UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
OR
o TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-3279
KIMBALL INTERNATIONAL, INC. |
(Exact name of registrant as specified in
its charter) |
Indiana | 35-0514506 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
1600 Royal Street, Jasper, Indiana | 47549-1001 | |
(Address of principal executive offices) | (Zip Code) |
(812) 482-1600 |
Registrant's telephone number, including area code |
Not Applicable |
Former name, former address and former fiscal year, if changed since last report |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The number of shares outstanding of the Registrant's common stock as of
January 20, 2005 were:
Class A Common Stock - 13,566,834 shares
Class B Common Stock - 24,585,477 shares
1
KIMBALL INTERNATIONAL, INC.
FORM 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for
Share Data)
(Unaudited) December 31, 2004 |
June 30, 2004 |
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Assets | |||
Current Assets: | |||
Cash and cash equivalents | $ 72,843 | $ 54,941 | |
Short-term investments | 29,795 | 30,541 | |
Receivables, less allowances of $2,304 and $3,456, respectively | 138,459 | 127,411 | |
Inventories | 92,059 | 92,531 | |
Other | 28,303 | 34,621 | |
Total current assets | 361,459 | 340,045 | |
Property and Equipment -
Net of Accumulated Depreciation of $352,304 and $354,253, respectively |
178,595 | 198,146 | |
Capitalized Software -
Net of
Accumulated Amortization of $39,716 and $36,823, respectively |
39,523 | 41,059 | |
Other Assets | 35,423 | 34,819 | |
Total Assets | $615,000 | $614,069 | |
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Liabilities and Share Owners' Equity | |||
Current Liabilities: | |||
Current maturities of long-term debt | $ 143 | $ 426 | |
Accounts payable | 92,178 | 89,907 | |
Borrowings under credit facility | 2,294 | -0- | |
Dividends payable | 6,234 | 6,131 | |
Accrued expenses | 46,879 | 51,334 | |
Total current liabilities | 147,728 | 147,798 | |
Other Liabilities: | |||
Long-term debt, less current maturities | 353 | 395 | |
Deferred income taxes and other | 30,749 | 31,265 | |
Total other liabilities | 31,102 | 31,660 | |
Share Owners' Equity: | |||
Common stock-par value $0.05 per share: | |||
Class A -
49,826,000 shares authorized 14,368,000 shares issued |
718 | 718 | |
Class B -
100,000,000 shares authorized 28,657,000 shares issued |
1,433 | 1,433 | |
Additional paid-in capital | 5,542 | 6,063 | |
Retained earnings | 502,359 | 503,396 | |
Accumulated other comprehensive income | 2,980 | 1,622 | |
Deferred stock-based compensation | (4,459) | (5,134) | |
Less: Treasury stock, at cost: | |||
Class A - 581,000 and 511,000 shares, respectively | (8,991) | (7,989) | |
Class B - 3,975,000 and 4,079,000 shares, respectively | (63,412) | (65,498) | |
Total Share Owners' Equity | 436,170 | 434,611 | |
Total Liabilities and Share Owners' Equity | $615,000 | $614,069 | |
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See Notes to Condensed Consolidated Financial Statements | |||
3 |
KIMBALL INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per
Share Data)
(Unaudited) | (Unaudited) | ||||
Three Months Ended | Six Months Ended | ||||
December 31, | December 31, | ||||
2004 | 2003 | 2004 | 2003 | ||||
|
|||||||
Net Sales | $293,560 | $297,289 | $573,995 | $567,601 | |||
Cost of Sales | 231,848 | 231,175 | 452,997 | 439,616 | |||
Gross Profit | 61,712 | 66,114 | 120,998 | 127,985 | |||
Selling, General and Administrative Expenses | 56,688 | 58,746 | 111,795 | 113,861 | |||
Restructuring Expense | -0- | 641 | 321 | 2,404 | |||
Operating Income | 5,024 | 6,727 | 8,882 | 11,720 | |||
Other Income (Expense): | |||||||
Interest income | 459 | 352 | 896 | 751 | |||
Interest expense | (35) | (33) | (73) | (63) | |||
Non-operating income | 3,079 | 3,852 | 6,436 | 4,817 | |||
Non-operating expense | (560) | (290) | (964) | (692) | |||
Other income - net | 2,943 | 3,881 | 6,295 | 4,813 | |||
Income from Continuing Operations Before Income Taxes | 7,967 | 10,608 | 15,177 | 16,533 | |||
Provision for Income Taxes | 1,173 | 3,278 | 2,821 | 5,384 | |||
|
|||||||
Income from Continuing Operations | 6,794 | 7,330 | 12,356 | 11,149 | |||
Loss from Operations of Discontinued Operation, Net of Tax |
(991) |
(726) |
(1,538) |
(1,467) |
|||
Gain on Disposal of Discontinued Operation, Net of Tax | 313 | -0- | 313 | -0- | |||
Net Income | $ 6,116 | $ 6,604 | $ 11,131 | $ 9,682 | |||
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Earnings Per Share of Common Stock: | |||||||
Basic Earnings Per Share from Continuing Operations: | |||||||
Class A | $0.18 | $0.19 | $0.32 | $0.29 | |||
Class B | $0.18 | $0.19 | $0.33 | $0.30 | |||
Diluted Earnings Per Share from Continuing Operations: | |||||||
Class A | $0.17 | $0.19 | $0.31 | $0.29 | |||
Class B | $0.18 | $0.19 | $0.32 | $0.30 | |||
Basic Earnings Per Share: | |||||||
Class A | $0.16 | $0.17 | $0.29 | $0.25 | |||
Class B | $0.16 | $0.18 | $0.29 | $0.26 | |||
Diluted Earnings Per Share: | |||||||
Class A | $0.16 | $0.17 | $0.28 | $0.25 | |||
Class B | $0.16 | $0.17 | $0.29 | $0.26 | |||
Dividends Per Share of Common Stock: | |||||||
Class A | $0.155 | $0.155 | $0.310 | $0.310 | |||
Class B | $0.160 | $0.160 | $0.320 | $0.320 | |||
Average Total Number of Shares
Outstanding Class A and B Common Stock: |
|||||||
Basic | 38,139 | 38,099 | 38,129 | 38,091 | |||
Diluted | 38,525 | 38,151 | 38,518 | 38,125 |
See Notes to Condensed Consolidated Financial Statements
4
KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES | |||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||
|
(Unaudited) Six Months Ended December 31, |
||
(Amounts in Thousands) |
|||
2004 | 2003 | ||
Cash Flows From Operating Activities: | |||
Net income | $ 11,131 | $ 9,682 | |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
||
Depreciation and amortization | 20,991 | 20,029 | |
Gain on sales of assets | (540) | (402) | |
Gain on disposal of discontinued operation | (520) |
-0- |
|
Restructuring | 116 | 1,176 | |
Deferred income tax and other deferred charges | (2,010) | (1,531) | |
Stock-based compensation | 1,332 | 292 | |
Change in current assets and liabilities: | |||
Receivables | (11,048) | (12,030) | |
Inventories | 472 | 597 | |
Other current assets | 5,786 | 6,584 | |
Accounts payable | 2,194 | 393 | |
Accrued expenses | (5,677) | (3,146) | |
Net cash provided by operating activities | 22,227 | 21,644 | |
Cash Flows From Investing Activities: | |||
Capital expenditures | (12,914) | (13,538) | |
Proceeds from sales of assets | 47 | 1,948 | |
Proceeds from sales of facilities | 17,520 | 1,100 | |
Proceeds from disposal of discontinued operation | 2,300 | -0- | |
Purchase of capitalized software and other assets | (1,946) | (6,317) | |
Proceeds from cancellation of split-dollar life insurance policy | -0- | 2,958 | |
Purchases of available-for-sale securities | (12,771) | (18,500) | |
Sales and maturities of available-for-sale securities | 13,519 | 17,171 | |
Net cash provided by (used for) investing activities | 5,755 | (15,178) | |
Cash Flows From Financing Activities: | |||
Net change in short-term borrowings |
2,294 |
-0- |
|
Net change in long-term debt | (325) | (288) | |
Dividends paid to share owners | (12,063) | (12,050) | |
Other, net | (622) | (229) | |
Net cash used for financing activities | (10,716) | (12,567) | |
Effect of Exchange Rate Change on Cash and Cash Equivalents |
636 |
276 |
|
Net Increase (Decrease) in Cash and Cash Equivalents | 17,902 | (5,825) | |
Cash and Cash Equivalents-Beginning of Period | 54,941 | 51,291 | |
Cash and Cash Equivalents-End of Period | $ 72,843 | $45,466 | |
Supplemental Disclosure of Cash Flow Information: | |||
Cash paid (refunded) during the period for: | |||
Income taxes | $ (595) | $ (348) | |
Interest | $ 141 | $ 97 | |
Total Cash, Cash Equivalents and Short-Term Investments: | |||
Cash and cash equivalents | $ 72,843 | $45,466 | |
Short-term investments | 29,795 | 31,702 | |
Totals | $102,638 | $77,168 | |
See Notes to Condensed Consolidated Financial Statements | |||
5 |
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Kimball International, Inc. (the "Company") have been prepared in accordance with the instructions to Form 10-Q. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. All significant intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K.
In October 2004, the Company committed to a plan to convert a forest products operation within the Furniture and Cabinets segment from a veneer slicing and warehousing facility to a lumber warehousing facility. The plan also included the sale of veneer slicing machinery and equipment. In accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the accompanying Condensed Consolidated Financial Statements and notes have been restated to reflect the results of the veneer operation as a discontinued operation.
Certain prior year information has been reclassified to conform to the current year presentation.
Stock-Based Compensation
The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, because all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant, no expense related to employee stock options is recognized in income. The Company recognizes expense associated with restricted share units, performance shares and unrestricted share grants, which compensate employees with common stock. The Company's stock-based employee compensation plans are described in the Company's Annual Report on Form 10-K for the year ended June 30, 2004 and in the Company's proxy statement filed September 8, 2004.
6
The following table illustrates the effect on income from continuing operations and earnings per share from continuing operations if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended
December 31,Six Months Ended
December 31,2004 2003 2004 2003 (Amounts in Thousands, Except for Per Share Data) Income from Continuing Operations, as reported $6,794 $7,330 $12,356 $11,149 Add: Stock-based employee compensation expense included in reported income, net of related tax effects 433 69 722 126 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 539 333 968 810 Pro Forma Income from Continuing Operations $6,688 $7,066 $12,110 $10,465 Earnings per share: As reported: Basic earnings per share from continuing operations: Class A $0.18 $0.19 $0.32 $0.29 Class B $0.18 $0.19 $0.33 $0.30 Diluted earnings per share from continuing operations: Class A $0.17 $0.19 $0.31 $0.29 Class B $0.18 $0.19 $0.32 $0.30 Pro Forma: Basic earnings per share from continuing operations: Class A $0.17 $0.18 $0.31 $0.27 Class B $0.18 $0.19 $0.32 $0.28 Diluted earnings per share from continuing operations: Class A $0.17 $0.18 $0.31 $0.27 Class B $0.18 $0.19 $0.32 $0.28
Pre-Production Costs and Tooling
Pre-production design and development costs related to long-term supply arrangements in which a customer contractually guarantees reimbursement are capitalized. Pre-production design and development costs are expensed as incurred if no contractual guarantees are provided. The Company has $0.4 million and $0.3 million of pre-production costs which are recoverable from customers capitalized as of December 31, 2004 and June 30, 2004, respectively.
The Company capitalizes the cost of tooling which it owns or which it has a noncancelable right to use during a supply arrangement. As of December 31, 2004 and June 30, 2004, respectively, the Company has $1.6 million and $1.7 million of Company-owned tooling costs capitalized, and $0.4 million and $0.6 million of customer-owned tooling costs capitalized.
New Accounting Standards
In December 2004 the Financial Accounting Standards Board (FASB) issued a revised Statement of Financial Accounting Standard (SFAS) No. 123, Share-Based Payment (FAS 123(R)). FAS 123(R) requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize the cost over the period during which an employee is required to provide service in exchange for the award. The Company is required to adopt FAS 123(R) in the first quarter of fiscal year 2006. Currently, the Company follows APB No. 25 which does not require the recognition of compensation expense relating to the issuance of stock options so long as the quoted market price of the Company's stock at the date of grant is less than or equal to the amount an employee must pay to acquire the stock. However, other share-based awards such as restricted share units and performance shares are currently expensed under the present rules. The original FAS 123 requires footnote disclosure only of pro forma net income as if a fair-value-based method had been used. The Company is evaluating the impact of FAS 123(R) and will record non-cash stock compensation expense of unvested stock options outstanding beginning in the first quarter of fiscal year 2006. The adoption of FAS 123(R) is not expected to have a material impact on the Company's results of operations, financial position, or cash flows.
7
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets (FAS 153) which eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. The Company is required to adopt FAS 153 for nonmonetary asset exchanges occurring in the first quarter of fiscal year 2006 and its adoption is not expected to have a significant impact on the Company's results of operations, financial condition or cash flows.
In December 2004, the FASB issued Staff Position No. 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The Act provides a deduction for income from qualified domestic production activities, which will be phased in from the Company's fiscal year 2006 through 2011. In return, the Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. In this Staff Position, the FASB states that the deduction should be accounted for as a special deduction, meaning that it should not reduce the Company's statutory rate but shall be recognized in the period when it is deductible on the Company's tax return. The Company does not expect the Staff Position to materially impact the financial position, results of operations or cash flows for the Company's fiscal year 2005.
In December 2004, the FASB issued Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and, as of today, uncertainty remains as to how to interpret numerous provisions in the Act. This Staff Position allows companies additional time beyond the financial reporting period of enactment to evaluate the effect of the Act. As such, we are not yet in a position to decide on whether, and to what extent, we might repatriate foreign earnings that have not yet been remitted to the U.S. We expect to be in a position to finalize our assessment by June 30, 2005.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (FAS 151), which adopts wording from the International Accounting Standards Board's (IASB) IAS 2 Inventories in an effort to improve the comparability of international financial reporting. The new standard indicates that abnormal freight, handling costs, and wasted materials (spoilage) are required to be treated as current period charges rather than as a portion of inventory cost. Additionally, the standard clarifies that fixed production overhead should be allocated based on the normal capacity of a production facility. The statement is effective for the Company beginning in the first quarter of fiscal year 2006. Adoption is not expected to have a material impact on the Company's results of operations, financial position or cash flows.
In November 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", in Determining Whether to Report Discontinued Operations. In this consensus, the EITF provided guidance on how an ongoing entity should evaluate whether the operations and cash flow of a disposed component have been or will be eliminated from the ongoing operations of the entity. This EITF is effective for the Company's quarter ending March 31, 2005. Although not yet effective, this EITF would not have impacted the reporting of the discontinued operation in the current period.In September 2004, the EITF reached a consensus on EITF Issue No. 04-10, "Applying Paragraph 19 of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (FAS 131), in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds." The EITF clarifies the criteria for aggregating an operating segment that does not meet all of the aggregation criteria of FAS 131, but also falls below the quantitative criteria that would dictate that the segment be reported separately. The consensus reached would enable an entity to aggregate two or more segments that have similar economic characteristics and share a majority of the aggregation criteria of FAS 131. The EITF requires retroactive restatement to previous periods. The effective date of the EITF 04-10 has been delayed pending the release of an anticipated staff position that will address the meaning of similar economic characteristics.
In March 2004, the FASB ratified the EITF's consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 provides guidelines on the meaning of other-than-temporary impairment and its application to investments, in addition to requiring quantitative and qualitative disclosures in the financial statements. The disclosure provisions of EITF 03-1 were effective beginning in fiscal year ended June 30, 2004, and were reported in the Company's Form 10-K. The implementation of the recognition and measurement provisions of EITF 03-1 have been delayed by the Financial Accounting Standards Board pending the release of another staff position.8
Note 2. Inventories
Inventory components of the Company are as follows:
December 31, June 30, 2004 2004 (Amounts in Thousands) Finished Products $34,477 $33,989 Work-in-Process 14,012 15,666 Raw Materials 43,570 42,876 Total Inventory, net $92,059 $92,531 For interim reporting, LIFO inventories are computed based on year-to-date quantities and interim changes in price levels. Changes in quantities and price levels are reflected in the interim financial statements in the period in which they occur.
Note 3. Comprehensive Income
Comprehensive income includes all changes in equity during a period except those resulting from investments by, and distributions to, Share Owners. Comprehensive income, shown net of tax if applicable, for the three and six month periods ended December 31, 2004 and 2003 is as follows:
Three Months Ended Six Months Ended December 31, December 31,
2004 2003 2004 2003 (Amounts in Thousands) Net Income $6,116 $6,604 $11,131 $ 9,682 Change in Unrealized Gains/Losses on Securities [1] (99) (239) 2 (231) Change in Gains/Losses on Derivatives [2] 1,079 712 1,341 688 Foreign Currency Translation Adjustment 16 36 15 47 Comprehensive Income $7,112 $7,113 $12,489 $10,186 [1] Net of tax expense/(benefit) of ($66) and ($129) for the three months ended December 31, 2004 and 2003, respectively, and $0 and ($124) for the six months ended December 31, 2004 and 2003, respectively.
[2] Net of tax expense of $257 and $263 for three months ended December 31, 2004 and 2003, respectively, and $318 and $258 for the six months ended December 31, 2004 and 2003, respectively. The Company's use of derivatives is generally limited to forward purchases of foreign currency designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency.
Note 4. Segment Information
Management organizes the Company into segments based upon differences in products and services offered in each segment. The Furniture and Cabinets segment provides furniture for the office, residential, and hospitality industries, all sold under the Company's family of brand names. The Furniture and Cabinets segment also provides engineering and manufacturing services which utilize common production and support capabilities on a contract basis to customers in the residential furniture and cabinets, office furniture, and retail infrastructure industries, as well as forest products. The Electronic Contract Assemblies segment provides engineering and manufacturing services which utilize common production and support capabilities to a variety of industries globally. The Company's focus is on electronic assemblies that have high durability requirements and are sold on a contract basis and produced to customers' specifications. The Company currently sells primarily to customers in the transportation, industrial controls, telecommunications and medical industries. Intersegment sales are insignificant.
9
Unallocated corporate assets include cash and cash equivalents, short-term investments and other assets not allocated to segments. Unallocated corporate income from continuing operations consists of income not allocated to segments for purposes of evaluating segment performance and includes income from corporate investments and other non-operational items. The basis of segmentation and accounting policies of the segments are consistent with those as disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2004.
At or For the Three Months Ended Six Months Ended December 31, December 31,
2004 2003 2004 2003 (Amounts in Thousands) Net Sales: Furniture and Cabinets $180,750 $186,578 $353,234 $354,692 Electronic Contract Assemblies 112,590 110,386 220,464 212,388 Unallocated Corporate and Eliminations 220 325 297 521 Consolidated $293,560 $297,289 $573,995 $567,601 Income (Loss) from Continuing Operations: Furniture and Cabinets $ 978
$ 391
$ 2,781
$ (6) Electronic Contract Assemblies 4,700
5,570
7,519 8,589 Unallocated Corporate and Eliminations 1,116
1,369
2,056 2,566 Consolidated $ 6,794 [1]
$ 7,330 [2]
$ 12,356 [1] $ 11,149 [2]
Total Assets: Furniture and Cabinets $302,592 $347,072 Electronic Contract Assemblies 222,917 200,492 Unallocated Corporate and Eliminations 89,491 64,852 Consolidated $615,000 $612,416 [1] Income from Continuing Operations includes after-tax restructuring charges of $0 and $193 in the three and six months ended December 31, 2004, respectively. On a segment basis, in the three months and six months ended December 31, 2004, the Furniture and Cabinets segment recorded $0 and $179 of restructuring charges, and Unallocated Corporate recorded $0 and $14 of restructuring charges, respectively. See Note 5 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion.
[2] Income (Loss) from Continuing Operations includes after-tax restructuring charges of $742 and $1,153 in the three and six months ended December 31, 2003, respectively. On a segment basis, in the three and six months ended December 31, 2003, the Furniture and Cabinets segment recorded $437 and $753 of restructuring charges and Unallocated Corporate recorded $305 and $400 of restructuring charges, respectively. See Note 5 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion.
Sales by Product Line
The Furniture and Cabinets segment produces and sells a broad range of similar products and services. Net sales to external customers by product line within the Furniture and Cabinets segment were as follows:
Three Months Ended | Six Months Ended | ||||||
December 31, | December 31, | ||||||
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2004 | 2003 | 2004 | 2003 | ||||
(Amounts in Thousands) | |||||||
Net Sales: | |||||||
Furniture and Cabinets | |||||||
Branded Furniture | $136,167 | $140,743 | $267,791 | $269,034 | |||
Contract Furniture and Cabinets | 31,206 | 34,797 | 58,358 | 64,424 | |||
Forest Products | 13,377 | 11,038 | 27,085 | 21,234 | |||
Total | $180,750 | $186,578 | $353,234 | $354,692 |
10
During the second quarter of fiscal year 2003, the Company announced incremental cost scaling actions to more closely align its operating capacities and capabilities with reduced demand levels related to the prolonged nature of the global economic slowdown in many of the Company's markets and the resulting continuation of underutilized manufacturing capacity. The actions included the consolidation of capabilities and operations, selling and/or exiting redundant facilities, aligning personnel costs and adjusting associated assets to their current fair values.
Fiscal Year 2005 Charges
There were no restructuring charges in the second quarter of fiscal year 2005. The Company recognized consolidated pre-tax restructuring expense of $0.3 million in the six months ended December 31, 2004, primarily within the Furniture and Cabinets segment. Included in the year-to-date restructuring charge is $0.1 million for asset write-downs and $0.2 million for plant closure and other exit costs. The Company accounts for restructuring costs in accordance with FASB Statement No. 146, Accounting for Cost Associated with Exit or Disposal Activities.
Activities outlined in the restructuring plan began in the second quarter of fiscal year 2003 and were completed in the first quarter of fiscal year 2005. These charges are included in the Restructuring Expense line item on the Company's Condensed Consolidated Statements of Income.
Fiscal Year 2004 ChargesThe consolidated operating results included pre-tax restructuring charges of $0.6 million and $2.4 million for the three months and six months ended December 31, 2003, respectively. For the second quarter, $0.6 million of pre-tax restructuring charges primarily related to asset write-downs, plant closure and other exit costs were recorded in the Furniture and Cabinets segment. For the six month period ended December 31, 2003, $1.2 million of pre-tax restructuring charges primarily related to asset write-downs, plant closure and other exit costs were recorded in the Furniture and Cabinets segment, and $1.2 million of pre-tax restructuring charges were recorded in Unallocated Corporate, primarily related to asset write-downs.
Reserves:
At December 31, 2004, a total of $0.1 million of restructuring liabilities related to a lease obligation for an exited sales office remained on the Condensed Consolidated Balance Sheet in Accrued Expenses. The restructuring charge, utilization and cash paid to date, and ending reserve balances at December 31, 2004 were as follows:
Asset
Write-downsPlant Closure and Other Exit Costs Total (Amounts in Thousands) Accrued Restructuring at June 30, 2004 $ -0- $ 227 $ 227 Amounts Charged - Cash -0- 205 205 Amounts Charged - Non-Cash 116 -0- 116 Subtotal 116 205 321 Amounts Utilized / Cash Paid (116) (323) (439) Amounts Adjusted -0- -0- -0- Accrued Restructuring at December 31, 2004 $ -0- $ 109 $ 109
11
Note 6. Guarantees and Product Warranties
As of December 31, 2004, the Company had guarantees issued which are contingent on the future performance of another entity. The guarantees include customer lease financing with recourse, whereby the Company may become liable to a third party leasing company if the customer defaults on its lease, guarantees of third party dealer facility leases and bank loans, whereby the Company may become liable if the dealer defaults on a lease or bank loan, and guarantees associated with subleases, whereby the Company may be responsible for lease commitments if the sublessee defaults. At the inception of a guarantee, the Company recognizes a liability for obligations the Company may incur if specified triggering events or conditions occur. The liability is recorded at fair value which is estimated based on various factors including risk that the Company may have to perform under a guarantee, and ability to recover against payments made on a guarantee. The maximum potential liability and carrying amount recorded for these guarantees is immaterial to the Company's financial position.
The Company estimates product warranty liability at the time of sale based on historical repair cost trends in conjunction with the length of the warranty offered. Management may refine the warranty liability in cases where specific warranty issues become known.
Changes in the product warranty accrual for the six months ended December 31, 2004 and 2003 were as follows:
Six Months Ended
December 31,
(Amounts in Thousands) 2004
2003
Product Warranty Liability at the beginning of the period $ 3,578 $ 5,011 Accrual for warranties issued 668 1,157 Accruals related to pre-existing warranties (including changes in estimates) 84 9 Settlements made (in cash or in kind) (732) (1,131) Product Warranty Liability at the end of the period $ 3,598 $ 5,046
Note 7. Discontinued Operation
On October 12, 2004, the Company announced a plan to exit its veneer slicing operation, which is part of the forest products product line within the Furniture and Cabinets segment. The plan included the sale of veneer slicing machinery and equipment, conversion of a veneer slicing and warehousing facility to a lumber warehousing facility, and the sale of remaining veneer inventories. In accordance with Statement of Financial Accounting Standards No. 144 (FAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, the veneer slicing operation has been classified as a discontinued operation.
During the quarter ended December 31, 2004, veneer slicing and warehousing operations ceased. All held for sale veneer slicing machinery and equipment was sold for cash proceeds of $2.3 million, resulting in an after-tax gain of $0.3 million. The veneer slicing and warehousing facility has been converted and is now functioning as a lumber warehousing facility. As of December 31, 2004, substantially all veneer inventories have been sold, and the remaining veneer inventories are expected to be sold during the next three months.
12
Operating results and the gain on sale of the discontinued operation were as follows:
Three Months Ended Six Months Ended December 31, December 31, (Amounts in Thousands) 2004
2003 2004 2003 Net Sales of Discontinued Operation $ 6,427 $ 3,781 $ 10,769 $ 7,644 Operating Loss of Discontinued Operation $ (1,647) $ (1,260) $ (2,554) $ (2,467) Benefit (Provision) for Income Taxes 656 534 1,016 1,000 Loss from Operations of Discontinued Operation, Net of Tax $ (991) $ (726) $ (1,538) $ (1,467) Gain on Disposal of Discontinued Operation $ 520 $ -0- $ 520 $ -0- Benefit (Provision) for Income Taxes (207) -0- (207) -0- Gain on Disposal of Discontinued Operation, Net of Tax $ 313 $ -0- $ 313 $ -0-
Note 8. Subsequent Event
On January 14, 2005, the Company committed to a plan to discontinue sales of residential furniture which is part of the branded furniture product line within the Furniture and Cabinets segment. The plan involves the liquidation of inventory and is expected to be complete within three months. The cost of exiting the residential branded furniture sales market is not expected to be material. For the six months ended December 31, 2004, net sales of residential branded furniture approximated 1% of consolidated net sales.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW
Kimball International, Inc. 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 provides
furniture for the office, residential and hospitality industries, all sold under
the Company's family of brand names. The Furniture and Cabinets segment also
provides engineering and manufacturing services which utilize common production
and support capabilities on a contract basis to customers in the residential
furniture and cabinets, office furniture, and retail infrastructure industries,
as well as forest products. The Electronic Contract Assemblies segment provides
engineering and manufacturing services which utilize common production and
support capabilities to a variety of industries globally.
Management currently considers the following events, trends and uncertainties
to be most important to understanding its financial condition and operating
performance:
The preceding statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties including, but not limited to, a significant change in economic conditions, loss of key customers or suppliers, or similar unforeseen events.
13
Discontinued Operation
During the current quarter ended December 31, 2004, the Company committed to a
plan to convert a forest products operation within the Furniture and Cabinets
segment from a veneer slicing and warehousing facility to a lumber warehousing
facility. The plan also included the sale of veneer slicing machinery and
equipment, and the sale was completed in the current quarter. Market condition
changes made it imprudent to continue investing in this industry as the Company
did not anticipate positive earnings in the foreseeable future. The results of the veneer
operation are reported as a discontinued operation in the Company's Condensed
Consolidated Financial Statements and all prior periods have been restated. (See
Note 7 - Discontinued Operation of Notes to Condensed Consolidated Financial
Statements for more information on the discontinued operation.) The
conversion of this operation does not impact any of the remaining
operations of the Company.
Financial results of the discontinued operation were as follows:
Three Months Ended | Six Months Ended | ||||||
December 31, | December 31, | ||||||
|
|
||||||
(Amounts in Millions, Except for Per Share Data) | 2004 | 2003 | 2004 | 2003 | |||
Net Sales of Discontinued Operation | $ 6.4 | $ 3.8 | $ 10.8 | $ 7.6 | |||
After-Tax Operating Loss of Discontinued Operation | $ (1.0) | $ (0.7) | $ (1.5) | $ (1.5) | |||
After-Tax Gain on Sales of Assets of Discontinued Operation | $ 0.3 | $ 0.0 | $ 0.3 | $ 0.0 | |||
Loss of Discontinued Operation per Class B Diluted Share | $ (0.02) | $ (0.02) | $ (0.03) | $ (0.04) |
The following discussions exclude all income statement activity of the discontinued operation.
Financial Overview - Consolidated
Second quarter fiscal year 2005 net sales of $293.6 million decreased 1%
from fiscal year 2004 second quarter net sales of $297.3 million as a net sales
decrease within the Furniture and Cabinets segment more than offset a net sales
increase within the Electronic Contract Assemblies segment. Second quarter
fiscal year 2005 consolidated income from continuing operations was $6.8
million, or $0.18 per Class B diluted share. The prior fiscal year second quarter consolidated income from continuing
operations was $7.3 million, or $0.19 per Class B diluted share, inclusive of
$0.7 million, or $0.02 per Class B diluted share, of after-tax restructuring
costs. Net sales for the six-month period ended December 31, 2004 of $574.0
million were up 1% from the same period of the prior year as a net sales
increase in the Electronic Contract Assemblies segment was greater than the net
sales decrease within the Furniture and Cabinets segment. Current fiscal
year-to-date income from continuing operations for the period ended December
31, 2004 totaled $12.4 million, or $0.32 per Class B diluted share, inclusive of
$0.2 million, or $0.01 per Class B diluted share, of after-tax restructuring
costs. Prior year-to-date income from continuing operations for the period
ended December 31, 2003 totaled $11.1 million, or $0.30 per Class B diluted
share, inclusive of $1.2 million, or $0.03 per Class B diluted share, of
after-tax restructuring costs.
During the second quarter of fiscal year 2003, the Company's Board of Directors
approved a restructuring plan comprised of incremental cost scaling actions to
more closely align the Company's operating capacities and capabilities with
reduced demand levels related to the prolonged nature of the global economic
slowdown in many of the Company's markets and the resulting continuation of
underutilized manufacturing capacity within both of the Company's segments. The
Company has successfully executed the restructuring activities and the final
restructuring expenses were recorded in the first quarter of fiscal year 2005.
Management estimates that the restructuring actions have reduced the Company's
total cost structure by approximately $20 million on an annualized pre-tax
basis, with part of the savings being redeployed into strategic initiatives
designed to accelerate sales growth and improve quality and efficiencies. (See
Note 5 - Restructuring Expense of Notes to Condensed Consolidated Financial
Statements for more information on restructuring.)
The Company experienced a decline in gross margin for the second quarter and
year-to-date period of fiscal year 2005 when compared to the prior fiscal year
same periods. Increased costs for steel, wood composite sheet stock and other
commodities along with costs incurred for new product introductions hindered the
Company's consolidated gross margin for the second quarter and first six months
of fiscal year 2005 when compared to the prior year same periods. Price
increases on select products and improved efficiencies at select locations
partially mitigated the gross margin declines.
Consolidated selling, general and administrative (SG&A) expenses for the second
quarter of fiscal year 2005 decreased in absolute dollars and as a percent of
net sales compared to the prior fiscal year second quarter in part due to lower
bad debt expenses as a result of the Company's focused efforts on collection of
receivables and lower professional services consulting costs. Consolidated SG&A
expenses for the six months ended December 31, 2004 decreased in absolute
dollars and as a percent of net sales compared to the prior year same period.
14
The effective income tax rate for the three and six-month periods ended December 31, 2004 decreased 16.2 and 14.0 percentage points, respectively, from the same periods of the prior fiscal year primarily due to the positive tax effect of the Company's foreign operations as a greater portion of income was generated during the quarter and first half of fiscal year 2005 by foreign operations which have a lower effective tax rate than the Company's domestic facilities.
Results of Operations by Segment - Three and Six Months Ended December 31, 2004 Compared to Three and Six Months Ended December 31, 2003
Furniture and Cabinets Segment
The Furniture and Cabinets segment provides furniture for a variety of
industries, sold under the Company's family of brand names and on a contract
basis. The Company's production flexibility allows it to utilize portions of the
available production capacity created by lower volumes within these product
lines to support and balance increased production schedules of other product
lines within this segment.
Second quarter fiscal year 2005 net sales of $180.8 million decreased 3% in the
Furniture and Cabinets segment when compared to fiscal year 2004 second quarter
net sales of $186.6 million as net sales decreases in the branded furniture and
contract furniture and cabinet product lines more than offset a net sales
increase in forest products. Six-month net sales for fiscal year 2005 decreased
less than 1% as net sales decreases in the branded furniture and contract
furniture and cabinet product lines offset a net sales increase in forest
products.
Second quarter fiscal year 2005 net sales of the Company's branded furniture
products, which include office, residential and hospitality furniture, decreased
3% from the second quarter last fiscal year as a result of decreased sales of
custom hospitality furniture. Fiscal 2005 year-to-date net sales of branded
furniture products were relatively flat as compared to the prior fiscal
year-to-date as decreased sales of hospitality furniture were offset by
increased sales of office furniture. Branded furniture products open orders at
December 31, 2004 were 9% lower than open orders at December 31, 2003 as an
increase in office furniture open orders were offset by a larger decrease in
open orders for hospitality furniture.
Net sales of contract furniture and cabinets, which includes residential
furniture and cabinets, office furniture, and retail infrastructure, declined
10% and 9%, respectively, in the second quarter and first half of fiscal year
2005, compared to the prior year same periods primarily due to decreased sales
of residential furniture and cabinets. At December 31, 2004, open orders for the
contract furniture and cabinets product line were 19% lower than open orders at
December 31, 2003.
Net sales in the forest products product line increased 21% and 28%,
respectively, in the second quarter and first half of fiscal year 2005, compared
to the prior fiscal year same periods. Net sales of logs and lumber increased
during these time periods which is partially due to greater exporting to Europe
and Asia as well as price increases on select products. Open orders for forest
products as of December 31, 2004 were 49% higher than open orders at December
31, 2003.
Despite the net sales decline, the Furniture and Cabinets segment income
from continuing operations improved to $1.0 million in the second quarter of
fiscal year 2005, compared to income from continuing operations of $0.4
million in the second quarter of fiscal year 2004 which included $0.4 million of
after-tax restructuring charges. The fiscal year over year second quarter
earnings improvement was aided by price increases on select products within the
segment, improved manufacturing efficiencies in our Mexico operations and lower
bad debt expenses as well as the exit of underperforming facilities as part of
the previously executed restructuring activities. Compared to the prior fiscal
year second quarter, the current quarter was negatively impacted by higher costs on several
key commodities such as steel and wood composite sheet stock. For the six-month
period ended December 31, 2004, the Furniture and Cabinets segment recorded
income from continuing operations of $2.8 million, inclusive of after-tax
restructuring charges of $0.2 million, as compared to a slight year-to-date
fiscal year 2004 loss inclusive of $0.8 million of after-tax restructuring
charges.
Risk factors within this segment include, but are not limited to, general
economic and market conditions, increased global competition, supply chain cost
pressures, and relationships with strategic customers and product distributors.
Additional risk factors that could have an effect on the Company's performance
are contained in the Company's Form 10-K filing for the period ended June 30,
2004.
Electronic Contract Assemblies Segment
Electronic Contract Assemblies segment net sales of $112.6 million for the
second quarter of fiscal year 2005 increased 2% from net sales of $110.4 million
for the prior fiscal year second quarter. Net sales for the six-month period
ended December 31, 2004 of $220.5 million increased 4% from the prior year same
period net sales of $212.4 million. The net sales increases for both the three
and six-month periods ended December 31, 2004 are due to higher electronic
assembly sales to customers in the transportation, industrial controls, and
telecommunications industries which more than offset sales decreases to
customers in the computer and medical industries.
15
Electronic Contract Assemblies segment second quarter fiscal year 2005
income from continuing operations totaled $4.7 million, which is a decrease from
the prior fiscal year second quarter income from continuing operations of
$5.6 million. Electronic Contract Assemblies segment gross margin decreased in
the second quarter of fiscal year 2005 compared to the prior fiscal year second
quarter primarily from higher new product development costs, a sales mix shift
toward newer programs and start-ups which generally carry a lower margin, and
higher freight costs. The current fiscal year second quarter earnings were
positively impacted by lower taxes as a greater portion of income was generated
during the quarter by foreign operations which have a lower effective tax rate
than the Company's domestic facilities. For the six-month period ended December
31, 2004, this segment recorded income from continuing operations of $7.5
million as compared to a year-to-date fiscal year 2004 income from
continuing operations of $8.6 million.
Included in this segment are sales to TRW Automotive, Inc., a full-service automotive supplier, which accounted
for the following portions of consolidated net sales and Electronic Contract
Assemblies segment net sales:
Three months ended December 31, |
Six months ended December 31, |
|||
2004 | 2003 | 2004 | 2003 | |
As a % of Consolidated Net Sales from Continuing Operations | 11% | 14% | 11% | 14% |
As a % of Electronic Contract
Assemblies Segment Net Sales from Continuing Operations |
28% | 37% | 29% | 38% |
The reduced percentages of segment and consolidated net sales were a result of certain TRW Automotive, Inc. products reaching end of life in addition to the Company's on-going efforts to diversify its customer base. TRW Automotive, Inc. sells complete braking assemblies, in part manufactured by the Company, to several major automotive companies, most with multiple braking assembly programs that span multiple vehicles, which partially mitigates the Company's exposure to this customer. Beginning in the current quarter, the Company also began supplying electronic power steering products to TRW Automotive, Inc.
The nature of the contract electronics manufacturing industry is such that
the start-up of new customers and new programs to replace expiring programs
occurs frequently. New customer and program start-ups generally cause losses
early in the life of a program, which are generally recovered as the program
matures and becomes established. This segment continues to experience margin
pressures related to an overall excess capacity position in the electronics
subcontracting services market and more specifically this segment's new customer
and program diversification efforts.
Risk factors within this segment include, but are not limited to, general
economic and market conditions, increased globalization, foreign currency
exchange rate fluctuations, rapid technological changes, component availability,
the contract nature of this industry, and the importance of sales to large
customers. The continuing success of this segment is dependent upon its ability
to replace expiring customers/programs with new customers/programs. Additional
risk factors that could have an effect on the Company's performance are
contained in the Company's Form 10-K filing for the period ended June 30, 2004.
Liquidity and Capital Resources
The Company's net cash position from an aggregate of cash, cash equivalents, and
short-term investments less short-term borrowings increased from $85 million at
June 30, 2004 to $100 million at December 31, 2004. Net cash provided by
operating and investing activities exceeded net cash used for financing
activities during the first half of fiscal year 2005. Working capital at
December 31, 2004 was $214 million compared to working capital of $192 million
at June 30, 2004. The current ratio was 2.4 and 2.3 at December 31 and June 30,
2004, respectively.
The Company's internal measure of Accounts Receivable performance, also referred
to as Days Sales Outstanding (DSO) for the first half of fiscal year 2005
improved to 42.5 from 46.2 for the same period of fiscal year 2004. The Company
defines DSO as the average of monthly accounts and notes receivable divided by
one day's net sales. The Company's Production Days Supply on Hand (PDSOH) of
inventory measure for the first half of fiscal year 2005 increased to 51.7 from
50.7 for the same period of fiscal year 2004. The Company defines PDSOH as the
average of the monthly gross inventory divided by one day's cost of sales.
Operating activities generated $22 million of cash flow in the first six months
of both fiscal year 2005 and 2004. Current fiscal year investing activities
include proceeds of $17 million from the sale of a Mexican facility.
Subsequently a portion of the facility has been leased by the Company for
continuing operations at this location. The Company reinvested $15 million into
capital investments for the future, including manufacturing equipment and
improvements to the Company's information technology systems and solutions. The
Company expects to continue to invest in resources for leveraging new and
improved enterprise-wide information technology systems and solutions. Fiscal
year 2005 financing cash flow activities included $12 million in dividend
payments, which remained flat with the prior year six months ended December 31,
2003, and $2 million in short-term borrowings.
16
The Company's $75 million revolving credit facility allows for both issuances of
letters of credit and cash borrowings. At December 31, 2004, the Company had
$2.3 million of short-term borrowings outstanding under a separate foreign
credit facility which is backed by the $75 million revolving credit facility. In
addition, the Company issued $2.1 million in letters of credit against the
revolving credit facility, which reduces total availability to borrow to $70.6
million at December 31, 2004. At June 30, 2004, the Company had no short-term
borrowings outstanding under its $75 million revolving credit facility.
The $75 million revolving credit facility also provides an option to increase
the amount available for borrowing to $125 million at the Company's request,
subject to participating banks' consent. The credit facility requires the
Company to comply with certain debt covenants including debt-to-total
capitalization, interest coverage ratio, minimum net worth, and other terms and
conditions. The Company was in compliance with these covenants at December 31,
2004.
The Company believes its principal sources of liquidity from available funds on
hand, cash generated from operations and the availability of borrowing under the
Company's revolving credit facility will be sufficient in fiscal year 2005 for
working capital needs and for funding investments in the Company's future,
including potential acquisitions. The Company's primary source of funds is its
ability to generate cash from operations to meet its liquidity obligations,
which could be affected by factors such as a decline in demand for the Company's
products, loss of key contract customers, the ability of the Company to generate
profits, and other unforeseen circumstances. The Company's secondary source of
funds is its revolving credit facility, which is contingent on complying with
certain debt covenants. The Company does not expect the covenants to limit or
restrict its ability to borrow on the facility in fiscal year 2005. The Company
anticipates maintaining a strong liquidity position for the 2005 fiscal year.
The preceding statements are forward-looking statements under the Private
Securities Litigation Reform Act of 1995 where factors could cause actual
results to differ materially from forward-looking statements.
Contractual Obligations
Compared to the contractual obligations disclosure in the Company's Form 10-K
filing for the period ended June 30, 2004, there have been no material changes
to the aggregate contractual obligations of the Company outside the ordinary
course of business. During the first quarter of fiscal year 2005, the Company
entered into a new operating lease for a facility which does impact the
operating leases reported in the contractual obligations table at June 30, 2004.
The lease term is five years and the lease payments for fiscal year 2005 total
$1.1 million. The annual lease payments are $1.4 million for each of the fiscal
years 2006 through 2009, and the fiscal year 2010 lease obligation is $0.2
million. The lease obligation will not have a material effect on the Company's
financial position or results of operations.
Off-Balance Sheet Arrangements
Other than operating leases entered into in the normal course of business, the
Company's off-balance sheet arrangements are limited to guarantees which are
contingent on the future performance of another entity. However, these
arrangements do not have a material current effect and are not reasonably likely
to have a material future effect on the Company's financial condition, results
of operations, liquidity, capital expenditures or capital resources. The Company
does not have material exposures to trading activities of non-exchange traded
contracts or material transactions with related parties. The preceding
statements are forward-looking statements under the Private Securities
Litigation Reform Act of 1995, where factors could cause actual results to
differ materially from forward-looking statements.
Critical Accounting Policies
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
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. Kimball management
overlays a fundamental philosophy of valuing its assets and liabilities in an
appropriately conservative manner. Management believes the following critical
accounting policies reflect the more significant judgments and estimates used in
preparation of the Company's consolidated financial statements and are the
policies that are most critical in the portrayal of the Company's financial
position and results of operations. Management has discussed these critical
accounting policies and estimates with the Audit Committee of the Company's
Board of Directors and with the Company's registered public accounting firm.
17
Revenue recognition - The Company recognizes revenue when title and risk
transfer to the customer, which under the terms and conditions of the sale may
occur either at the time of shipment or when the product is delivered to the
customer. Service revenue is recognized as services are rendered. Shipping and
handling fees billed to customers are recorded as sales while the related
shipping and handling costs are included in cost of goods sold. Guidelines
regarding revenue recognition are strictly adhered to and volatility resulting
from estimates or judgment is minimal.
Excess and obsolete inventory - Inventories were valued using the lower of last-in, first-out (LIFO) cost or market value for approximately 49% and 54% of consolidated inventories at December 31 and June 30, 2004, respectively, including approximately 87% of the Furniture and Cabinets segment inventories at both December 31 and June 30, 2004. The remaining inventories are valued at lower of first-in, first-out (FIFO) cost or market value. Inventories recorded on the Company's balance sheet are adjusted for excess and obsolete inventory. In general, the Company purchases materials for contract-based business from customer orders and projections, primarily in the case of long lead-time items, and has a general philosophy to only purchase materials to the extent covered by a written commitment from its customers. However, there are times when inventory is purchased beyond customer commitments where minimal lot sizes, component allocation or other component procurement issues may exist. Evaluation of excess inventory includes such factors as anticipated usage, inventory turnover, inventory levels, and product demand levels. Factors considered when evaluating inventory obsolescence include the age of on-hand inventory and reduction in value due to damage, use as showroom samples, design changes or cessation of product lines.
Self-insurance reserves - The Company is self-insured up to certain limits for auto and general liability, workers' compensation and certain employee health benefits including medical, short-term disability and dental with the related liabilities included in the accompanying financial statements. The Company's policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims and actuarial analyses, which are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At December 31 and June 30, 2004, the Company's accrued liabilities for self-insurance exposure were $7.3 million and $6.6 million, respectively, excluding immaterial amounts held in a voluntary employees' beneficiary association (VEBA) trust.
New Accounting Standards
In December 2004 the Financial Accounting Standards Board (FASB) issued a
revised Statement of Financial Accounting Standard (SFAS) No. 123, Share-Based
Payment (FAS 123(R)). FAS 123(R) requires public entities to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award and recognize the cost over the period
during which an employee is required to provide service in exchange for the
award. The Company is required to adopt FAS 123(R) in the first quarter of
fiscal year 2006. Currently, the Company follows APB No. 25 which does not
require the recognition of compensation expense relating to the issuance of
stock options so long as the quoted market price of the Company's stock at the
date of grant is less than or equal to the amount an employee must pay to
acquire the stock. However, other share-based awards such as restricted share
units and performance shares are currently expensed under the present rules. The
original FAS 123 requires footnote disclosure only of pro forma net income as if a
fair-value-based method had been used. The Company is evaluating the impact of
FAS 123(R) and will record non-cash stock compensation expense of unvested stock
options outstanding beginning in the first quarter of fiscal year 2006. The
adoption of FAS 123(R) is not expected to have a material impact on the
Company's results of operations, financial position, or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
(FAS 153) which eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception from fair value measurement for exchanges of nonmonetary
assets that do not have commercial substance. The Company is required to adopt
FAS 153 for nonmonetary asset exchanges occurring in the first quarter of fiscal
year 2006
and its adoption is not expected to have a significant impact on the Company's
results of operations, financial condition or cash flows.
18
In December 2004, the FASB issued Staff Position No. 109-1, Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004. The Act provides a deduction for income from qualified domestic production
activities, which will be phased in from the Company's fiscal year 2006 through
2011. In return, the Act also provides for a two-year phase-out of the existing
extra-territorial income exclusion (ETI) for foreign sales that was viewed to be
inconsistent with international trade protocols by the European Union. In this
Staff Position, the FASB states that the deduction should be accounted for as a
special deduction, meaning that it should not reduce the Company's statutory
rate but shall be recognized in the period when it is deductible on the
Company's tax return. The Company does not expect the Staff Position to
materially impact the financial position, results of operations or cash flows
for the Company's fiscal year 2005.
In December 2004, the FASB issued Staff Position No. 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004. The Act creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned abroad by providing an
85 percent dividends received deduction for certain dividends from controlled
foreign corporations. The deduction is subject to a number of limitations and,
as of today, uncertainty remains as to how to interpret numerous provisions in
the Act. This Staff Position allows companies additional time beyond the
financial reporting period of enactment to evaluate the effect of the Act. As
such, we are not yet in a position to decide on whether, and to what extent, we
might repatriate foreign earnings that have not yet been remitted to the U.S. We
expect to be in a position to finalize our assessment by June 30, 2005.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (FAS 151), which
adopts wording from the International Accounting Standards Board's (IASB) IAS 2
Inventories in an effort to improve the comparability of international financial
reporting. The new standard indicates that abnormal freight, handling costs, and
wasted materials (spoilage) are required to be treated as current period charges
rather than as a portion of inventory cost. Additionally, the standard clarifies
that fixed production overhead should be allocated based on the normal capacity
of a production facility. The statement is effective for the Company beginning
in the first quarter of fiscal year 2006. Adoption is not expected to have a
material impact on the Company's results of operations, financial position or
cash flows.
In November 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", in
Determining Whether to Report Discontinued Operations. In this consensus, the
EITF provided guidance on how an ongoing entity should evaluate whether the
operations and cash flow of a disposed component have been or will be eliminated
from the ongoing operations of the entity. This EITF is effective for the
Company's quarter ending March 31, 2005. Although not yet effective, this EITF
would not have impacted the reporting of the discontinued operation in the
current period.
In September 2004, the EITF reached a consensus on EITF Issue No. 04-10,
"Applying Paragraph 19 of FASB Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information (FAS 131), in Determining Whether to
Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds." The EITF clarifies the criteria for aggregating an operating segment that does not
meet all of the aggregation criteria of FAS 131, but also falls below the
quantitative criteria that would dictate that the segment be reported
separately. The consensus reached would enable an entity to aggregate two or
more segments that have similar economic characteristics and share a majority of
the aggregation criteria of FAS 131. The EITF requires retroactive restatement
to previous periods. The effective date of the EITF 04-10 has been delayed
pending the release of an anticipated staff position that will address the
meaning of similar economic characteristics.
In March 2004, the FASB ratified the EITF's consensus on Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). EITF 03-1 provides guidelines on the meaning of
other-than-temporary impairment and its application to investments, in addition
to requiring quantitative and qualitative disclosures in the financial
statements. The disclosure provisions of EITF 03-1 were effective beginning in
fiscal year ended June 30, 2004, and were reported in the Company's Form 10-K.
The implementation of the recognition and measurement provisions of EITF 03-1
have been delayed by the Financial Accounting Standards Board pending the
release of another staff position.
Subsequent Event
On January 14, 2005, the Company committed to a plan to discontinue sales of
residential furniture which is part of the branded furniture product line within
the Furniture and Cabinets segment. The plan involves the liquidation of
inventory and is expected to be complete within three months. The cost of
exiting the residential branded furniture sales market is not expected to be
material. For the six months ended December 31, 2004, net sales of
residential branded furniture approximated 1% of consolidated net sales.
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Forward-Looking Statements
Certain statements contained within this document are considered forward-looking
under the Private Securities Litigation Reform Act of 1995. These statements can
be identified by the use of words such as "believes", "estimates", "projects",
"expects", "anticipates" and similar expressions. These forward-looking
statements are subject to risks and uncertainties including, but not limited to,
general economic conditions, significant volume reductions from key contract
customers, loss of key customers or suppliers within specific industries,
availability or cost of raw materials, increased competitive pricing pressures
reflecting excess industry capacities, foreign currency exchange rate
fluctuations 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 period
ended June 30, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk: As of December 31, 2004, the Company had an investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $30 million. These securities are classified as available-for-sale and are stated at market value with unrealized gains and losses recorded net of tax related effect as a component of Share Owners' Equity. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. A hypothetical 100 basis point increase in market interest rates from levels at December 31, 2004 would cause the fair value of these short-term investments to decline by an immaterial amount.
Foreign Exchange Rate Risk: The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency rate changes. The Company's risk management strategy includes the use of derivative financial instruments to hedge certain foreign currency exposures. Derivatives are used only to manage underlying exposures of the Company and are not used in a speculative manner. The effect of movements in the exchange rates were not material to the consolidated operating results of the Company on a year-to-date basis. The Company estimates that a hypothetical 10% adverse change in foreign currency exchange rates relative to its financial instruments would not affect the consolidated operating results of the Company by a material amount.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of December 31, 2004, the Chief Executive Officer and Chief Financial Officer of the Company concluded, based upon their best judgment, that the Company's disclosure controls and procedures were effective.
(b) Changes in internal control over financial reporting.
There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2004 that have materially affected, or that are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents a summary of share repurchases made by the Company:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |
Month #1 (October 1 - October 31, 2004) |
-- | -- | -- | 2,000,000 | |
Month #2 (November 1 - November 30, 2004) | -- | -- | -- | 2,000,000 | |
Month #3 (December 1 - December 31, 2004) | -- | -- | -- | 2,000,000 | |
Total | -- | -- | -- |
The share repurchase program previously authorized by the Board of Directors was announced on August 5, 2004. The program allows for the repurchase of up to 2 million of any combination of Class A or Class B shares and will remain in effect until all shares authorized have been repurchased.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Share Owners was held on October 19, 2004. The Board of Directors was elected in its entirety, based on the following election results: Nominees as Directors by Holders of Class A Common Stock Votes For* Votes Withheld Douglas A. Habig 12,632,593 20,820 James C. Thyen 12,632,593 20,820 John B. Habig 12,632,593 20,820 Ronald J. Thyen 12,632,593 20,820 Christine M. Vujovich 12,643,285 10,128 Brian K. Habig 12,633,813 19,600 John T. Thyen 12,632,593 20,820 Alan B. Graf, Jr. 12,635,245 18,168 Polly B. Kawalek 12,635,245 18,168 Harry W. Bowman 12,635,245 18,168 Geoffrey L. Stringer 12,635,245 18,168 Gary P. Critser 12,633,813 19,600
Broker non-votes totaled 86,014 for each of the above nominees as Directors. *Votes for nominees as Directors by holders of Class A Common Stock represented 93% of the total 13,626,298 Class A shares outstanding and eligible to vote.
Nominee as Director by Holders of Class B Common Stock Votes For* Votes Withheld Dr. Jack R. Wentworth 18,138,080 1,130,402 Broker non-votes totaled 3,262,640 for the above nominee as Director. *Votes for nominee as Director by holders of Class B Common Stock represented 74% of the total 24,484,230 Class B shares outstanding and eligible to vote.
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(b) On October 19, 2004, the Company's Board of Directors established a Governance and Nominating Committee, whose responsibilities include recommendations of Director nominees to the board. The Governance and Nominating Committee will consider properly submitted Share Owner recommendations for Director candidates. A Share Owner who wishes to recommend a Director for consideration by the Governance and Nominating Committee should send such recommendation to the Secretary of the Company at 1600 Royal Street, Jasper, IN 47549, who will forward it to the Committee. Any such recommendations should include a description of the candidate's qualifications for Board service; the candidate's written consent to be considered for nomination and to serve if nominated and elected; and addresses and telephone numbers for contacting the Share Owner and the candidate for more information. A Share Owner who wishes to nominate an individual as a Director candidate at the Annual Meeting of Share Owners, rather than recommend the individual to the Governance and Nominating Committee as a nominee, must comply with advance notice requirements mandated by the Company's By-laws.
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
(11) Computation of Earnings Per Share
(31.1) Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32.2) Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized.
KIMBALL INTERNATIONAL, INC. | ||
By: | /s/ James C. Thyen | |
JAMES C. THYEN President, Chief Executive Officer |
||
February 4, 2005 | ||
By: | /s/ Robert F. Schneider | |
ROBERT F. SCHNEIDER Executive Vice President, Chief Financial Officer, Treasurer |
||
February 4, 2005 |
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Kimball International, Inc.
Exhibit Index
Exhibit No. | Description |
11 | Computation of Earnings Per Share |
31.1 | Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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