Log in
E-mail
Password
Show password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

KIMBALL INTERNATIONAL, INC.

(KBAL)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector newsMarketScreener Strategies

KIMBALL INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

08/31/2021 | 05:04pm EDT
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 and Poppin.
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 Markit, a global information provider, as of May
2021 for the U.S. office furniture market, projects a year-over-year increase of
1.8% for calendar year 2021. The forecast for two of the leading indicators for
the hospitality furniture market in the May 2021 PwC Hospitality Directions U.S.
report includes a projected 40.1% increase in RevPAR (Revenue Per Available
Room) for calendar year 2021, while occupancy levels for calendar 2021 are
anticipated to increase to 57.2%, compared to 44.1% in calendar year 2020.
Management currently considers the following events, trends, and uncertainties
to be most important to understanding our financial condition and operating
performance:
•COVID-19 - The COVID-19 pandemic continued to adversely impact our financial
performance during fiscal year 2021, but the negative effects are expected to
decline as the markets to which we sell rebound. The expected duration and
severity of the COVID-19 impact on our business is affected by plans to return
to the workplace balanced with working from home and the potential prolonged
reduction in travel. Our dealers and suppliers are also experiencing similar
negative impacts from the COVID-19 pandemic. Total orders received during fiscal
year 2021 declined compared to fiscal year 2020 due to declines in workplace,
health, and hospitality. Order rates gained momentum sequentially through fiscal
year 2021 in our workplace and health end markets, but have not yet reached
pre-pandemic levels. We are closely monitoring market changes and our liquidity
in order to proactively adjust our operating costs. In order to preserve cash
during this time, we have also reduced spending on discretionary expenditures,
but plan to invest appropriately to fuel our growth during fiscal year 2022.
Managing working capital in conjunction with fluctuating demand levels is
likewise key. 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 amended revolving credit facility will be sufficient to meet
our working capital and other operating needs for at least the next twelve
months.
•'Kimball International Connect 2.0' Strategy - In August 2020, Kimball
International announced Connect 2.0, which centers around accelerating our
growth. The four pillars of our previously announced strategy remain constant:
inspire our people with a purpose driven and high performance culture, build our
capabilities by expanding our work on innovation, fuel our future through the
dedication to cost savings, and accelerate our growth. Connect 2.0 is designed
to accelerate the growth of Kimball International and aid us in effectively
managing through the current economic downturn, by driving market share gains as
well as yielding additional cost savings. The Company has been reorganized into
four market centric business units which are Workplace, Health, Hospitality, and
eBusiness that will accelerate our ability to redesign and reimagine the new
workplace, build a new work from home portfolio, continue assembling experts in
health, and expand our hospitality business into other commercial direct sales
environments. The dedicated eBusiness unit has taken a leadership role in
establishing all e-commerce across our brands and end markets. Each of these
four business units is supported by the agility and efficiency of Global
Operations and the streamlined center-led structure that we implemented in year
one of our strategy and the transformation restructuring plan described below.
•Transformation Restructuring Plan Phase 1 - In June 2019, we announced a
transformation restructuring plan to optimize resources for future growth,
improve efficiency, and build capabilities across our organization. We believe
phase 1 of our transformation restructuring plan has established a more
cost-efficient structure to better align our operations with our long-term
strategic goals. Phase 1 of our transformation restructuring plan is
substantially complete as of June 30, 2021. See   Note 3 - Restructuring   of
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for
additional information.
•Transformation Restructuring Plan Phase 2 - In August 2020, we announced the
next phase of our transformation restructuring plan that will align our business
units to a new market-centric orientation and is expected to yield additional
cost savings that will aid us in effectively managing through the downturn
caused by the COVID-19 pandemic. Phase 2 of
                                       22

--------------------------------------------------------------------------------


the transformation restructuring plan builds on the initial strategy and the
transformation restructuring plan announced in June 2019. Phase 2 of the
transformation restructuring plan began in the first quarter of our fiscal year
2021, and we expect a substantial majority of the underlying activities of these
aforementioned actions to be completed by the end of fiscal year 2023. We
currently estimate the transformation restructuring plan will incur total
pre-tax restructuring charges of approximately $16.0 million to $18.0 million
related to the initiatives under phase 2 of the transformation restructuring
plan, with $8.8 million recorded in fiscal year 2021, approximately $6.0 million
in fiscal year 2022 and the remainder thereafter. The restructuring charges
consist of approximately $5.1 million for severance and other employee-related
costs, $1.6 million for facility costs, and $2.2 million for lease and other
asset impairment. Approximately 65% of the total cost estimate is expected to be
cash expense. The following is a summary of the activities we will be
undertaking pursuant to phase 2 of the transformation restructuring plan:
•As part of the previously announced plan to consolidate manufacturing of all
brands into one world-class global operations group, we are streamlining our
manufacturing facilities by leveraging production capabilities across all
facilities, establishing centers of excellence, and setting up processes to
facilitate flexing of product between facilities in response to volume
fluctuations. We are also reviewing our overall facility footprint to identify
opportunities to reduce capacity and gain efficiencies, including the
consolidation of our Baltimore, Maryland facility into other manufacturing
facilities.
•We are streamlining our workforce to align with the new organizational
structure and respond to lower volumes created by the COVID-19 pandemic,
creating a more efficient organization to deliver on our Connect 2.0 strategy.
•In the third quarter of fiscal 2021, we offered two voluntary retirement
incentive programs to eligible employees. Employees electing to participate were
paid special termination benefits, including a severance benefit and cash
payment that may be used to pay for a period of healthcare coverage or for any
other purpose.
•Starting in fiscal year 2022, many of our showrooms will feature multiple
brands thus eliminating the need for more than one showroom in the same city.
Showroom locations are being reviewed and select leased showroom locations will
be closed.
•During the second quarter of fiscal year 2021, we acquired Poppin, Inc.
("Poppin"), a tech-enabled, market-leading B2B commercial furniture design
company headquartered in New 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. The acquisition purchase price
totaled $110.4 million in cash consideration plus additional contingent
payments, if all remaining milestones are achieved, of $65.0 million based on
revenue and profitability milestones achieved through June 30, 2024. As of the
acquisition date the fair value of the contingent earn-out was $31.8 million.
During the fourth quarter of fiscal year 2021 the fair value of the contingent
earn-out liability decreased to $20.2 million.
•In connection with and to facilitate the acquisition, on November 4, 2020, we
amended our revolving credit facility to allow for up to $125.0 million in
borrowings, with an option to increase the amount available for borrowing to
$200.0 million at our request, subject to participating banks' consent. We
borrowed $40.0 million on our revolving credit facility which was utilized for
the Poppin acquisition. The amended revolving credit facility maintains a
maturity date of October 2024. The complete agreement was filed as Exhibit 10.1
to our Current Report on Form 8-K filed on November 4, 2020.
•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 are expected to remain elevated. We are
experiencing commodity cost increases especially for wood components, steel,
aluminum, foam and plastics. We expect these commodity pricing pressures to
continue in fiscal year 2022. We are working to offset increases in these costs
through pricing, inclusion of a portion of the increased freight in quotes,
supplier negotiations, global sourcing initiatives, product re-engineering and
parts standardization.
•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 $107.6 million at June 30, 2021.
                                       23

--------------------------------------------------------------------------------

Results of Operations - Fiscal Year 2021 Compared to Fiscal Year 2020

                                                        At or for the
                                                          Year Ended
                                                           June 30

(Amounts in Millions, Except for Per Share Data) 2021 2020 % Change Net Sales

                                          $ 569.0       $ 727.9         (22%)
Organic Net Sales*                                   544.9         727.9         (25%)
Gross Profit                                         182.4         250.8         (27%)
Selling and Administrative Expenses                  181.8         187.9          (3%)
Contingent Earn-out (Gain) Loss                      (11.6)            -
Restructuring Expense                                 10.7           8.5
Operating Income                                       1.5          54.4         (97%)
Operating Income %                                     0.3  %        7.5  %
Adjusted Operating Income *                        $  12.4       $  64.2         (81%)
Adjusted Operating Income % *                          2.2  %        8.8  %
Net Income                                         $   7.4       $  41.1         (82%)
Net Income as a Percentage of Net Sales                1.3  %        5.6  %
Adjusted Net Income *                                 13.0          47.9         (73%)
Diluted Earnings Per Share                         $  0.20       $  1.11         (82%)
Adjusted Diluted Earnings Per Share *              $  0.35       $  1.29         (73%)
Return on Invested Capital **                         12.1  %       37.5  %
Adjusted EBITDA *                                  $  29.7       $  81.3         (63%)
Adjusted EBITDA %*                                     5.2  %       11.2  %
Order Backlog **                                   $ 141.4       $ 151.1          (6%)


* 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.
Net Sales by End Market
                                 Year Ended
                                  June 30
(Amounts in Millions)        2021         2020        % Change
Workplace                  $ 354.3      $ 435.4        (19%)
Health                        97.3        108.9        (11%)
Hospitality                  117.4        183.6        (36%)
Total Net Sales            $ 569.0      $ 727.9        (22%)

The Workplace, Health and Hospitality end markets align with the reorganization which occurred at the beginning of fiscal year 2021. Our Workplace end market includes sales to the commercial, financial, government and education vertical markets and eBusiness. The revenue of the Poppin acquisition is included in eBusiness. Fiscal year 2021 consolidated net sales were $569.0 million compared to fiscal year 2020 consolidated net sales of $727.9 million, a 22% decrease. Organic net sales decreased $183.0 million, or 25%, year-over-year due to lower volume primarily in our workplace and hospitality end markets, which more than offset increased pricing. The declines in sales volumes in all three of our end markets were driven by the COVID-19 pandemic. Each of our end market sales levels can fluctuate depending on the mix of projects in a given period. Order backlog at June 30, 2021 decreased 6%, when compared to the open order level as of June 30, 2020, driven by the COVID-19 pandemic. Open orders at a point in time may not be indicative of future sales trends.

                                       24

--------------------------------------------------------------------------------


Gross profit as a percent of net sales decreased 240 basis points to 32.1% for
fiscal year 2021 compared to 34.5% for fiscal year 2020. The primary drivers for
the decrease were loss of leverage on the lower sales volumes, increased freight
costs, inflationary pressure on raw materials and higher healthcare costs,
partially offset by favorable impacts from our operational excellence initiative
and pricing increases.
Selling and administrative expenses as a percent of net sales in fiscal year
2021 compared to fiscal year 2020 increased 610 basis points due to the decline
in volume outpacing our reduction in selling and administrative expenses. The
year-over-year 3% reduction in selling and administrative expenses in absolute
dollars was driven by reduced marketing expenses, reduced travel expenses due to
the COVID-19 pandemic, decreased retirement contribution expense, lower
incentive compensation, savings resulting from our transformation restructuring
plan, and lower commissions due to the volume decline. Partially offsetting the
decline in selling and administrative expenses were the increased amortization
expense of intangible assets primarily due to the acquisition of Poppin, higher
professional services costs related to the acquisition of Poppin, higher
healthcare costs, and higher expense related to the normal revaluation 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.
In June 2019, we announced a transformation restructuring plan to optimize
resources for future growth, improve efficiency, and build capabilities across
our organization. The transformation restructuring plan has established a more
cost-efficient structure to better align our operations with our long-term
strategic goals. We recognized pre-tax restructuring expense of $10.7 million in
fiscal year 2021 and $8.5 million in fiscal year 2020 related to both phases of
our transformation restructuring plan. See   Note 3 - Restructuring   of Notes
to Consolidated Financial Statements for further information on our
transformation restructuring plan.
Other income (expense), net consisted of the following:
Other Income (Expense), net                                       Year Ended
                                                                   June 30
(Amounts in Thousands)                                        2021         2020
Interest Income                                             $   336      $ 1,641
Interest Expense                                               (453)         (79)

Gain on Supplemental Employee Retirement Plan Investments 3,324 600 Other

                                                          (118)        (419)
Other Income (Expense), net                                 $ 3,089      $ 1,743


Our fiscal year 2021 effective tax rate of (60.9%) was driven by the book versus
tax treatment of the $11.6 million Poppin earn-out gain and a $0.6 million
research and development tax credit. Our fiscal year 2020 effective tax rate of
26.9% was higher than the combined federal and state statutory rate primarily
from the impact of nondeductible officer compensation which more than offset a
$0.4 million research and development tax credit.
Comparing our balance sheets as of June 30, 2021 to June 30, 2020, our cash
balance declined and our long-term debt increased as we funded our acquisition
of the Poppin business. See   Note 2 - Acquisition   of Notes to Consolidated
Financial Statements for details of the purchase which drove increases in the
following lines on our balance sheet: goodwill, other intangible assets, and
contingent earn-out liability. Our accounts receivable balance declined as a
result of our reduced sales volumes near the end of fiscal year 2021 compared to
the prior year. Our deferred tax asset increased primarily due to the
acquisition of Poppin and a research and development tax credit carryforward.
Results of Operations - Fiscal Year 2020 Compared to Fiscal Year 2019
For the comparison of fiscal years ended June 30, 2020 and June 30, 2019, see
the Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7 of our Annual Report on Form 10-K filed August 28,
2020.
Liquidity and Capital Resources
Our total cash, cash equivalents, and short-term investments was $24.3 million
at June 30, 2021 and $97.1 million at June 30, 2020. We borrowed cash of $40
million and subsequently expended net cash of $101.5 million for the Poppin
acquisition. Cash flows from operations of $27.3 million were more than offset
by capital expenditures, including capitalized software, of $19.5 million and
the return of capital to shareholders in the form of dividends totaling $13.3
million and stock repurchases totaling $3.6 million during fiscal year 2021.
                                       25

--------------------------------------------------------------------------------


Working capital at June 30, 2021 was $44.1 million compared to working capital
of $123.1 million at June 30, 2020. The current ratio was 1.4 and 2.1 at
June 30, 2021 and June 30, 2020, respectively.
Our short-term liquidity available, represented as cash and cash equivalents
plus the unused amount of our revolving credit facility, totaled $107.6 million
at June 30, 2021. At June 30, 2021, we had $1.7 million in letters of credit
outstanding, which reduced our borrowing capacity on the revolving credit
facility. We had $40.0 million of revolving credit facility borrowings
outstanding as of June 30, 2021. Total availability to borrow under the credit
facility totaled $83.3 million at June 30, 2021. We had no revolving credit
facility borrowings outstanding as of June 30, 2020.
We acquired Poppin, Inc. subsequent to their borrowing of a Paycheck Protection
Program ("PPP") loan. During the fourth quarter of fiscal year 2021 we were
notified that Poppin's PPP loan had been forgiven in full and the proceeds were
paid in the first quarter of fiscal year 2022 to the former Poppin, Inc. equity
holders per the terms of the agreement and plan of merger.
Cash Flows
The following table reflects the major categories of cash flows for fiscal years
2021 and 2020.
                                                                    Year Ended
                                                                      June 30
(Amounts in thousands)                                          2021           2020
Net cash provided by operating activities                   $   27,294      $  29,798

Net cash provided by (used for) investing activities $ (115,984) $ 6,141 Net cash provided by (used for) financing activities $ 21,973 $ (17,332)



Cash Flows from Operating Activities
For fiscal years 2021 and 2020, net cash provided by operating activities was
$27.3 million and $29.8 million, respectively, beginning with net income of $7.4
million and $41.1 million, respectively. Changes in working capital balances
provided $6.1 million of cash in fiscal year 2021 and used $42.6 million of cash
in fiscal year 2020.
The $6.1 million of cash provided by changes in working capital balances in
fiscal year 2021 was primarily driven by a $12.7 million decrease in our
accounts receivable balance due to decreased sales in the latter portion of
fiscal year 2021 and an $11.2 million decrease in our inventories balance as we
scaled to the new order levels. These changes were partially offset by a $10.4
million decrease to our accrued expenses balance and a $6.6 million decrease in
our accounts payable balance in conjunction with the lower inventory purchases.
The $42.6 million usage of cash from changes in working capital balances in
fiscal year 2020 was partially due to the $17.9 million cash impact of a
reduction in our accrued expenses balance as the cash incentive compensation and
retirement profit sharing contribution accruals for fiscal year 2020 were lower
than for fiscal year 2019 and our accrual for customer incentives were also
lower for fiscal year 2020 as programs were altered due to COVID-19. In
addition, the impact of COVID-19 drove an $8.3 million cash decrease in our
accounts payable as our expenditures declined, a $5.2 million cash increase in
our accounts receivable balance, and a $5.0 million cash reduction in customer
deposits.
Our measure of accounts receivable performance, also referred to as Days Sales
Outstanding ("DSO"), for the fiscal years ended June 30, 2021 and June 30, 2020
were 34 days and 32 days, respectively. 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 fiscal
years ended June 30, 2021 and June 30, 2020 were 65 and 50 days, respectively.
While inventory, excluding inventory acquired with Poppin, has declined since
last year, there are certain minimum inventory thresholds essential to
efficiently serving our customers causing an increase in our inventory days on
hand. In addition, the Poppin inventory levels acquired increased our PDSOH by
approximately 9 days. 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 fiscal year 2021, we expended $101.5 million for the Poppin acquisition
which is less than the $110.4 million initial cash consideration due to
adjustments for cash acquired and cash diverted to escrow for payment of the PPP
loan for the benefit of the Poppin equity holders upon the forgiveness of the
loan, which occurred in the fourth quarter of fiscal year 2021. During fiscal
year 2021 we invested $10.0 million in available-for-sale securities, and $15.3
million matured. During fiscal year 2020, we invested $25.0 million in
available-for-sale securities, and $52.9 million matured. While we held no
short-term investments as of June 30, 2021, throughout fiscal years 2021 and
2020, our short-term investments included certificates of deposit purchased in
the secondary market, U.S. Treasury and federal agency securities, and municipal
bonds. During fiscal years 2021
                                       26

--------------------------------------------------------------------------------


and 2020, we reinvested $19.5 million and $21.1 million, respectively, into
capital investments for the future. The current year capital investments were
primarily for various manufacturing equipment upgrades to increase automation in
production facilities, configuration design software, and facility improvements.
The prior year capital investments were primarily for facility improvements such
as renovations to our corporate headquarters and various manufacturing equipment
upgrades.
Cash Flows from Financing Activities
During fiscal year 2021, we had proceeds from borrowings on our revolving credit
facility of $40.0 million which was utilized for the Poppin acquisition. We paid
$13.3 million of dividends in fiscal year 2021 compared to paying $12.9 million
of dividends in fiscal year 2020. 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 $3.6 million in fiscal year 2021
and $3.0 million in fiscal year 2020. Future debt payments may be paid out of
cash flows from operations or from future refinancing of our debt.
Revolving Credit Facility
During fiscal year 2021, we amended our revolving credit facility to increase
our maximum borrowing available. The complete agreement was filed as   Exhibit

10.1 to our Current Report on Form 8-K filed on November 4, 2020. As of June 30, 2021 we had a $125 million revolving credit facility with a maturity date of October 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 million, subject to participating banks' consent. The 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 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. At June 30, 2021, we had $1.7 million in letters of credit outstanding, which reduced our borrowing capacity on the revolving credit facility. At June 30, 2021 we had $40.0 million in borrowings outstanding, and at June 30, 2020 we had no borrowings outstanding. The revolving credit facility required us to comply with certain debt covenants, the most significant of which were the adjusted leverage ratio and the interest coverage ratio. The adjusted leverage ratio was defined as (a) consolidated total indebtedness minus unencumbered U.S. cash equivalents in excess of $15,000,000 provided that the maximum subtraction did 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 twelve-month period ended June 30, 2021. The table below compares the adjusted leverage ratio and interest coverage ratio with the limits specified in the credit agreement.

                                At or For the Period
                                        Ended               Limit As Specified in
Covenant                            June 30, 2021             Credit Agreement          Excess
Adjusted Leverage Ratio                   1.06                       3.00               1.94
Interest Coverage Ratio                  78.00                       3.00              75.00

Future Liquidity While we expect the impact of COVID-19 will continue to impact our sales levels, we believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our amended 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 which was paid during our first 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. We reinstated our share repurchase program during fiscal year 2021 and plan to continue repurchasing shares when conditions are favorable. At June 30, 2021, 2.2 million shares remained available under the repurchase program.

                                       27

--------------------------------------------------------------------------------

During fiscal year 2022, we expect to invest approximately $25 million in capital expenditures, particularly for construction of a warehouse and projects such as machinery and equipment upgrades and automation. Additionally, we have short-term purchase obligations as of June 30, 2021 of approximately $52 million. Our purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. Purchase obligations include contractual commitments for items such as raw materials, supplies, capital expenditures, services, and software acquisitions/license commitments. As of June 30, 2021, our short-term contractual obligations also included lease liability, short-term debt, and a liability for SERP and severance future payments. Refer to Note 5 -

Leases , Note 11 - Long-Term Debt and Revolving Credit Facility and Note 12 - Employee Benefit Plans , respectively, of Notes to Consolidated Financial Statements for details. Our long-term purchase obligations as of June 30, 2021 are approximately $26 million, and are of a similar nature to the aforementioned purchase obligations. In addition to the purchase obligations, as of June 30, 2021, our long-term contractual obligations also included lease liability, long-term debt, primarily related to our acquisition of Poppin in fiscal year 2021, and a liability for SERP and severance future payments. Refer to Note 5 - Leases , Note 11 - Long-Term Debt and Revolving Credit Facility and Note 12

- Employee Benefit Plans , respectively, of Notes to Consolidated Financial Statements for details. We continuous 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 reduced revenues from the COVID-19 pandemic, the impact of changes in tariffs, lack of availability of raw material components in the supply chain, lack of availability or cost of manufacturing labor, 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.

                                       28

--------------------------------------------------------------------------------

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 excluding restructuring expenses, CEO transition costs, acquisition-related amortization and inventory valuation adjustments, costs of the acquisition, contingent earn-out (gain) loss, 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 excluding restructuring expenses, CEO transition costs, acquisition-related amortization and inventory valuation adjustments, costs of the acquisition, and contingent earn-out (gain) loss; (5) adjusted diluted earnings per share, defined as diluted earnings per share excluding restructuring expenses, CEO transition costs, acquisition-related amortization and inventory valuation adjustments, costs of the acquisition, and contingent earn-out (gain) loss; (6) adjusted EBITDA, defined as earnings before interest, statutory income tax impacts for after-tax measures, depreciation, and amortization and excluding restructuring expenses, CEO transition costs, acquisition-related inventory valuation adjustments, costs of the acquisition, and contingent earn-out (gain) loss; 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, and without acquisition-related costs. Many of our internal performance measures that management uses to make certain operating decisions exclude these expenses to enable meaningful trending of core operating metrics. These non-GAAP financial measures should not be viewed as an alternative to the GAAP measures and are presented as supplemental information. Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators (Amounts in Thousands, Except for Per Share Data)


Organic Net Sales                                                 Fiscal Year Ended
                                                                       June 30,
                                                                         2021
Net Sales, as reported                                           $          569,008
Less: Poppin acquisition net sales                                           24,070
Organic Net Sales                                                $          544,938



                                       29

--------------------------------------------------------------------------------


Adjusted Operating Income                                         Fiscal Year Ended
                                                                       June 30,
                                                                 2021            2020
Operating Income, as reported                                $   1,521       $  54,387

Add: Pre-tax Restructuring Expense                              10,727           8,489
Add: Pre-tax Expense Adjustment to SERP Liability                3,324             600
Add: Pre-tax CEO Transition Costs                                  564             698
Add: Pre-tax Acquisition-related Amortization                    3,737               -

Add: Pre-tax Acquisition-related Inventory Valuation Adjustment

                                                         536               -
Add: Pre-tax Costs of Acquisition                                3,579               -
Subtract: Contingent Earn-Out (Gain) Loss                      (11,600)              -
Adjusted Operating Income                                    $  12,388       $  64,174
Net Sales                                                    $ 569,008       $ 727,859
Adjusted Operating Income %                                        2.2  %          8.8  %

Adjusted Net Income                                               Fiscal Year Ended
                                                                       June 30,
                                                                 2021            2020
Net Income, as reported                                      $   7,416       $  41,054
Pre-tax Restructuring Expense                                   10,727           8,489
Tax on Restructuring Expense                                    (2,761)         (2,185)
Add: After-tax Restructuring Expense                             7,966           6,304
Pre-tax CEO Transition Costs                                       564             698
Tax on CEO Transition Costs                                       (144)           (180)
Add: After-tax CEO Transition Costs                                420             518
Pre-tax Acquisition-related Amortization                         3,737               -
Tax on Acquisition-related Amortization                           (962)              -
Add: After-tax Acquisition-related Amortization                  2,775               -
Pre-tax Acquisition-related Inventory Valuation Adjustment         536               -
Tax on Acquisition-related Inventory Valuation Adjustment         (139)              -
Add: After-tax Acquisition-related Inventory Adjustment            397               -
Pre-tax Costs of Acquisition                                     3,579               -
Tax on Costs of Acquisition                                       (921)              -
Add: After-tax Costs of Acquisition                              2,658               -
Pre-tax Contingent Earn-Out (Gain) Loss                        (11,600)              -
Tax on Contingent Earn-Out (Gain) Loss                           2,986               -
Subtract: After-tax Contingent Earn-Out (Gain) Loss             (8,614)              -
Adjusted Net Income                                          $  13,018       $  47,876


                                       30

--------------------------------------------------------------------------------


Adjusted Diluted Earnings Per Share                               Fiscal Year Ended
                                                                      June 30,
                                                                  2021             2020
Diluted Earnings Per Share, as reported                     $     0.20           $ 1.11
Add: After-tax Restructuring Expense                              0.22             0.17
Add: After-tax CEO Transition Costs                               0.01             0.01
Add: After-tax Acquisition-related Amortization                   0.07                -
Add: After-tax Acquisition-related Inventory Adjustment           0.01                -
Add: After-tax Costs of Acquisition                               0.07                -
Subtract: After-tax Contingent Earn-Out (Gain) Loss              (0.23)               -
Adjusted Diluted Earnings Per Share                         $     0.35           $ 1.29


Earnings Before Interest, Taxes, Depreciation, and
Amortization excluding Restructuring Expense, CEO Transition
Costs, Acquisition-related Inventory Valuation Adjustment,
Costs of Acquisition, and Contingent Earn-Out (Gain) Loss
("Adjusted EBITDA")

                                                                    Fiscal Year Ended
                                                                         June 30,
                                                                   2021            2020
Net Income                                                     $   7,416       $  41,054
Provision (Benefit) for Income Taxes                              (2,806)         15,076
Income Before Taxes on Income                                      4,610          56,130

Interest Expense                                                     453              79
Interest Income                                                     (336)         (1,641)
Depreciation                                                      14,511          15,107
Amortization                                                       6,683           2,402
Restructuring Expense                                             10,727           8,489
CEO Transition Costs                                                 564             698
Acquisition-related Inventory Valuation Adjustment                   536               -
Costs of Acquisition                                               3,579               -
Contingent Earn-Out (Gain) Loss                                  (11,600)              -
Adjusted EBITDA                                                $  29,727       $  81,264
Net Sales                                                      $ 569,008       $ 727,859
Net Income %                                                         1.3  %          5.6  %
Adjusted EBITDA %                                                    5.2  %         11.2  %


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, Costs of
the Acquisition, and Contingent Earn-out Gain/ Loss) 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 fiscal year 2021, 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. For available-for-sale securities
classified as level 2 assets, the fair values are determined based on market
data which use evaluated pricing models and incorporate available trade, bid,
and other
                                       31

--------------------------------------------------------------------------------

market information. We evaluated the inputs used to value the instruments and validated the accuracy of the instrument fair values based on historical evidence. The investment in stock warrants and equity securities without readily determinable fair value of a privately-held company are classified as level 3 financial assets. The stock warrants are accounted for as a derivative instrument valued on a recurring basis considering the pricing of recent purchases or sales of the investment as well as positive and negative qualitative evidence, while the equity securities without readily determinable fair value are 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. See Note 14 - Fair Value of Notes to Consolidated Financial Statements for more information.

                                       32

--------------------------------------------------------------------------------


Critical Accounting Policies
Our 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 consolidated financial statements and
related notes. Actual results could differ from these estimates and assumptions.
Management uses its best judgment in the assumptions used to value these
estimates, which are based on current facts and circumstances, prior experience,
and other assumptions that are believed to be reasonable. Management believes
the following critical accounting policies reflect the more significant
judgments and estimates used in preparation of our consolidated financial
statements and are the policies that are most critical in the portrayal of our
financial position and results of operations. Management has discussed these
critical accounting policies and estimates with the Audit Committee of our Board
of Directors and with our independent registered public accounting firm.
Revenue recognition - Revenue is measured as the amount of consideration we
expect to receive in exchange for transferring distinct goods or providing
services to customers. Our revenue consists substantially of product sales, and
is reported net of sales discounts, rebates, incentives, returns, and other
allowances offered to customers. We recognize revenue when performance
obligations under the terms of contracts with our customers are satisfied, which
occurs when control passes to a customer to enable them to direct the use of and
obtain benefit from the product. This typically occurs when a customer obtains
legal title, obtains the risks and rewards of ownership, has received the goods
according to the contractual shipping terms either at the shipping point or
destination, and is obligated to pay for the product. Shipping and handling
activities are recognized as fulfillment activities and are expensed at the time
revenue is recognized. We recognize sales net of applicable sales taxes and
similar revenue-based taxes.
We use judgment in estimating the reduction in net sales driven by customer
rebate and incentive programs. Judgments primarily include expected sales levels
to be achieved and the corresponding rebate and incentive amounts expected to be
earned by dealers and salespersons.
We also use judgment in estimating a reserve for returns and allowances which is
recorded at the time of the sale, based on estimated product returns and price
concessions. The reserve for returns and allowances is recorded in accrued
expenses on the Consolidated Balance Sheets, and the expense is recorded as a
reduction of net sales in the Consolidated Statements of Income.
We perform ongoing credit evaluations of our customers and impair receivable
balances by recording specific allowances for bad debts based on judgment using
factors such as current trends, the length of time the receivables are past due,
and historical collection experience. The allowance for accounts receivable
balances that are determined likely to be uncollectible are a reduction in the
receivables line of the Consolidated Balance Sheets, and the expense is recorded
in selling and administrative expenses in the Consolidated Statements of Income.
Inventory - Inventories are stated at the lower of cost or market value. Cost
includes material, labor, and applicable manufacturing overhead. Costs
associated with underutilization of capacity are expensed as incurred.
Inventories were valued using the last-in, first-out ("LIFO") method for
approximately 67% and 93% of consolidated inventories at June 30, 2021 and
June 30, 2020, respectively, and the remaining inventories were valued using the
first-in, first-out ("FIFO") method and average cost method. Inventory valued
using the LIFO method requires judgement in the determination of appropriate
indices used for evaluating price level changes and the application of indices
to the various types of inventory within LIFO inventory pools. See   Note 1

- Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for further information regarding the LIFO calculation. As of June 30, 2021 and 2020, the LIFO reserve was $18.2 million and $16.2 million, respectively. Inventories recorded on our balance sheets are adjusted for excess and obsolete inventory. For inventory using the LIFO method, excess and obsolete inventory is determined based upon FIFO inventory values, but the LIFO reserve is adjusted to prevent recognizing excessive inventory reserves in total. Self-insurance reserves - We are self-insured up to certain limits for automobile and general liability, workers' compensation, and certain employee health benefits such as medical, short-term disability, and dental, with the related liabilities included in the accompanying financial statements. Our policy is to estimate reserves based upon a number of factors, including known claims, estimated incurred but not reported claims, and other analyses, which are based on historical information, along with certain assumptions about future events. Changes in assumptions for such matters as a result of increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At June 30, 2021 and June 30, 2020, our accrued liabilities for self-insurance exposure were $3.0 million and $2.7 million, respectively.

Business Combinations, including Contingent Earn-Out Liability - We completed the acquisition of Poppin during the second quarter of fiscal year 2021. The accounting for a business combination requires tangible and intangible assets acquired and liabilities assumed to be recorded at estimated fair value. We valued intangible assets at their estimated fair values at the acquisition date based upon assumptions related to the future cash flows and discount rates utilizing currently available information, and in some cases, valuation results from independent valuation specialists. The use of a discounted cash flow analysis requires significant judgment to estimate the future cash flows derived from the asset and the expected period of time over which those cash flows will occur and to determine an appropriate discount rate.

                                       33

--------------------------------------------------------------------------------

The acquisition purchase price includes contingent payments if revenue and EBITDA milestones are achieved through June 30, 2024. The fair value at initial measurement was $31.8 million, and as of June 30, 2021, the fair value of the contingent earn-out liability was $20.2 million. We utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process. The fair value of the contingent earn-out liability was estimated using the Monte Carlo Simulation methodology, which is a discounted cash flow method. The fair value determination of the contingent earn-out liability required significant estimates and assumptions related to the forecasts of revenue and EBITDA, and the selection of the discount and volatility rates. Goodwill - Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business combinations. Goodwill is assigned to and the fair value is tested at the reporting unit level. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test which compares the carrying value of the reporting unit to the reporting unit's fair value to identify impairment. Using the quantitative test, we determine the fair value of our reporting unit generally using market data, appraised values and discounted cash flow analyses. The use of a discounted cash flow analysis requires significant judgment to estimate the future cash flows derived from the business and the period of time over which those cash flows will occur, as well as to determine an appropriate discount rate. Under the quantitative assessment, if the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date. During fiscal years 2021 and 2020, no goodwill impairment was recognized. At June 30, 2021 and June 30, 2020, goodwill totaled $82.0 million and $11.2 million, respectively.


New Accounting Standards
See   Note 1 - Summary of Significant Accounting Policies   of Notes to
Consolidated Financial Statements for information regarding New Accounting
Standards.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Commodity Risk: We are exposed to market risk with respect to commodity price
fluctuations for components used in the manufacture of our products, primarily
related to wood and wood-related components, steel, aluminum, foam, and
plastics. These components are impacted by global pricing pressures, general
economic conditions, and changes in tariff 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 may continue to remain at
elevated levels depending on freight carrier capacity and fuel prices.
Transportation costs are managed by optimizing logistics and supply chain
planning.
Interest Rate Risk: We had proceeds from borrowings on our revolving credit
facility of $40.0 million which was utilized for the Poppin acquisition. The
debt has a variable interest rate. In July 2021, we entered an interest rate
swap to hedge the variable rate interest rate of our long-term revolving credit
facility debt.
Foreign Exchange Rate Risk: We have minimal foreign currency risk and held no
derivative securities to hedge foreign currency risk as of June 30, 2021 and
June 30, 2020.
Equity Rate Risk: We hold a total investment of $2.0 million in a privately-held
company, consisting of $0.5 million in equity securities without readily
determinable fair value and $1.5 million in stock warrants. The fair value of
the investment may fluctuate due to events and changes in circumstances, but we
have incurred no impairment during fiscal years 2021 or 2020.
                                       34

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses

All news about KIMBALL INTERNATIONAL, INC.
09/24KIMBALL INTERNATIONAL INC : Entry into a Material Definitive Agreement, Creation of a Dire..
AQ
09/24Kimball International, Inc. Enters into Second Amendment to Credit Agreement
CI
09/23KIMBALL INTERNATIONAL, INC. : Ex-dividend day for
FA
08/31KIMBALL INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Re..
AQ
08/30KIMBALL INTERNATIONAL : Maintains Quarterly Dividend at $0.09 Per Share, Payable Oct. 15 t..
MT
08/30Kimball International, Inc. Declares Dividend
GL
08/30Kimball International, Inc. Declares Quarterly Cash Dividend, Payable on October 15, 20..
CI
08/04KIMBALL INTERNATIONAL : Fiscal Q4 Earnings Snapshot
AQ
08/04KIMBALL INTERNATIONAL : REPORTS FOURTH QUARTER AND FISCAL YEAR 2021 RESULTS (Form 8-K)
PU
08/04KIMBALL INTERNATIONAL : Earnings Flash (KBAL) KIMBALL INTERNATIONAL Posts Q4 Revenue $146...
MT
More news
Analyst Recommendations on KIMBALL INTERNATIONAL, INC.
More recommendations