Electronics Production | May 07, 2009

Kimball's EMS sales declined 22% in Q3

Third quarter fiscal year 2009 net sales declined 22% in the Electronic Manufacturing Services (EMS) segment compared with the prior year.
Consolidated third quarter gross profit as a percent of net sales declined 1.1 percentage points when compared to the third quarter of the prior year on lower margins in both the EMS segment and the Furniture segment, primarily due to the lower sales volumes.

Consolidated third quarter selling and administrative expenses declined 21% compared to the prior year primarily due to benefits realized from restructuring actions, the comprehensive cost reduction efforts throughout the Company and lower incentive compensation and employee benefit costs which are linked to Company profitability. An increase in bad debt expense partially offset these cost declines.

Other general income of $23.2 million in the third quarter of fiscal year 2009 is the pre-tax gain on the sale of the Company’s remaining undeveloped land holdings and timberlands. The gain was included in Unallocated Corporate in segment reporting. Refer to the Company’s Form 8-K filed on November 14, 2008 for additional information on the land and timber sales.

The Company recorded non-cash pre-tax goodwill impairment charges of $14.6 million in the third quarter of fiscal year 2009 as a result of interim goodwill impairment testing which was completed during the quarter due to the continued uncertainty associated with the economy and the significant decline in the Company’s sales and order trends during the quarter as well as the decline in the Company’s market capitalization. The goodwill was related to prior acquisitions in both of the Company’s segments. Remaining goodwill totaled $2.5 million, well under 1% of total assets at March 31, 2009.

The Company’s effective tax rate of 42.6% for the current year third quarter was impacted by 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 2009 was $23.7 million compared to $3.1 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, totaled $51.0 million at March 31, 2009 compared to $29.8 million at June 30, 2008. The increase was primarily due to the Company’s sale of its land holdings and timberlands which was partially offset by construction costs of a new EMS facility in Poland. Long-Term Debt, Less Current Maturities remains at less than $0.5 million.

James C. Thyen, Chief Executive Officer and President, stated, “The global recession presented challenges on many fronts during our third quarter. Most of our markets continued the decline that started last fall, and we have responded with both increased emphasis on supporting our markets and supporting our customers and potential customers while implementing aggressive cost control. We had several encouraging new customer wins during the third quarter but these wins could not offset the general downdraft of the overall markets. Double-digit sales declines and continued softness in order rates required us to accelerate and expand our cost reduction actions. As a result, we reduced our selling and administrative costs by 21% when compared to the prior year third quarter. Even more notable, we reduced our selling and administrative costs by 10% from just one quarter ago. Despite these significant improvements, the sales decline was simply too swift and deep to overcome completely.”

Mr. Thyen continued, “Given the current economic conditions, cash and liquidity preservation is a top priority throughout the Company at this time. We generated $23.7 million of cash flow from operations during the third quarter as we are aggressively managing our working capital. We are keenly focused on a daily basis on prudent management of our trade receivables and reducing our inventory levels. As expected, we have seen some aging of our accounts receivable which necessitated an increase in our bad debt reserve during the quarter. As the length and breadth of the recession remains difficult to predict, visibility into the future is very limited and will continue to present significant operating challenges in the near–term. Our strong balance sheet and the timely generation of cash by our timberland sales position us well to navigate through this global economic crisis.”

Net sales to customers in the public safety industry were flat in the third quarter of fiscal year 2009 compared to last year while net sales to customers in the automotive and industrial control industries experienced double digit percentage declines compared to the prior year. Sales to customers in the medical industry declined slightly when compared to the third quarter of the prior year.

The EMS segment ended the current year third quarter with a loss of $9.6 million compared to a loss of $2.2 million in the prior year third quarter primarily due to the goodwill impairment charges and the impact of the lower sales volumes. With the significant decline in sales, not apparent in the net income results is a reduction in selling and administrative costs of 33% when compared to the third quarter of the prior year resulting from the benefits of restructuring actions and other extensive cost reduction actions taken in response to the recession.
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