related to the COVID-19 pandemic: •Labor constraints - A shortage of manufacturing labor is a limiting factor for our production. In addition to limiting the volume of production, the labor shortage also may drive increased labor costs driven by both increased wages and overtime expenses. •Supply constraints - We are experiencing inflationary pressure on our materials coupled with supplier volatility as certain suppliers are also experiencing material and labor shortages. We are working to offset these issues through price increases on our products, supplier negotiations, global sourcing initiatives, product re-engineering and parts standardization. To avoid future gross margin compression as we experience inflationary pressure on our manufacturing inputs, timely adjustments to customer prices may be necessary. •Shipping disruptions - We expect to continue to be exposed to fluctuations in both domestic freight and ocean freight costs. Transportation costs are managed by optimizing logistics and supply chain planning, but the current freight rate levels are elevated such that significant year-over-year increases occurred during the second half of our fiscal year 2021 and first nine months of fiscal year 2022 and are expected to remain elevated. We intend to adjust customer pricing, including the use of temporary surcharges, as necessary to mitigate increased freight costs. •Vaccine mandates - The Biden administration had proposed a vaccine mandate on federal contractors. As a federal contractor we took steps to comply, and duringDecember 2021 we offered a one-time incentive to employees who complied with the requirements which totaled$2.7 million in the second quarter of fiscal year 2022. The mandate is the subject of multiple lawsuits and is currently stayed due to a nationwide injunction. •Transformation Restructuring Plan - Included in the current phase of our transformation restructuring plan are activities such as the streamlining of manufacturing facilities, voluntary retirement incentive programs, and the consolidation of showrooms. 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. In addition to the savings 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 annualized pre-tax savings of approximately$18.0 million when it is fully implemented. See Note 4 - Restructuring of Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information. •During the second quarter of fiscal year 2021, we acquiredPoppin, Inc. ("Poppin"), a tech-enabled, market-leading B2B commercial furniture design company headquartered inNew York City ,New York .Poppin designs commercial-grade furniture that is made to mix, match, and scale in today's modern office and work-from-home environments. In addition to the cash consideration paid at acquisition date, the acquisition purchase price included contingent payments based on revenue and profitability milestones achieved throughJune 30, 2024 . As of the acquisition date the fair value of the contingent earn-out was$31.8 million . As of the end of our third quarter of fiscal year 2022 the fair value of the contingent earn-out liability was$4.4 million . During the second quarter of fiscal year 2022 we recorded goodwill impairment of$34.1 million as the carrying value ofPoppin exceeded its fair value as of theOctober 31, 2022 testing date, most notably driven by the impact of 25 -------------------------------------------------------------------------------- COVID-19 and supply chain disruptions on our sales growth models. See Note 3 - Acquisition of Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information. •In connection with the$58.0 million of borrowings on our revolving credit facility, during the first half of fiscal year 2022 we entered into an interest rate swap agreement with a bank with a notional value of$40.0 million . The interest rate swap agreement exchanges the variable interest rate on the revolving line of credit with a fixed interest rate and is used to hedge our exposure to interest rate risk. •Due to the contract and project nature of furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business, which in turn impacts our operating results. Effective management of our manufacturing capacity is and will continue to be critical to our success. See below for further details regarding current sales and order backlog trends.
•We expect to continue to invest in capital expenditures prudently, particularly for projects that will enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
•We continue to maintain a strong balance sheet. Our short-term liquidity
available, represented as cash and cash equivalents plus the unused amount of
our revolving credit facility, was
Financial Overview
At or for the For the
Three Months Ended Nine Months Ended
March 31 March 31
(Amounts in Millions, Except for Per
Share Data) 2022 2021 % Change 2022 2021 % Change
Net Sales $ 180.9 $ 138.7 30 % $ 488.9 $ 422.8 16 %
Organic Net Sales* 180.9 138.7 30 % 460.2 420.1 10 %
Gross Profit 55.1 39.8 38 % 150.7 137.7 9 %
Selling and Administrative Expenses 48.8 44.9 9 % 150.9 132.6 14 %
Other General (Income) Expense (4.5) - (4.5) -
Contingent Earn-out (Gain) Loss 2.2 - (15.8) -
Restructuring Expense 1.7 2.6 4.2 8.5
Goodwill Impairment - - 34.1 -
Operating Income (Loss) 7.0 (7.7) 191 % (18.2) (3.3) (449 %)
Operating Income (Loss) % 3.9 % (5.6 %) (3.7 %) (0.8 %)
Adjusted Operating Income (Loss) *
378 %$ 7.3 $ 13.9 (48 %)
Adjusted Operating Income (Loss) % * 3.9 % (1.8 %)
1.5 % 3.3 %
Net Income (Loss) $ 6.3 $ (4.5) 239 % $ (20.1) $ -
Net Income (Loss) as a Percentage of
Net Sales 3.5 % (3.3 %) (4.1 %) - %
Adjusted Net Income (Loss) * $ 7.6 $ (1.0) 845 % $ 3.8 $ 10.9 (65 %)
Diluted Earnings (Loss) Per Share
242 %$ (0.55) $ - Adjusted Diluted Earnings (Loss) Per Share*$ 0.21 $ (0.03) 800 %$ 0.11 $ 0.30 (63 %) Return on Invested Capital ** 14.1 % (1.8 %) 5.2 % (0.2 %) Adjusted EBITDA *$ 11.5 $ 1.9 517 %$ 20.5 $ 26.8 (24 %) Adjusted EBITDA % * 6.4 % 1.3 % 4.2 % 6.3 % Order Backlog **$ 178.5 $ 129.6 38 % * Items indicated represent Non-GAAP (Generally Accepted Accounting Principles) measurements. ** Items indicated represent Key Performance Indicators. See the "Non-GAAP Financial Measures and Other Key Performance Indicators" section below. 26 --------------------------------------------------------------------------------
Net Sales by End Market Three Months Ended Nine Months Ended March 31 March 31 (Amounts in Millions) 2022 2021 % Change 2022 2021 % Change Workplace$ 119.8 $ 78.9 52 %$ 336.3 $ 261.6 29 % Health 26.6 24.6 8 % 76.2 72.2 6 % Hospitality 34.5 35.2 (2 %) 76.4 89.0 (14 %) Total Net Sales$ 180.9 $ 138.7 30 %$ 488.9 $ 422.8 16 %
Our Workplace end market includes sales to the commercial, financial, government
and education vertical markets and eBusiness. The revenue of the
Third quarter fiscal year 2022 consolidated net sales increased$42.2 million , or 30% compared to third quarter fiscal year 2021 net sales as increased pricing and increased sales of workplace and health products more than offset a decline in our hospitality market. Consolidated net sales for the year-to-date period of fiscal year 2022 increased 16% compared to the same year-to-date period in fiscal year 2021. Organic net sales increased 10% compared to the year-to-date period of fiscal year 2021 as increased pricing and increased sales of workplace and health products were offset by a decline in our hospitality market. Each of our end market sales levels can fluctuate depending on overall demand and mix of projects in a given period. Order backlog atMarch 31, 2022 increased$48.8 million , or 38%, when compared to the backlog level as ofMarch 31, 2021 , as the backlog ofPoppin coupled with the increased backlog of workplace and health more than offset a decline in our hospitality end market backlog. Increased lead times have also contributed to the increase in our backlog levels. Backlog at a point in time may not be indicative of future sales trends. Gross profit as a percent of net sales increased 180 basis points to 30.5% for the third quarter of fiscal year 2022 from 28.7% for the third quarter of fiscal year 2021. The increased third quarter gross profit as a percent of net sales was driven by price increases, leverage on higher net sales, savings realized from our operational excellence initiatives, and lower healthcare expenses which more than offset inflationary pressure on materials, increased freight costs, manufacturing labor increases, and the impact of LIFO expense. Gross profit as a percent of net sales decreased 180 basis points to 30.8% for the year-to-date period of fiscal year 2022 from 32.6% for the year-to-date period of fiscal year 2021. The decline in year-to-date gross profit as a percent of net sales was driven by inflationary pressure on materials, increased freight costs, manufacturing labor increases, the impact of LIFO expense and the cost associated with the one-time COVID vaccine incentive which were partially offset by price increases, savings realized from our operational excellence initiatives, and lower healthcare expenses. Selling and administrative (S&A) expenses in the third quarter and year-to-date period of fiscal year 2022 compared to the third quarter and year-to-date period of fiscal year 2021 increased$3.9 million and$18.3 million , respectively, and decreased 550 and 70 basis points as a percent of net sales, respectively, due to the leverage of our increased sales. Increased S&A expenses in the third quarter were driven by increased incentive compensation costs, increased advertising and marketing expense, and increased retirement expense. Fiscal year-to-date S&A expenses increased due to the incremental S&A expenses of our acquiredPoppin business which were partially offset by reductions in our S&A expense of our organic business. The consulting costs related to thePoppin acquisition in the prior year-to-date period did not repeat in the current year. We also recorded decreased salary expenses, decreased employee benefit expenses, decreased commission costs, increased incentive compensation expenses, increased expense for our COVID vaccine incentive, and increased travel and entertainment expenses compared to the year-to-date period of the prior fiscal year. During the third quarter and year-to-date period of fiscal year 2022 we recorded lower selling and administrative expenses related to the normal revaluation to fair value of our Supplemental Employee Retirement Plan ("SERP") liability. The impact from the change in the SERP liability that was recognized in selling and administrative expenses was offset with the change in fair value of the SERP investments which was recorded in Other Income (Expense), and thus there was no effect on net income. We recognized pre-tax restructuring expense of$1.7 million and$4.2 million for the three and nine months endedMarch 31, 2022 , respectively, and$2.6 million and$8.5 million for the three and nine months endedMarch 31, 2021 , respectively. See Note 4 - Restructuring of Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information. 27 -------------------------------------------------------------------------------- In connection with our annual goodwill impairment test, we assessed goodwill at the reporting unit level for impairment during our second quarter of fiscal year 2022 endedDecember 31, 2021 , and based on our analysis ourPoppin 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 forecasts primarily attributable to changes in demand due to the ongoing COVID-19 pandemic and supply chain constraints. As a result, we recorded a pre-tax, non-cash charge to reduce the carrying value of goodwill by$34.1 million during the year-to-date period of fiscal year 2022. We also recorded a non-cash pre-tax contingent earn-out benefit during the year-to-date period of fiscal year 2022, of$15.8 million which partially offset the goodwill impairment, as there was a lower likelihood ofPoppin achieving targeted milestones during the earn-out period.
Other General (Income) Expense consisted of a
Other Income (Expense) consisted of the following:
Three Months Ended Nine Months Ended
March 31 March 31
(Amounts in Thousands) 2022 2021 2022 2021
Interest Income $ 25 $ 59 $ 77 $ 248
Interest Expense (390) (177) (922) (263)
Gain (Loss) on Supplemental Employee Retirement Plan
Investments (887) 428 (300) 2,567
Other 17 (117) (47) (133)
Other Income (Expense), net $ (1,235) Our effective tax rates for the three and nine months endedMarch 31, 2022 were negative tax rates of (9.3)% and (3.3)%, respectively, driven by the book versus tax treatment of nondeductible goodwill impairment and earn-out valuation adjustments. Our effective tax rates for the three and nine months endedMarch 31, 2021 were 39.8% and 102.1%, respectively. These rates were higher than the combined federal and state statutory tax rate primarily due to R&D tax credits, which increased the tax benefit associated with the pre-tax losses during the quarter and year-to-date periods. Comparing the balance sheet as ofMarch 31, 2022 toJune 30, 2021 , our accounts receivable balance increased as a result of the increased sales volumes. Our inventory and accounts payable balances increased as we ramped up our material purchases and production to fulfill our order backlog and to cushion against supply chain disruptions. Our customer deposit balance has also increased in line with our increased order backlog. Finally, due to COVID-19 and supply chain disruptions which have temporarily delayedPoppin's sales growth expectations, we recognized a goodwill impairment charge which reduced our goodwill balance, and we also reduced our earn-out liability due to the lower likelihood ofPoppin achieving targeted milestones during the earn-out period.
Liquidity and Capital Resources
Our total cash and cash equivalents was$12.7 million atMarch 31, 2022 and$24.3 million atJune 30, 2021 . Our total debt was$58.1 million atMarch 31, 2022 and$40.1 million atJune 30, 2021 . During the first nine months of fiscal year 2022, cash flows used for operations were$6.6 million , capital expenditures including capitalized software were$15.8 million , the return of capital to shareholders in the form of dividends totaled$9.9 million and stock repurchases totaled$2.4 million which were partially offset by proceeds from the sale of assets of$5.5 million .
Working capital at
Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our revolving credit facility, totaled$78.2 million atMarch 31, 2022 . AtMarch 31, 2022 , we had$1.5 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. We had$58.0 million and$40.0 million of borrowings on our revolving credit facility atMarch 31, 2022 andJune 30, 2021 , respectively. Total availability to borrow under the credit facility totaled$65.5 million atMarch 31, 2022 . 28 --------------------------------------------------------------------------------
Cash Flows
The following table reflects the major categories of cash flows for the first nine months of fiscal years 2022 and 2021.
Nine Months Ended
March 31
(Amounts in Thousands) 2022 2021
Net cash (used for) provided by operating activities
$ (10,346) $ (110,064) Net cash provided by financing activities$ 5,008
Cash Flows from Operating Activities
For the first nine months of fiscal year 2022 net cash used for operating activities was$6.6 million inclusive of net loss of$20.1 million which included$34.1 million of goodwill impairment and$15.8 million of contingent earn-out liability gains. In the first nine months of fiscal year 2021 net cash provided by operating activities was$27.3 million . Changes in working capital balances used$21.2 million of cash in the first nine months of fiscal year 2022 and provided$8.4 million of cash in the first nine months of fiscal year 2021. 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 our accounts payable. The inventory, receivables, and accounts payable increases were due to the increased net sales and associated increase in material purchases and production to fulfill our order backlog and to cushion against supply chain disruptions. The$8.4 million of cash provided by changes in working capital balances in the first nine months of fiscal year 2021 was driven by a$24.1 million reduction in our accounts receivable primarily due to the reduction in our sales volume. Our accrued expenses decreased in the first nine months of fiscal year 2021 as our accrued cash incentive compensation and retirement profit sharing contribution, which together totaled$10.7 million and were related to our fiscal year 2020 performance, were paid out during the year-to-date period of fiscal year 2021. Our measure of accounts receivable performance, also referred to as Days Sales Outstanding ("DSO"), for the nine-month periods endedMarch 31, 2022 andMarch 31, 2021 were 32 and 34 days, respectively. The DSO decrease was largely driven by the impact of thePoppin business which has lower DSO than our other brands. We define DSO as the average of monthly accounts and notes receivable divided by an average day's net sales. Our Production Days Supply on Hand ("PDSOH") of inventory measure for the nine-month periods endedMarch 31, 2022 andMarch 31, 2021 were 72 and 65 days, respectively. The increase in PDSOH was driven by increases in average inventory levels outpacing the sales ramp up. We define PDSOH as the average of the monthly net inventory divided by an average day's cost of sales.
Cash Flows from Investing Activities
During the first nine months of fiscal years 2022 and 2021, we reinvested$15.8 million and$13.9 million , respectively, into capital investments for the future. The current year capital investments includes current construction of a warehouse, and both the current and prior year capital investments include various manufacturing equipment upgrades to increase automation in production facilities, configuration design software, and facility improvements. We expended$101.5 million of cash for thePoppin acquisition during the year-to-date period of fiscal year 2021. During the first nine months of fiscal year 2021, we invested$10.0 million in available-for-sale securities, and$14.8 million matured.
Cash Flows from Financing Activities
During the nine months endedMarch 31, 2022 , we had proceeds from borrowings on our revolving credit facility of$45.0 million and during the same period we also repaid$27.0 million on our revolving credit facility. During the nine months endedMarch 31, 2021 we had proceeds from borrowings on our credit facility of$40.0 million which was utilized for thePoppin acquisition. We paid dividends of$9.9 million and$10.0 million in the nine-month periods endedMarch 31, 2022 andMarch 31, 2021 , respectively. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. We repurchased shares pursuant to a previously announced stock repurchase program, which drove cash outflow of$2.4 million and$2.1 million in the year-to-date periods of fiscal year 2022 and 2021, respectively. Future debt payments may be paid out of cash flows from operations or from future refinancing of our debt. 29 --------------------------------------------------------------------------------
Revolving Credit Facility
During the first quarter of fiscal year 2022, we entered into a Second Amendment to Credit Agreement which amended our credit agreement by adding content to facilitate a transition to a base interest rate index other than theLondon Interbank Offered Rate and to define the provisions by which an overpayment or erroneous payment may be requested and returned to us. The complete amended agreement was filed as Exhibit 10.1 to our Current Report on Form 8-K filed onSeptember 24, 2021 . As ofMarch 31, 2022 we had a$125.0 million revolving credit facility with a maturity date ofOctober 2024 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 loans under the Credit Agreement could consist of, at our election, advances inU.S. dollars or advances in any other currency that was agreed to by the lenders. The proceeds are to be used for general corporate purposes including acquisitions. A portion of the revolving credit facility, not to exceed$10 million of the principal amount, was available for the issuance of letters of credit. AtMarch 31, 2022 , we had$1.5 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. AtMarch 31, 2022 andJune 30, 2021 we had$58.0 million and$40.0 million , respectively, in borrowings outstanding. The revolving credit facility requires us to comply with certain debt covenants, the most significant of which is the adjusted leverage ratio and the interest coverage ratio. The adjusted leverage ratio is defined as (a) consolidated total indebtedness minus unencumberedU.S. cash 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, to not be greater than 3.00 to 1.00. The interest coverage ratio, for any period, of (a) Consolidated EBITDA for such period to (b) cash interest expense for such period, calculated on a consolidated basis in accordance with GAAP for the trailing four quarter period then ending, to not be less than 3.00 to 1.00. We were in compliance with all debt covenants of the revolving credit facility during the nine-month period endedMarch 31, 2022 .
The table below compares the adjusted leverage ratio and the interest coverage ratio with the limits specified in the credit agreement.
At or For the Period Ended Limit As Specified in
Covenant March 31, 2022 Credit Agreement ExcessAdjusted Leverage Ratio 2.07 3.00 0.93 Interest Coverage Ratio 26.00 3.00 23.00 Future Liquidity We believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our revolving credit facility will be sufficient to meet our working capital and other operating needs for at least the next twelve months. Our Board of Directors declared quarterly dividends of$0.09 per share to be paid during our fourth quarter of fiscal year 2022. Future cash dividends are subject to approval by our Board of Directors and may be adjusted as business needs or market conditions change. During the remainder of fiscal year 2022 we expect to invest approximately$10 million in capital expenditures, particularly for projects such as machinery and equipment upgrades and automation, software, construction of a warehouse, and showroom related expenses. As ofMarch 31, 2022 , 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 endedJune 30, 2021 outside the ordinary course of business. We also continuously monitor for potential acquisitions that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability. Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by factors such as general economic and market conditions, including potential reduced revenues from the COVID-19 pandemic if future shut downs occur, lack of availability or cost of manufacturing labor, lack of availability of raw material components in the supply chain, loss of key contract customers, and other unforeseen circumstances. In particular, should demand for our products decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted. 30
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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 statements of income, statements of comprehensive income,
balance sheets, statements of cash flows, or statements of shareholders' equity
of the company. The non-GAAP financial measures used within this MD&A include
(1) organic net sales, defined as net sales excluding acquisition-related net
sales; (2) adjusted operating income, defined as operating income (loss)
excluding restructuring expenses, goodwill impairment, CEO transition costs,
acquisition-related amortization and inventory valuation adjustments, costs of
acquisition, contingent earn-out gain or loss, COVID vaccine incentive costs, a
gain on sale of a warehouse, and market value adjustments related to our SERP
liability; (3) adjusted operating income percentage, defined as adjusted
operating income as a percentage of net sales; (4) adjusted net income, defined
as net income (loss) excluding restructuring expenses, goodwill impairment, CEO
transition costs, acquisition-related amortization and inventory valuation
adjustments, costs of acquisition, contingent earn-out gain or loss, COVID
vaccine incentive costs, and a gain on sale of a warehouse; (5) adjusted diluted
earnings per share, defined as diluted earnings (loss) per share excluding
restructuring expenses, goodwill impairment, CEO transition costs,
acquisition-related amortization and inventory valuation adjustments, costs of
acquisition, contingent earn-out gain or loss, COVID vaccine incentive costs,
and a gain on sale of a warehouse; (6) adjusted EBITDA, defined as earnings
before interest, statutory income tax impacts for taxable after-tax measures,
depreciation, and amortization and excluding restructuring expenses, goodwill
impairment, CEO transition costs, acquisition-related inventory valuation
adjustments, costs of acquisition, contingent earn-out gain or loss, COVID
vaccine incentive costs, and a gain on sale of a warehouse; and (7) adjusted
EBITDA percentage, defined as adjusted EBITDA as a percentage of net sales.
Reconciliations of the reported GAAP numbers to these non-GAAP financial
measures are included in the tables below. Management believes it is useful for
investors to understand and to be able to meaningfully trend, analyze and
benchmark how our core operations performed without market value adjustments
related to our SERP liability, without expenses incurred in executing our
transformation restructuring plan, without CEO transition costs, without
acquisition-related costs, without costs of the COVID vaccine incentive, and
without the gain on sale of a warehouse. Many of our internal performance
measures that management uses to make certain operating decisions exclude these
expenses to enable meaningful trending of core operating metrics. These non-GAAP
financial measures should not be viewed as an alternative to the GAAP measures
and are presented as supplemental information.
31
--------------------------------------------------------------------------------Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators (Amounts in Thousands, Except for Per Share Data)
Organic Net Sales Three Months Ended Nine Months Ended
March 31, March 31,
2022 2021 2022 2021
Net Sales, as reported $ 180,918 $ 138,676 $ 488,931 $ 422,817
Less: Poppin acquisition net sales (1) - - 28,718 2,678
Organic Net Sales $ 180,918 $ 138,676 $ 460,213 $ 420,139
(1) Poppin was acquired on December 9, 2020 thus no adjustment for organic sales
was necessary for the three months ended March 31, 2022 and 2021. For the nine
month periods ended March 31, 2022 and 2021, organic net sales exclude Poppin
acquisition net sales for the fiscal year-to-date periods ended December 31,
2021 and 2020.
Adjusted Operating Income (Loss) Three Months Ended Nine Months Ended
March 31 March 31
2022 2021 2022 2021
Operating Income (Loss), as reported $ 6,996 $ (7,714) $ (18,226) $ (3,319)
Add: Pre-tax Restructuring Expense 1,730 2,617 4,195 8,473
Add: Pre-tax Goodwill Impairment - - 34,118 -
Add: Pre-tax Other General (Income) Expense(2) (4,523) - (4,523) -
Add: Pre-tax Expense Adjustment to SERP Liability (887) 428 (300) 2,567
Add: Pre-tax CEO Transition Costs - 141 - 423
Add: Pre-tax Acquisition-related Amortization 1,610 1,671 4,830 2,066
Add: Pre-tax Acquisition-related Inventory
Valuation Adjustment 48 247 253 289
Add: Pre-tax Costs of Acquisition - 47 - 3,435
Add: Pre-tax Contingent Earn-Out (Gain) Loss 2,150 - (15,750) -
Add: Pre-tax COVID Vaccine Incentive - - 2,709 -
Adjusted Operating Income (Loss) $ 7,124 $ (2,563) $ 7,306 $ 13,934
Net Sales $ 180,918 $ 138,676 $ 488,931 $ 422,817
Adjusted Operating Income (Loss) % 3.9 % (1.8) % 1.5 % 3.3 %
32
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Adjusted Net Income (Loss) Three Months Ended Nine Months Ended
March 31 March 31
2022 2021 2022 2021
Net Income (Loss), as reported $ 6,295 $ (4,529) $ (20,068) $ 19
Pre-tax Restructuring Expense 1,730 2,617 4,195 8,473
Tax on Restructuring Expense (445) (673) (1,079) (2,181)
Add: After-tax Restructuring Expense 1,285 1,944 3,116 6,292
Pre-tax Goodwill Impairment - - 34,118 -
Tax on Goodwill Impairment - - - -
Add: After-tax Goodwill Impairment - - 34,118 -
Pre-tax Other General (Income) Expense(2) (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 CEO Transition Costs - 141 - 423
Tax on CEO Transition Costs - (36) - (108)
Add: After-tax CEO Transition Costs - 105 - 315
Pre-tax Acquisition-related Amortization 1,610 1,671 4,830 2,066
Tax on Acquisition-related Amortization (414) (430) (1,243) (532)
Add: After-tax Acquisition-related Amortization 1,196 1,241 3,587 1,534
Pre-tax Acquisition-related Inventory Valuation
Adjustment 48 247 253 289
Tax on Acquisition-related Inventory Valuation
Adjustment (12) (64) (65) (75)
Add: After-tax Acquisition-related Inventory
Adjustment 36 183 188 214
Pre-tax Costs of Acquisition - 47 - 3,435
Tax on Costs of Acquisition - (12) - (884)
Add: After-tax Costs of Acquisition - 35 - 2,551
Pre-tax Contingent Earn-Out (Gain) Loss 2,150 - (15,750) -
Tax on Contingent Earn-Out (Gain) Loss - - - -
Add: After-tax Contingent Earn-Out (Gain) Loss 2,150 - (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 (Loss) $ 7,603 $ (1,021) $ 3,844 $ 10,925
33
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Adjusted Diluted Earnings (Loss) Per Share Three Months Ended Nine Months Ended
March 31 March 31
2022 2021 2022 2021
Diluted Earnings (Loss) Per Share, as reported $ 0.17 $ (0.12) $ (0.55) 0.00
Add: After-tax Restructuring Expense 0.04 0.05 0.09 0.17
Add: After-tax CEO Transition Costs 0.00 0.00 0.00 0.01
Add: After-tax Goodwill Impairment 0.00 0.00 0.93 0.00
Add: After-tax Other General (Income) Expense(2) (0.09) 0.00 (0.09) 0.00
Add: After-tax Acquisition-related Amortization 0.03 0.03 0.10 0.04
Add: After-tax Acquisition-related Inventory
Adjustment 0.00 0.01 0.01 0.01
Add: After-tax Costs of Acquisition 0.00 0.00 0.00 0.07
Add: After-tax Contingent Earn-Out (Gain) Loss 0.06 0.00 (0.43) 0.00
Add: COVID Vaccine Incentive 0.00 0.00 0.05 0.00
Adjusted Diluted Earnings (Loss) Per Share $ 0.21 $ (0.03) $ 0.11 $ 0.30
Adjusted EBITDA
Three Months Ended Nine Months Ended
March 31 March 31
2022 2021 2022 2021
Net Income (Loss) $ 6,295 $ (4,529) $ (20,068) $ 19
Provision (Benefit) for Income Taxes (534) (2,992) 650 (919)
Income (Loss) Before Taxes on Income 5,761 (7,521) (19,418) (900)
Interest Expense 390 177 922 263
Interest Income (25) (59) (77) (248)
Depreciation 3,635 3,708 10,820 10,836
Amortization 2,358 2,510 7,212 4,212
Pre-tax Restructuring Expense 1,730 2,617 4,195 8,473
Pre-Tax Goodwill Impairment - - 34,118 -
Pre-tax Other General (Income) Expense(2) (4,523) - (4,523) -
Pre-tax CEO Transition Costs - 141 - 423
Pre-tax Acquisition-related Inventory Valuation
Adjustment 48 247 253 289
Pre-tax Costs of Acquisition - 47 - 3,435
Pre-tax Contingent Earn-Out (Gain) Loss 2,150 - (15,750) -
Pre-tax COVID Vaccine Incentive - - 2,709 -
Adjusted EBITDA $ 11,524 $ 1,867 $ 20,461 $ 26,783
Adjusted EBITDA % 6.4 % 1.3 % 4.2 % 6.3 %
(2) Third quarter fiscal year 2022 Other General (Income) Expense consists of a
gain realized on the sale of a warehouse totaling
34
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The order 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 the backlog of orders is expected to ship within a six-month
period.
Return on Invested Capital is a key performance indicator calculated as:
[(Earnings Before Interest, Taxes, Amortization, Restructuring Expense, CEO
Transition Costs, Acquisition-related Inventory Valuation Adjustments, Goodwill
Impairment, Contingent Earn-out Gain or Loss, COVID Vaccine Incentive, and Other
General Income) multiplied by (1 minus Effective Tax Rate)] divided by (Total
Shareholders' Equity plus Net Debt). Net Debt is defined as current maturities
of long-term debt plus long-term debt less cash, cash equivalents, and
short-term investments.
Fair Value
During the third quarter and year-to-date period of fiscal year 2022, no financial instruments were affected by a lack of market liquidity. Financial assets classified as level 1 assets were valued using readily available market pricing. We evaluated the inputs used to value the instruments and validated the accuracy of the instrument fair values based on historical evidence. For the interest rate swap classified as a level 2 asset, the fair value is determined based on market data which use observable market inputs using standard calculations, such as time value, forward interest rate yield curves and current spot rates adjusted forKimball International's non-performance risk. We evaluated the inputs used to value the interest rate swap and validated the accuracy and hedge effectiveness using a qualitative approach. The investment in stock warrants and equity securities without readily determinable fair value of a privately-held company are classified as level 3 financial assets. The stock warrants are accounted for as a derivative instrument valued on a recurring basis considering the pricing of recent purchases or sales of the investment as well as positive and negative qualitative evidence, while the equity securities without readily determinable fair value are 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.Goodwill is classified as a Level 3 financial asset and is based on a valuation model that measures the present value of estimated future cash flows of the reporting unit at a discount rate that captures the risk associated with these future cash flows. During the second quarter of fiscal year 2022, we recorded$34.1 million of goodwill impairment related to ourPoppin business, as the annual goodwill impairment testing determined the carrying value of thePoppin reporting unit exceeded its relative fair value, most notably driven by the impact of COVID-19 and supply chain disruptions on our sales growth models.
See Note 13 - Fair Value of Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Critical Accounting Policies
Our Condensed Consolidated Financial Statements have been prepared in accordance withU.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the Condensed Consolidated Financial Statements and related notes. Actual results could differ from these estimates and assumptions. Management continually reviews the accounting policies and financial information disclosures. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 . During the first nine months of fiscal year 2022, there were no material changes in the accounting policies and assumptions previously disclosed.
New Accounting Standards
See Note 2 - Recent Accounting Pronouncements and Supplemental Information of Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for information regarding New Accounting Standards.
Forward-Looking Statements
Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. The statements generally can be identified by the use of words or phrases, including, but not limited to "intend," "anticipate," "believe," "estimate," "project," "target," "plan," "expect," "setting up," "beginning to," "will," "should," "would," "resume," or similar statements. We caution that forward-looking statements are subject to known and unknown risks and uncertainties that may cause the Company's actual future results and performance to differ materially from expected results, including, but not limited to, the possibility that any of the anticipated benefits of thePoppin acquisition will not be realized or 35
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will not be realized within the expected time period; the risk that any projections or guidance by the Company, including revenues, margins, earnings, or any other financial results are not realized; a shortage of manufacturing labor and related cost; disruptions in our supply chain and freight channels including impacts on cost and availability, adverse changes in global economic conditions; successful execution of the second phase of the Company's restructuring plan; significant reduction in customer order patterns; loss of key suppliers; relationships with strategic customers and product distributors; changes in the regulatory environment; global health concerns (including the impact of the COVID-19 pandemic); or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of the Company are contained in the Company's Form 10-K filing for the fiscal year endedJune 30, 2021 and other filings with theSecurities and Exchange Commission .
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