James C. Thyen - President and Chief Executive Officer
Robert F. Schneider - Executive Vice President and Chief Financial Officer
Kimball International (KBALB) F4Q09 (Qtr End 6/30/09) Earnings Call August 5, 2009 11:00 AM ET
Good morning ladies and gentlemen. My name is Anita and I will be your conference call facilitator. At this time I would like to welcome everyone to the Kimball International Fourth Quarter Fiscal 2009 Financial Result Conference Call.
All lines have been placed on listen-only mode to prevent any background noise. After the Kimball speaker opening remarks, there would be a question and answer period where Kimball will respond to questions from analyst. (Operator Instructions)
As with prior conference calls, today's call August 5, 2009 will be recorded and may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Risk factors that may influence the outcome of forward-looking statements can be seen in the Kimball Form 10-K and today's release.
The panel for today's call is Jim Thyen, President and Chief Executive Officer of Kimball international and Bob Schneider, Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Mr. Jim Thyen. Mr. Thyen you may begin.
James C. Thyen
Thank you Anita and welcome everyone to our fourth quarter conference call. We hope you had an opportunity to review our earnings release; was issued this morning on the results of the fourth quarter which ended June 30, 2009.
As in our last conference call, our format today will start with my overview comments on the quarter followed by Bob's financial review, we will then open the call to your questions.
The liquidity crisis and slowdown in the economy had began last fall and accelerated during our third fiscal quarter, moderated a bit in our fourth quarter. Sales in our fourth quarter ended slightly higher than our third quarter which is a positive sign.
But sales are still down 66.7 million or 19.7% from the fourth quarter of the prior year. The majority of this decline occurred between our fiscal second and third quarters. The economy and the liquidity crisis continue to be major themes in our business.
We are reminded of this every day as the number of reported bankruptcies increase due to companies running out of cash. The reduction of markets has been severe and the economy remains a depressing factor in most of our vertical markets.
We are seeing some signs of stabilization but we remain in a cautious mode. A positive impact of federal stimulus monies has been very spotty and difficult to ascertain any sustainable effect.
Our priorities continue to center on improving liquidity by preserving cash, promoting growth, retaining our core and stressing cost innovation. Contingency plans for every market remain very important as the economic outlook remains uncertain and very difficult to forecast. We are very pleased with our operating cash flow for the quarter which was a positive 47.5 million and was over 37 million better than the same quarter last year.
Recall we also have positive cash flow from operations in the third quarter. It is encouraging that since the onset of economic decline, we have been able to improve our cash position and strengthen our balance sheet.
I recognize when markets and sales drop as much as they have, most companies naturally generate some cash flow merely by lower needs of working capital. We have taken this a step further, in that we have improved key working capital metrics since the third quarter which will Bob will talk about in more detail shortly.
And this also improved our cash flow during the quarter. While the economy seems to have stopped its steep decline we are certainly not complacent with where we are in terms of working capital. Until our markets begin to show marked improvement, we will continue to have the risk of customer bankruptcy which can impact our account receivable and potentially drive excess or obsolete inventory risks.
Additionally, there is a financial and operating risk with suppliers and could disrupt supply chains. These areas are being closely managed and monitored to reduce the exposure. Today I feel we have achieved excellent results in both of these risk areas.
As we discussed in our conference call last quarter, capital expenditures are being tightly controlled. If the expenditure is not required to retain our core capabilities or if the visibility is less than required in order to make prudent capital deployment decisions, deferral is the chose course.
That said, we've made and are making very important capital investments for future capability and growth. Our new Poland EMS facility that we have discussed in past calls has substantially complete and it was done so on time under budget. And we are now on the process of relocating production lines into that new facility.
In our furniture operations, we are implementing new state-of-the-art ultraviolet light cured finish lines, often referred to as UV finish lines. These improve the durability of our finishes. They achieve higher in-door air quality standard and a significantly reduced emissions into the environment. These investments are merely a couple of examples of our confidence in the future of our markets.
Continuously improving our cost structure is always a relevant topic and need to be more cost innovative is increasing as we experienced the stated intentions of the U.S. Government to significantly increase taxation on business and selected individuals.
Besides seeing opposite trends in other manufacturing venues of the world, domestic consumption indicators continue to show reluctance of consumers to pay these increased cost burdens. Actions taken to simplify our business to reduce process complexity, eliminate bureaucracy, continue to be high in importance on our list as we're as forced cost choices change our cost structure makeup.
Our selling and administrative cost in the fourth quarter dropped significantly over the past year, down 18%. We're very proud of that organizational achievement. We've recognize that these net cost reductions are not enough to offset the reclining - the rapidly declining market trends. And it remains critical that we move faster in making decisions and to move with speed and confidence when implementing.
We will not compromise our excellence in quality, reliability or customer service as we approach the need to be more cost innovative.
The fourth quarter is important in the furniture markets because we have at two key trade shows that occur during that time, our Hospitality Design show in Las Vegas and the NEOCON show in Chicago.
Both trade shows were sparsely attended this year as was predicted in advance. However, both shows affirmed very positive customer feedback for Kimball on our marketing strategies, our product development and our service levels. We were honored to be recognized by the Office Furniture Dealers Alliance with the 2009 not-aligned manufacturer of the year Bronze award for National Office furniture and the 2009 align manufacture of the year Silver award for Kimball office.
Only six such awards were given to the industry and we are honored that two of them came to our units. These are outstanding awards of recognition by our customers and are examples of our continued focus on excellence in quality, reliability and customer service.
It's a great foundation for growth as the economy improves. We expect the furniture market to continue to decline or become flat at best for the same reasons of tight credit availability, increasing credit cost and much lower consumer spending patterns.
Furniture purchases are more discretionary in nature and more deferrable than some other products. We expect the competitive pressure in the hospitality and commercial office furniture markets to remain very strong this next quarter. Our customer's constant search for the best value will be a positive factor for our mid market office furniture products and our national brand.
This is consistent with the furniture industry forecast that I am sure you read. The medical EMS market is showing some stability. The uncertainty of the National Healthcare Debate has softened spending decisions in the professional hospital equipment area.
We expect this to continue to be soft until the medical industry has greater clarity around changes in future funding and regulation burden. Our devices for use in home healthcare and the smaller medical clinics continue to show strength.
Our growth in this vertical market is a result of our diversification strategy, emphasized several years ago. Today, this is our largest EMS vertical market.
The industrial EMS market is showing some pockets of improvement. Stimulus tax credits are providing incentives to consumers to replace their heating and air-conditioning units, with higher efficiency units meeting greater CR ratings. Other areas of the industrial market are remaining stable.
Now, the automotive EMS market continues to be down significantly from prior years. But fortunately, it has stabilized at a lower volume levels. The emergence of GM and Chrysler from bankruptcy brings needed clarity to the US market place.
The cash for clunker stimulus is having a positive impact on automobile dealer inventories and is causing our customers to revisit their demand schedules. It is also alleging the very lean global supply chain and increasing the risk of breakage.
While the automotive turnaround remains uncertain, we see these as very positive developments and are pleased with the manner in which our key customers have come through this storm. The automotive EMS market remains a very important market to Kimball, even though our concentration of sales is significantly lower than just a few short years ago.
We have been pleased with the recent contract wins announced in this market, this automotive EMS market, and the margin improvement of opportunities they are bringing to us. The public safety EMS market is continuing to show strength for us. It remains an important aspect of our growth and margin improvement goals.
Recent successes in this vertical market have also been announced in separate press releases. Looking forward, it's still very difficult to forecast even one quarter out. Demand in the end markets in which we compete remains volatile. Order patterns continue to be erratic.
There are some indicators of economic stabilization and consumer spending and the flattening trend of other leading indicators, the financial and credit markets continue to remain very tight.
So overall for Kimball international, uncertainty in the automotive and the medical industry, falling occupancy rates of commercial properties and hotels, declining RevPAR rates in hotels, declining commercial real estate values are all key factors in keeping the outlook tentative and uncertain for the remainder of this calendar year.
The breaks remain firmly applied in most commercial credit areas. Unemployment continues to rise and our government is very focused on enacting sweeping change on many fronts at the same time, all of which impact each of our markets.
As a result we will continue to adjust operations as needed to properly stay focused on our priorities and align with the changing market conditions.
With that I'd like to turn it over to Bob to discuss our fourth quarter results in more detail. Bob?
Robert F. Schneider
Thanks Jim. We reported today net sales in the fourth quarter of $271.5 million which is a decrease of 20% from the same quarter of the prior year.
As Jim mentioned, the decline was very swift between our second and third quarters. And while at a very low level it is good to see our Q4 sales were actually up slightly from the immediate preceding third quarter.
We're beginning to see pockets of growth in some of our market and hopefully our third quarter was the low point.
Given the volatility in our markets it is difficult to see beyond just a few weeks. Our EMS segment sales were down 20% compared to the fourth quarter of last year. But as I just mentioned all of this decline actually occurred between our second and third quarter of this fiscal year. A very encouraging sign is the improvement in our EMS segment in the fourth quarter, where sales increased 8% over the immediately preceding quarter. We saw improvement in the automotive market along with industrial controls.
The furniture segment was down 19% compared to the fourth quarter of last year. And most that decline also occurred between the second and third quarter of this fiscal year with a further 7% decline occurring from the third to the fourth quarter of this fiscal year. While certain areas of our furniture segment improved over the third quarter, our overall trend of furniture sales was down in the fourth quarter, reflecting the continued challenges in our end markets.
Our hospitality operation while operating in a very challenging market, improved in the fourth quarter compared to the prior year and thereby muted the overall reduction of the segment.
Importantly, our gross profit as a percent of net sales was 16.7% in the fourth quarter which was an improvement up nine-tenths of a percentage point compared to the immediately preceding quarter.
As I mentioned earlier, our sales in the fourth quarter were up slightly from the third quarter and so this improvement in gross profit is encouraging.
Compared to the prior year fourth quarter, our gross profit was down four-tenths of percentage point. But this is in part primarily driven by our loss of leverage of fixed manufacturing overhead cost that often occurs with such a large decline in sales. We have removed manufacturing capacity since last year but not to the extent that sales have declined.
Other income expense net in our P&L was income of $3.4 million in the fourth quarter. There are several components that comprise income; the largest being $1.3 million of income in our SERP retirement account which we have discussed in the past.
When we have income in this area, we also have exactly offsetting expense in our selling and administrative expenses, with no effect on profits. During the fourth quarter, the general stock market improved and thereby the SERP investments improved over the closing balance at March 31, 2009 thereby driving these entries.
We also had $900,000 of pretax income related to our sale of used municipal bond investments as well as favorable impact on foreign currency movements.
You might have noticed in our press release that we recorded an overall tax benefit in the fourth quarter, even though we generated pretax income during the quarter. We had approximately $900,000 of net favorable tax adjustments related to our tax accruals during the fourth quarter which caused our overall tax to be a benefit instead of the tax expense you'd normally expect to see with pretax income. Our overall effective tax rate for the fiscal year ended at 31.6%.
On a segment basis, our furniture operations had a profit in the fourth quarter of $2.7 million, while the EMS segment had a loss from continuing operation of $721,000.
Our cash position at June 30, 2009 was greatly improved due to the improvement in working capital as Jim referred to.
Our net cash and investment position at June 30, after deducting borrowings on our short term credit revolver was $88.6 million.
Our operating cash flow for the fourth quarter was a positive $47.5 million which is significantly more than any quarter in the past five years. Additionally, we continue to have almost no long term debt which stood at only $360,000 at June 30, 2009. This is a financial position that is the envy of most companies but we're not complacent with where we stand. We have worked hard in reducing past due accounts receivable and driving collection on accounts according to terms. Consequently our DSO, day's sales outstanding in the fourth quarter declined to 47 days that compares to 51 in the most recent third quarter.
Likewise, we've performed lean events with dedicated teams to reduce inventory levels and achieve a PDSOH as production days supply on hand of 62 days which compares to 72 for the most recent third quarter. An important part of working capital payments to vendors and we have been diligent in ensuring we are not paying quicker than is prudent.
And so while our lower sales volumes by itself naturally tends to drive some cash flow generation, we were able to see additional generation through the actions just mentioned.
That said, we closely benchmark our inventory levels with our public competitors and our inventory levels remain too high even after the work we had done to reduce them. We are determined to lower these levels which will free up further cash. With that I'd like to open up today's call to questions from analysts. Anita, do we have any analysts with questions in the queue?
(Operator Instructions) At this time there are no further questions. I would now like to turn the call over to Jim for your closing remarks.
Okay thank you Anita. That brings us to the end of today's call. While the volatility in the financial markets is driving tremendous uncertainty around the world, we believe we are well positioned with strong brands, strong businesses and a strong balance sheet and able to seize market opportunities as they arise.
We appreciate your interest in Kimball and we look forward to speaking with you on our next call.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.
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