5.6.10 | Jasper, IN | Kimball International, Inc. (NASDAQ: KBALB) today reported net sales of $282.3 million and net income of $6.3 million, or $0.17 per Class B diluted share, for the third quarter of fiscal year 2010 which ended March 31, 2010. Net income for the fiscal year 2010 third quarter includes a $7.7 million after-tax gain, or $0.20 per Class B diluted share, resulting from the sale of the Company's land and facility that houses its current Poznan, Poland operation and $0.6 million of after-tax restructuring expense, or $0.01 per Class B diluted share. Excluding the land and facility sale and the restructuring expense, the Company recorded a non-GAAP net loss of $0.8 million, or a loss of $0.02 per Class B diluted share for the fiscal year 2010 third quarter.

In the prior fiscal year 2009 third quarter, the Company reported net sales of $268.9 million and net income of $4.1 million, or $0.11 per Class B diluted share. The prior fiscal year third quarter net income included a $13.9 million after-tax gain, or $0.37 per Class B diluted share, related to the sale of undeveloped land holdings and timberland; a non-cash charge of $9.1 million after-tax for goodwill impairment, or $0.24 per Class B diluted share; and $0.4 million of after-tax restructuring expense, or $0.01 per Class B diluted share. Excluding these items, the prior fiscal year third quarter non-GAAP net loss was $0.3 million, or a loss of $0.01 per Class B diluted share.

Net sales in the third quarter of fiscal year 2010 increased 35% in the Electronic Manufacturing Services (EMS) segment while net sales in the Furniture segment declined 28% when compared with the prior year third quarter. Sequentially, consolidated net sales in the third quarter of fiscal year 2010 increased 3% over the most recent second quarter as a 14% increase in net sales in the EMS segment was largely offset by a 15% reduction in net sales in the Furniture segment. With the sales mix changes, the EMS segment represented 67% of consolidated net sales in the third quarter of fiscal year 2010 compared to 52% in the same quarter of the prior year.

Third quarter gross profit as a percent of net sales declined in comparison to the prior year primarily due to the sales mix shift toward the EMS segment which operates at a lower gross profit percentage than the Furniture segment. At the segment level, margin improvement in the EMS segment was partially offset by a decline in gross profit as a percent of net sales in the Furniture segment.

Consolidated third quarter selling and administrative expenses increased 2% compared to the prior year primarily due to increased incentive compensation costs at select business units, higher severance costs due to scaling operations and the reinstatement of the Company's retirement plan contribution for fiscal year 2010. These costs were partially offset by lower employee salary compensation realized from the salary reduction plan implemented by the Company late in the third quarter of fiscal year 2009 along with lower bad debt expense.

Other General Income in the third quarter of fiscal year 2010 included a $6.7 million pre-tax gain from the sale of the Company's land and facility that houses its current Poznan, Poland operation. The Company is leasing back a portion of the facility until it completes the transfer of production to its newly constructed facility in Poznan. Other General Income in the prior fiscal year third quarter included a $23.2 million pre-tax gain on the sale of undeveloped land holdings and timberlands.

Other Income/Expense for the third quarter of fiscal year 2010 was income of $0.5 million compared to income of $0.9 million in the prior year third quarter.

The Company recorded a tax benefit of $4.7 million during the current year third quarter on pre-tax income of $1.7 million. The unusual relationship between pre-tax income and the tax provision was the result of a tax benefit associated with the sale of the land and facility in Poland along with the impact of the Company's earnings mix between U.S. and foreign jurisdictions which resulted in an overall tax benefit due to losses in the U.S. which has a higher statutory tax rate than the Company's foreign jurisdictions which were profitable in the third quarter of fiscal year 2010. In the third quarter of fiscal year 2009, the Company recorded a tax benefit related to its European operations which was primarily offset by the impact of losses in select foreign jurisdictions which have a lower tax rate.

Operating cash flow for the third quarter of fiscal year 2010 was a cash outflow of $6.7 million compared to a cash inflow of $23.7 million in the third quarter of the prior year.

The Company's net cash position, an aggregate of cash and short-term investments less short-term borrowings, declined to $57.1 million at March 31, 2010 compared to $88.6 million at June 30, 2009 primarily due to an increase in working capital to support increased EMS segment sales. Long-Term Debt including Current Maturities is $0.4 million.

James C. Thyen, Chief Executive Officer and President, stated, "We are very pleased with the sales growth and margin improvement we experienced in our EMS segment during the third quarter. We achieved double digit sales growth when compared to both the third quarter of last year and our most recent second quarter, and third quarter sales were just slightly below the previous record EMS sales quarter. Along with the sales growth, profit margins in this segment are improving also. Our team has an intense focus on profitable growth as we continue to strengthen our partnerships with existing customers and build relationships with new ones."

Mr. Thyen continued, "In our Furniture segment, as anticipated, our sales in the third quarter were below last year and were also below our most recent second quarter which benefited from seasonal government demand. We were encouraged to see a pickup in orders late in the third quarter. However, we recognize that there is still uncertainty within the furniture markets where recovery generally lags the overall economic improvement. The third quarter loss in this segment was disappointing, but not unexpected with the significant decline in volumes we have experienced over the last 15 months. We are very committed to returning this segment to profitability. With our recent organizational changes within this segment, we have confidence in our strategy, our product offerings, and our leadership team to overcome the challenges."

Electronic Manufacturing Services Segment

Third quarter net sales in the EMS segment increased 35% over the third quarter of the prior year with double digit percentage sales increases to customers in all four of the Company's vertical markets of medical, automotive, industrial control and public safety. Sequentially, third quarter fiscal year 2010 net sales in this segment increased 14% over the immediately preceding quarter as sales increased in the automotive, medical and industrial control industries while public safety remained flat.

Gross profit as a percent of net sales in the EMS segment for the third quarter of fiscal year 2010 increased over the third quarter of the prior year primarily due to improved labor efficiencies and fixed cost leverage associated with the increased sales.

Selling and administrative costs in this segment increased 12% in the third quarter when compared to the prior year primarily related to increased incentive compensation and retirement plan contribution costs.

The previously mentioned fiscal year 2010 third quarter $6.7 million pre-tax gain and associated tax benefit resulting from the sale of the Company's Poland land and facility was recorded in the EMS segment. Net income in the prior fiscal year third quarter included $8.0 million of after-tax goodwill impairment charges.

Furniture Segment

Fiscal year 2010 third quarter net sales of furniture products declined 28% compared to the prior year as net sales of both office furniture and hospitality furniture declined. Sequentially, third quarter fiscal year 2010 net sales in this segment decreased 15% over second quarter of fiscal year 2010 as the second quarter benefited from the seasonal government buying patterns.

Gross profit as a percent of net sales declined in the Furniture segment in the third quarter of fiscal year 2010 when compared to the prior year on lower absorption of fixed costs associated with the lower net sales, higher employee benefit costs related to the Company's retirement plan contribution, and increased discounting due to competitive pricing pressures. In addition, the favorable impact of a decrease in LIFO inventory reserves resulting primarily from lower inventory levels was lower in the current year third quarter when compared to the prior year. Favorable impacts to the current year third quarter including a sales mix shift to higher margin product and other overall cost reduction actions partially mitigated the gross profit decline.

Selling and administrative costs in this segment for the third quarter of fiscal year 2010 declined 9% when compared to the prior year on benefits realized from past restructurings and the salary reduction plan implemented by the Company in fiscal year 2009 and lower bad debt expense. Partially offsetting the lower costs were increased retirement plan contribution costs, higher incentive costs at select business units and severance costs due to scaling operations.