KIMBALL INTERNATIONAL INC - Quarter Report: 2009 December (Form 10-Q)

The Electronic Manufacturing Services (EMS) segment had goodwill of, in thousands, $2,634 and $2,608, as of December 31, 2009 and June 30, 2009, respectively. Goodwill increased by, in thousands, $26 during the six months ended December 31, 2009 due to the effect of changes in foreign currency exchange rates.

Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, the Company compares the carrying value of the reporting unit to an estimate of the reporting unit's fair value to identify potential impairment. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed to determine the amount of potential goodwill impairment. If impaired, goodwill is written down to its estimated implied fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting units considers current market conditions existing at the assessment date.

In addition to performing the required annual testing, the Company will continue to monitor circumstances and events in future periods to determine whether additional goodwill impairment testing is warranted on an interim basis. The Company can provide no assurance that an impairment charge for the goodwill balance, which approximates only 0.4% of the Company's total assets, will not occur in future periods as a result of these analyses.

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Other intangible assets consist of capitalized software, product rights, and customer relationships and are reported as Other Intangible Assets on the Condensed Consolidated Balance Sheets.  Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. 

Note 4. Segment Information

Management organizes the Company into segments based upon differences in products and services offered in each segment. The EMS segment provides engineering and manufacturing services which utilize common production and support capabilities to a variety of industries globally. The EMS segment focuses on electronic assemblies that have high durability requirements and are sold on a contract basis and produced to customers' specifications. The EMS segment currently sells primarily to customers in the medical, automotive, industrial controls, and public safety industries. The Furniture segment provides furniture for the office and hospitality industries, sold under the Company's family of brand names. Each segment's product line offerings consist of similar products and services sold within various industries. Intersegment sales are insignificant.

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Unallocated corporate assets include cash and cash equivalents, short-term investments, and other assets not allocated to segments. Unallocated corporate net income consists of income not allocated to segments for purposes of evaluating segment performance and includes income from corporate investments and other non-operational items. The basis of segmentation and accounting policies of the segments are consistent with those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

	Three Months Ended				Six Months Ended
	December 31				December 31
(Amounts in Thousands)	2009		2008		2009		2008
Net Sales:
Electronic Manufacturing Services	$166,983		$166,912		$332,469		$349,833
Furniture	108,140		160,694		217,306		317,268
Unallocated Corporate and Eliminations	38		-0-		45		-0-
Consolidated	$275,161		$327,606		$549,820		$667,101
Net Income (Loss):
Electronic Manufacturing Services	$    2,665		$     (709)		$    2,446		$   (1,477)
Furniture	(996)		4,049		784		7,232
Unallocated Corporate and Eliminations	237		4,842		450		4,611
Consolidated	$    1,906	(1)	$    8,182	(2)	$     3,680	(1)	$   10,366	(2)

(1) Net Income (Loss) included after-tax restructuring charges, in thousands, of $184 and $476 in the three and six months ended December 31, 2009, respectively. The EMS segment recorded, in the three and six months ended December 31, 2009, in thousands, $229 and $505, respectively, of after-tax restructuring charges. The Furniture segment recorded, in the three and six months ended December 31, 2009, in thousands, $59 and $51, respectively, of after-tax restructuring income. Unallocated Corporate and Eliminations recorded, in the three and six months ended December 31, 2009, in thousands, $14 and $22, respectively, of after-tax restructuring charges. See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion. Additionally, the EMS segment recorded for both the three and six months ended December 31, 2009, after-tax income of  $2.0 million resulting from settlement proceeds related to an antitrust class action lawsuit of which the Company was a class member.

(2) Net Income (Loss) included after-tax restructuring charges, in thousands, of $661 and $1,255 in the three and six months ended December 31, 2008, respectively.  The EMS segment recorded, in the three and six months ended December 31, 2008, in thousands, $464 and $899, respectively, of after-tax restructuring charges.  The Furniture segment recorded, in the three and six months ended December 31, 2008, in thousands, $143 and $289, respectively, of after-tax restructuring charges.  Unallocated Corporate and Eliminations recorded, in the three and six months ended December 31, 2008, in thousands, $54 and $67, respectively, of after-tax restructuring charges.  See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion.  Additionally, the EMS segment recorded for both the three and six months ended December 31, 2008, $1.6 million of after-tax income for earnest money deposits retained by the Company resulting from the termination of the contract to sell the Company's Poland building and real estate.  Unallocated Corporate and Eliminations also recorded, for both the three and six months ended December 31, 2008, after-tax gains of $4.8 million on the sale of undeveloped land holdings and timberlands which were closed on during the quarter. 

	December 31,		June 30,
(Amounts in Thousands)	2009		2009
Total Assets:
Electronic Manufacturing Services	$377,596		$351,506
Furniture	186,646		184,755
Unallocated Corporate and Eliminations	79,694		106,008
Consolidated	$643,936		$642,269

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Note 5. Commitments and Contingent Liabilities

Standby letters of credit are issued to third-party suppliers, lessors, and insurance and financial institutions and can only be drawn upon in the event of the Company's failure to pay its obligations to the beneficiary.  As of December 31, 2009, the Company had a maximum financial exposure from unused standby letters of credit totaling $4.8 million. The Company is not aware of circumstances that would require it to perform under any of these arrangements and believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the Company's financial statements. Accordingly, no liability has been recorded as of December 31, 2009 with respect to the standby letters of credit. The Company also enters into commercial letters of credit to facilitate payment to vendors and from customers.

The Company estimates 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, 2009 and 2008 were as follows:

	Six Months Ended December 31
(Amounts in Thousands)	2009		2008
Product Warranty Liability at the beginning of the period	$ 2,176		$ 1,470
Accrual for warranties issued	217		619
Reductions related to pre-existing warranties (including changes in estimates)	(37)		(4)
Settlements made (in cash or in kind)	(504)		(498)
Product Warranty Liability at the end of the period	$ 1,852		$ 1,587

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Note 6. Restructuring Expense

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Note 10.  Assets Held for Sale

At December 31, 2009, a facility and land related to the Gaylord, Michigan, exited operation within the EMS segment were classified as held for sale and totaled, in thousands, $1,160. The assets were reported as unallocated corporate assets for segment reporting purposes.  The Company expects to sell these assets during the next 12 months. During the second quarter of fiscal year 2010, the Company sold equipment related to previously held timberlands. The sale had an immaterial effect on the Company's consolidated financial statements. At June 30, 2009, the Company had, in thousands, assets totaling $1,358 classified as held for sale.

Note 11. Postemployment Benefits

The Company maintains severance plans for all domestic employees. These plans provide severance benefits to eligible employees meeting the plans' qualifications, primarily involuntary termination without cause. The components of net periodic postemployment benefit cost applicable to the Company's severance plans were as follows:

	Three Months Ended				Six Months Ended
	December 31				December 31
(Amounts in Thousands)	2009		2008		2009		2008
Service cost	$  185		$   48		$   378		$ 162
Interest cost	104		21		212		69
Amortization of prior service costs	72		72		143		143
Amortization of actuarial change	146		(2)		298		8
Net periodic benefit cost	$  507		$ 139		$1,031		$ 382

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, such as those disclosed in Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements, are not estimable using actuarial methods and are expensed in accordance with the applicable U.S. GAAP.

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Note 12.  Stock Compensation Plan

During fiscal year 2010, the following stock compensation was awarded to officers, key employees, and non-employee directors. All awards were granted under the 2003 Stock Option and Incentive Plan. For more information on similar unrestricted shares and performance share awards, refer to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Performance Shares		Quarter Awarded		Maximum Potential Shares Issuable		Grant Date Fair Value (4)
Annual Performance Shares - Class A (1)		1st Quarter		240,000		$ 6.24
Long-Term Performance Shares - Class A (2)		1st Quarter		726,350		$ 6.24
Long-Term Performance Shares - Class A (2)		2nd Quarter		1,280		$ 7.22

 

Unrestricted Shares		Quarter Awarded		Shares		Grant Date Fair Value (4)
Unrestricted Shares (Director Compensation) - Class B (3)		2nd Quarter		19,662		$ 7.63

(1)	Annual performance shares were awarded to officers. Payouts will be based upon the fiscal year 2010 cash incentive payout percentages calculated under the Company's 2005 Profit Sharing Incentive Bonus Plan. The number of shares issued will be less than the maximum potential shares issuable if the maximum cash incentive payout percentages are not achieved. Annual performance shares vest after one year.
(2)	Long-term performance shares were awarded to officers and other key employees. Payouts will be based upon the cash incentive payout percentages calculated under the Company's 2005 Profit Sharing Incentive Bonus Plan. Long-term performance shares are based on five successive annual performance measurement periods, with each annual tranche having a grant date when economic profit tiers are established at the beginning of the applicable fiscal year and a vesting date at the end of each annual period. The number of shares issued will be less than the maximum potential shares issuable if the maximum cash incentive payout percentages are not achieved.
(3)	Unrestricted shares were awarded to non-employee members of the Board of Directors as compensation for director's fees, as a result of directors' elections to receive unrestricted shares in lieu of cash payment. Director's fees 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.
(4)	The grant date fair value of 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 performance share awards. The grant date fair value shown for long-term performance shares is applicable to the first tranche only. The grant date fair value of the unrestricted shares was based on the stock price at the date of the award.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Kimball International, Inc. provides a variety of products from its two business segments: the Electronic Manufacturing Services (EMS) segment and the Furniture segment. The EMS segment provides engineering and manufacturing services which utilize common production and support capabilities globally to the medical, automotive, industrial control, and public safety industries.  The Furniture segment provides furniture for the office and hospitality industries, sold under the Company's family of brand names.

Within both segments, most of the markets in which the Company competes were adversely affected by the global recession and liquidity crisis. The Company experienced declining sales and order trends beginning in the second quarter of fiscal year 2009. Open orders at December 31, 2009 were 45% lower in the Furniture segment and 2% higher in the EMS segment when compared to December 31, 2008.  As compared to September 30, 2009, the December 31, 2009 open orders for the Furniture segment declined 6%, and the EMS segment open orders increased 6%.  While open orders at a point in time are not necessarily indicative of future sales, three consecutive increases in open order levels for the EMS segment are encouraging.

After experiencing sales declines in calendar year 2009, the EMS industry sales projections (by IDC, InForum, and Electronic Trend Publications) show growth for calendar year 2010 in the range of 4.5% to 9.1% as compared to the calendar year 2009 levels. In addition, the Semiconductor Industry Association (SIA) reported that semiconductor sales are projected to grow approximately 10% in calendar year 2010, and although the Company does not directly serve this market, it may be indicative of end market demand for products utilizing electronic components.

The Company continues its strategy of diversification within the EMS segment customer base as it currently focuses on the four key vertical markets of medical, automotive, industrial control, and public safety. Short-term demand in the automotive market improved during the first half of the Company's fiscal year 2010 in conjunction with the Cash for Clunkers program, but the automotive market recovery is expected to remain slow due to the impact of current economic conditions on durable goods spending. Demand in the medical market has remained stable, and the Company sees signs of growth. The industrial control vertical market is also showing signs of stability, after benefiting from spending targeted at energy savings technologies, and the public safety vertical market is likewise stable. Sales to customers in the medical industry are the largest portion of the Company's EMS segment with sales to customers in the automotive industry being the second largest of the four vertical markets. The Company's sales to customers in the automotive industry are diversified among more than ten domestic and foreign customers and represented approximately 33% of the EMS segment's net sales for the second quarter of fiscal year 2010. The amount of sales of electronic components that relate to General Motors, Ford, and Chrysler automobiles sold in North America were only approximately 8% of the Company's EMS segment net sales during the second quarter of fiscal year 2010.

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As of November 2009, the Business and Institutional Furniture Manufacturer Association (BIFMA International) is projecting an approximate 2% year-over-year decline in the office furniture industry for calendar year 2010 after an approximate 30% projected decline in calendar year 2009 with a return to positive growth expected to begin late in calendar year 2010. While the Company's mid-market brand has fared better than its contract office furniture brand due to the project nature of the contract market and the changing U.S. consumption patterns, it cannot predict future overall office furniture order trends at this time due to the short lead time of orders and the volatility in the economy. In addition, the hotel industry forecasts (reported by Smith Travel Research and PricewaterhouseCoopers LLP) project occupancy rates to stabilize in calendar year 2010 after an approximate 9% decline in calendar year 2009 and project revenue per available room (RevPAR) to decline another 1% for calendar year 2010 after an approximate 17% decline in calendar year 2009. The Company expects order rates for hospitality furniture to remain depressed in the near term due to the lower hotel occupancy rates and RevPAR rates.

Competitive pricing pressures within the EMS segment and on many projects within the Furniture segment continue to put pressure on the Company's operating margins.

The current market conditions and the tightening of the credit markets have also increased the risk of uncollectible accounts and notes receivables. Accordingly, the Company heightened its monitoring of receivables and related credit risks, and the Company believes its accounts and notes receivables allowance for uncollectible accounts is adequate as of December 31, 2009. The Company could potentially record additional allowances in the future depending on the pace of recovery of the markets in which the Company competes.

The Company is continually assessing its strategies in relation to the market conditions. A long-standing component of the Company's profit sharing incentive bonus plan is that it is linked to the performance of the Company which automatically lowers total compensation expense when profits are down. The Company has also implemented various initiatives in response to the market conditions including reducing operating costs, more closely scrutinizing customer and supply chain risk, and deferring or cancelling capital expenditures that are not immediately required to support customer requirements. The Company will continue to closely monitor market changes and its liquidity in order to proactively adjust its operating costs, discretionary capital spending, and dividend levels as needed.

The Company continues to maintain a strong balance sheet which includes a minimal amount of long-term debt of $0.4 million and Share Owners' equity of $386.0 million. The Company's short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of the Company's revolving credit facility was $158.9 million at December 31, 2009.

In addition to the above risks related to the current market conditions, management currently considers the following events, trends, and uncertainties to be most important to understanding the Company's financial condition and operating performance:

The Company will continue its focus on preserving cash and minimizing debt.  Managing working capital levels is key.  In addition, the Company plans to minimize capital expenditures where appropriate but will continue to invest in capital expenditures prudently, particularly for projects that would enhance the Company's capabilities and diversification while providing an opportunity for growth and improved profitability as the economy and the Company's markets recover.

Although the Company has seen recent declines in the cost of some commodities and in fuel prices, if the price of oil trends upwards, the price of other commodities may also increase.  This continues to be an area of focus within the Company.

Globalization continues to reshape not only the industries in which the Company operates but also its key customers and competitors.

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The nature of the electronic manufacturing services industry is such that the start-up of new programs to replace departing customers or expiring programs occurs frequently. The success of the Company's EMS segment is dependent on the successful replacement of such customers or programs. Such changes usually occur gradually over time as old programs phase out of production while newer programs ramp up. While the margins vary depending on the size of the program and the vertical market being served, replacement programs often carry lower margins.

Successful execution of the Company's restructuring plans is critical to the Company's future performance. The success of the restructuring initiatives is dependent on accomplishing the plans in a timely and effective manner. The Company's restructuring plans are discussed in the segment discussions below.

The increasingly competitive marketplace mandates that the Company continually re-evaluate its business models.

The Company's employees throughout its business operations are an integral part of the Company's ability to compete successfully, and the stability of its management team is critical to long-term Share Owner value. The Company's career development and succession planning process helps to maintain stability in management.

As end markets dictate, the Company is continually assessing under-utilized capacity and developing plans to grow the Company's customer base and better utilize manufacturing operations, including shifting manufacturing capacity to lower cost venues as necessary. o    During the first quarter of fiscal year 2009, the Company approved a restructuring plan to consolidate production of select office furniture manufacturing departments. The consolidation is complete and has reduced manufacturing costs and excess capacity by eliminating redundant property and equipment, processes, and employee costs. o    During the fourth quarter of fiscal year 2008, the Company approved a plan to expand its European automotive electronics capabilities and to establish a European Medical Center of Expertise in Poznan, Poland. The Company presently has an operation in Poznan. The Company successfully completed the move of production from Longford, Ireland, into the existing Poznan facility during the second quarter of fiscal year 2009. As part of the plan, the Company is also consolidating its EMS facilities located in Bridgend, Wales, and Poznan into a new, larger facility in Poznan, with a projected final completion by the end of the Company's fiscal year 2011.  Construction of the new, larger facility in Poland is complete and limited production has begun.

To support growth and diversification efforts, the Company has focused on both organic growth and acquisition activities. Acquisitions allow rapid diversification of both customers and industries served.

The regulatory and business environment for U.S. public companies requires that the Company continually evaluate and enhance its practices in the areas of corporate governance and management practices. The Company has taken a number of steps to conform its corporate governance to evolving national and industry-wide best practices among U.S. public companies, not only to comply with new legal requirements, but also to enhance the decision-making process of the Board of Directors.

Certain preceding statements could be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties including, but not limited to, a significant change in economic conditions, loss of key customers or suppliers, or similar unforeseen events.

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Financial Overview - Consolidated

Second quarter fiscal year 2010 consolidated net sales were $275.2 million compared to second quarter fiscal year 2009 net sales of $327.6 million, a 16% decrease, due to a net sales decrease in the Furniture segment. Net income for the second quarter of fiscal year 2010 was $1.9 million, or $0.05 per Class B diluted share, inclusive of $2.0 million after-tax income, or $0.05 per Class B diluted share, resulting from settlement proceeds related to an antitrust class action lawsuit of which the Company was a class member and after-tax restructuring charges of $0.2 million, or less than $0.01 per Class B diluted share. Second quarter fiscal year 2009 net income was $8.2 million, or $0.22 per Class B diluted share, inclusive of after-tax restructuring charges of $0.7 million, or $0.02 per Class B diluted share. The second quarter fiscal year 2009 restructuring charges were primarily related to the European consolidation plan.  Second quarter fiscal year 2009 results also include two non-recurring income items: a $4.8 million after-tax gain, or $0.13 per Class B diluted share, related to the sale of a portion of the Company's undeveloped land holdings and timberlands; and $1.6 million of after-tax income, or $0.04 per Class B diluted share, for earnest money deposits retained by the Company resulting from the termination of the contract to sell the Company's Poland building and real estate.  

Net sales for the six-month period ended December 31, 2009 of $549.8 million were down 18% from net sales of $667.1 million for the same period of the prior fiscal year due to a 32% net sales decrease in the Furniture segment and a 5% net sales decrease in the EMS segment. Net income for the six-month period ended December 31, 2009 totaled $3.7 million, or $0.10 per Class B diluted share, inclusive of $0.5 million, or $0.01 per Class B diluted share, of after-tax restructuring costs and  $2.0 million after-tax income, or $0.05 per Class B diluted share, resulting from the settlement proceeds related to the antitrust class action lawsuit. Net income for the six-month period ended December 31, 2008 totaled $10.4 million, or $0.28 per Class B diluted share, inclusive of $1.3 million, or $0.03 per Class B diluted share, of after-tax restructuring costs primarily related to the European consolidation plan; $4.8 million after-tax gain, or $0.13 per Class B diluted share, related to the sale of a portion of the Company's undeveloped land holdings and timberlands; and $1.6 million of after-tax income, or $0.04 per Class B diluted share, for earnest money deposits retained by the Company resulting from the termination of the contract to sell the Company's Poland building and real estate.

Consolidated gross profit as a percent of net sales declined to 16.0% for the second quarter of fiscal year 2010 from 17.2% in the second quarter of fiscal year 2009.  For the year-to-date period of fiscal year 2010, gross profit as a percent of net sales declined to 16.6% compared to 17.2% for the year-to-date period of fiscal year 2009. Improved gross profit as a percent of net sales for the second quarter and fiscal-year-to-date periods by both the Furniture segment and EMS segment was more than offset on a consolidated basis by a shift in sales mix (as depicted in the table below) toward the EMS segment which operates at a lower gross profit percentage than the Furniture segment.  Gross profit is discussed in more detail in the segment discussions below.

	Three Months Ended		Six Months Ended
	December 31		December 31
	2009	2008	2009	2008
EMS segment net sales as % of total	61%	51%	60%	52%
Furniture segment net sales as % of total	39%	49%	40%	48%

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Consolidated selling and administrative expense increased as a percent of net sales for both the three and six months ended December 31, 2009 compared to the three and six months ended December 31, 2008 due to sales volumes declining at a quicker rate than the selling and administrative expenses. Second quarter fiscal year 2010 consolidated selling and administrative expenses declined in absolute dollars by 5% compared to the second quarter of fiscal year 2009 primarily due to decreased labor costs, other comprehensive cost reduction efforts throughout the Company, lower bad debt expense, and lower profit-based incentive compensation costs.  Partially offsetting these costs reductions were increased employee benefit costs primarily related to the Company's retirement plan contribution and increased sales and product marketing initiatives. Consolidated selling and administrative expenses for the first half of fiscal year 2010 declined in absolute dollars by 9% compared to the first half of fiscal year 2009 primarily due to decreased labor expenses, lower depreciation and amortization expenses, and other comprehensive cost reduction efforts throughout the Company.  In addition, in the second quarter and fiscal-year-to-date period of fiscal year 2010, the Company recorded $0.5 million and $2.0 million, respectively, of expense compared to $2.2 million and $3.4 million, respectively, of income in the second quarter and fiscal-year-to-date period of fiscal year 2009 related to the normal revaluation to fair value of its Supplemental Employee Retirement Plan (SERP) liability. The result for the second quarter and year-to-date period was an unfavorable variance in selling and administrative costs of $2.7 million and $5.4 million, respectively. As the general equity markets improved, the value of the SERP investments increased, causing additional selling and administrative expense related to the SERP liability. The SERP expense recorded in selling and administrative expenses was exactly offset by an increase in SERP investment income which was recorded in Other Income (Expense) as an investment gain; therefore, there was no effect on net earnings. The SERP investment is primarily comprised of employee contributions. 

Other General Income in the second quarter and first half of fiscal year 2010 included $3.3 million of pre-tax income recorded in the EMS segment resulting from settlement proceeds related to an antitrust class action lawsuit of which the Company was a class member. The class action alleged the defendant sellers illegally conspired to fix prices for electronic components purchased by a business unit within the EMS segment. Other General Income in the second quarter of fiscal year 2009 included the $8.0 million pre-tax gain on the sale of a portion of the Company's undeveloped land holdings and timberlands. The gain was included in Unallocated Corporate in segment reporting. In addition, the Company had a conditional agreement to sell and lease back the facilities and real estate that house its current Poland operations. However, during the second quarter of fiscal year 2009, the buyer was unable to close the transaction.  As a result, the Company was entitled to retain approximately $1.9 million of the deposit funds held by the Company which was recorded as pre-tax income in Other General Income.  This income was recorded in the EMS segment. 

The Company recorded other income of $1.0 million and $3.0 million during the three and six months ended December 31, 2009, respectively, compared to other expense of $3.9 million and $4.6 million recorded during the three and six months ended December 31, 2008, respectively. The $2.7 million and $5.4 million appreciation in SERP investments was the primary driver of the increased other income for the three and six months ended December 31, 2009, respectively. In addition, Other Income (Expense) in the second quarter and first half of fiscal year 2009 included an unfavorable impact of foreign currency movements which were partially offset by a favorable currency impact within operating income. Interest expense for the second quarter and first half of fiscal year 2010 was lower than the same periods of fiscal year 2009 due to lower average outstanding debt balances coupled with lower interest rates.  Interest income was likewise lower for the second quarter and first half of fiscal year 2010 compared to the same periods of fiscal year 2009 due to lower interest rates and lower average investment balances.

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Relatively low pre-tax income accompanied by $1.1 million of favorable tax accrual adjustments primarily related to the research and development tax credit and a foreign deferred tax adjustment, in conjunction with the positive impacts of lower tax rates in foreign jurisdictions as compared to the domestic rate, drove the lower than normal effective tax rate of 10.7% for the first half of fiscal year 2010.  The effective tax rate for the first half of fiscal year 2009 of 34.4% included a favorable $0.9 million tax benefit related to the European operations and a $0.5 million research and development tax credit adjustment which were partially offset by the negative impact of losses generated in select foreign jurisdictions which have a lower tax rate than the domestic tax rate.   

Comparing the balance sheets as of December 31, 2009 to June 30, 2009, the Company's inventory balance increased in order to support the transfer of production to the new EMS facility in Poland from the other EMS facilities in Europe.

Electronic Manufacturing Services Segment

During the fourth quarter of fiscal year 2008, the Company approved a plan to expand its European automotive electronics capabilities and to establish a European Medical Center of Expertise in Poznan, Poland. The Company successfully completed the move of production from Longford, Ireland, into the existing Poznan facility during the fiscal year 2009 second quarter. As part of the plan, the Company is also consolidating its EMS facilities located in Bridgend, Wales, and Poznan, Poland, into a new, larger facility in Poznan, which is expected to improve the Company's margins in the very competitive EMS market. Construction of the new, larger facility in Poland is complete and limited production has begun. The plan is being executed in stages with a projected final completion by the end of the Company's fiscal year 2011. See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for more information on restructuring charges.

EMS segment results were as follows:

	At or for the Three Months Ended				For the Six Months Ended
	December 31				December 31
(Amounts in Millions)	2009		2008	% Change	2009		2008	% Change
Net Sales	$   167.0		$  166.9	0%	$  332.5		$  349.8	(5%)
Net Income (Loss)	$       2.7		$     (0.7)	476%	$      2.4		$    (1.5)	266%
Restructuring Expense, net of tax	$       0.2		$      0.5		$      0.5		$      0.9
Open Orders	$   170.9		$  167.7	2%

Second quarter fiscal year 2010 EMS segment net sales to customers in the automotive industry increased which offset net sales declines to customers in the industrial control and public safety industries compared to the second quarter of fiscal year 2009. Sales to customers in the medical industry were flat compared to the same quarter of the prior fiscal year. The decreased EMS segment net sales for the first half of fiscal year 2010 as compared to the first half of fiscal year 2009 were due to decreased sales to customers in all four of this segment's vertical markets. While open orders increased 2%, open orders at a point in time may not be indicative of future sales trends due to the contract nature of the Company's business.

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The second quarter fiscal year 2010 EMS segment gross profit as a percent of net sales improved 0.6 percentage points compared to the second quarter of fiscal year 2009, and the improvement was primarily driven by labor efficiency improvements at select manufacturing facilities and reduced overhead costs. The year-to-date fiscal year 2010 EMS segment gross profit as a percent of sales improved slightly from the year-to-date fiscal year 2009 level. 

EMS segment selling and administrative expense declined in absolute dollars by 4% and 10% for the second quarter and first half of fiscal year 2010 compared to the same periods of fiscal year 2009, respectively. The second quarter improvement was primarily related to decreased labor expense, lower bad debt expense, and a strong focus on managing all costs. The year-to-date improvement was driven by benefits realized from restructuring actions, lower depreciation/amortization expense, decreased labor expense, and other overall cost reduction efforts.  Partially offsetting these second quarter and year-to-date improvements were increased profit-based incentive compensation costs. 

EMS segment Other General Income in the second quarter of fiscal year 2010 included $3.3 million of pre-tax income, or $2.0 million after-tax, resulting from settlement proceeds related to the antitrust class action lawsuit. EMS segment Other General Income for the second quarter of fiscal year 2009 included the aforementioned $1.9 million pre-tax, which equated to $1.6 million after-tax, amount retained due to the buyer being unable to close on the sale of the existing Poland building.

The EMS segment second quarter and first half of fiscal year 2010 included the benefit of $0.7 million favorable net tax accrual adjustments.  The EMS segment also recorded $0.8 million and $0.9 million in the second quarter and first half of fiscal year 2009, respectively, of tax benefit related to its European operations, and $0.3 million of favorable net tax accrual adjustments in both the second quarter and first half of fiscal year 2009.

Included in this segment are a significant amount of sales to Bayer AG affiliates which accounted for the following portions of consolidated net sales and EMS segment net sales:

	Three Months Ended		Six Months Ended
	December 31		December 31
	2009	2008	2009	2008
Bayer AG affiliated sales as a percent of consolidated net sales	14%	10%	15%	11%
Bayer AG affiliated sales as a percent of EMS segment net sales	23%	20%	25%	22%

The nature of the electronic manufacturing services industry is such that the start-up of new customers and new programs to replace expiring programs occurs frequently. New customer and program start-ups generally cause losses early in the life of a program, which are generally recovered as the program matures and becomes established. This segment continues to experience margin pressures related to an overall excess capacity position in the electronics subcontracting services market.

Risk factors within the EMS segment include, but are not limited to, general economic and market conditions, customer order delays, increased globalization, foreign currency exchange rate fluctuations, rapid technological changes, component availability, the contract nature of this industry, unexpected integration issues with acquisitions, the concentration of sales to large customers, and the potential for customers to choose to insource a greater portion of their electronics manufacturing. The continuing success of this segment is dependent upon its ability to replace expiring customers/programs with new customers/programs. Additional risk factors that could have an effect on the Company's performance are contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

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Furniture Segment

During the first quarter of fiscal year 2009, the Company approved a restructuring plan to consolidate production of select office furniture manufacturing departments. The consolidation reduced manufacturing costs and excess capacity by eliminating redundant property and equipment, processes, and employee costs. The consolidation is complete. See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for more information on restructuring charges.

Furniture segment results were as follows:

	At or for the Three Months Ended				For the Six Months Ended
	December 31				December 31
	2009		2008	% Change	2009		2008	% Change
(Amounts in Millions)
Net Sales	$  108.1		$   160.7	(33%)	$  217.3		$  317.3	(32%)
Net Income (Loss)	$    (1.0)		$       4.0	(125%)	$      0.8		$      7.2	(89%)
Restructuring (Income) Expense, net of tax	$    (0.1)		$       0.2		$    (0.1)		$      0.3
Open Orders	$    61.4		$   111.1	(45%)

The net sales decline in the Furniture segment for the three and six months ended December 31, 2009 compared to the same periods of the prior fiscal year resulted from decreased net sales of both office furniture and hospitality furniture. Decreased sales volumes of office furniture more than offset price increases net of higher discounting which contributed approximately $2.1 million and $5.5 million to net sales during the second quarter and first half of fiscal year 2010 when compared to the same periods of fiscal year 2009, respectively. Second quarter and fiscal 2010 year-to-date sales of newly introduced office furniture products which have been sold for less than twelve months approximated $6.5 million and $12.6 million, respectively. Furniture products open orders at December 31, 2009 declined when compared to the open orders at December 31, 2008 due to decreased open orders for both office furniture and hospitality furniture. Open orders at a point in time may not be indicative of future sales trends.

Second quarter and year-to-date fiscal year 2010 Furniture segment gross profit as a percent of net sales improved 1.2 and 2.3 percentage points when compared to the same periods of fiscal year 2009, respectively.  Items contributing to the improved second quarter and year-to-date gross profit as a percent of net sales included: price increases on select product, lower freight and commodity costs, a sales mix shift to higher margin product, and other overall cost reduction actions. A decrease in LIFO inventory reserves resulting primarily from lower LIFO inventory levels also positively impacted the fiscal-year-to-date 2010 gross profit. These improvements more than offset the negative impact of the lower volumes on the gross profit percentage, increased employee benefit costs, and increased discounting resulting from competitive pricing pressures. Due to the significant decline in sales volume, the gross profit dollars declined as compared to the second quarter and year-to-date period of fiscal year 2009.

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Second quarter and year-to-date fiscal year 2010 selling and administrative expenses decreased in absolute dollars by 12% and 15%, respectively, but increased as a percent of net sales on the lower sales volumes, when compared to the same periods of fiscal year 2009. The second quarter and year-to-date fiscal year 2010 selling and administrative expense decline resulted from lower labor costs, lower profit-based incentive compensation costs, lower bad debt expense, and other improvements resulting from the focus on managing all costs. Partially offsetting the lower costs in the second quarter of fiscal year 2010 were increased employee benefit expenses and increased sales and product marketing costs. 

Risk factors within this segment include, but are not limited to, general economic and market conditions, increased global competition, financial stability of customers, supply chain cost pressures, and relationships with strategic customers and product distributors. Additional risk factors that could have an effect on the Company's performance are contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Liquidity and Capital Resources

Working capital at December 31, 2009 was $173.2 million compared to working capital of $176.2 million at June 30, 2009. The current ratio was 1.7 at December 31, 2009 and 1.8 at June 30, 2009.

The Company's internal measure of Accounts Receivable performance, also referred to as Days Sales Outstanding (DSO), for the first half of fiscal year 2010 of 47.4 days increased from the 45.7 days for the first six months of fiscal year 2009. The Company defines DSO as the average of monthly accounts and notes receivable divided by an average day's net sales. The Company's Production Days Supply on Hand (PDSOH) of inventory measure for the first six months of fiscal year 2010 decreased to 63.2 days from 64.2 days for the first six months of fiscal year 2009. The Company defines PDSOH as the average of the monthly gross inventory divided by an average day's cost of sales.

The Company's short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of the Company's revolving credit facility, totaled $158.9 million at December 31, 2009 compared to $183.7 million at June 30, 2009. The credit facility provides an option to increase the amount available by an additional $50 million at the Company's request, subject to participating banks' consent.

The Company's net cash position from an aggregate of cash, cash equivalents, and short-term investments less short-term borrowings under credit facilities decreased from $88.6 million at June 30, 2009 to $62.3 million at December 31, 2009. Operating activities used $3.8 million of cash flow in the first six months of fiscal year 2010 compared to the $12.9 million of cash generated by operating activities in the first six months of fiscal year 2009.  Increased inventory levels were the primary operating activity use of cash. During the first half of fiscal year 2010, the Company reinvested $20.9 million into capital investments for the future, primarily for manufacturing equipment in both segments and the new Poland facility, which is part of the plan to consolidate the European manufacturing footprint. Financing cash flow activities for the first six months of fiscal year 2010 included $3.6 million in dividend payments, which was a decrease from the $11.7 million of dividends paid during the first six months of fiscal year 2009. The approximate 70% decline in dividends paid was a result of reduced dividend rates beginning in the fourth quarter of fiscal year 2009 to preserve cash. Consistent with the Company's historical dividend policy, the Company's Board of Directors will evaluate the appropriate dividend payment on a quarterly basis. During fiscal year 2010, the Company expects to minimize capital expenditures where appropriate but will continue to invest in capital expenditures prudently, particularly for projects that would enhance the Company's capabilities and diversification while providing an opportunity for growth and improved profitability as the economy and the Company's markets recover. The Company plans to sell its Poland facility which is being replaced by the newly constructed larger Poland facility.

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At December 31, 2009, the Company had $12.9 million of short-term borrowings outstanding under its $100 million credit facility described in more detail below. The Company also has several smaller foreign credit facilities available and had total borrowings of $1.4 million US dollar equivalent under these facilities as of December 31, 2009. At June 30, 2009, the Company had $12.7 million of short-term borrowings outstanding.

The Company maintains a $100 million credit facility with an expiration date in April 2013 that allows for both issuances of letters of credit and cash borrowings. The $100 million credit facility provides an option to increase the amount available for borrowing to $150 million at the Company's request, subject to the group of participating banks' consent. The $100 million credit facility requires the Company to comply with certain debt covenants including interest coverage ratio, minimum net worth, and other terms and conditions. The Company was in compliance with these covenants at December 31, 2009.

The Company believes the most significant covenants under its $100 million credit facility are minimum net worth and interest coverage ratio. The table below compares the actual net worth and interest coverage ratio with the limits specified in the credit agreement.

Covenant		At or For the Period Ended December 31, 2009		Limit As Specified in Credit Agreement		Excess
Minimum Net Worth		$385,974,000		$362,000,000		$23,974,000
Interest Coverage Ratio		65.0		3.0		62.0

The Interest Coverage Ratio is calculated on a rolling four-quarter basis as defined in the credit agreement.

The outstanding balance under the $100 million credit facility at December 31, 2009 consisted of $12.9 million for a Euro currency borrowing, which provides a natural currency hedge against a Euro denominated intercompany note between the U.S. parent and Euro functional currency subsidiaries. There were also approximately $4.8 million in letters of credit against the credit facility. Total availability to borrow under the $100 million credit facility was $82.3 million at December 31, 2009.

The Company maintains a separate foreign credit facility for its EMS segment operation in Thailand which is backed by the $100 million revolving credit facility.  In addition to the $100 million credit facility, the Company can opt to utilize foreign credit facilities which are available to satisfy short-term cash needs at that specific location rather than funding from intercompany sources. The Company has a credit facility for its EMS segment operation in Poznan, Poland, which allows for multi-currency borrowings up to 6 million Euro equivalent (approximately $8.6 million U.S. dollars at December 31, 2009 exchange rates). These foreign credit facilities can be cancelled at any time by either the bank or the Company. At December 31, 2009, the Company had $1.4 million US dollar equivalent of Euro denominated short-term borrowings outstanding under the foreign credit facility in Poland.

The Company believes its principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under the Company's credit facilities will be sufficient in fiscal year 2010 and the foreseeable future. One of the Company's primary sources of funds is its ability to generate cash from operations to meet its liquidity obligations, which could be adversely affected by factors such as general economic and market conditions, a decline in demand for the Company's products, loss of key contract customers, the ability of the Company to generate profits, and other unforeseen circumstances. In particular, should demand for the Company's products decrease significantly over the next 12 months due to the weakened economy, the available cash provided by operations could be adversely impacted. Another source of funds is the Company's credit facilities. The $100 million credit facility is contingent on complying with certain debt covenants.

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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.

Fair Value

During fiscal year 2010, no financial assets were affected by a lack of market liquidity. For level 1 financial assets, readily available market pricing was used to value the financial instruments. For available-for-sale securities classified as level 2 assets, the fair values are determined based on observable market inputs which use evaluated pricing models that vary by asset class and incorporate available trade, bid, and other market information. The Company evaluated the inputs used to value the instruments and validated the accuracy of the instrument fair values based on historical evidence. The Company's foreign currency forward contract derivatives, which were classified as level 2 assets/liabilities, were independently valued using a financial risk management software package using observable market inputs such as forward interest rate yield curves, current spot rates, and time value calculations. To verify the reasonableness of the independently determined fair values, these derivative fair values were compared to fair values calculated by the counterparty banks. The Company's own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency forward contract derivatives.

The Company invested in a convertible promissory note and stock warrants of a privately-held company during the quarter ended December 31, 2009 and has been chosen as the primary supplier for the privately-held company to produce products in the future and negotiations for a definitive supply agreement are underway. The convertible promissory note, classified as an available-for-sale debt security, was valued using a recurring market-based method which approximates fair value by using the amortized cost basis of the promissory note, with the discount amortized to interest income over the term. The stock warrants, classified as derivative instruments, were valued on a recurring basis using a market-based method which utilizes the Black-Scholes valuation model.  The fair value measurements for the convertible promissory note and stock warrants were calculated using unobservable inputs and were classified as level 3 financial assets.

See Note 7 - Fair Value of Financial Assets and Liabilities of Notes to Condensed Consolidated Financial Statements for more information.

Contractual Obligations

There have been no material changes outside the ordinary course of business to the Company'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 the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements other than standby letters of credit 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 the Company's financial condition, results of operations, liquidity, capital expenditures, or capital resources. See Note 5 - Commitments and Contingent Liabilities of Notes to Condensed Consolidated Financial Statements for more information on standby letters of credit. The Company does 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.

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Critical Accounting Policies

The Company's 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 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 on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. The Company's management overlays a fundamental philosophy of valuing its assets and liabilities in an appropriately conservative manner. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in preparation of the Company's consolidated financial statements and are the policies that are most critical in the portrayal of the Company's 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 - The Company recognizes revenue when title and risk transfer to the customer, which under the terms and conditions of the sale may occur either at the time of shipment or when the product is delivered to the customer. Service revenue is recognized as services are rendered. 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. The Company recognizes sales net of applicable sales tax.

• Sales returns and allowances - At the time revenue is recognized certain provisions may also be recorded, including returns and allowances, which involve estimates based on current discussions with applicable customers, historical experience with a particular customer and/or product, and other relevant factors. As such, these factors may change over time causing the provisions to be adjusted accordingly. At December 31, 2009 and June 30, 2009, the reserve for returns and allowances was $3.2 million and $4.4 million, respectively. The returns and allowances reserve approximated 2% to 3% of gross trade receivables during the past two years.
• Allowance for doubtful accounts - Allowance for doubtful accounts is generally based on a percentage of aged accounts receivable, where the percentage increases as the accounts receivable become older. However, management judgment is utilized in the final determination of the allowance based on several factors including specific analysis of a customer's credit worthiness, changes in a customer's payment history, historical bad debt experience, and general economic and market trends. The allowance for doubtful accounts at both December 31, 2009 and June 30, 2009 was $3.1 million. During the preceding two-year period, this reserve had been at or less than 1% of gross trade accounts receivable up until March 2009 and has since approximated 2% of gross trade accounts receivable. The higher reserve was driven by increased risk created by deteriorating market conditions at that time.

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Excess and obsolete inventory - Inventories were valued using the lower of last-in, first-out (LIFO) cost or market value for approximately 10% and 14% of consolidated inventories at December 31, 2009 and June 30, 2009, respectively, including approximately 78% and 83% of the Furniture segment inventories at December 31, 2009 and June 30, 2009, respectively. The remaining inventories were valued at lower of first-in, first-out (FIFO) cost or market value. Inventories recorded on the Company's balance sheet are adjusted for excess and obsolete inventory. In general, the Company purchases materials and finished goods for contract-based business from customer orders and projections, primarily in the case of long lead time items, and has a general philosophy to only purchase materials to the extent covered by a written commitment from its customers. However, there are times when inventory is purchased beyond customer commitments due to minimum lot sizes and inventory lead time requirements, or where component allocation or other procurement issues may exist. The Company may also purchase additional inventory to support transfers of production between manufacturing facilities. Evaluation of excess inventory includes such factors as anticipated usage, inventory turnover, inventory levels, and product demand levels. Factors considered when evaluating inventory obsolescence include the age of on-hand inventory and reduction in value due to damage, use as showroom samples, design changes, or cessation of product lines.

Self-insurance reserves - The Company is 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. The Company's 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, 2009 and June 30, 2009, the Company's accrued liabilities for self-insurance exposure were $5.4 million and $6.5 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. The Company evaluates the recoverability of its deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize its deferred tax assets. If recovery is not likely, the Company provides a valuation allowance based on its 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.

The Company operates within multiple taxing jurisdictions and is subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. However, the Company believes it has made adequate provision for income and other taxes for all years that are subject to audit. As tax periods are effectively settled, the provision will be adjusted accordingly. The liability for uncertain income tax and other tax positions was $3.6 million at December 31, 2009 and $3.5 million at June 30, 2009.

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Goodwill - Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, the Company compares the carrying value of the reporting unit to an estimate of the reporting unit's fair value to identify potential impairment. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed to determine the amount of potential goodwill impairment. If impaired, goodwill is written down to its estimated implied fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting units considers current market conditions existing at the assessment date. In addition to performing the required annual testing, the Company will continue to monitor circumstances and events in future periods to determine whether additional goodwill impairment testing is warranted on an interim basis. The Company can provide no assurance that an impairment charge for the Company's remaining goodwill balance will not occur in future periods as a result of these analyses. At both December 31, 2009 and June 30, 2009, the Company's goodwill totaled $2.6 million.

New Accounting Standards

See Note 1 - Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for information regarding New Accounting Standards.

Forward-Looking Statements

Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of words such as "believes," "estimates," "projects," "expects," "anticipates," "forecasts," and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, continuing impacts of the global economic conditions, significant volume reductions from key contract customers, significant reduction in customer order patterns, loss of key customers or suppliers within specific industries, financial stability of key customers and suppliers, availability or cost of raw materials, increased competitive pricing pressures reflecting excess industry capacities, successful execution of restructuring plans, or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of the Company are contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

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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 the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits 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 the Company's management, including its 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, 2009, the Chief Executive Officer and Chief Financial Officer of the Company concluded that its disclosure controls and procedures were effective.

(b) Changes in internal control over financial reporting.

There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2009 that have materially affected, or that are reasonably likely to materially affect, the Company's internal control over financial reporting.

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 any combination of Class A and Class B shares and will remain in effect until all shares authorized have been repurchased. The Company did not repurchase any shares under the repurchase program during the second quarter of fiscal year 2010. At December 31, 2009, two million shares remained available under the repurchase program.

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Item 4. Submission of Matters to a Vote of Security Holders

The Company's Annual Meeting of Share Owners was held on October 20, 2009.  The Board of Directors was elected in its entirety, based on the following election results:
Nominees as Directors by Holders of Class A Common Stock	Votes For*	Votes Withheld
Douglas A. Habig	9,627,367	16,148
James C. Thyen	9,300,047	343,468
Christine M. Vujovich	9,300,047	343,468
Harry W. Bowman	9,300,047	343,468
Geoffrey L. Stringer	9,300,047	343,468
Thomas J. Tischhauser	9,627,367	16,148

	There were 110,202 broker non-votes for the above nominees as Directors.
	*Votes for nominees as Directors by holders of Class A Common Stock represented an average of 88% of the total 10,711,825 Class A shares outstanding and eligible to vote.

Nominee as Director by Holders of Class B Common Stock	Votes For**	Votes Withheld
Dr. Jack R. Wentworth	22,407,869	1,326,193
There were 3,126,338 broker non-votes for the above nominee as Director.
**Votes for nominee as Director by holders of Class B Common Stock represented 84% of the total 26,574,005 Class B shares outstanding and eligible to vote.
The appointment of the Deloitte Entities, an independent registered public accounting firm, as the Company's independent auditors for the fiscal year ended June 30, 2010 was approved by holders of Class A Common Stock based on the following voting results:
Votes for***: 9,642,235              Votes Against:  -0-              Votes Abstaining:  1,280
There were no broker non-votes for the appointment of the Deloitte Entities proposal.
***Votes for the appointment of the Deloitte Entities as the Company's independent auditors represented 90% of the total 10,711,825 Class A shares outstanding and eligible to vote.

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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, 2007)

(3(b))  Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed October 23, 2009)

(10)  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

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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/ James C. Thyen
		JAMES C. THYEN President, Chief Executive Officer
		February 5, 2010
	By:	/s/ Robert F. Schneider
		ROBERT F. SCHNEIDER Executive Vice President, Chief Financial Officer
		February 5, 2010

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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, 2007)
3(b)		Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed October 23, 2009)
10		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

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