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EX-3.B - KIMBALL INTERNATIONAL, INC. EXHIBIT 3.B - KIMBALL INTERNATIONAL INCa10qexhibit3b12312015q2.htm
EX-32.1 - KIMBALL INTERNATIONAL, INC. EXHIBIT 32.1 - KIMBALL INTERNATIONAL INCexhibit32112312015q2.htm
EX-31.2 - KIMBALL INTERNATIONAL, INC. EXHIBIT 31.2 - KIMBALL INTERNATIONAL INCexhibit31212312015q2.htm
EX-31.1 - KIMBALL INTERNATIONAL, INC. EXHIBIT 31.1 - KIMBALL INTERNATIONAL INCexhibit31112312015q2.htm
EX-10.A - KIMBALL INTERNATIONAL, INC. EXHIBIT 10.A - KIMBALL INTERNATIONAL INCa10qexhibit10a12312015q2.htm
EX-11 - KIMBALL INTERNATIONAL, INC. EXHIBIT 11 - KIMBALL INTERNATIONAL INCa10qexhibit11eps12312015q2.htm
EX-32.2 - KIMBALL INTERNATIONAL, INC. EXHIBIT 32.2 - KIMBALL INTERNATIONAL INCexhibit32212312015q2.htm


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, 2015
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o                                                                                       Accelerated filer  x 
Non-accelerated filer  o (Do not check if a smaller reporting company)            Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes  o    No  x

The number of shares outstanding of the Registrant's common stock as of January 22, 2016 was:
Class A Common Stock - 297,799 shares
Class B Common Stock - 37,141,350 shares




KIMBALL INTERNATIONAL, INC.
FORM 10-Q
INDEX
 
Page No.
 
 
 
 
PART I    FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II    OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data)
 
(Unaudited)
 
 

 
December 31,
2015
 
June 30,
2015
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
26,090

 
$
34,661

Receivables, net of allowances of $1,330 and $1,522, respectively
48,734

 
55,710

Inventories
46,693

 
37,634

Prepaid expenses and other current assets
19,479

 
23,548

Total current assets
140,996

 
151,553

Property and Equipment, net of accumulated depreciation of $200,387 and $197,500, respectively
96,577

 
97,163

Intangible Assets, net of accumulated amortization of $35,778 and $35,447, respectively
2,984

 
2,669

Other Assets
14,956

 
14,744

Total Assets
$
255,513

 
$
266,129

 
 
 
 
LIABILITIES AND SHARE OWNERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt
$
29

 
$
27

Accounts payable
37,473

 
41,170

Customer deposits
15,919

 
18,618

Dividends payable
2,102

 
1,921

Accrued expenses
40,360

 
45,425

Total current liabilities
95,883

 
107,161

Other Liabilities:
 
 
 
Long-term debt, less current maturities
217

 
241

Other
16,892

 
17,222

Total other liabilities
17,109

 
17,463

Share Owners' Equity:
 
 
 
Common stock-par value $0.05 per share:
 
 
 
Class A - Shares authorized: 50,000,000
               Shares issued: 299,000 and 386,000, respectively
15

 
19

Class B - Shares authorized: 100,000,000
               Shares issued: 42,726,000 and 42,639,000, respectively
2,136

 
2,132

Additional paid-in capital
2,610

 
3,445

Retained earnings
200,217

 
194,372

Accumulated other comprehensive income
1,268

 
1,229

Less: Treasury stock, at cost, 5,601,000 shares and 5,111,000 shares, respectively
(63,725
)
 
(59,692
)
Total Share Owners' Equity
142,521

 
141,505

Total Liabilities and Share Owners' Equity
$
255,513

 
$
266,129


3



KIMBALL INTERNATIONAL, INC.
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
 
2015
 
2014
 
2015
 
2014
Net Sales
$
163,819

 
$
151,418

 
$
320,388

 
$
295,864

Cost of Sales
110,551

 
104,822

 
216,038

 
202,085

Gross Profit
53,268

 
46,596

 
104,350

 
93,779

Selling and Administrative Expenses
41,236

 
43,422

 
81,407

 
86,927

Restructuring Expense
2,014

 
3,335

 
3,200

 
3,335

Operating Income (Loss)
10,018

 
(161
)
 
19,743

 
3,517

Other Income (Expense):
 
 
 
 
 
 
 
Interest income
45

 
50

 
116

 
91

Interest expense
(5
)
 
(6
)
 
(11
)
 
(12
)
Non-operating income (expense), net
201

 
183

 
(488
)
 
(150
)
Other income (expense), net
241

 
227

 
(383
)
 
(71
)
Income from Continuing Operations Before Taxes on Income
10,259

 
66

 
19,360

 
3,446

Provision for Income Taxes
3,757

 
67

 
7,236

 
1,930

Income (Loss) from Continuing Operations
$
6,502

 
$
(1
)
 
$
12,124

 
$
1,516

Income from Discontinued Operations, Net of Tax

 
2,678

 

 
9,157

Net Income
$
6,502

 
$
2,677

 
$
12,124

 
$
10,673

 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock:
 

 
 

 
 
 
 
Basic Earnings (Loss) Per Share from Continuing Operations:
$
0.17

 
 

 
$
0.32

 
 
Class A
 
 
$
(0.02
)
 
 
 
$
0.02

Class B
 
 
$
0.00

 
 
 
$
0.04

Diluted Earnings (Loss) Per Share from Continuing Operations:
$
0.17

 
 
 
$
0.32

 
 
Class A
 
 
$
(0.02
)
 
 
 
$
0.02

Class B
 
 
$
0.00

 
 
 
$
0.04

Basic Earnings Per Share:
$
0.17

 
 

 
$
0.32

 
 
Class A
 
 
$
0.05

 
 
 
$
0.26

Class B
 
 
$
0.07

 
 
 
$
0.28

Diluted Earnings Per Share:
$
0.17

 
 
 
$
0.32

 
 
Class A
 
 
$
0.05

 
 
 
$
0.26

Class B
 
 
$
0.07

 
 
 
$
0.28

 
 
 
 
 
 
 
 
Dividends Per Share of Common Stock:
$
0.055

 
 
 
$
0.110

 
 
Class A
 
 
$
0.050

 
 
 
$
0.095

Class B
 
 
$
0.050

 
 
 
$
0.100

 
 
 
 
 
 
 
 
Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Class A and B Common Stock:
 
 
 
 
 
 
 
Basic
37,421

 
38,862

 
37,468

 
38,786

Diluted
37,617

 
38,862

 
37,848

 
38,892

See Exhibit 11 Computation of Earnings Per Share for explanatory notes.

4



KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
 
Three Months Ended
 
Three Months Ended
 
December 31, 2015
 
December 31, 2014
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
6,502

 
 
 
 
 
$
2,677

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$

 
$

 
$

 
$
(484
)
 
$

 
$
(484
)
Postemployment severance actuarial change
49

 
(19
)
 
30

 
305

 
(122
)
 
183

Derivative gain

 

 

 
282

 
(68
)
 
214

Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 

 
(130
)
 
16

 
(114
)
Amortization of prior service costs

 

 

 
65

 
(26
)
 
39

Amortization of actuarial change
(105
)
 
41

 
(64
)
 
(97
)
 
39

 
(58
)
Other comprehensive income (loss)
$
(56
)
 
$
22

 
$
(34
)
 
$
(59
)
 
$
(161
)
 
$
(220
)
Total comprehensive income
 
 
 
 
$
6,468

 
 
 
 
 
$
2,457

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
Six Months Ended
 
December 31, 2015
 
December 31, 2014
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
12,124

 
 
 
 
 
$
10,673

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$

 
$

 
$

 
$
(6,070
)
 
$

 
$
(6,070
)
Postemployment severance actuarial change
283

 
(110
)
 
173

 
653

 
(260
)
 
393

Derivative gain

 

 

 
2,513

 
(416
)
 
2,097

Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 

 
(1,484
)
 
291

 
(1,193
)
Amortization of prior service costs

 

 

 
136

 
(54
)
 
82

Amortization of actuarial change
(219
)
 
85

 
(134
)
 
(77
)
 
31

 
(46
)
Other comprehensive income (loss)
$
64

 
$
(25
)
 
$
39

 
$
(4,329
)
 
$
(408
)
 
$
(4,737
)
Total comprehensive income
 
 
 
 
$
12,163

 
 
 
 
 
$
5,936



5



KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
 
(Unaudited)
 
Six Months Ended
 
December 31
 
2015
 
2014
Cash Flows From Operating Activities:
 
 
 
Net income
$
12,124

 
$
10,673

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
7,398

 
13,071

Loss on sales of assets
105

 
646

Restructuring and asset impairment charges
52

 
1,132

Deferred income tax and other deferred charges
491

 
634

Stock-based compensation
2,939

 
4,506

Excess tax benefits from stock-based compensation
(301
)
 
(1,157
)
Other, net
(37
)
 
2,668

Change in operating assets and liabilities:
 
 
 
Receivables
7,068

 
(10,259
)
Inventories
(9,059
)
 
(17,954
)
Prepaid expenses and other current assets
2,560

 
(8,515
)
Accounts payable
(1,142
)
 
10,604

Customer deposits
(2,699
)
 
3,001

Accrued expenses
(4,242
)
 
(7,283
)
Net cash provided by operating activities
15,257

 
1,767

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(8,191
)
 
(18,504
)
Proceeds from sales of assets
59

 
624

Purchases of capitalized software
(704
)
 
(865
)
Other, net
(158
)
 
71

Net cash used for investing activities
(8,994
)
 
(18,674
)
Cash Flows From Financing Activities:
 
 
 
Transfer of cash and cash equivalents to Kimball Electronics, Inc.

 
(63,006
)
Net change in capital leases and long-term debt
(22
)
 
(20
)
Dividends paid to Share Owners
(3,961
)
 
(3,786
)
Repurchases of common stock
(9,665
)
 

Excess tax benefits from stock-based compensation
301

 
1,157

Repurchase of employee shares for tax withholding
(1,487
)
 
(3,823
)
Net cash used for financing activities
(14,834
)
 
(69,478
)
Effect of Exchange Rate Change on Cash and Cash Equivalents

 
(1,246
)
Net Decrease in Cash and Cash Equivalents
(8,571
)
 
(87,631
)
Cash and Cash Equivalents at Beginning of Period
34,661

 
136,624

Cash and Cash Equivalents at End of Period
$
26,090

 
$
48,993

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
3,738

 
$
10,661

Interest expense
$
11

 
$
30


6



KIMBALL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Kimball International, Inc. (the “Company,” “Kimball,” “we,” “us,” or “our”) 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 (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. 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 fiscal year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.

Note 2. Spin-Off Transaction
On October 31, 2014 (“Distribution Date”), we completed the spin-off of our Electronic Manufacturing Services (“EMS”) segment by distributing the related shares of Kimball Electronics, Inc. (“Kimball Electronics”), on a pro rata basis, to the Company's Share Owners of record as of October 22, 2014. After the Distribution Date, the Company does not beneficially own any Kimball Electronics shares and Kimball Electronics is an independent publicly traded company. Kimball International, Inc. trades on the NASDAQ under the ticker symbol “KBAL” and Kimball Electronics, Inc. trades on the NASDAQ under the ticker symbol “KE”.
The EMS segment was reclassified to discontinued operations in the Condensed Consolidated Statements of Income. Financial results of the discontinued operations were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands, Except Per Share Data)
2015
 
2014
 
2015
 
2014
Net Sales
$

 
$
71,748

 
$

 
$
275,551

Income Before Taxes on Income
$

 
$
3,599

 
$

 
$
13,098

Provision for Income Taxes
$

 
$
921

 
$

 
$
3,941

Income from Discontinued Operations, Net of Tax
$

 
$
2,678

 
$

 
$
9,157

Income From Discontinued Operations per Diluted Share
$

 
$
0.07

 
$

 
$
0.24


Note 3. Recent Accounting Pronouncements and Supplemental Information
Recent Accounting Pronouncements:
In January 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which is intended to improve the recognition and measurement of financial instruments. The guidance revises an entity's accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective prospectively for our first quarter of fiscal year 2019 financial statements with early adoption allowed on certain provisions. We have not yet selected a transition method nor determined the effect of this guidance on our consolidated financial statements.
In November 2015, the FASB issued guidance on simplifying the balance sheet classification of deferred taxes. The guidance requires the classification of deferred tax assets and liabilities as noncurrent in a classified balance sheet. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected by this update. The guidance is effective for our first quarter of fiscal year 2018 financial statements with early adoption

7



permitted, and allows for the use of either a prospective or retrospective transition method. We plan to early adopt using the prospective transition method for our fiscal year ending June 30, 2016, and will reclassify any current deferred tax assets or liabilities to noncurrent in our consolidated financial position.
In July 2015, the FASB issued guidance on simplifying the measurement of inventory which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Inventory within the scope of this update is required to be measured at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The guidance does not impact inventory measured on a last-in, first-out (“LIFO”) basis. The standards update is effective prospectively for our first quarter fiscal year 2018 financial statements with early adoption permitted. We do not expect the adoption to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued guidance that requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability and further clarification guidance allows the cost of securing a revolving line of credit to be recorded as a deferred asset regardless of whether a balance is outstanding. This guidance is effective for our first quarter fiscal year 2017 financial statements. We currently comply with this method therefore the adoption will not have a material effect on our consolidated financial statements.
In April 2015, the FASB issued guidance on customer’s accounting for cloud computing fees and provided criteria for customers in a cloud computing arrangement to use to determine whether the arrangement includes a license of software.  The guidance clarifies that a software license included in a cloud computing arrangement should be accounted for consistent with the acquisition of other software licenses, whereas a cloud computing arrangement that does not include a software license should be accounted for as a service contract. The guidance is effective for our first quarter of fiscal year 2017 financial statements, and allows for the use of either a prospective or retrospective transition method. We have not yet selected a transition method nor determined the effect of this guidance on our consolidated financial statements.
In June 2014, the FASB provided explicit guidance on how to account for share-based payments granted to employees in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The guidance will be applied prospectively for our first quarter fiscal year 2017 financial statements.  We do not expect the adoption to have a material effect on our consolidated financial statements.
In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. To achieve this core principle, the guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance addresses several areas including transfer of control, contracts with multiple performance obligations, and costs to obtain and fulfill contracts. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB decided to defer the effective date for this new revenue standard by one year, which will make the guidance effective for our first quarter fiscal year 2019 financial statements using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients; or (ii) adoption with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures. We have not yet selected a transition method nor determined the effect of this guidance on our consolidated financial statements.
In April 2014, the FASB issued guidance on reporting discontinued operations and disclosures of disposals of components of an entity. Under the new guidance, a disposal that represents a strategic shift that has or will have a major effect on an entity's operations and financial results is a discontinued operation. The new guidance requires expanded disclosures that will provide more information about the assets, liabilities, income, and expenses of discontinued operations, and also requires disclosures of significant disposals that do not qualify for discontinued operations reporting. The guidance was effective prospectively for disposals or components of our business classified as held for sale beginning in our first quarter of fiscal year 2016. The adoption did not have a material effect on our consolidated financial statements.
Notes Receivable and Trade Accounts Receivable:
Notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.

8



Our policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable includes analysis of such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for credit losses on the trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Our limited amount of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses. Customary terms require payment within 30 days, with terms beyond 30 days being considered extended.
Income Taxes:
In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.
Our 36.6% effective tax rate for the second quarter of fiscal year 2016 did not include any material unusual items. The second quarter fiscal year 2015 effective tax rate of 101.5% was primarily driven by a lower combined state tax rate post spin-off, requiring a $0.4 million unfavorable adjustment to deferred taxes. This impact had a large effect on the effective tax rate due to the relatively low level of pre-tax income in the second quarter of fiscal year 2015.
Our effective tax rate for the first half of fiscal year 2016 of 37.4% did not include any material unusual items. Our effective tax rate for the first half of fiscal year 2015 of 56.0% was unfavorably impacted as our combined state tax rate was lower post spin-off, requiring a $0.4 million adjustment to deferred taxes in the second quarter of fiscal year 2015 which increased our fiscal 2015 year-to-date tax expense and effective tax rate. In addition, a portion of our spin-off expenses which are nondeductible also unfavorably impacted the fiscal 2015 year-to-date tax rate.
Non-operating Income (Expense), net:
The non-operating income (expense), net line item includes the impact of such items as fair value adjustments on Supplemental Employee Retirement Plan (“SERP”) investments, foreign currency rate movements, non-production rent income, bank charges, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain (loss) on SERP investments is offset by a change in the SERP liability that is recognized in selling and administrative expenses.
Components of the Non-operating income (expense), net line, from continuing operations were:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands)
2015
 
2014
 
2015
 
2014
Foreign Currency Loss
$
(17
)
 
$
(17
)
 
$
(40
)
 
$
(42
)
Gain (Loss) on Supplemental Employee Retirement Plan Investments
297

 
352

 
(278
)
 
166

Other
(79
)
 
(152
)
 
(170
)
 
(274
)
Non-operating income (expense), net
$
201

 
$
183

 
$
(488
)
 
$
(150
)


9



Note 4. Inventories
Inventory components were as follows:
(Amounts in Thousands)
December 31, 2015
 
June 30,
2015
Finished products
$
33,217

 
$
26,634

Work-in-process
2,546

 
1,952

Raw materials
24,531

 
23,201

Total FIFO inventory
60,294

 
51,787

LIFO reserve
(13,601
)
 
(14,153
)
Total inventory
$
46,693

 
$
37,634

For interim reporting, LIFO inventories are computed based on quantities as of the end of the quarter 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, except in cases where LIFO inventory liquidations are expected to be reinstated by fiscal year end. The earnings impact of LIFO inventory liquidations during the three and six-month periods ended December 31, 2015 and 2014 was immaterial.

Note 5. Accumulated Other Comprehensive Income (Loss)
During the three months ended December 31, 2015 and 2014, the changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows:
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Postemployment Benefits
 
 
(Amounts in Thousands)
Foreign Currency Translation Adjustments
 
Derivative Gain (Loss)
 
Prior Service Costs
 
Net Actuarial Gain (Loss)
 
Accumulated Other Comprehensive Income (Loss)
Balance at September 30, 2015
$

 
$

 
$

 
$
1,302

 
$
1,302

Other comprehensive income (loss) before reclassifications

 

 

 
30

 
30

Reclassification to (earnings) loss

 

 

 
(64
)
 
(64
)
Net current-period other comprehensive income (loss)

 

 

 
(34
)
 
(34
)
Balance at December 31, 2015
$

 
$

 
$

 
$
1,268

 
$
1,268

 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2014
$
(677
)
 
$
(2,607
)
 
$
(77
)
 
$
1,284

 
$
(2,077
)
Other comprehensive income (loss) before reclassifications
(484
)
 
214

 

 
183

 
(87
)
Reclassification to (earnings) loss

 
(114
)
 
39

 
(58
)
 
(133
)
Distribution of Kimball Electronics, Inc.
1,161

 
2,507

 
8

 
(197
)
 
3,479

Net current-period other comprehensive income (loss)
677

 
2,607

 
47

 
(72
)
 
3,259

Balance at December 31, 2014
$

 
$

 
$
(30
)
 
$
1,212

 
$
1,182


10



During the six months ended December 31, 2015 and 2014, the changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows:
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Postemployment Benefits
 
 
(Amounts in Thousands)
Foreign Currency Translation Adjustments
 
Derivative Gain (Loss)
 
Prior Service Costs
 
Net Actuarial Gain (Loss)
 
Accumulated Other Comprehensive Income (Loss)
Balance at June 30, 2015
$

 
$

 
$

 
$
1,229

 
$
1,229

Other comprehensive income (loss) before reclassifications

 

 

 
173

 
173

Reclassification to (earnings) loss

 

 

 
(134
)
 
(134
)
Net current-period other comprehensive income (loss)

 

 

 
39

 
39

Balance at December 31, 2015
$

 
$

 
$

 
$
1,268

 
$
1,268

 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2014
$
4,909

 
$
(3,411
)
 
$
(120
)
 
$
1,062

 
$
2,440

Other comprehensive income (loss) before reclassifications
(6,070
)
 
2,097

 

 
393

 
(3,580
)
Reclassification to (earnings) loss

 
(1,193
)
 
82

 
(46
)
 
(1,157
)
Distribution of Kimball Electronics, Inc.
1,161

 
2,507

 
8

 
(197
)
 
3,479

Net current-period other comprehensive income (loss)
(4,909
)
 
3,411

 
90

 
150

 
(1,258
)
Balance at December 31, 2014
$

 
$

 
$
(30
)
 
$
1,212

 
$
1,182


11



The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Condensed Consolidated Statements of Income:
Reclassifications from Accumulated Other Comprehensive Income (Loss)
 
Three Months Ended
 
Six Months Ended
 
Affected Line Item in the Condensed Consolidated Statements of Income
 
December 31,
 
December 31,
 
(Amounts in Thousands)
 
2015
 
2014
 
2015
 
2014
 
Derivative Gain (Loss) (1)
 
$

 
$
114

 
$

 
$
1,193

 
Income from Discontinued Operations, Net of Tax
 
 
 
 
 
 
 
 
 
 
 
Postemployment Benefits:
 
 
 
 
 
 
 
 
 
 
Amortization of Prior Service Costs (2)
 
$

 
$
(40
)
 
$

 
$
(79
)
 
Cost of Sales
 
 

 
(21
)
 

 
(43
)
 
Selling and Administrative Expenses
 
 

 
24

 

 
48

 
Provision for Income Taxes
 
 

 
(37
)
 

 
(74
)
 
Income (Loss) from Continuing Operations
 
 
$

 
$
(2
)
 
$

 
$
(8
)
 
Income from Discontinued Operations, Net of Tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of Actuarial Gain (Loss) (2)
 
$
66

 
$
48

 
$
143

 
$
30

 
Cost of Sales
 
 
39

 
38

 
76

 
34

 
Selling and Administrative Expenses
 
 
(41
)
 
(34
)
 
(85
)
 
(25
)
 
Provision for Income Taxes
 
 
64

 
52

 
134

 
39

 
Income (Loss) from Continuing Operations
 
 
$

 
$
6

 
$

 
$
7

 
Income from Discontinued Operations, Net of Tax
 
 
 
 
 
 
 
 
 
 
 
Total Reclassifications for the Period
 
$
64

 
$
15

 
$
134

 
$
(35
)
 
Income (Loss) from Continuing Operations
 
 

 
118

 

 
1,192

 
Income from Discontinued Operations, Net of Tax
 
 
$
64

 
$
133

 
$
134

 
$
1,157

 
Net Income
Amounts in parentheses indicate reductions to income.
(1) See Note 9 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information on derivative instruments.
(2) See Note 11 - Postemployment Benefits of Notes to Condensed Consolidated Financial Statements for further information on postemployment benefit plans.

Note 6. Commitments and Contingent Liabilities
Standby letters of credit are issued to third-party suppliers, lessors, and insurance institutions and can only be drawn upon in the event of Kimball's failure to pay its obligations to a beneficiary. As of December 31, 2015, we had a maximum financial exposure from unused standby letters of credit totaling $1.0 million. We are not aware of circumstances that would require us to perform under any of these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our consolidated financial statements. Accordingly, no liability has been recorded as

12



of December 31, 2015 with respect to the standby letters of credit. Kimball also enters into commercial letters of credit to facilitate payments to vendors and from customers.
We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability in cases where specific warranty issues become known.
Changes in the product warranty accrual for the six months ended December 31, 2015 and 2014 were as follows:
 
Six Months Ended
 
December 31
(Amounts in Thousands)
2015
 
2014
Product Warranty Liability at the beginning of the period
$
2,264

 
$
3,221

Additions to warranty accrual (including changes in estimates)
717

 
475

Settlements made (in cash or in kind)
(514
)
 
(374
)
Distribution of Kimball Electronics, Inc.

 
(910
)
Product Warranty Liability at the end of the period
$
2,467

 
$
2,412


Note 7. Restructuring Expense
We recognized pre-tax restructuring expense of $2.0 million and $3.2 million in the three and six months ended December 31, 2015, respectively, and recognized $3.3 million restructuring expense in both the three and six months ended December 31, 2014. We utilize available market prices and management estimates to determine the fair value of impaired fixed assets. Restructuring charges are included in the Restructuring Expense line item on the Company's Condensed Consolidated Statements of Income.
Capacity Utilization Restructuring Plan:
In November 2014, we announced a capacity utilization restructuring plan which includes the consolidation of our metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and the reduction of our Company plane fleet from two jets to one.
Key factors in the decision to consolidate the Idaho operation into the Indiana facilities include the improvement of customer delivery, supply chain dynamics, and transportation costs. The transfer of work involves the start-up of metal fabrication capabilities in a Company-owned facility, along with the transfer of certain assembly operations into two additional company-owned facilities, all located in southern Indiana. The manufacturing capacity realignment is being carefully managed to mitigate customer disruptions. The consolidation activities began immediately after the announcement in November 2014, and we are actively marketing for sale the Post Falls, Idaho facility. We expect to incur approximately $1.6 million for future capital investments to support the transfer of production to Indiana. We anticipate pre-tax savings of approximately $5 million per year after the plan is fully implemented by June 2016, which is three months earlier than the original plan. A majority of the savings will not be realized until the plan is complete.
The reduction of our plane fleet from two jets to one reduced our cost structure while aligning the plane fleet size with our needs following the spin-off of Kimball Electronics on October 31, 2014. Previously, one of our jets was used primarily for the successful strategy of transporting customers to visit our showrooms, offices, research and development center, and manufacturing locations, while the remaining jet was used primarily for management travel. The plane used primarily for management travel was sold in the third quarter of fiscal year 2015. The sale of the plane resulted in a $0.2 million pre-tax gain in the third quarter of fiscal year 2015 which partially offset the impairment charge of $1.1 million recorded in the second quarter of fiscal year 2015. As a result of the aircraft fleet reduction, we began realizing the annual pre-tax savings of $0.8 million. In regards to the remaining jet, we believe that our location in rural Jasper, Indiana and the location of our manufacturing locations in small towns away from major metropolitan areas necessitates the need for the remaining jet to efficiently transport customers.
We currently estimate that the pre-tax restructuring charges will be approximately $10.3 million with $8.5 million recorded since the plan was announced with the remainder expected to be incurred over the remaining anticipated transition period. The restructuring charges are expected to consist of approximately $4.1 million of transition and other employee costs, $5.2 million of plant closure and other exit costs, and $1.0 million of non-cash asset impairment. Approximately 90% of the total cost estimate is expected to be cash expense.

13



Summary of Restructuring Plan:
 
  
 
  
 
  
 
 
 
 
 
Accrued
June 30,
2015
 
Six Months Ended December 31, 2015
 
 
 
Total Charges
Incurred Since
Plan Announcement
 
Total Expected
Plan Costs
(Amounts in Thousands)
 
Amounts
Charged Cash
 
Amounts
Charged 
Non-cash
 
Amounts Utilized/
Cash Paid
 
Accrued
December 31,
2015 (1)
 
 
Capacity Realignment and Post Falls, Idaho Exit
 
 
 
 
 
 
 

 
 

 
 

 
 

Transition and Other Employee Costs
$
2,613

 
$
715

 
$

 
$
(525
)
 
$
2,803

 
$
3,372

 
$
3,864

Asset Write-downs

 

 
52

 
(52
)
 

 
183

 
209

Plant Closure and Other Exit Costs

 
2,433

 

 
(2,353
)
 
80

 
3,889

 
5,215

Total
$
2,613

 
$
3,148

 
$
52

 
$
(2,930
)
 
$
2,883

 
$
7,444

 
$
9,288

Plane Fleet Reduction
 
 
 
 
 
 
 
 
 
 
 
 
 
Transition and Other Employee Costs
$

 
$

 
$

 
$

 
$

 
$
224

 
$
224

Asset Write-downs

 

 

 

 

 
822

 
822

Total
$

 
$

 
$

 
$

 
$

 
$
1,046

 
$
1,046

Total Restructuring Plan
$
2,613

 
$
3,148

 
$
52

 
$
(2,930
)
 
$
2,883

 
$
8,490

 
$
10,334


(1)
The accrued restructuring balance at December 31, 2015 is recorded in current liabilities.

Note 8. Fair Value
Kimball categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3: Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.
Our policy is to recognize transfers between these levels as of the end of each quarterly reporting period. There were no transfers between these levels during the six months ended December 31, 2015. There were also no changes in the inputs or valuation techniques used to measure fair values compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.
Financial Instruments Recognized at Fair Value:
The following methods and assumptions were used to measure fair value:
Financial Instrument
 
Level
 
Valuation Technique/Inputs Used
Cash Equivalents
 
1
 
Market - Quoted market prices
Trading securities: Mutual funds held in nonqualified SERP
 
1
 
Market - Quoted market prices


14



Recurring Fair Value Measurements:
As of December 31, 2015 and June 30, 2015, the fair values of level 1 financial assets that are measured at fair value on a recurring basis using the market approach were as follows:
(Amounts in Thousands)
December 31, 2015
 
June 30, 2015
Cash equivalents
$
24,127

 
$
23,414

Trading Securities: Mutual funds in nonqualified SERP
9,895

 
10,353

Total assets at fair value
$
34,022

 
$
33,767

We had no purchases or sales of level 3 assets during the three and six months ended December 31, 2015.
The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, target date funds, a bond fund, and a money market fund. The SERP investment assets are offset by a SERP liability which represents Kimball's obligation to distribute SERP funds to participants. See Note 10 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.
Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include the following:
Financial Instrument
 
Level
 
Valuation Technique/Inputs Used
Notes receivable
 
2
 
Market - Price approximated based on the assumed collection of receivables in the normal course of business, taking into account the customer's non-performance risk
Long-term debt (carried at amortized cost)
 
3
 
Income - Price estimated using a discounted cash flow analysis based on quoted long-term debt market rates, taking into account Kimball's non-performance risk
The carrying value of our cash deposit accounts, trade accounts receivable, trade accounts payable, and dividends payable approximates fair value due to the relatively short maturity and immaterial non-performance risk.

Note 9. Derivative Instruments
Foreign Exchange Contracts:
Our former EMS segment, classified as discontinued operations, operated internationally and was therefore exposed to foreign currency exchange rate fluctuations in the normal course of business. The primary means of managing this exposure was to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques did not fully offset currency risk, derivative instruments were used with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure included the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure was committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments were only utilized for risk management purposes and were not used for speculative or trading purposes.
Forward contracts designated as cash flow hedges were used to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency. Foreign exchange contracts were also used to hedge against foreign currency exchange rate risks related to intercompany balances denominated in currencies other than the functional currencies. In limited cases due to unexpected changes in forecasted transactions, cash flow hedges may have ceased to meet the criteria to be designated as cash flow hedges. Depending on the type of exposure hedged, either a derivative contract in the opposite position of the undesignated hedge may have been purchased or the hedge may have been retained until it matured if the hedge had continued to provide an adequate offset in earnings against the currency revaluation impact of foreign currency denominated liabilities.

15



When derivatives were settled with the counterparty, the derivative asset or liability was relieved and cash flow was impacted for the net settlement. For derivative instruments that met the criteria of hedging instruments under FASB guidance, the effective portions of the gain or loss on the derivative instrument were initially recorded net of related tax effect in Accumulated Other Comprehensive Income, a component of Share Owners' Equity, and were subsequently reclassified into earnings in the period or periods during which the hedged transaction was recognized in earnings. The gain or loss associated with derivative instruments that were not designated as hedging instruments or that ceased to meet the criteria for hedging under FASB guidance was recognized in earnings.
After the spin-off of the EMS segment on October 31, 2014, we held no derivative instruments. See the Condensed Consolidated Statements of Comprehensive Income for the changes in deferred derivative gains and losses. Information on the location and amounts of derivative gains and losses in the Condensed Consolidated Statements of Income are presented below.
The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 31
 
December 31
(Amounts in Thousands)
 
 
 
2015
 
2014
 
2015
 
2014
Amount of Pre-Tax Gain Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives (Effective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
$

 
$
282

 
$

 
$
2,513


The Effect of Derivative Instruments on Condensed Consolidated Statements of Income
 
 
 
 
Three Months Ended
 
Six Months Ended
(Amounts in Thousands)
 
 
 
December 31
 
December 31
Derivatives in Cash Flow Hedging Relationships
 
Location of Gain or (Loss) 
 
2015
 
2014
 
2015
 
2014
Amount of Pre-Tax Gain Reclassified from Accumulated OCI into Income (Effective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Income from Discontinued Operations, Net of Tax
 
$

 
$
130

 
$

 
$
1,484

 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 

 
 

 
 
 
 
Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Income from Discontinued Operations, Net of Tax
 
$

 
$
(184
)
 
$

 
$
740

 
 
 
 
 

 
 

 
 
 
 
Total Derivative Pre-Tax Gain (Loss) Recognized in Income
 
$

 
$
(54
)
 
$

 
$
2,224


Note 10. Investments
Kimball maintains a self-directed supplemental employee retirement plan (“SERP”) in which executive employees are eligible to participate. The SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. Kimball recognizes SERP investment assets on the Condensed Consolidated Balance Sheets at current fair value. A SERP liability of the same amount is recorded on the Condensed Consolidated Balance Sheets representing an obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income in the Other Income (Expense) category. Adjustments made to revalue the SERP liability are also recognized in income as selling and administrative expenses and offset valuation adjustments on SERP investment assets. Net unrealized holding losses from continuing operations for the six months ended December 31, 2015 and 2014 were, in thousands, $648 and $389, respectively.

16



SERP asset and liability balances were as follows:
(Amounts in Thousands)
December 31,
2015
 
June 30,
2015
SERP investments - current asset
$
708

 
$
1,276

SERP investments - other long-term asset
9,187

 
9,077

    Total SERP investments
$
9,895

 
$
10,353

 
 
 
 
SERP obligation - current liability
$
708

 
$
1,276

SERP obligation - other long-term liability
9,187

 
9,077

    Total SERP obligation
$
9,895

 
$
10,353


Note 11. Postemployment Benefits
Kimball's domestic employees participate in severance plans. These plans cover domestic employees and provide severance benefits to eligible employees meeting the plans' qualifications, primarily involuntary termination without cause. In connection with the spin-off, the Company transferred the post-employment obligation for EMS employees to Kimball Electronics.
The components of net periodic postemployment benefit cost applicable to our severance plans were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands)
2015
 
2014
 
2015
 
2014
Service cost
$
124

 
$
159

 
$
244

 
$
390

Interest cost
20

 
26

 
39

 
56

Amortization of prior service costs

 
65

 

 
136

Amortization of actuarial income
(105
)
 
(97
)
 
(219
)
 
(77
)
Net periodic benefit cost — Total cost
$
39

 
$
153

 
$
64

 
$
505

Less: Discontinued operations

 
11

 

 
81

Net periodic benefit cost — Continuing operations
$
39

 
$
142

 
$
64

 
$
424

The benefit cost in the above table includes only normal recurring levels of severance activity, as estimated using an actuarial method. Unusual or non-recurring severance actions are not estimable using actuarial methods and are expensed in accordance with the applicable U.S. GAAP.

Note 12. Stock Compensation Plan
During fiscal year 2016, the following stock compensation was awarded to officers, key employees, and members of the Board of Directors. All awards were granted under the Amended and Restated 2003 Stock Option and Incentive Plan. For more information on stock compensation awards, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

17



Type of Award
 
Quarter Awarded
 
Shares or Units
 
Grant Date Fair Value (5)
Annual Performance Shares (1)
 
1st Quarter
 
111,695

 

$12.12

Relative Total Shareholder Return Awards (2)
 
1st Quarter
 
36,093

 

$15.10

Restricted Share Units (3)
 
1st Quarter
 
93,232

 
$11.58 - $12.32

Unrestricted Shares (4)
 
1st Quarter
 
5,304

 

$11.31

Unrestricted Shares (4)
 
2nd Quarter
 
2,443

 

$12.29

Unrestricted Shares (Director Compensation) (4)
 
2nd Quarter
 
6,587

 

$12.04

(1) Annual performance shares were awarded to officers and other key employees. The number of annual performance shares to be issued will be dependent upon operating income performance, with a percentage payout up to a maximum of 200% of the target number set forth above. Annual performance shares vest after one year.
(2) Performance units were awarded to key officers under the Company's Relative Total Shareholder Return program. Vesting occurs at June 30, 2018. Participants will earn from 0% to 200% of the target award depending upon how the compound annual growth rate of Kimball International common stock ranks within the peer group at the end of the performance period.
(3) Restricted share units were awarded to officers and key employees. Vesting occurs at June 30, 2016, June 30, 2017, and June 30, 2018. Upon vesting, the outstanding number of restricted share units and the value of dividends accumulated over the vesting period are converted to shares of common stock.
(4) Unrestricted shares were awarded to key employees as consideration for service to the Company. Other unrestricted shares were awarded to non-employee members of the Board of Directors as compensation for director's fees which are expensed over the period that directors earn the compensation. Unrestricted shares do not have vesting periods, holding periods, restrictions on sale, or other restrictions.
(5) The grant date fair value of annual performance shares is based on the stock price at the date of the award, reduced by the present value of dividends normally paid over the vesting period which are not payable on outstanding annual performance share awards. The grant date fair value of the Relative Total Shareholder Return awards was calculated using a Monte Carlo simulation. This valuation technique includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends. The grant date fair value of the restricted share units and unrestricted shares was based on the stock price at the date of the award.

Note 13. Variable Interest Entities
Kimball's involvement with a variable interest entity (“VIE”) is limited to a situation in which we are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the VIE's economic performance. Thus, consolidation is not required.
Our involvement with the VIE is limited to a note receivable related to the sale of an Indiana facility. The carrying value of the note receivable, net of a $0.5 million allowance, was $0.8 million as of December 31, 2015. As of June 30, 2015, the carrying value of the note receivable, net of a $0.5 million allowance, was $0.9 million. For both periods, the short-term portion of the carrying value was included on the Receivables line and the long-term portion of the carrying value was included on the Other Assets line of our Condensed Consolidated Balance Sheets.
We have no obligation to provide additional funding to the VIE, and thus our exposure and risk of loss related to the VIE is limited to the carrying value of the notes receivable. Kimball did not provide additional financial support to the VIE during the quarter ended December 31, 2015.


18



Note 14. Credit Quality and Allowance for Credit Losses of Notes Receivable
Kimball monitors credit quality and associated risks of notes receivable on an individual basis based on criteria such as financial stability of the party and collection experience in conjunction with general economic and market conditions. We hold collateral for the note receivable from the sale of an Indiana facility thereby mitigating the risk of loss. As of December 31, 2015 and June 30, 2015, Kimball had no material past due outstanding notes receivable.
 
As of December 31, 2015
 
As of June 30, 2015
(Amounts in Thousands)
Unpaid Balance
 
Related Allowance
 
Receivable Net of Allowance
 
Unpaid Balance
 
Related Allowance
 
Receivable Net of Allowance
Note Receivable from Sale of Indiana Facility
$
1,324

 
$
489

 
$
835

 
$
1,347

 
$
489

 
$
858

Other Notes Receivable
391

 
144

 
247

 
439

 
149

 
290

Total
$
1,715

 
$
633

 
$
1,082

 
$
1,786

 
$
638

 
$
1,148


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Kimball International, Inc. (the “Company,” “Kimball,” “we,” “us,” or “our”) is a leading manufacturer of design driven, technology savvy, high quality furnishings sold under the Company’s family of brands: National, Kimball Office, and Kimball Hospitality. Our diverse portfolio provides solutions for the workplace, learning, healing, and hospitality environments. Customers can access our products globally through a variety of distribution channels.  Recognized with a reputation for excellence as a trustworthy company and recognized with the Great Place to Work® designation, Kimball International is committed to a high performance culture with a foundation of sound ethics, continuous improvement, and social responsibility.
Current global economic uncertainties including the slowing in China's economy, distressed oil prices, and volatility in financial markets may pose a threat to our future growth if companies reduce capital spending in response to the uncertainty. We continue to closely monitor key indicators for the markets in which we compete.
In relation to the office furniture industry, the Business and Institutional Furniture Manufacturer Association (“BIFMA”) forecast (by IHS as of November 2015) projects a year-over-year increase of 7.1% for calendar year 2016. The forecast for two of the leading indicators for the hospitality furniture market (January 2016 PwC Hospitality Directions U.S. report) include an increase in occupancy rates of less than 1% and an increase in RevPAR (Revenue Per Available Room) of 5.5% for calendar year 2016.
We expect to continue to invest in capital expenditures prudently, particularly for projects, including potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability. We have a strong focus on cost control and closely monitor market changes and our liquidity in order to proactively adjust our operating costs, discretionary capital spending, and dividend levels as needed. Managing working capital in conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of our profit sharing incentive bonus plan is that it is linked to our worldwide and business unit performance which is designed to adjust compensation expense as profits change.
We continue to maintain a strong balance sheet. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facility, was $55.1 million at December 31, 2015.
In addition to the above discussion, management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
Successful execution of the Company's restructuring plan is critical to the Company's future performance. The success of the restructuring initiatives is dependent on accomplishing the plan in a timely and effective manner. A critical component of the restructuring initiatives is the transfer of production among facilities which will result in some manufacturing inefficiencies and excess working capital during the transition period. The Company's restructuring plan is discussed below.
We continue to focus on mitigating the impact of select raw material commodity pricing pressures.

19



Due to the contract and project nature of the furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business. Effective management of our manufacturing capacity is and will continue to be critical to our success. See below for further details regarding current sales and open order trends.
While both the hospitality and office furniture markets are currently expanding, we continue to see volatility in order rates which in turn can impact our operating results.
Globalization continues to reshape not only the markets in which we operate but also our key customers and competitors. In addition, demand is increasing for hospitality furniture manufactured in the U.S., and we are shifting focus of underutilized manufacturing capacity to fill this need.
Employees throughout our business operations are an integral part of our ability to compete successfully, and the stability of the management team is critical to long-term Share Owner value. Our career development and succession planning processes help to maintain stability in management.
Spin-Off of Kimball Electronics reported as Discontinued Operations
On October 31, 2014 (“Distribution Date”), we completed the previously announced spin-off of our Electronic Manufacturing Services (“EMS”) segment by distributing the related shares of Kimball Electronics, Inc. (“Kimball Electronics”), on a pro rata basis, to the Company's Share Owners of record as of October 22, 2014. After the Distribution Date, the Company does not beneficially own any Kimball Electronics shares and Kimball Electronics is an independent publicly traded company. Kimball International, Inc. trades on the NASDAQ under the ticker symbol “KBAL” and Kimball Electronics, Inc. trades on the NASDAQ under the ticker symbol “KE”.
The EMS business was reclassified to discontinued operations. Financial results of the discontinued operations were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands, Except Per Share Data)
2015
 
2014
 
2015
 
2014
Net Sales of Discontinued Operations
$

 
$
71,748

 
$

 
$
275,551

Income from Discontinued Operations, Net of Tax
$

 
$
2,678

 
$

 
$
9,157

Income From Discontinued Operations per Diluted Share
$

 
$
0.07

 
$

 
$
0.24

As a result of the October 30, 2014 stock unification, all distinctions between Class A common stock and Class B common stock were eliminated so that all shares of Class B common stock are equivalent to shares of Class A common stock with respect to all matters, including without limitation, dividend payments and voting rights. Therefore, beginning in fiscal year 2016 the earnings per share calculation includes all common stock in a single calculation. Unless the context otherwise indicates, reference to earnings per share for periods prior to fiscal year 2016 reflects the earnings per Class B diluted share as has historically been reported.

20



Financial Overview
 
At or for the
Three Months Ended
 
 
 
For the
Six Months Ended
 
 
 
December 31
 
 
 
December 31
 
 
(Amounts in Millions)
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Net Sales
$
163.8

 
$
151.4

 
8
%
 
$
320.4

 
$
295.9

 
8
%
Gross Profit
53.3

 
46.6

 
14
%
 
104.4

 
93.8

 
11
%
Selling and Administrative Expenses
41.2

 
43.4

 
(5
%)
 
81.4

 
86.9

 
(6
%)
Restructuring Expense
2.0

 
3.3

 


 
3.2

 
3.3

 
 
Operating Income (Loss)
10.0

 
(0.2
)
 


 
19.7

 
3.5

 


Operating Income (Loss) %
6.1
%
 
(0.1
%)
 


 
6.2
%
 
1.2
%
 


Adjusted Operating Income *
12.0

 
4.9

 
145
%
 
22.9

 
9.7

 
136
%
Adjusted Operating Income % *
7.3
%
 
3.2
 %
 
 
 
7.2
%
 
3.3
%
 
 
Income (Loss) from Continuing Operations
6.5

 

 


 
12.1

 
1.5

 


Adjusted Income from Continuing Operations *
$
7.7

 
$
3.8

 
 
 
$
14.1

 
$
6.5

 
 
Diluted Earnings (Loss) Per Share from Continuing Operations
$
0.17

 
$
0.00

 
 
 
$
0.32

 
$
0.04

 
 
Adjusted Diluted Earnings Per Share from Continuing Operations *
$
0.21

 
$
0.10

 
 
 
$
0.37

 
$
0.17

 
 
Open Orders
$
125.3

 
$
119.5

 
5
%
 
 
 
 
 
 
* Items indicated represent Non-GAAP measurements. See “Reconciliation of Non-GAAP Financial Measures” below.
Net Sales by End Market Vertical
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended

 

Six Months Ended

 
 
December 31

 

December 31

 
(Amounts in Millions)
2015

2014

% Change

2015

2014

% Change
Commercial
$
54.4

 
$
52.5

 
4
%
 
$
103.8

 
$
101.8

 
2
%
Education
9.4


7.8


21
%

23.0


20.6


12
%
Finance
18.4


13.6


35
%

34.4


28.9


19
%
Government
24.0


27.3


(12
%)

52.3


54.5


(4
%)
Healthcare
19.4


14.8


31
%

34.9


29.4


19
%
Hospitality
38.2


35.4


8
%

72.0


60.7


19
%
Total Net Sales
$
163.8


$
151.4


8
%

$
320.4


$
295.9


8
%
The following operating results discussions are based on income from continuing operations and therefore exclude all income statement activity of the discontinued operations.
Second quarter fiscal year 2016 consolidated net sales were $163.8 million compared to second quarter fiscal year 2015 net sales of $151.4 million, or an 8% increase. Net sales for the six-month period ended December 31, 2015 of $320.4 million also increased 8% from net sales of $295.9 million for the same period of the prior fiscal year. The sales increases for both the second fiscal quarter and year-to-date periods were driven by sales increases in all vertical markets except the government vertical market. Increased volume and to a lesser extent the positive impact of price increases drove the net sales increase. Our finance vertical market sales increase was the result of our investment in building product solutions applicable specifically to the needs of the changing workplace environment within financial institutions. Our healthcare vertical market sales benefited from strengthening relationships with purchasing organizations and product solutions specific to healthcare settings. Our hospitality

21



vertical market sales increase was driven by increased new construction as well as renovations. Our education vertical market sales increased as we increase our focus in this area. The decline in sales to the government vertical market was driven by lower sales to the federal government. Vertical market sales levels can fluctuate depending on the mix of projects in a given period.
In the second quarter of fiscal year 2016 we recorded income from continuing operations of $6.5 million and diluted earnings per share of $0.17, inclusive of $1.2 million, or $0.04 per diluted share, of after-tax restructuring charges. In the second quarter of fiscal year 2015 we recorded approximate break-even income from continuing operations and earnings per diluted share, inclusive of $2.0 million, or $0.05 per diluted share, of after-tax restructuring charges, and $1.8 million, or $0.05 per diluted share, of incremental after-tax costs related to the spin-off of our EMS segment. Excluding these nonrecurring costs, our adjusted income from continuing operations for the second quarter of fiscal year 2016 improved to $7.7 million, or $0.21 per diluted share, compared to adjusted income from continuing operations for the second quarter of fiscal year 2015 of $3.8 million, or $0.10 per diluted share.
In the first half of fiscal year 2016 we recorded income from continuing operations of $12.1 million and diluted earnings per share of $0.32, inclusive of $2.0 million, or $0.05 per diluted share, of after-tax restructuring charges. In the first half of fiscal year 2015 we recorded income from continuing operations of $1.5 million and diluted earnings per diluted share of $0.04, inclusive of $2.0 million, or $0.05 per diluted share, of after-tax restructuring charges, and $2.9 million, or $0.08 per diluted share, of incremental after-tax costs related to the spin-off of our EMS segment. Excluding these nonrecurring costs, our adjusted income from continuing operations for the first half of fiscal year 2016 improved to $14.1 million, or $0.37 per diluted share, compared to adjusted income from continuing operations for the first half of fiscal year 2015 of $6.5 million, or $0.17 per diluted share.
Open orders at December 31, 2015 increased 5% when compared to the open order level as of December 31, 2014 as increased open orders for office furniture more than offset a decline in open orders for hospitality furniture. Open orders at a point in time may not be indicative of future sales trends.
Gross profit as a percent of net sales increased 1.7 percentage points in the second quarter of fiscal year 2016 compared to the second quarter of fiscal year 2015 and increased 0.9 of a percentage point in the first six months of fiscal year 2016 compared to the first six months of fiscal year 2015. The favorable impact of price increases, lower discounting, lower outbound freight, material cost savings, and the benefit of leverage gained on higher sales volumes, were partially offset by an unfavorable shift in sales mix to lower margin product and higher warehousing and handling expenses related to higher inventory levels. In addition, labor productivity improvements at select units were offset by labor inefficiencies related to the transfer of production from the Idaho manufacturing facility to our other manufacturing facilities.
As a percent of net sales, selling and administrative expenses in the second quarter and first six months of fiscal year 2016 compared to the second quarter and first six months of fiscal year 2015 decreased 3.5 percentage points and 4.0 percentage points, respectively, due to the increased sales volumes coupled with lower costs. In absolute dollars, selling and administrative expenses in the second quarter and first six months of fiscal year 2016 compared to the same periods of fiscal year 2015 decreased 5.0% and 6.4% primarily due to spin-off expenses of $1.7 million and $2.9 million incurred in the prior year second quarter and year-to-date period, respectively. In addition, selling and administrative expenses declined due to the retirement of key executives as of the spin-off date. Partially offsetting the favorable variances, incentive compensation expense excluding the retirement of key executives increased in both the second quarter and first six months of fiscal year 2016 compared to the same periods of the prior year.
In November 2014, we approved a capacity utilization restructuring plan which includes the consolidation of our metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and the reduction of our Company plane fleet from two jets to one. The jet was sold in the third quarter of fiscal year 2015, and as a result of the aircraft fleet reduction, we began realizing the expected pre-tax annual savings of $0.8 million. The remaining jet is primarily used for transporting customers to visit our showrooms, offices, research and development center, and manufacturing locations. The consolidation of our metal fabrication production is underway and after the consolidation is complete, we anticipate annual pre-tax savings of $5 million per year thereafter. We recognized pre-tax restructuring expense related to continuing operations of $2.0 million and $3.2 million in the three and six months ended December 31, 2015, respectively, and recognized $3.3 million restructuring expense in both the three and six months ended December 31, 2014. See Note 7 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further information on restructuring.

22



Other Income (Expense) consisted of the following:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands)
2015
 
2014
 
2015
 
2014
Interest Income
$
45

 
$
50

 
$
116

 
$
91

Interest Expense
(5
)
 
(6
)
 
(11
)
 
(12
)
Foreign Currency Loss
(17
)
 
(17
)
 
(40
)
 
(42
)
Gain (Loss) on Supplemental Employee Retirement Plan Investments
297

 
352

 
(278
)
 
166

Other
(79
)
 
(152
)
 
(170
)
 
(274
)
Other Income (Expense), net
$
241

 
$
227

 
$
(383
)
 
$
(71
)
Our effective tax rate for the first half of fiscal year 2016 was 37.4% and did not include any material unusual items. Our effective tax rate for the first half of fiscal year 2015 of 56.0% was unfavorably impacted by a lower combined state tax rate post spin-off, requiring a $0.4 million unfavorable adjustment to deferred taxes which increased our fiscal 2015 year-to-date tax expense and effective tax rate. In addition, a portion of our spin-off expenses which were nondeductible also unfavorably impacted the fiscal 2015 effective tax rate. The impact to our effective tax rate is magnified in periods when our pre-tax income is lower.
Comparing the balance sheet as of December 31, 2015 to June 30, 2015, inventory levels increased to support the manufacturing consolidation plan, higher sales levels, and select hospitality customer lead time requirements. Our accounts receivable balance decline was driven by variation in shipment levels shortly before December 31, 2015 and June 30, 2015.

Liquidity and Capital Resources
Our cash and cash equivalents position declined to $26.1 million at December 31, 2015 from $34.7 million at June 30, 2015, primarily due to share repurchases and capital expenditures as discussed below.
Working capital at December 31, 2015 was $45.1 million compared to working capital of $44.4 million at June 30, 2015. The current ratio was 1.5 at December 31, 2015 and 1.4 at June 30, 2015.
Kimball's short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facility, totaled $55.1 million at December 31, 2015. We had no short-term borrowings outstanding as of December 31, 2015 or June 30, 2015.
Cash Flows
Cash management was centralized prior to the spin-off, thus cash flows prior to the October 31, 2014 spin-off date include Kimball Electronics cash flows. Cash flows from discontinued operations are combined with cash flows from continuing operations within each cash flow statement category on the Company’s Condensed Consolidated Statements of Cash Flows.
The following table reflects the major categories of cash flows for the first half of fiscal years 2016 and 2015.
 
 
Six Months Ended
 
 
December 31
(Amounts in millions)
 
2015
 
2014
Net cash provided by operating activities
 
$
15,257

 
$
1,767

Net cash used for investing activities
 
$
(8,994
)
 
$
(18,674
)
Net cash used for financing activities
 
$
(14,834
)
 
$
(69,478
)
Cash Flows from Operating Activities
For the first half of fiscal year 2016 net cash provided by operating activities was $15.3 million and for the first half of fiscal year 2015 net cash provided by operating activities was $1.8 million. Changes in working capital balances used $7.5 million of cash in the first half of fiscal year 2016 and $30.4 million in the first half of fiscal year 2015.

23



The $7.5 million usage of cash from changes in working capital balances in the first half of fiscal year 2016 was primarily driven by fluctuations in our inventory balances. Inventory levels increased $9.1 million primarily to support the manufacturing consolidation plan, higher sales levels, and customer lead time requirements. The $30.4 million usage of cash from changes in working capital balances in the first half of fiscal year 2015 was primarily driven by increases in our inventory and accounts receivable balances. Approximately half of the $18.0 million usage of cash for inventory was driven by increased inventory levels in our furniture operations while the remainder was related to inventory fluctuations of the discontinued EMS business prior to the spin date. The $10.3 million usage of cash from an increase in accounts receivable balance was primarily driven by the discontinued EMS business prior to spin date.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for the six-month periods ended December 31, 2015 and December 31, 2014 was approximately 29 days and approximately 30 days, respectively. For the pre-spin periods the amount is estimated on a continuing operations basis. We define DSO as the average of monthly trade accounts and notes receivable divided by an average day's net sales. Our Production Days Supply on Hand (“PDSOH”) of inventory measure for the six-month period ended December 31, 2015 increased to approximately 53 days from approximately 42 days from the six-month period ended December 31, 2014. The PDSOH increase was driven by increased inventory levels to support growth, customer lead time requirements, and the manufacturing consolidation plan. For the pre-spin periods the amount is estimated on a continuing operations basis. We define PDSOH as the average of the monthly gross inventory divided by an average day's cost of sales.
Cash Flows from Investing Activities
During the first half of fiscal years 2016 and 2015, we reinvested $8.9 million and $19.4 million, respectively, into capital investments for the future. The capital investments during the first half of the current year were primarily for facility improvements and manufacturing equipment. The capital investments during the first half of the prior year were primarily for manufacturing equipment in our discontinued EMS business and facility improvements.
Cash Flows from Financing Activities
Kimball paid dividends of $4.0 million and $3.8 million in the six-month periods ended December 31, 2015 and December 31, 2014, respectively. Consistent with our historical dividend policy, the Company's Board of Directors evaluates the appropriate dividend payment on a quarterly basis. During the first half of fiscal year 2016, we repurchased shares pursuant to a previously announced stock repurchase program which drove cash outflow of $9.7 million. During the first half of fiscal year 2015, Kimball transferred $63.0 million of cash to Kimball Electronics in conjunction with the spin-off.
Credit Facility
We maintain a $30 million credit facility with a maturity date of October 2019 that allows for both issuances of letters of credit and cash borrowings. This facility provides an option to increase the amount available for borrowing to $55 million at our request, subject to the consent of the participating banks. At both December 31, 2015 and June 30, 2015, we had no short-term borrowings outstanding. At December 31, 2015, we had $1.0 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility.
The credit facility requires us to comply with certain debt covenants, the most significant of which are the adjusted leverage ratio and the fixed charge coverage ratio. The adjusted leverage ratio is defined as (a) consolidated total indebtedness minus unencumbered U.S. cash on hand in the U.S. in excess of $15,000,000 to (b) consolidated EBITDA, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.0 to 1.0. The fixed charge coverage ratio is defined as (a) the sum of (i) consolidated EBITDA, minus (ii) 50% of depreciation expense, minus (iii) taxes paid, minus (iv) dividends and distributions paid, to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii) interest expense, calculated on a consolidated basis in accordance with GAAP, determined as of the end of each of its fiscal quarters for the trailing four fiscal quarters then ending, to not be less than 1.10 to 1.00.
We were in compliance with all debt covenants of the credit facility during the six-month period ended December 31, 2015.

24



The table below compares the adjusted leverage ratio and fixed charge coverage ratio with the limits specified in the credit agreement.
 
 
At or For the Period Ended
 
Limit As Specified in
 
 
Covenant
 
December 31, 2015
 
Credit Agreement
 
Excess
Adjusted Leverage Ratio
 
(0.18
)
 
3.00

 
3.18

Fixed Charge Coverage Ratio
 
1,159.43

 
1.10

 
1,158.33

Future Liquidity
We believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our credit facility will be sufficient to fund future dividends and meet our working capital and other operating needs for at least the next 12 months. We may continue to repurchase shares if conditions are favorable. We also expect to continue to invest in capital expenditures prudently, particularly for projects, including potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by factors such as general economic and market conditions, lack of availability of raw material components in the supply chain, a decline in demand for our services, loss of key contract customers, and other unforeseen circumstances. In particular, should demand for our products decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted.

Non-GAAP Financial Measures
This item contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company's financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States in the statement of income, statement of comprehensive income, balance sheet, or statement of cash flows of the Company. The non-GAAP financial measures used within this item include (1) operating income excluding spin-off expenses and restructuring charges; (2) income from continuing operations excluding spin-off expenses and restructuring charges; and (3) diluted earnings per share from continuing operations excluding spin-off expenses and restructuring charges. Reconciliations of the reported GAAP numbers to these non-GAAP financial measures are included in the table below. Management believes it is useful for investors to understand how its core operations performed without spin-off expenses and costs incurred in executing its restructuring plans. Excluding these amounts allows investors to meaningfully trend, analyze, and benchmark the performance of the Company's core operations. Many of the Company's internal performance measures that management uses to make certain operating decisions exclude these charges to enable meaningful trending of core operating metrics.

25



Reconciliation of Non-GAAP Financial Measures
 
 
 
 
 
 
(Amounts in Thousands, Except for Per Share Data)
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
Six Months Ended
 
December 31
 
 
 
December 31
 
2015
 
2014
 
 
 
2015
 
2014
Operating Income (Loss)
$
10,018

 
$
(161
)
 
 
 
$
19,743

 
$
3,517

Add: Pre-tax Spin-off Expenses

 
1,735
 
 
 

 
2,870
Add: Pre-tax Restructuring Charges
2,014
 
3,335
 
 
 
3,200
 
3,335
Adjusted Operating Income
$
12,032

 
$
4,909

 
 
 
$
22,943

 
$
9,722

 
 
 
 
 
 
 
 
 
 
Income (Loss) from Continuing Operations
$
6,502

 
$
(1
)
 
 
 
$
12,124

 
$
1,516

Add: After-tax Spin-off Expenses

 
1,809

 
 
 

 
2,931

Add: After-tax Restructuring Charges
1,230

 
2,039

 
 
 
1,955

 
2,039

Adjusted Income from Continuing Operations
$
7,732

 
$
3,847

 
 
 
$
14,079

 
$
6,486

 
 
 
 
 
 
 
 
 
 
Diluted Earnings (Loss) Per Share from Continuing Operations
$
0.17

 
$
0.00

 
 
 
$
0.32

 
$
0.04

Add: Impact of Spin-off Expenses
0.00

 
0.05

 
 
 
0.00

 
0.08

Add: Impact of Restructuring Charges
0.04

 
0.05

 
 
 
0.05

 
0.05

Adjusted Diluted Earnings Per Share from Continuing Operations
$
0.21

 
$
0.10

 
 
 
$
0.37

 
$
0.17


Fair Value
During the second quarter of fiscal year 2016, no financial instruments were affected by a lack of market liquidity. Our financial instruments are categorized as level 1 financial assets and are valued using readily available market pricing.
See Note 8 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.
Contractual Obligations
There have been no material changes outside the ordinary course of business to Kimball's summary of contractual obligations under the caption, “Contractual Obligations” in Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to standby letters of credit, a performance bond, and operating leases entered into in the normal course of business. These arrangements do not have a material current effect and are not reasonably likely to have a material future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. See Note 6 - Commitments and Contingent Liabilities of Notes to Condensed Consolidated Financial Statements for more information on standby letters of credit. We do not have material exposures to trading activities of non-exchange traded contracts.
The preceding statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Certain factors could cause actual results to differ materially from forward-looking statements.
Critical Accounting Policies
Kimball's condensed 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 condensed 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

26



on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in preparation of our condensed consolidated financial statements and are the policies that are most critical in the portrayal of our 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 independent registered public accounting firm.
Revenue recognition — We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the title and the risk of loss passes to the customer according to the terms of the contract. Title and risk of loss are transferred upon shipment to or receipt at our customers’ locations, or in limited circumstances, as determined by other specific sales terms of the transaction. 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. We recognize sales net of applicable sales tax.
Sales returns and allowances — Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time of the sales, resulting in a reduction of revenue. These estimates may change over time causing the provisions to be adjusted accordingly. At both December 31, 2015 and June 30, 2015, the reserve for returns and allowances was $0.8 million. The returns and allowances reserve approximated 1% to 2% of gross trade receivables during the two-year period preceding December 31, 2015.
Allowance for doubtful accounts — Our estimate for the allowance for credit losses on trade accounts receivable and notes receivable includes analysis of such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for credit losses on the trade accounts receivable and notes receivable. The allowance for doubtful accounts at December 31, 2015 and June 30, 2015 was $1.1 million and $1.0 million, respectively. During the two-year period preceding December 31, 2015, this reserve approximated 1% of gross trade accounts receivable prior to the spin-off, and approximated 2% to 4% of post-spin gross trade accounts receivable.
Self-insurance reserves — We are self-insured up to certain limits for auto and general liability, workers' compensation, and certain employee health benefits such as medical, short-term disability, and dental with the related liabilities included in the accompanying financial statements. Our policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims, and other 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, 2015 and June 30, 2015, our accrued liabilities for self-insurance exposure were $3.4 million and $2.8 million, respectively.
Taxes — Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management's assessment.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. However, we believe we have made adequate provision for income and other taxes for all years that are subject to audit. As tax positions are effectively settled, the tax provision will be adjusted accordingly. The liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions, was $2.9 million at both December 31, 2015 and June 30, 2015.
New Accounting Standards
See Note 3 - Recent Accounting Pronouncements and Supplemental Information of Notes to Condensed Consolidated Financial Statements for information regarding New Accounting Standards.

27



Forward-Looking Statements
Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “seeks,” “likely,” “future,” “may,” “might,” “should,” “would,” “will,” and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the successful completion of the restructuring plan, adverse changes in the global economic conditions, increased global competition, significant reduction in customer order patterns, loss of key customers or suppliers, financial stability of key customers and suppliers, relationships with strategic customers and product distributors, availability or cost of raw materials and components, increased competitive pricing pressures reflecting excess industry capacities, changes in the regulatory environment, or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of Kimball are contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to market risks from the information disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures.
Kimball maintains controls and procedures designed to ensure that information required to be disclosed in the reports that are filed or submitted 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 and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed as of December 31, 2015, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.
(b)Changes in internal control over financial reporting.
There have been no changes in Kimball's internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.


28



PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
A share repurchase program authorized by the Board of Directors was announced on October 16, 2007. The program allows for the repurchase of up to two million shares of common stock and will remain in effect until all shares authorized have been repurchased. On August 11, 2015 an additional two million shares of common stock were authorized by the Board of Directors for repurchase. Kimball did not repurchase any shares under the repurchase program during the second quarter of fiscal year 2016. At December 31, 2015, 2.3 million shares remained available under the repurchase program.
 
 
 
 
 
 
 
 
 


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Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
3(a)
Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2012)
3(b)
Restated By-laws of the Company
10(a)*
Summary of Director and Named Executive Officer Compensation
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
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

*Constitutes management contract or compensatory arrangement.

30



SIGNATURES
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 thereunto duly authorized.

 
 
KIMBALL INTERNATIONAL, INC.
 
 
 
 
By:
/s/ ROBERT F. SCHNEIDER
 
 
Robert F. Schneider
Chief Executive Officer
 
 
February 3, 2016
 
 
 
 
 
 
 
By:
/s/ MICHELLE R. SCHROEDER
 
 
Michelle R. Schroeder
Vice President,
Chief Financial Officer
 
 
February 3, 2016

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Kimball International, Inc.
Exhibit Index
Exhibit No.
 
Description
3(a)
 
Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2012)
3(b)
 
Restated By-laws of the Company
10(a)*
 
Summary of Director and Named Executive Officer Compensation
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
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
*Constitutes management contract or compensatory arrangement.

32