Consolidated net sales in the second quarter of fiscal year 2013 decreased 1% from the prior year second quarter as increased net sales in the Electronic Manufacturing Services (EMS) segment were more than offset by lower net sales in the Furniture segment. The Furniture segment saw growth in several market verticals offset by a double digit decline in office furniture sales to the federal government and a decline in hospitality furniture sales due to the prior year including sales from two unusually large projects.

Second quarter gross profit as a percent of net sales improved 0.4 percentage points from the prior year second quarter on improved margins in both the EMS segment and the Furniture segment. The Company recorded a $1.1 million inventory reserve in the EMS segment in the second quarter of fiscal year 2013 relating to a customer that notified the Company they are going out of business. Sales to this customer were immaterial.

Consolidated second quarter selling and administrative expenses increased 1% compared to the prior year. Lower sales and marketing costs and lower commissions related to the volume declines in the Furniture segment were more than offset by increased incentive compensation costs.

Other Income/Expense for the second quarter of fiscal year 2013 was expense of $1.4 million compared to income of $1.4 million in the prior year second quarter. During the current year second quarter, the Company recorded a non-cash pre-tax impairment charge of $1.5 million on an investment in non-marketable equity securities and stock warrants of a privately-held company.

The Company's effective tax rate for the second quarter of fiscal year 2013 was 12.3% compared to 43.8% in the prior year second quarter. The current year effective tax rate was favorably impacted by the mix of earnings between U.S. and foreign jurisdictions as the Company had a greater share of income from foreign operations with lower tax rates.

Operating cash flow for the second quarter of fiscal year 2013 was a cash inflow of $20.5 million compared to an operating cash inflow of $7.8 million in the second quarter of the prior year.

The Company's cash and cash equivalents increased to $88.1 million at December 31, 2012, compared to $75.2 million at June 30, 2012. The Company had no short-term borrowings outstanding at December 31, 2012 or June 30, 2012. Long-term debt including current maturities remains at less than $0.3 million.

James C. Thyen, president and Chief Executive Officer, stated, "We were very pleased with the strong second quarter results in spite of the earnings charges for the customer that notified us they are going out of business and the impaired investment in a start-up company. These two charges had an after-tax impact of 4 cents per share and offset nice progress in the EMS segment. During the second quarter, our EMS segment continued its trend of gaining traction with double-digit sales growth and improved margins. We again saw sales growth to customers in the automotive market during the quarter as the overall U.S. automotive industry experienced steady growth in calendar year 2012. Sales to the industrial and public safety vertical markets also increased compared to last year partially resulting from the ramp up of sales to new customers. Quote activity in this segment has been strong, and we are optimistic in this segment going into the second half of our fiscal year."

Thyen concluded, "Sales in the Furniture segment declined compared to last year primarily due to lower office furniture sales to the federal government, and the effect of higher sales in hospitality furniture last year resulting from two unusually large projects. We were encouraged, though, by a 7% increase in orders received during the quarter over last year. This increase is in spite of a continued decline in orders from the federal government and continued fiscal uncertainty in Washington, D.C. which has caused customers to delay implementation of planned projects. We are heading into the normal seasonal slowdown within the office furniture industry and anticipate our third quarter to again be challenging. We continue to aggressively manage our costs to align with the fluctuating volumes within this segment."

Electronic Manufacturing Services Segment

Financial Highlights

(Amounts in Thousands) Three Months Ended

December 31, 2011      December 31, 2011

Percent         Change

Net Sales $ 164,181 $ 148,112 11 %

Operating Income $ 4,996 $ 225 2,120 %

Operating Income % 3.0 % 0.2 %

Adjusted Operating Income * $ 5,025 $ 1,680 199 %

Adjusted Operating Income % * 3.1 % 1.1 %

Net Income $ 3,932 $ 315 1,148 %

Adjusted Net Income * $ 3,950 $ 1,189 232 %

* Items indicated represent Non-GAAP measurements. See "Reconciliation of Non-GAAP Financial Measures" below.

Fiscal year 2013 second quarter net sales in the EMS segment increased 11% compared to the second quarter of the prior year related to sales growth to customers in the automotive, industrial and public safety industries. Sales to customers in the medical industry declined in the second quarter compared to the prior year.

Gross profit as a percent of net sales in the EMS segment for the second quarter of fiscal year 2013 improved 2.1 percentage points when compared to the second quarter of the prior year primarily due to leverage gained on the higher revenue as well as benefits realized from global purchasing efforts and operating efficiencies related to continuous improvement initiatives. As mentioned above, second quarter fiscal year 2013 gross profit was unfavorably impacted by a $1.1 million inventory reserve relating to a customer that announced they are going out of business.

Selling and administrative expenses in this segment increased 12% in the fiscal year 2013 second quarter when compared to the prior year primarily due to increased incentive compensation costs related to the significant improvement in earnings. As a percent of net sales, selling and administrative costs in the EMS segment increased 0.1 percentage point.

Furniture Segment

Financial Highlights

(Amounts in Thousands) Three Months Ended

               December 31, 2012   December 31, 2011

                Percent                        Change

 Net Sales $ 130,955 $ 148,792 (12 %)

Operating Income $ 1,939 $ 5,401 (64 %)

Operating Income % 1.5 % 3.6 %

Net Income $ 1,504 $ 3,438 (56 %)

Fiscal year 2013 second quarter net sales in the Furniture segment declined 12% compared to the prior year on decreased net sales of both hospitality and office furniture. Sales of hospitality product were lower in the second quarter of the current year primarily due to two unusually large projects that began shipping in the second quarter of last year. Sales of office furniture product to the federal and state governments lagged prior year with the largest decline to the federal government.

Gross profit as a percent of net sales improved 0.7 percentage points in the Furniture segment in the second quarter of fiscal year 2013 when compared to the prior year as benefits realized from price increases and lower commodity costs were partially offset by the loss of leverage from the lower revenue.

Selling and administrative expenses in the Furniture segment for the second quarter of fiscal year 2013 declined 1% compared to the prior year as lower sales and marketing costs and lower commission costs due to the decline in revenue were partially offset by higher incentive compensation costs.

Non-GAAP Financial Measures

Source: Kimball International, Inc.