Kimball International Inc. Reports Operating Results (10-Q)
Kimball InternationalInt. provides a vast array of products from its two business segments: the Furniture and Cabinets Segment and the Electronic Contract Assemblies Segment. The Furniture and Cabinets Segment manufactures furniture for the office residential lodging and healthcare industries and store display fixtures all sold under the Company's family of brand names.The Electronic Contract Assemblies Segment is a provider of design engineering manufacturing packaging and distribution of electronic assemblies circuit boards and multi-chip modules. Kimball International Inc. has a market cap of $273 million; its shares were traded at around $7.32 with a P/E ratio of 33.3 and P/S ratio of 0.2. The dividend yield of Kimball International Inc. stocks is 2.7%. Highlight of Business Operations: First quarter fiscal year 2010 consolidated net sales were $274.7 million compared to first quarter fiscal year 2009 net sales of $339.5 million, a 19% decrease, driven by a 10% net sales decrease in the EMS segment and a 30% net sales decrease in the Furniture segment. Net income for the first quarter of fiscal year 2010 was $1.8 million, or $0.05 per Class B diluted share, inclusive of after-tax restructuring charges of $0.3 million, or $0.01 per Class B diluted share. Net income for the first quarter of fiscal year 2009 was $2.2 million, or $0.06 per Class B diluted share, inclusive of after-tax restructuring charges of $0.6 million, or $0.02 per Class B diluted share. The first quarter fiscal year 2010 and 2009 restructuring charges were primarily related to the European consolidation plan.
The Company's net cash position from an aggregate of cash, cash equivalents, and short-term investments less short-term borrowings under credit facilities decreased from $88.6 million at June 30, 2009 to $87.5 million at September 30, 2009. Operating activities generated $12.5 million of cash flow in the first quarter of fiscal year 2010 compared to $14.0 million in the first quarter of fiscal year 2009. During the first quarter of fiscal year 2010, the Company reinvested $13.5 million into capital investments for the future, primarily for the new Poland facility, which is part of the plan to consolidate the European manufacturing footprint, and manufacturing equipment in both segments. First quarter fiscal year 2010 financing cash flow activities included $1.8 million in dividend payments, which was a decrease from the $5.9 million of dividends paid during the first quarter of fiscal year 2009. The approximate 70% decline in dividends paid was a result of reduced dividend rates to preserve cash. The dividend declared to be paid in the second quarter of fiscal year 2010 was comparable to the dividend paid in the Company's first quarter of fiscal year 2010. Consistent with the Company's historical dividend policy, the Company's Board of Directors will evaluate the appropriate dividend payment on a quarterly basis. During fiscal year 2010, the Company expects to minimize capital expenditures where appropriate but will continue to invest in capital expenditures prudently, particularly for projects that would enhance the Company's capabilities and diversification while providing an opportunity for growth and improved profitability as the economy and the Company's markets recover. The Company plans to sell its Poland facility which is being replaced by the newly constructed larger Poland facility.
The Company maintains a $100 million credit facility with an expiration date in April 2013 that allows for both issuances of letters of credit and cash borrowings. The $100 million credit facility provides an option to increase the amount available for borrowing to $150 million at the Company's request, subject to the group of participating banks' consent. The $100 million credit facility requires the Company to comply with certain debt covenants including interest coverage ratio, minimum net worth, and other terms and conditions. The Company was in compliance with these covenants at September 30, 2009.
The outstanding balance under the $100 million credit facility at September 30, 2009 consisted of $13.2 million for a Euro currency borrowing, which provides a natural currency hedge against a Euro denominated intercompany note between the U.S. parent and Euro functional currency subsidiaries. There were also approximately $5.0 million in letters of credit against the credit facility. Total availability to borrow under the $100 million credit facility was $81.8 million at September 30, 2009.
The Company also maintains a separate foreign credit facility for its EMS segment operation in Thailand which is backed by the $100 million revolving credit facility. In addition to the $100 million credit facility, the Company has several other foreign credit facilities which are available to cover bank overdrafts to satisfy short-term cash needs at that specific location rather than funding from intercompany sources. The Company has a credit facility for its EMS segment operation in Wales, United Kingdom, which is comprised of an overdraft facility which allows for multi-currency borrowings up to 2 million Sterling equivalent (approximately $3.2 million U.S. dollars at September 30, 2009 exchange rates) and an engagement facility of 3.5 million Sterling equivalent (approximately $5.6 million U.S. dollars at September 30, 2009 exchange rates), which can be used only for payment of customs, duties, or value-added taxes in the event of the Company's failure to pay its obligations. The Company also has a credit facility for its EMS segment operation in Poznan, Poland, which allows for multi-currency borrowings up to 6 million Euro equivalent (approximately $8.8 million U.S. dollars at September 30, 2009 exchange rates). These overdraft facilities can be cancelled at any time by either the bank or the Company. At September 30, 2009, the Company had no borrowings outstanding under these foreign facilities.
Allowance for sales returns - At the time revenue is recognized certain provisions may also be recorded, including returns and allowances, which involve estimates based on current discussions with applicable customers, historical experience with a particular customer and/or product, and other relevant factors. As such, these factors may change over time causing the provisions to be adjusted accordingly. At September 30, 2009 and June 30, 2009, the reserve for returns and allowances was $4.2 million and $4.4 million, respectively. The returns and allowances reserve approximated 2% of gross trade receivables during the past two years up until the last three quarters at which time it trended up to 3% primarily due to issues isolated to two furniture projects with unique specifications. Allowance for doubtful accounts - Allowance for doubtful accounts is generally based on a percentage of aged accounts receivable, where the percentage increases as the accounts receivable become older. However, management judgment is utilized in the final determination of the allowance based on several factors including specific analysis of a customer's credit worthiness, changes in a customer's payment history, historical bad debt experience, and general economic and market trends. The allowance for doubtful accounts at September 30, 2009 and June 30, 2009 was $3.5 million and $3.1 million, respectively. During the preceding two year period, this reserve had been at or less than 1% of gross trade accounts receivable up until the last three quarters at which point it approximated 2% of gross trade accounts receivable. The higher reserve was driven by increased risk created by the current market conditions. 37
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