KIMBALL INTERNATIONAL INC - Quarter Report: 2010 December (Form 10-Q)

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

KIMBALL INTERNATIONAL, INC.
FORM 10-Q
INDEX

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

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

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KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)

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KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying unaudited Condensed Consolidated Financial Statements of Kimball International, Inc. and subsidiaries (the "Company") 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 the Company believes that the disclosures are adequate to make the information presented not misleading. All significant 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 the Company's latest annual report on Form 10-K.

Notes Receivable and Trade Accounts Receivable:

The Company's notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. The Company determines 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 the Company's limited number of notes receivable.

The Company's policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable includes analysis of such items as agement, credit worthiness, payment history, and historical bad debt experience. These specific analyses in conjunction with general economic and market conditions are considered as management judgment is utilized in the final determination of the 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. The Company's limited number of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis.

Other General Income:

Other General Income in the three and six months ended December 31, 2009 included, in thousands, $3,256 of settlement proceeds related to an antitrust class action lawsuit of which the Company was a class member.

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Non-operating Income, net:

Non-operating income includes the impact of such items as foreign currency rate movements and related derivative gain or loss, fair value adjustments on Supplemental Employee Retirement Plan (SERP) investments, non-production rent income, bank charges, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain on SERP investments is exactly offset by a change in the SERP liability that is recognized in selling and administrative expenses.

Components of Non-operating income, net:

	Three Months Ended				Six Months Ended
	December 31				December 31
(Amounts in Thousands)	2010		2009		2010		2009
Foreign Currency/Derivative Gain (Loss)	$     (895)		$       456		$  (1,371)		$       783
Gain on Supplemental Employee Retirement Plan Investments	1,055		503		2,276		2,020
Other	(96)		(243)		(239)		(363)
Non-operating income, net	$        64		$       716		$       666		$    2,440

Effective Tax Rate:

In determining the quarterly provision for income taxes, the Company uses 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 the Company operates. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.

The Company's effective tax rate was (121.2)% and (50.0)%, respectively, for the three and six months ended December 31, 2010, as compared to (26.8)% and 10.7%, respectively, for the three and six months ended December 31, 2009. Relatively low pre-tax income coupled with favorable net tax accrual adjustments of $0.5 million and $0.7 million in the three and six-month periods of fiscal year 2011, respectively, drove the negative tax rates in the current fiscal year. The current fiscal year tax accrual adjustments were primarily related to the research and development tax credit and a foreign deferred tax valuation allowance adjustment. The prior fiscal year second quarter and year-to-date periods included $1.1 million of favorable tax accrual adjustments which were also primarily related to the research and development tax credit and a foreign deferred tax adjustment.

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New Accounting Standards:

In July 2010, the Financial Accounting Standards Board (FASB) issued guidance expanding disclosures about the credit quality of financing receivables and the allowance for credit losses. The additional disclosures are intended to facilitate the evaluation of 1) the nature of credit risk inherent in the Company's portfolio of financing receivables, 2) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and 3) the changes and reasons for those changes in the allowance for credit losses. Financing receivables include loans and notes receivable, trade accounts receivable, and certain other contractual rights to receive money on demand or on fixed or determinable dates. The expanded disclosures, disaggregated by portfolio segment or class of financing receivable, include a roll-forward of the allowance for credit losses as well as impaired, nonaccrual, restructured and past due loans, and credit quality indicators. The guidance became effective for the Company's second quarter fiscal year 2011 financial statements, as it relates to disclosures required as of the end of a reporting period. These disclosures have been provided in Note 1 - Summary of Significant Accounting Policies and Note 14 - Credit Quality and Allowance for Credit Losses of Notes Receivable of Notes to Condensed Consolidated Financial Statements. Disclosures that relate to activity during a reporting period will be required for the Company's third quarter fiscal year 2011 financial statements. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.

In January 2010, the FASB issued guidance to improve disclosures about fair value instruments. The guidance requires additional disclosure about significant transfers between levels 1, 2, and 3 of the fair value hierarchy and requires disclosure of level 3 activity on a gross basis. In addition, the guidance clarifies existing requirements regarding the required level of disaggregation by class of assets and liabilities and also clarifies disclosures of inputs and valuation techniques. The guidance became effective beginning in the Company's third quarter of fiscal year 2010, except for the requirement to disclose level 3 activity on a gross basis, which will be effective as of the beginning of the Company's fiscal year 2012. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.

In June 2009, the FASB issued guidance related to variable interest entities (VIEs) which modifies how a company determines when VIEs should be consolidated. The guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. The guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a VIE and requires additional disclosures about a company's involvement in VIEs. The guidance was effective as of the beginning of the Company's fiscal year 2011. The adoption did not have an impact on the Company's consolidated financial statements. Required disclosures have been provided in Note 13 - Variable Interest Entities of Notes to Condensed Consolidated Financial Statements.

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Note 2. Inventories

Inventory components of the Company were as follows:

	December 31,		June 30,
(Amounts in Thousands)	2010		2010
Finished Products	$  38,873		$  33,177
Work-in-Process	11,672		13,209
Raw Materials	125,329		112,897
Total FIFO Inventory	$175,874		$159,283
LIFO Reserve	(13,581)		(12,877)
Total Inventory	$162,293		$146,406

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. During the three-month period ended December 31, 2010, there were no LIFO inventory liquidations. During the six-month period ended December 31, 2010, LIFO inventory liquidations increased net income by, in thousands, $199. During the three and six-month periods ended December 31, 2009, LIFO inventory liquidations increased net income by, in thousands, $371 and $967, respectively.

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Note 3. Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those resulting from investments by and distributions to Share Owners. Comprehensive income (loss), shown net of tax if applicable, for the three and six-month periods ended December 31, 2010 and 2009 was as follows:

	Three Months Ended December 31, 2010						Three Months Ended December 31, 2009
(Amounts in Thousands)	Pre-tax		Tax		Net of Tax		Pre-tax		Tax		Net of Tax
Net income					$       876						$   1,906
Other comprehensive income (loss):
Foreign currency translation adjustments	$  (2,157)		$     398		$  (1,759)		$  (1,442)		$    353		$  (1,089)
Postemployment severance actuarial change	117		(47)		70		516		(206)		310
Other fair value changes:
Available-for-sale securities	-0-		-0-		-0-		(44)		18		(26)
Derivatives	1,092		(268)		824		1,169		(350)		819
Reclassification to (earnings) loss:
Available-for-sale securities	-0-		-0-		-0-		(30)		12		(18)
Derivatives	(568)		169		(399)		(60)		26		(34)
Amortization of prior service costs	72		(30)		42		72		(29)		43
Amortization of actuarial change	210		(83)		127		146		(58)		88
Other comprehensive income (loss)	$  (1,234)		$     139		$  (1,095)		$       327		$   (234)		$        93
Total comprehensive income (loss)					$     (219)						$   1,999
	Six Months Ended December 31, 2010						Six Months Ended December 31, 2009
(Amounts in Thousands)	Pre-tax		Tax		Net of Tax		Pre-tax		Tax		Net of Tax
Net income					$    1,332						$   3,680
Other comprehensive income (loss):
Foreign currency translation adjustments	$    6,778		$(1,562)		$    5,216		$    1,921		$   (432)		$   1,489
Postemployment severance actuarial change	487		(195)		292		(674)		269		(405)
Other fair value changes:
Available-for-sale securities	-0-		-0-		-0-		(44)		18		(26)
Derivatives	1,176		(321)		855		854		(140)		714
Reclassification to (earnings) loss:
Available-for-sale securities	-0-		-0-		-0-		(56)		22		(34)
Derivatives	(807)		243		(564)		1,385		(434)		951
Amortization of prior service costs	143		(58)		85		143		(57)		86
Amortization of actuarial change	425		(169)		256		298		(119)		179
Other comprehensive income	$    8,202		$(2,062)		$    6,140		$    3,827		$   (873)		$   2,954
Total comprehensive income					$    7,472						$   6,634

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Accumulated other comprehensive loss, net of tax effects, was as follows:
	December 31,		June 30,
	2010		2010
(Amounts in Thousands)
Foreign currency translation adjustments	$       2,653		$     (2,563)
Unrealized loss from:
Derivatives	(3,716)		(4,007)
Postemployment benefits:
Prior service costs	(722)		(807)
Net actuarial loss	(1,850)		(2,398)
Accumulated other comprehensive loss	$      (3,635)		$     (9,775)

Note 4. Segment Information

Management organizes the Company into segments based upon differences in products and services offered in each segment. The Electronic Manufacturing Services (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 were 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, 2010.

	Three Months Ended				Six Months Ended
	December 31				December 31
(Amounts in Thousands)	2010		2009		2010		2009
Net Sales:
Electronic Manufacturing Services	$181,439		$166,983		$359,306		$332,469
Furniture	129,193		108,140		246,002		217,306
Unallocated Corporate and Eliminations	-0-		38		-0-		45
Consolidated	$310,632		$275,161		$605,308		$549,820
Net Income (Loss):
Electronic Manufacturing Services	$     (109)		$    2,665		$     (357)		$    2,446
Furniture	801		(996)		1,390		784
Unallocated Corporate and Eliminations	184		237		299		450
Consolidated	$      876	(1)	$    1,906	(2)	$   1,332	(1)	$    3,680	(2)

(1) Net Income (Loss) included after-tax restructuring charges, in thousands, of $222 and $292 in the three and six months ended December 31, 2010, respectively. The EMS segment and Unallocated Corporate and Eliminations recorded in the three months ended December 31, 2010, in thousands, $206 and $16, respectively, of after-tax restructuring charges. The EMS segment and Unallocated Corporate and Eliminations recorded in the six months ended December 31, 2010, in thousands, $265 and $27, respectively, of after-tax restructuring charges. The Furniture segment did not record restructuring during the three and six months ended December 31, 2010. See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion. 

(2) 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. In the three months ended December 31, 2009, the EMS segment and Unallocated Corporate and Eliminations recorded, in thousands, $229 and $14, respectively, of after-tax restructuring charges, and the Furniture segment recorded, in thousands, $59, of after-tax restructuring income. In the six months ended December 31, 2009, the EMS segment and Unallocated Corporate and Eliminations recorded, in thousands, $505 and $22, respectively, of after-tax restructuring charges, and the Furniture segment recorded, in thousands, $51 of after-tax restructuring income. 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 member.

	December 31,		June 30,
(Amounts in Thousands)	2010		2010
Total Assets:
Electronic Manufacturing Services	$400,030		$384,491
Furniture	195,557		182,396
Unallocated Corporate and Eliminations	50,508		69,864
Consolidated	$646,095		$636,751

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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, 2010, the Company had a maximum financial exposure from unused standby letters of credit totaling $5.1 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, 2010 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, 2010 and 2009 were as follows:

	Six Months Ended December 31
(Amounts in Thousands)	2010		2009
Product Warranty Liability at the beginning of the period	$ 1,818		$ 2,176
Additions to warranty accrual (including changes in estimates)	1,253		180
Settlements made (in cash or in kind)	(1,133)		(504)
Product Warranty Liability at the end of the period	$ 1,938		$ 1,852

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Note 6. Restructuring Expense

The Company recognized consolidated pre-tax restructuring expense of $0.4 million and $0.5 million in the three and six months ended December 31, 2010, respectively, and $0.3 million and $0.8 million in the three and six months ended December 31, 2009, respectively. The action discussed below represents the majority of the restructuring costs during the period presented in the summary table on the following page. The EMS Gaylord restructuring plan, which is substantially complete and did not have significant expense during the period presented, is included in the summary table on the following page under the Other Restructuring Plan caption.

The Company utilizes 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.

European Consolidation Plan:

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 near Poznan, Poland. The Company previously had one operation in Poznan. Construction of a new, larger facility in Poland is complete and production has begun. The Company successfully completed the move of production from Longford, Ireland, into the existing Poznan facility during fiscal year 2009. As part of the plan, the Company is also consolidating its EMS facilities located in Wales, United Kingdom, and Poznan, Poland, into the new facility near Poznan, which is expected to improve the Company's margins in the very competitive EMS market. The plan is being executed in stages with a projected final completion date of mid-fiscal year 2012. The Company sold the existing Poland facility and land during fiscal year 2010, and the Company is leasing back a portion of the facility until it completes the transfer of production to the new facility. The Company currently estimates that the total pre-tax charges related to the consolidation activities will be approximately, in millions, $21.3 consisting of $19.9 of severance and other employee costs, $0.5 of property and equipment asset impairment, $0.3 of lease exit costs, and $0.6 of other exit costs.

 

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Note 7. Fair Value

Note 10.  Assets Held for Sale

At both December 31, 2010 and June 30, 2010, 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.

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)	2010		2009		2010		2009
Service cost	$  242		$  185		$    484		$    378
Interest cost	69		104		138		212
Amortization of prior service costs	72		72		143		143
Amortization of actuarial change	210		146		425		298
Net periodic benefit cost	$  593		$  507		$ 1,190		$ 1,031

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 2011, 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, 2010.

Performance Shares		Quarter Awarded		Shares		Grant Date Fair Value (4)
Annual Performance Shares - Class A (1)		1st Quarter		235,710		$ 5.09
Long-Term Performance Shares - Class A (2)		1st Quarter		483,318		$ 5.09

 

Unrestricted Shares		Quarter Awarded		Shares		Grant Date Fair Value (4)
Unrestricted Shares - Class A (3)		1st Quarter		1,000		$ 5.27
Unrestricted Shares - Class B (3)		1st Quarter		500		$ 5.27
Unrestricted Shares - Class B (3)		2nd Quarter		1,000		$ 6.72
Unrestricted Shares (Director Compensation) - Class B (3)		2nd Quarter		25,477		$ 6.32

 

(1)	Annual performance shares were awarded to officers. Payouts will be based upon the fiscal year 2011 cash incentive payout percentages calculated under the Company's 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 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. Other unrestricted shares were awarded to officers as consideration for their service to the Company. 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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Note 13.  Variable Interest Entities

The Company's involvement with variable interest entities (VIEs) is limited to situations in which the Company is not the primary beneficiary as the Company lacks the power to direct the activities that most significantly impact the VIE's economic performance. Thus, consolidation is not required.

The Company is involved with VIEs consisting of an investment in convertible debt securities and stock warrants of a privately-held company and a note receivable related to the sale of an Indiana facility. For information related to the Company's investment in the privately-held company, see Note 9 - Short-Term Investments and Note 8 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements. The carrying value of the note receivable is $1.3 million, with no reserve, as of December 31, 2010, and is recorded on the Receivables line of the Company's Condensed Consolidated Balance Sheet. The Company has no material exposure related to the VIEs in addition to the items recorded on its Condensed Consolidated Balance Sheet.

The Company has no obligation to provide additional funding to the VIEs, and thus its risk of loss related to the VIEs is limited to the original funding amount. The Company did not provide any additional financial support to the VIEs during the quarter ended December 31, 2010.

Note 14.  Credit Quality and Allowance for Credit Losses of Notes Receivable

The Company 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. The Company holds collateral for the note receivable from the sale of an Indiana facility thereby mitigating the risk of loss.

		As of December 31, 2010
(Amounts in Thousands)		Unpaid Balance		Related Allowance		Receivable Net of Allowance
Note Receivable from Sale of Indiana Facility		$ 1,300		$   -0-		$ 1,300
Other Notes Receivable		84		84		-0-
Total		$ 1,384		$ 84		$ 1,300

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.

Overall market conditions in the EMS industry continue to be favorable. The EMS industry sales projections (by IDC, InForum, and New Venture Research) show average forecasted growth for calendar year 2011 of 10.6% compared to calendar year 2010. In addition, the Semiconductor Industry Association (SIA) reported that semiconductor sales are projected to grow 6.0% in calendar year 2011, and although the Company does not directly serve this market, it may be indicative of increased end market demand for products utilizing electronic components.

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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. While automotive activity was projected to moderate in fiscal year 2011 as the impact of the government stimulus programs ended, industry growth above previous expectations has occurred, in part due to the continually increasing number of electronic components in the design of automobiles. Demand in the medical market has remained relatively stable, but the Company has seen some signs of growth. The industrial control market is also showing signs of stability, after benefiting from spending targeted at energy savings technologies, and the public safety 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 one-fourth of the EMS segment's net sales for the second quarter of fiscal year 2011. The EMS segment December 31, 2010 open orders exceeded the December 31, 2009 level by 15%.

The office furniture and hospitality furniture markets are showing signs of improvement. As of November 2010, the Business and Institutional Furniture Manufacturer Association (BIFMA) projected a 10% year-over-year increase in the office furniture industry for calendar year 2011 compared to a projected 6% increase in calendar year 2010 and a 29% decrease in calendar year 2009. 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, the Company cannot predict future overall office furniture order trends at this time due to the short lead time of orders and the uncertainty that still exists in this market. In addition, the hotel industry forecasts (reported by Smith Travel Research and PricewaterhouseCoopers LLP) project occupancy rates to increase 1% to 3% in calendar year 2011 after an approximate 5% increase in calendar year 2010 and a 9% industry decline in calendar year 2009 and project revenue per available room to increase 5% to 7% for calendar year 2011 after an approximate 5% increase in calendar year 2010 and a 17% industry decline in calendar year 2009. Furniture segment open orders as of December 31, 2010 were 30% higher than the December 31, 2009 level.

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 Company made great strides over the last two years in reducing its overall cost structure and thus lowering its breakeven sales point. In addition, 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 and likewise increases total compensation expense when profits are up. The focus on cost control continues. At the same time, the Company has continued making prudent investments in product development, technology, and marketing and business development initiatives to drive profitable growth. The Company also continues 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 continued to maintain a strong balance sheet as of the end of the second quarter of fiscal year 2011, which included minimal long-term debt of $0.3 million and Share Owners' equity of $381.7 million. The Company's short-term liquidity available, represented as cash and cash equivalents plus the unused amount of the Company's revolving credit facility, was $123.2 million at December 31, 2010.

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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 in conjunction with fluctuating demand levels is key. In addition, the Company plans to minimize capital expenditures where appropriate but has been and will continue to invest in capital expenditures 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 continue to recover.

Commodity price pressure is expected to continue in the near-term. Mitigating the impact of commodity and fuel prices continues to be an area of focus within the Company.

Management continues to evaluate the healthcare reform legislation that was signed into law in March 2010 to understand the full impact on the Company. This legislation is expected to increase the Company's healthcare and related administrative expenses.

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

As demand within the EMS industry increases, the availability of components used in products manufactured by the Company continues to be a concern. Suppliers have not increased their production as rapidly as demand has increased, and component shortages are occurring. While the shortage situation appears to be improving, if shortages of components continue or worsen, the Company's production and shipment schedules could be negatively impacted. In addition, pricing premiums associated with part shortages have impacted the Company in fiscal year 2011 and remain a concern.

The nature of the EMS industry is such that the start-up of new programs to replace departing customers or expiring programs occurs frequently. The Company's sales to Bayer AG are expected to begin to decline in the fourth quarter of fiscal year 2011 as the Company's manufacturing contract with Bayer AG reaches end-of-life. Margins on the Bayer AG product are generally lower than the Company's other EMS products. 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 generally require more competitive pricing. Thus the Company must strive to identify cost savings opportunities to offset the lower pricing. Additional information on the risks related to contract customers is contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

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 processes help to maintain stability in management.

To support growth and diversification efforts, the Company focuses on both organic growth and potential acquisition targets. Acquisitions allow rapid diversification of both customers and industries served.

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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.

Financial Overview - Consolidated

Second quarter fiscal year 2011 consolidated net sales were $310.6 million compared to second quarter fiscal year 2010 net sales of $275.2 million, a 13% increase, driven by net sales increases in the Furniture and EMS segments of 19% and 9%, respectively. Second quarter fiscal year 2011 net income was $0.9 million, or $0.02 per Class B diluted share, inclusive of after-tax restructuring charges of  $0.2 million, or $0.01 per Class B diluted share, compared to net income for the second quarter of fiscal year 2010 of $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.

Net sales for the six-month period ended December 31, 2010 of $605.3 million were up 10% from net sales of $549.8 million for the same period of the prior fiscal year due to a 13% net sales increase in the Furniture segment and an 8% net sales increase in the EMS segment. Net income for the six-month period ended December 31, 2010 totaled $1.3 million, or $0.04 per Class B diluted share, inclusive of $0.3 million, or $0.01 per Class B diluted share, of after-tax restructuring charges. 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 charges 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.

Consolidated gross profit as a percent of net sales was 16.0% for the second quarter of both fiscal year 2011 and fiscal year 2010 as lower gross profit within the Furniture segment was largely offset on a consolidated basis by a shift in sales mix (as depicted in the table below) toward the Furniture segment which operates at a higher gross profit percentage than the EMS segment. For the year-to-date period of fiscal year 2011, gross profit as a percent of net sales declined to 16.0% compared to 16.6% for the year-to-date period of fiscal year 2010 as lower gross profit within the Furniture segment was only partially offset on a consolidated basis by a slight shift in sales mix (as depicted in the table below) toward the Furniture segment. Gross profit is discussed in more detail in the following segment discussions.

	Three Months Ended		Six Months Ended
	December 31		December 31
	2010	2009	2010	2009
EMS segment net sales as % of total	58%	61%	59%	60%
Furniture segment net sales as % of total	42%	39%	41%	40%

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Second quarter fiscal year 2011 consolidated selling and administrative expenses increased 5.1% in absolute dollars but decreased as a percent of net sales compared to the second quarter of fiscal year 2010, as sales volumes increased at a quicker rate than the selling and administrative expenses. The increase in absolute dollars was primarily due to higher profit-based incentive compensation costs and higher commissions resulting from the higher Furniture segment net sales. In addition, the Company recorded $1.1 million expense within selling and administrative expenses due to an increase in its Supplemental Employee Retirement Plan (SERP) liability resulting from the normal revaluation of the liability to fair value in the second quarter of fiscal year 2011 compared to $0.5 million expense which was recorded in the second quarter of fiscal year 2010.  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. 

Consolidated selling and administrative expenses for the first half of fiscal year 2011 also increased in absolute dollars but decreased as a percent of net sales compared to the first half of fiscal year 2010, as sales volumes increased at a quicker rate than the selling and administrative expenses. The  increase of 3.9% in absolute dollars for the first half of fiscal year 2011 compared to the first half of fiscal year 2010 was primarily due to increased employee benefits expense, higher profit-based incentive compensation costs, and higher commissions resulting from the higher Furniture segment net sales.

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 Company did not have any Other General Income in the first half of fiscal year 2011.

The Company recorded other income of $0.2 million and $1.0 million during the three and six months ended December 31, 2010, respectively, compared to other income of $1.0 million and $3.0 million recorded during the three and six months ended December 31, 2009, respectively. The decline in other income for the second quarter and year-to-date periods of fiscal year 2011 compared to the same periods of fiscal year 2010 was primarily related to foreign currency exchange movement that impacts the Company's EMS segment which was partially offset by the other income related to the appreciation of the SERP investments.

The fiscal year 2011 year-to-date effective tax rate was (50.0)% compared to the effective tax rate for the same period of fiscal year 2010 of 10.7%. Relatively low pre-tax income coupled with favorable net tax accrual adjustments of $0.7 million, primarily related to the research and development tax credit and a foreign deferred tax valuation allowance adjustment, drove the negative effective tax rate in the first half of fiscal year 2011. The year-to-date period of fiscal year 2010 included $1.1 million in favorable tax accrual adjustments resulting from the research and development credit and a foreign deferred tax valuation allowance adjustment.

Comparing the balance sheet as of December 31, 2010 to June 30, 2010, the Company's inventory balance increased primarily to support production ramp ups at select EMS facilities and to support the transfer of production to the new EMS facility in Poland from the other EMS facilities in Europe. The Company's borrowings under credit facilities was $17.1 million at December 31, 2010 as the Company borrowed funds to support short-term U.S. dollar working capital needs. The Company had no borrowings on the credit facilities outstanding at June 30, 2010.

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Electronic Manufacturing Services Segment

EMS segment results were as follows:

	At or for the Three Months Ended				For the Six Months Ended
	December 31				December 31
	2010		2009	% Change	2010		2009	% Change
(Amounts in Millions)
Net Sales	$ 181.4		$ 167.0	9%	$ 359.3		$ 332.5	8%
Operating Income	$     0.2		$     3.1	(94)%	$     0.4		$     2.3	(85)%
Net Income (Loss)	$    (0.1)		$     2.7	(104)%	$   (0.4)		$     2.4	(115)%
Open Orders	$ 197.2		$ 170.9	15%

Second quarter and year-to-date fiscal year 2011 EMS segment net sales to customers in the medical, industrial control, and public safety industries increased compared to the second quarter and year-to-date period of fiscal year 2010 which more than offset a decrease in net sales to customers in the automotive industry. While open orders were up 15% as of December 31, 2010 compared to December 31, 2009, open orders at a point in time may not be indicative of future sales trends due to the contract nature of the EMS segment's business.

Gross profit as a percent of net sales in the EMS segment for the second quarter and first half of fiscal year 2011 remained flat when compared to the second quarter and first half of fiscal year 2010. The benefit from fixed cost leverage associated with the increased sales, benefit from a sales mix shift toward higher margin product,  lower depreciation expense, and improved labor efficiencies at select units were offset by anticipated start-up costs and tighter margins associated with select new customer programs, higher component costs related to the rapid ramp up of new customer programs, and inefficiencies related to the European restructuring activities. 

EMS segment selling and administrative expenses in the second quarter and first half of fiscal year 2011 compared to the second quarter and first half of fiscal year 2010 increased in absolute dollars in-line with the higher sales volumes and remained flat as a percent of net sales. The increase in selling and administrative expenses was primarily related to an increase in salary expense to support sales growth and increased employee benefit expenses. In addition, the second quarter of fiscal year 2010 was aided by a favorable adjustment to bad debt reserves.

As the Company continues to execute its plan to expand its European automotive electronics capabilities and to establish a European Medical Center of Expertise near Poznan, Poland, the consolidation of its EMS facilities has a final completion target of mid-fiscal year 2012.  The consolidation is expected to improve the Company's margins in the very competitive EMS market. While the restructuring charges recorded during the second quarter and first half of fiscal year 2011 were immaterial, the EMS segment is experiencing inefficiencies related to the consolidation.

EMS segment Other General Income in the second quarter of the prior fiscal year 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.

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EMS segment Other Income/Expense for the second quarter and first half of fiscal year 2011 totaled expense of $1.0 million and $1.8 million, respectively, compared to other income of $0.2 million and $0.4 million recorded during the second quarter and first half of fiscal year 2010, respectively. The unfavorable variance in other income/expense for the second quarter and year-to-date periods of fiscal year 2011 compared to the same periods of fiscal year 2010 was primarily related to foreign currency exchange movement.

As a percent of net sales, operating income was 0.1% for both the second quarter and year-to-date period of fiscal year 2011 and 1.9% and 0.7% for the second quarter and year-to-date period of fiscal year 2010, respectively.

The EMS segment recognized the benefit of $0.4 million and $0.5 million favorable net tax accrual adjustments in the second quarter and first half of fiscal year 2011, respectively. The EMS segment recorded $0.7 million of benefit in the second quarter and first half of fiscal year 2010 resulting from favorable net tax accrual adjustments.

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
	2010	2009	2010	2009
Bayer AG affiliated sales as a percent of consolidated net sales	12%	14%	13%	15%
Bayer AG affiliated sales as a percent of EMS segment net sales	21%	23%	22%	25%

The Company's sales to Bayer AG are expected to begin to decline in the fourth quarter of fiscal year 2011 as the Company's manufacturing contract with Bayer AG reaches end-of-life.  Margins on the Bayer AG product are generally lower than the Company's other EMS products. 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 becomes established and matures. 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, supplier stability, 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 in-source 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, 2010.

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Furniture Segment

Furniture segment results were as follows:

	At or for the Three Months Ended				For the Six Months Ended
	December 31				December 31
	2010		2009	% Change	2010		2009	% Change
(Amounts in Millions)
Net Sales	$  129.2		$ 108.1	19%	$ 246.0		$ 217.3	13%
Operating Income (Loss)	$      1.3		$   (2.0)	164%	$     2.3		$     1.0	142%
Net Income (Loss)	$      0.8		$   (1.0)	180%	$     1.4		$     0.8	77%
Open Orders	$    80.0		$   61.4	30%

The second quarter fiscal year 2011 net sales increase in the Furniture segment compared to the second quarter of fiscal year 2010 resulted from increased net sales of both office furniture and hospitality furniture. The Furniture segment net sales increase for the first half of fiscal year 2011 compared to the first half of fiscal year 2010 resulted from increased net sales of office furniture which more than offset decreased net sales of hospitality furniture. The increase in office furniture sales during both the second quarter and first half of fiscal year 2011 was primarily due to increased sales volumes which more than offset the impact of higher discounting net of price increases. Net sales of newly introduced office furniture products which have been sold for less than twelve months approximated $4.2 million and $9.8 million for the second quarter and first half of fiscal year 2011, respectively. Open orders of furniture products at December 31, 2010 increased 30% when compared to the open orders level as of December 31, 2009 as open orders for both office furniture and hospitality furniture increased. Open orders at a point in time may not be indicative of future sales trends.

Second quarter fiscal year 2011 Furniture segment gross profit as a percent of net sales declined 1.4 percentage points from the second quarter of fiscal year 2010. Items contributing to the decline in gross profit as a percent of net sales included increased discounting resulting from competitive pricing pressures and higher employee benefit costs. In addition, the unfavorable impact of an increase in LIFO inventory reserves resulting primarily from higher LIFO inventory levels in the second quarter of fiscal year 2011 compared to the favorable impact of a LIFO inventory reserve decrease in the second quarter of fiscal year 2010 contributed to the gross profit as a percent of net sales decline. The gross profit percentage decline was partially offset by price increases on select product and the favorable impact of the higher sales volumes on the gross profit.

Year-to-date fiscal 2011 Furniture segment gross profit as a percent of net sales declined 2.4 percentage points when compared to the same period of fiscal year 2010. Items contributing to the decreased year-to-date gross profit as a percent of net sales included increased discounting resulting from competitive pricing pressures and higher employee benefit costs. In addition, the prior year-to-date period was favorably impacted by a decrease in LIFO inventory reserve in the year-to-date period of fiscal year 2010 which contributed to the gross profit as a percent of net sales decline. The gross profit percentage decline was partially offset by price increases on select product, a sales mix shift to higher margin product, and the favorable impact of the higher sales volumes on the gross profit.

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Second quarter and year-to-date fiscal year 2011 Furniture segment selling and administrative expenses increased in absolute dollars but as a percent of net sales decreased 4.3 and 2.9 percentage points, respectively, primarily due to the higher sales volumes when compared to the second quarter and year-to-date period of fiscal year 2010. Both the second quarter and year-to-date periods were impacted by higher profit-based incentive compensation costs and higher commissions resulting from the higher net sales which were partially offset by lower selling and administrative salary expense.

As a percent of net sales, operating income (loss) was 1.0% for both the second quarter and year-to-date periods of fiscal year 2011 and (1.8)% and 0.4% for the second quarter and year-to-date period of fiscal year 2010, respectively.

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, raw material availability, 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, 2010.

Liquidity and Capital Resources

Working capital at December 31, 2010 was $181.2 million compared to working capital of $180.0 million at June 30, 2010. The current ratio was 1.7 at December 31, 2010 and 1.8 at June 30, 2010.

The Company's internal measure of accounts receivable performance, also referred to as Days Sales Outstanding (DSO), for the first half of fiscal year 2011 of 47.0 days approximated the 47.4 days for the first half of fiscal year 2010. 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 half of fiscal year 2011 increased to 67.1 days from 63.2 days for the first half of fiscal year 2010. The increased PDSOH was primarily due to higher inventory levels associated with the ramp up of certain programs, the transfer of production among the Company's EMS segment facilities, and customer-requested shipping delays during the fiscal 2011 year-to-date period. 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 and cash equivalents plus the unused amount of the Company's revolving credit facility, totaled $123.2 million at December 31, 2010 compared to $161.1 million at June 30, 2010.

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The Company's net cash position from an aggregate of cash and cash equivalents less short-term borrowings under credit facilities decreased from $65.3 million at June 30, 2010 to $28.3 million at December 31, 2010. Operating activities used $21.0 million of cash flow in the first half of fiscal year 2011 compared to the $3.8 million of cash used by operating activities in the first half of fiscal year 2010. The cash outflow in the first half of fiscal year 2011 was primarily driven by an increase in inventory in the EMS segment due to higher inventory levels associated with the ramp up of certain programs and the transfer of production among the Company's EMS segment facilities. In addition, during the first half of fiscal year 2011, the Company reinvested $14.3 million into capital investments for the future, primarily for manufacturing equipment in the EMS segment. The Company also paid $5.5 million in dividends, which was higher than dividends paid in the first half of fiscal year 2010 due to a dividend payment occurring on December 31, 2010 rather than January as in the prior year. 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 2011, 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 continue to recover. At December 31, 2010, the Company had $17.1 million of short-term borrowings outstanding under its $100 million credit facility and no borrowings outstanding under the Company's several smaller foreign credit facilities. The borrowings were in support of short-term U.S. dollar working capital needs. At June 30, 2010, the Company had no borrowings outstanding.

At December 31, 2010, the Company had $5.1 million in letters of credit against the $100 million credit facility. Total availability to borrow under the $100 million credit facility was $77.8 million at December 31, 2010.

The Company maintains the $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 consent of the participating banks. The $100 million credit facility requires the Company to comply with certain debt covenants, the most significant of which are the interest coverage ratio and minimum net worth. The Company was in compliance with the debt covenants at December 31, 2010.

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, 2010		Limit As Specified in Credit Agreement		Excess
Minimum Net Worth		$381,668,000		$362,000,000		$19,668,000
Interest Coverage Ratio		43.4		3.0		40.4

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

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 maintains a foreign credit facility for its EMS segment operation in Thailand which is backed by the $100 million revolving credit facility. The Company has a credit facility for its EMS segment operation in Poland, which allows for multi-currency borrowings up to 6 million Euro equivalent (approximately $8.0 million U.S. dollars at December 31, 2010 exchange rates). These foreign credit facilities can be cancelled at any time by either the bank or the Company.

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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 for fiscal year 2011 and the foreseeable future. One of the Company's sources of funds has been its ability to generate cash from operations to meet its liquidity obligations, which during the first half of fiscal year 2011 was hampered by the ramp up in inventory balances, and could be adversely affected in the future 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, 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.

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 the second quarter of fiscal year 2011, 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. The Company's foreign currency 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 derivatives.

The Company invested in convertible promissory notes and stock warrants of a privately-held company during fiscal year 2010. The convertible promissory notes, classified as available-for-sale debt securities, were valued using a recurring market-based method which approximates fair value by using the amortized cost basis of the promissory notes, 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 notes and stock warrants were calculated using unobservable inputs and were classified as level 3 financial assets.

See Note 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.

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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, 2010.

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.

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.

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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 a provision for 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, 2010 and June 30, 2010, the reserve for returns and allowances was $2.1 million and $2.5 million, respectively. The returns and allowances reserve approximated 1% to 3% of gross trade receivables during the past two fiscal 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, 2010 and June 30, 2010 was $1.3 million. During the preceding two-year period, this reserve had approximated 1% of gross trade accounts receivable except for the period March 2009 through December 2009 during which time it approximated 2% of gross trade accounts receivable. The higher reserve was driven by increased risk created by deteriorating market conditions during that time.

Excess and obsolete inventory - Inventories were valued using the lower of last-in, first-out (LIFO) cost or market value for approximately 10% and 9% of consolidated inventories at December 31, 2010 and June 30, 2010, respectively, including approximately 81% and 78% of the Furniture segment inventories at December 31, 2010 and June 30, 2010, 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, 2010 and June 30, 2010, the Company's accrued liabilities for self-insurance exposure were $4.3 million and $4.7 million, respectively.

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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, including accrued interest and penalties on those positions, was $3.9 million and $3.7 million at December 31, 2010 and June 30, 2010, respectively.

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," "intends," "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 and components, increased competitive pricing pressures reflecting excess industry capacities, successful execution of restructuring plans, 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 the Company are contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

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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, 2010.

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, 2010, 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, 2010 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 2011. At December 31, 2010, two 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, 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)

(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.

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Kimball International, Inc.
Exhibit Index

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