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

A summary of other intangible assets subject to amortization by segment was as follows:

		March 31, 2010						June 30, 2009
(Amounts in Thousands)		Cost		Accumulated Amortization		Net Value		Cost		Accumulated Amortization		Net Value
Electronic Manufacturing Services:
Capitalized Software		$27,424		$       24,719		$    2,705		$27,455		$       24,217		$    3,238
Customer Relationships		1,167		585		582		1,167		448		719
Other Intangible Assets		$28,591		$       25,304		$    3,287		$28,622		$       24,665		$    3,957
Furniture:
Capitalized Software		$36,040		$       32,179		$    3,861		$37,107		$       32,533		$    4,574
Product Rights		1,160		436		724		1,160		334		826
Other Intangible Assets		$37,200		$       32,615		$    4,585		$38,267		$       32,867		$    5,400
Unallocated Corporate:
Capitalized Software		$  5,840		$         5,240		$       600		$  5,773		$         4,949		$       824
Other Intangible Assets		$  5,840		$         5,240		$       600		$  5,773		$         4,949		$       824
Consolidated		$71,631		$       63,159		$    8,472		$72,662		$       62,481		$  10,181

Non-operating Income (Expense): 

Non-operating income (expense) included 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 or loss 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 (expense), net:
	Three Months Ended				Nine Months Ended
(Amounts in Thousands)	March 31				March 31
	2010		2009		2010		2009
Foreign Currency/Derivative Gain (Loss)	$ (454)		$ 1,075		$    329		$        87
Gain (Loss) on Supplemental Employee Retirement Plan Investments	540		(749)		2,560		(4,106)
Other	157		115		(206)		(227)
Non-operating income (expense), net	$   243		$    441		$ 2,683		$ (4,246)

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Effective Tax Rate:

For the third quarter fiscal year 2010 year-to-date period, the Company used the actual effective tax rate for the year-to-date tax provision calculation because a reliable estimate of the full-year effective tax rate could not be made. Relatively low pre-tax income coupled with the mix of operating results in multiple taxing jurisdictions and the difficulty of forecasting in certain markets caused significant uncertainty in the estimate of the annual effective tax rate.

The fiscal 2010 year-to-date actual effective tax rate was (73.3%) compared to the effective tax rate for the same period of fiscal year 2009 of 37.0%. Relatively low pre-tax income coupled with a tax benefit due to a tax planning strategy related to the sale of a facility and land in Poland and a favorable impact of the Company's earnings mix drove the significantly lower effective tax rate compared to the same period of fiscal year 2009. The mix of earnings between U.S. and foreign jurisdictions resulted in an overall tax benefit due to U.S. losses which have a higher statutory tax rate than the Company's foreign operations which were profitable in the first nine months of fiscal year 2010.

New Accounting Standards:

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 changes in 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 adoption did not have a material impact on the Company's consolidated financial statements.

In June 2009, the FASB established the FASB Accounting Standards Codification (Codification) as the single official source of authoritative U.S. GAAP recognized by the FASB (other than guidance issued by the Securities and Exchange Commission). The Codification does not change current U.S. GAAP but is intended to simplify user access to all authoritative U.S. GAAP by providing all literature related to a particular topic in one place. All existing FASB accounting standard documents have been superseded.  During the first quarter of fiscal year 2010, the Company began to utilize the Codification and revised its financial statements to no longer refer to former U.S. GAAP standards.

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 variable interest entity and requires additional disclosures about a company's involvement in variable interest entities. The guidance will be effective as of the beginning of the Company's fiscal year 2011. The Company is currently evaluating the impact, if any, of adoption of the guidance on its consolidated financial statements.

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In April 2009, the FASB issued guidance for interim disclosures about fair value of financial instruments. This guidance expands to interim periods the existing annual requirement to disclose the fair value of financial instruments that are not reflected on the balance sheet at fair value. The guidance became effective for interim periods beginning in the Company's first quarter of fiscal year 2010, and the required disclosure has been provided in Note 7 - Fair Value of Financial Assets and Liabilities of Notes to Condensed Consolidated Financial Statements.

In June 2008, the FASB issued guidance for determining whether instruments granted in share-based payment transactions are participating securities. This guidance provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The two-class method is an earnings allocation method for computing earnings per share when an entity's capital structure includes multiple classes of common stock and participating securities. This guidance became effective as of the beginning of the Company's fiscal year 2010 and required that previously reported earnings per share data be recast in financial statements issued in periods after the effective date. The effect of adopting the guidance is disclosed under the caption "Revisions to the Earnings Per Share Calculation" within this footnote.

In April 2008, the FASB issued guidance for the determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the goodwill and other intangible assets accounting principles. This new guidance allows an entity to use its own historical experience in renewing or extending similar arrangements, adjusted for entity-specific factors, in developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset. As a result, the determination of intangible asset useful lives is now consistent with the method used to determine the period of expected cash flows used to measure the fair value of the intangible assets. The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively to intangible assets acquired after the effective date. Disclosure requirements are to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The provisions of this guidance were adopted prospectively as of the beginning of the Company's fiscal year 2010 and did not have an effect on the Company's consolidated financial statements.

In December 2007, the FASB issued  guidance on business combinations which requires that the fair value of the purchase price of an acquisition including the issuance of equity securities be determined on the acquisition date; requires that all assets, liabilities, noncontrolling interests, contingent consideration, contingencies, and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. This guidance also broadens the definition of a business combination and expands disclosures related to business combinations. Additionally, in April 2009, the FASB issued further guidance which requires that acquired contingent assets and liabilities be recognized at fair value if fair value can be reasonably estimated. If the fair value cannot be reasonably estimated, the asset or liability will be recognized in accordance with existing accounting principles for accounting for contingencies and reasonable estimation of the amount of a loss. This new guidance became effective for business combinations occurring after the beginning of the Company's fiscal year 2010. The impact, if any, of this guidance on the Company's financial position, results of operations, and cash flows will depend on the extent of business combinations completed in the future.

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In December 2007, the FASB issued guidance on noncontrolling interests in consolidated financial statements. This guidance requires that noncontrolling interests be reported as a separate component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statements of income, that changes in a parent's ownership interest be accounted for as equity transactions, and that, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. This guidance became effective as of the beginning of the Company's fiscal year 2010. The Company does not currently have noncontrolling interests, and therefore the adoption of this guidance did not have an impact on the Company's financial position, results of operations, or cash flows.

In September 2006, the FASB issued guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This guidance is only applicable to existing accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The guidance, as originally issued, was to be effective as of the beginning of the Company's fiscal year 2009. In February 2008, the FASB issued additional guidance on fair value measurements, approving a one-year deferral to the beginning of the Company's fiscal year 2010 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis at least annually. The Company adopted the provisions of fair value measurement guidance applicable to financial instruments as of July 1, 2008. The Company adopted the provisions of fair value measurement guidance applicable to non-financial assets and liabilities as of July 1, 2009 which did not have a material effect on the Company's consolidated financial statements. Required disclosures have been provided in Note 7 - Fair Value of Financial Assets and Liabilities of Notes to Condensed Consolidated Financial Statements.

Note 2. Inventories

Inventory components of the Company were as follows:

	March 31,		June 30,
(Amounts in Thousands)	2010		2009
Finished Products	$  37,453		$  35,530
Work-in-Process	13,236		11,752
Raw Materials	112,174		93,999
Total FIFO Inventory	$162,863		$141,281
LIFO Reserve	(12,427)		(14,277)
Total Inventory	$150,436		$127,004

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 and nine-month periods ended March 31, 2010, LIFO inventory liquidations increased net income by, in thousands, $412 and $1,379, respectively. During the three and nine-month periods ended March 31, 2009, LIFO inventory liquidations increased net income by, in thousands, $764 and $1,764, 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 nine-month periods ended March 31, 2010 and 2009 was as follows:

	Three Months Ended March 31, 2010						Three Months Ended March 31, 2009
(Amounts in Thousands)	Pre-tax		Tax		Net of Tax		Pre-tax		Tax		Net of Tax
Net income					$     6,330						$        4,114
Other comprehensive income (loss):
Foreign currency translation adjustments	$    (5,610)		$     1,228		$    (4,382)		$   (3,035)		$       (406)		$      (3,441)
Postemployment severance actuarial change	(1,823)		727		(1,096)		(1,690)		674		(1,016)
Other fair value changes:
Available-for-sale securities	(90)		36		(54)		594		(237)		357
Derivatives	1,990		(544)		1,446		(1,135)		57		(1,078)
Reclassification to (earnings) loss:
Available-for-sale securities	(272)		108		(164)		(148)		59		(89)
Derivatives	(1,042)		317		(725)		2,571		(919)		1,652
Amortization of prior service costs	71		(27)		44		71		(28)		43
Amortization of actuarial change	310		(123)		187		169		(68)		101
Other comprehensive income (loss)	$    (6,466)		$     1,722		$    (4,744)		$   (2,603)		$       (868)		$      (3,471)
Total comprehensive income					$     1,586						$           643
	Nine Months Ended March 31, 2010						Nine Months Ended March 31, 2009
(Amounts in Thousands)	Pre-tax		Tax		Net of Tax		Pre-tax		Tax		Net of Tax
Net income					$   10,010						$      14,480
Other comprehensive income (loss):
Foreign currency translation adjustments	$    (3,689)		$        796		$    (2,893)		$   (9,330)		$    (1,286)		$    (10,616)
Postemployment severance actuarial change	(2,497)		996		(1,501)		(1,690)		674		(1,016)
Other fair value changes:
Available-for-sale securities	(134)		54		(80)		1,585		(632)		953
Derivatives	2,844		(684)		2,160		(15,732)		4,690		(11,042)
Reclassification to (earnings) loss:
Available-for-sale securities	(328)		130		(198)		(148)		59		(89)
Derivatives	343		(117)		226		6,276		(2,559)		3,717
Amortization of prior service costs	214		(84)		130		214		(85)		129
Amortization of actuarial change	608		(242)		366		177		(71)		106
Other comprehensive income (loss)	$    (2,639)		$        849		$    (1,790)		$ (18,648)		$        790		$    (17,858)
Total comprehensive income (loss)					$     8,220						$      (3,378)

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The Company recognized consolidated pre-tax restructuring expense of $0.9 million and $1.7 million in the three and nine months ended March 31, 2010, respectively, and $0.7 million and $2.7 million in the three and nine months ended March 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. Former restructuring plans that are substantially complete and did not have significant expense during the period presented are included in the summary table on the following page under the caption Other Restructuring Plans and include the Furniture segment Office Furniture Manufacturing Consolidation Plan and the Unallocated Corporate Gaylord restructuring plan.

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 in Poznan, Poland. The Company previously had one operation in Poznan. The Company successfully completed the move of production from Longford, Ireland, into that 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 of the consolidation by mid-fiscal year 2012. The Company sold the existing Poland facility and land during the fiscal year 2010 third quarter and recorded a $6.7 million pre-tax gain which is included in the Other General Income line on the Company's Condensed Consolidated Statements of Income. 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, $21.2 consisting of  $19.6 of severance and other employee costs, $0.4 of property and equipment asset impairment, $0.7 of lease exit costs, and $0.5 of other exit costs.

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Note 7. Fair Value of Financial Assets and Liabilities

The Company categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:

Level 1:  Unadjusted quoted prices in active markets for identical assets and liabilities.

Level 2:  Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3:  Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

The Company invested in convertible promissory notes and stock warrants of a privately-held company during the quarters ended March 31, 2010 and December 31, 2009. The Company 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 in process.

The convertible promissory notes are classified as available-for-sale debt securities as a result of the conversion option and 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 are classified as derivative instruments as a result of a net settlement feature and were valued on a recurring basis using a market-based method which utilizes the Black-Scholes valuation model with the following inputs: risk-free interest rate, volatility, expected life, and the estimated stock price.

See Note 9 - Short-Term Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the convertible debt securities. See Note 8 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information regarding the stock warrants.  

There were no other changes in the Company's inputs or valuation techniques used to measure fair values compared to those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

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Note 10.  Assets Held for Sale

At March 31, 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.  The Company expects to sell these assets during the next 12 months. During the year-to-date period of fiscal year 2010, the Company sold equipment related to previously held timberlands, and 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				Nine Months Ended
	March 31				March 31
(Amounts in Thousands)	2010		2009		2010		2009
Service cost	$  217		$  108		$   595		$ 270
Interest cost	122		46		334		115
Amortization of prior service costs	71		71		214		214
Amortization of actuarial change	310		169		608		177
Net periodic benefit cost	$  720		$ 394		$1,751		$ 776

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
Annual Performance Shares - Class A (1)		3rd Quarter		1,167		$ 7.32
Long-Term Performance Shares - Class A (2)		3rd Quarter		4,766		$ 7.32

 

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, but the EMS segment open order trend has subsequently rebounded with four consecutive quarterly increases. Open orders at March 31, 2010 were 29% higher in the EMS segment; however, open orders were 34% lower in the Furniture segment when compared to March 31, 2009. As compared to the most recent quarter ending December 31, 2009, the March 31, 2010 open orders for the EMS segment increased 16%, and the Furniture segment open orders declined 7%.  While open orders at a point in time are not necessarily indicative of future sales, the EMS segment improvements are encouraging.

After experiencing 15% sales declines in calendar year 2009, the EMS industry sales projections (by IDC, InForum, and Electronic Trend Publications) show average forecasted growth for calendar year 2010 of 7.2% compared to calendar year 2009. 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. Automotive activity in the third quarter of fiscal year 2010 remained strong with sustained activity projected for the fourth quarter of fiscal year 2010. Thereafter, automotive demand is expected to return to a more normal level 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 30% of the EMS segment's net sales for the third 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 third quarter of fiscal year 2010.

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As of February 2010, the Business and Institutional Furniture Manufacturer Association (BIFMA International) is projecting an approximate 0.3% year-over-year decline in the office furniture industry for calendar year 2010 after a 29% decline in calendar year 2009 with a return to positive growth expected to begin mid-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 this market. In addition, the hotel industry forecasts (reported by Smith Travel Research and PricewaterhouseCoopers LLP) project occupancy rates to increase slightly in calendar year 2010 after a 9% decline in calendar year 2009 and project revenue per available room (RevPAR) to decline approximately another 1% for calendar year 2010 after a 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 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 $152.3 million at March 31, 2010.

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 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.

While commodity prices have been trending favorably on a year-over-year comparison basis, the prices of steel and aluminum are expected to increase in the near-term.  Mitigating the impact of higher commodity and fuel prices continues to be an area of focus within the Company.

Management is currently evaluating the healthcare reform legislation that was signed into law in March 2010 to determine 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.

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As demand within the EMS industry increases, the availability of components used in products manufactured by the Company is a concern.  Many suppliers are being cautious regarding increasing their capacity and as a result, component shortages could occur. If shortages of components occur, the Company's production and shipment schedules could be impacted.

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 previously had one operation in Poznan. The Company successfully completed the move of production from Longford, Ireland, into that 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 of the consolidation by mid-fiscal year 2012. Construction of the new, larger facility in Poland is complete and limited production has begun.

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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.

Financial Overview - Consolidated

Third quarter fiscal year 2010 consolidated net sales were $282.3 million compared to third quarter fiscal year 2009 net sales of $268.9 million, a 5% increase, due to a net sales increase in the EMS segment more than offsetting a net sales decrease in the Furniture segment. Net income for the third quarter of fiscal year 2010 was $6.3 million, or $0.17 per Class B diluted share, inclusive of a $7.7 million after-tax gain, or $0.20 per Class B diluted share, related to the sale of a facility and land in Poland, and after-tax restructuring charges of $0.6 million, or $0.01 per Class B diluted share. The third quarter fiscal year 2010 restructuring charges were primarily related to the European consolidation plan. The Company recorded net income for the third quarter of fiscal year 2009 of $4.1 million, or $0.11 per Class B diluted share, inclusive of after-tax restructuring charges of $0.4 million, or $0.01 per Class B diluted share. Third quarter fiscal year 2009 results also include a $13.9 million after-tax gain, or $0.37 per Class B diluted share, related to the sale of undeveloped land holdings and timberlands and a $9.1 million after-tax non-cash goodwill impairment charge, or $0.24 per Class B diluted share.

Net sales for the nine-month period ended March 31, 2010 of $832.2 million were down 11% from net sales of $936.0 million for the same period of the prior fiscal year due to a 31% net sales decrease in the Furniture segment more than offsetting a 7% net sales increase in the EMS segment. Net income for the nine-month period ended March 31, 2010 totaled $10.0 million, or $0.27 per Class B diluted share, inclusive of a $7.7 million after-tax gain, or $0.20 per Class B diluted share, related to the sale of a facility and land in Poland, $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 $1.0 million, or $0.03 per Class B diluted share, of after-tax restructuring costs primarily related to the European consolidation plan. Net income for the nine-month period ended March 31, 2009, totaled $14.5 million, or $0.39 per Class B diluted share, inclusive of $1.7 million, or $0.04 per Class B diluted share, of after-tax restructuring costs primarily related to the European consolidation plan. The fiscal 2009 year-to-date results also include several non-recurring items: an $18.7 million after-tax gain, or $0.50 per Class B diluted share, related to the sale of undeveloped land holdings and timberlands; a $9.1 million after-tax non-cash goodwill impairment charge, or $0.24 per Class B diluted share; 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 a termination of the contract to sell the Company's Poland facility and land.

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Consolidated gross profit as a percent of net sales declined to 14.3% for the third quarter of fiscal year 2010 from 15.8% in the third 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 15.8% compared to 16.8% for the year-to-date period of fiscal year 2009.  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 contributed to the decline for the third quarter and fiscal-year-to-date periods. The EMS segment gross profit as a percent of net sales improved for both the third quarter and year-to-date period of fiscal year 2010.  The Furniture segment gross profit as a percent of net sales declined in the third quarter but improved in the year-to-date period of fiscal year 2010.  Gross profit is discussed in more detail in the segment discussions below.

Segment Net Sales as a % of Consolidated	Three Months Ended		Nine Months Ended
Net Sales	March 31		March 31
	2010	2009	2010	2009
EMS segment	67%	52%	63%	52%
Furniture segment	33%	48%	37%	48%

Consolidated selling and administrative expense declined as a percent of net sales for the third quarter of fiscal year 2010 as compared to the third quarter of fiscal year 2009 due to the leverage gained with the higher sales volume.  Third quarter fiscal year 2010 consolidated selling and administrative expenses increased in absolute dollars by 2% compared to the third quarter of fiscal year 2009 primarily due to increased incentive compensation costs at select business units, increased severance costs due to scaling operations, and increased costs related to the reinstatement of the Company's retirement plan contribution for fiscal year 2010. Partially offsetting these cost increases were lower employee salary compensation realized from the salary reduction plan implemented by the Company late in the third quarter of fiscal year 2009 along with lower bad debt expense.

Consolidated selling and administrative expense increased as a percent of net sales for the nine months ended March 31, 2010 compared to the nine months ended March 31, 2009 due to sales volumes declining at a quicker rate than the selling and administrative expenses. Consolidated selling and administrative expenses for the first nine months of fiscal year 2010 declined in absolute dollars by 6% compared to the comparable period of fiscal year 2009 primarily due to decreased employee salary compensation, lower bad debt expense, lower depreciation and amortization expense, and other comprehensive cost reduction efforts throughout the Company.  The Company also experienced increased employee benefit costs primarily related to the reinstatement of the Company's retirement plan contribution and increased incentive compensation costs at select business units during the fiscal 2010 year-to-date period as compared to the fiscal 2009 year-to-date period.

In addition, in the third quarter and year-to-date period of fiscal year 2010, the Company recorded $0.5 million and $2.6 million, respectively, of expense compared to $0.7 million and $4.1 million, respectively, of income in the third quarter and 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 third quarter and year-to-date period was an unfavorable variance in selling and administrative costs of $1.3 million and $6.7 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.

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Other General Income in the third quarter of fiscal year 2010 included a $6.7 million pre-tax gain within the EMS segment related to the sale of the facility and land in Poland. The Company is leasing a portion of the facility until it completes the transfer of production to its newly constructed facility in Poland. In addition to the third quarter gain on the sale of the facility and land in Poland, the fiscal 2010 year-to-date Other General Income also 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 third quarter of fiscal year 2009 included a $23.2 million pre-tax gain on the sale of undeveloped land holdings and timberlands. The gain on the sale of land was included in Unallocated Corporate in segment reporting. The total pre-tax gain on the sale of the undeveloped land holdings and timberlands for the fiscal 2009 year-to-date period was $31.2 million. In addition during the fiscal 2009 year-to-date period, the Company had a conditional agreement to sell and lease back the facility that housed its Poland operations. However, 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. 

In the prior fiscal year third quarter, the Company recorded non-cash pre-tax goodwill impairment charges of $14.6 million as a result of interim goodwill impairment testing which was completed during the quarter due to the uncertainty associated with the economy and the significant decline in the Company's sales and order trends during the third quarter of fiscal year 2009 as well as the increased disparity between the Company's market capitalization and the carrying value of its Share Owners' equity.

The Other Income (Expense) line included other income of $0.5 million and $3.5 million during the three and nine months ended March 31, 2010, respectively, compared to other income of $0.9 million and other expense of $3.8 million recorded during the three and nine months ended March 31, 2009, respectively. Other Income (Expense) in the third quarter of fiscal year 2010 included the favorable impact of the SERP appreciation and an unfavorable impact of foreign currency movements which were partially offset by a favorable currency impact within operating income. The $6.7 million favorable variance in SERP investments was the primary driver of the increased other income for the nine months ended March 31, 2010. Interest expense for the first nine months of fiscal year 2010 was lower than the same period of fiscal year 2009 due to lower average outstanding debt balances coupled with lower interest rates. Interest income was likewise lower for the first nine months of fiscal year 2010 compared to the same period of fiscal year 2009 due to lower interest rates and lower average investment balances.

The fiscal 2010 year-to-date actual effective tax rate was (73.3%) compared to the effective tax rate for the same period of fiscal year 2009 of 37.0%.  Relatively low pre-tax income coupled with a tax benefit due to a tax planning strategy related to the sale of the Poland facility and land and a favorable impact of the Company's earnings mix drove the significantly lower effective tax rate compared to the same period of fiscal year 2009. The mix of earnings between U.S. and foreign jurisdictions resulted in an overall tax benefit due to U.S. losses which have a higher statutory tax rate than the Company's foreign operations which were profitable in the first nine months of fiscal year 2010.

Comparing the balance sheets as of March 31, 2010 to June 30, 2009, the Company's accounts receivable balance increased due to the higher sales volumes and due to a large customer holding payment until early April. The Company's inventory balance as of March 31, 2010 increased from the June 30, 2009 level primarily to support the increased EMS sales volumes and the transfer of production to the new EMS facility in Poland from the other EMS facilities in Europe. The Company's Accounts Payable balance increased in conjunction with the inventory increase. The Company's Borrowings under credit facilities is zero as of March 31, 2010 as the Company opted to pay off its short-term debt. 

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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 previously had one operation in Poznan. The Company successfully completed the move of production from Longford, Ireland, into that 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 mid-fiscal year 2012. 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 Nine Months Ended
	March 31				March 31
	2010		2009	% Change	2010		2009	% Change
(Amounts in Millions)
Net Sales	$  190.1		$  140.6	35%	$  522.6		$ 490.5	7%
Operating Income (Loss)	$    10.2		$  (16.1)	163%	$   12.5		$  (18.2)	169%
Net Income (Loss)	$    10.8		$    (9.6)	212%	$   13.2		$ (11.0)	220%
Poland Land/Facility Gain, net of tax	$      7.7		$      0.0		$     7.7		$     0.0
Goodwill Impairment, net of tax	$      0.0		$      8.0		$     0.0		$     8.0
Restructuring Expense, net of tax	$      0.5		$      0.2		$     1.0		$     1.1
Open Orders	$  198.9		$  154.1	29%

Third quarter fiscal year 2010 EMS segment net sales to customers in the automotive, medical, industrial control, and public safety industries all increased compared to the third quarter of fiscal year 2009. For the first nine months of fiscal year 2010 increased sales to customers in the automotive, medical, and industrial control industries more than offset decreased sales to public safety customers. While open orders increased 29% compared to March 31, 2009, 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.

The third quarter and year-to-date fiscal 2010 EMS segment gross profit as a percent of net sales improved 2.9 percentage points and 1.1 percentage points when compared to the third quarter and year-to-date periods of fiscal year 2009, respectively. The improvements were primarily driven by labor efficiency improvements and fixed cost leverage associated with the increased sales.

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EMS segment selling and administrative expenses in absolute dollars increased 12% in the third quarter of fiscal year 2010 and decreased 4% year-to-date in fiscal 2010.  Selling and administrative expense as a percent of net sales declined in both the third quarter and year-to-date period of fiscal year 2010 compared to the same periods of fiscal year 2009 on the higher sales volumes. The third quarter increased selling and administrative expense was primarily related to an increase in incentive compensation costs and the reinstatement of the Company's retirement plan contribution for fiscal year 2010.  On a fiscal 2010 year-to-date basis the improvement was primarily related to decreased labor expense, benefits realized from restructuring actions, lower depreciation/amortization expense, and other overall cost reduction efforts which were partially offset by higher incentive compensation costs.

EMS segment Other General Income for the three and nine months ended March 31, 2010 included a $6.7 million pre-tax gain from the sale of the existing Poland facility and land; including the tax benefit related to the sale of this facility and land, the after-tax gain was $7.7 million. In addition, Other General Income in the year-to-date period 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 fiscal 2009 year-to-date period included the $1.9 million pre-tax, or $1.6 million after-tax, amount retained due to the buyer being unable to close on the sale of the existing Poland facility and land.

The EMS segment earnings for the three and nine months ended March 31, 2009 were also impacted by the recording of non-cash pre-tax goodwill impairment of $12.8 million, or $8.0 million after-tax.

As a percent of net sales, operating income was 5.3% and 2.4% for the third quarter and year-to-date period of fiscal year 2010, respectively, and (11.5%) and (3.7%) for the third quarter and year-to-date period of fiscal year 2009, respectively. 

EMS segment Other Income (Expense) in the third quarter of fiscal year 2010 as compared to the third quarter of fiscal year 2009 was unfavorably impacted by foreign currency movements which were partially offset by a favorable currency impact within operating income.

During the third quarter of fiscal year 2010, the EMS segment recorded $1.0 million of tax income related to the sale of the facility and land in Poland instead of tax expense normally associated with a gain, due to a tax planning strategy. The fiscal year 2010 year-to-date EMS segment income tax was also favorably impacted by $0.7 million in favorable net tax accrual adjustments and tax benefits associated with losses generated by U.S. EMS operations which have a higher statutory rate than the EMS operations in foreign tax jurisdictions which generated income.   The third quarter and year-to-date fiscal 2009 EMS income tax was impacted by a tax benefit related to its European operations which was primarily offset by the impact of losses in select foreign jurisdictions which have a lower tax rate.

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		Nine Months Ended
	March 31		March 31
	2010	2009	2010	2009
Bayer AG affiliated sales as a percent of consolidated net sales	16%	14%	15%	12%
Bayer AG affiliated sales as a percent of EMS segment net sales	23%	26%	24%	23%

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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, 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, 2009.

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 Nine Months Ended
	March 31				March 31
	2010		2009	% Change	2010		2009	% Change
(Amounts in Millions)
Net Sales	$    92.2		$ 128.2	(28%)	$ 309.5		$ 445.5	(31%)
Operating Income (Loss)	$    (7.2)		$   (1.7)	(323%)	$   (6.2)		$     9.9	(163%)
Net Income (Loss)	$    (4.5)		$   (1.6)	(181%)	$   (3.8)		$     5.6	(167%)
Goodwill Impairment, net of tax	$      0.0		$     1.1		$     0.0		$     1.1
Restructuring (Income) Expense, net of tax	$      0.0		$     0.1		$   (0.1)		$     0.4
Open Orders	$    57.1		$   86.0	(34%)

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The net sales decline in the Furniture segment for the three and nine months ended March 31, 2010 compared to the same periods of the prior fiscal year resulted from decreased net sales of both office furniture and hospitality furniture. The decline in office furniture sales was due to both decreased sales volumes and higher discounting.  For the first nine months of fiscal year 2010, decreased sales volumes of office furniture more than offset price increases net of higher discounting when compared to the same period of fiscal year 2009. Third quarter and fiscal 2010 year-to-date sales of newly introduced office furniture products which have been sold for less than twelve months approximated $4.5 million and $17.1 million, respectively. Open orders of furniture products at March 31, 2010 declined when compared to the open orders at March 31, 2009 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.

Third quarter fiscal year 2010 Furniture segment gross profit as a percent of net sales declined 1.1 percentage points as compared to the third quarter of fiscal year 2009.  The decline was driven by lower absorption of fixed costs associated with the lower net sales, higher costs related to the Company's retirement plan contribution, and increased discounting due to competitive pricing pressures.  In addition, the favorable impact of a decrease in LIFO inventory reserves resulting primarily from lower LIFO inventory levels was lower in the third quarter of fiscal year 2010 as compared to the third quarter of fiscal year 2009.  Favorable impacts to the current year third quarter including a sales mix shift to higher margin product and other overall cost reduction actions partially mitigated the gross profit decline.

Year-to-date fiscal 2010 Furniture segment gross profit as a percent of net sales improved 1.3 percentage points when compared to the same period of fiscal year 2009. Items contributing to the improved year-to-date gross profit as a percent of net sales included: price increases on select product, lower commodity costs, a sales mix shift to higher margin product, lower employee benefit costs, and other overall cost reduction actions. In addition, the favorable impact of a decrease in LIFO inventory reserves resulting primarily from lower LIFO inventory levels in the fiscal-year-to-date 2010 period was larger than the favorable impact in the fiscal-year-to-date 2009 period. These improvements more than offset the negative impact of the lower volumes on the gross profit percentage, increased costs related to the reinstatement of the Company's retirement plan contribution for fiscal year 2010, 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 year-to-date period of fiscal year 2009.

Third quarter and year-to-date fiscal year 2010 selling and administrative expenses decreased in absolute dollars by 9% and 13%, 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 third quarter fiscal year 2010 selling and administrative expense decline resulted from lower employee salary compensation costs realized from past restructurings and the salary reduction plan implemented by the Company in fiscal year 2009 and lower bad debt expense.  Partially offsetting the lower costs were increased costs related to the reinstatement of the Company's retirement plan contribution and higher incentive costs at select business units and also higher severance costs due to scaling operations.   The year-to-date fiscal 2010 selling and administrative expense decline results from lower labor costs realized from past restructurings and the salary reduction plan, lower bad debt expense, and other improvements resulting from the focus on managing all costs. Partially offsetting the lower costs in the year-to-date period of fiscal year 2010 were increased costs related to the reinstatement of the retirement plan contribution and higher severance expenses due to the scaling of operations. 

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The Furniture segment earnings for the three and nine months ended March 31, 2009 were impacted by the recording of non-cash pre-tax goodwill impairment of $1.8 million.

As a percent of net sales, operating income (loss) was (7.8%) and (2.0%) for the third quarter and year-to-date period of fiscal year 2010, respectively, and (1.3%) and 2.2% for the third quarter and year-to-date period of fiscal year 2009, 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, 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 March 31, 2010 was $186.2 million compared to working capital of $176.2 million at June 30, 2009. The current ratio was 1.8 at both March 31, 2010 and June 30, 2009.

The Company's internal measure of Accounts Receivable performance, also referred to as Days Sales Outstanding (DSO), for the first nine months of fiscal year 2010 of 48.0 days increased from the 47.2 days for the first nine 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 nine months of fiscal year 2010 decreased to 62.7 days from 66.5 days for the first nine months of fiscal year 2009. Inventory levels in the first nine months of fiscal year 2009 were unfavorably impacted by customers delaying near-term requirements during that time period, and the Company has since been working to align inventory levels with the lower sales levels. 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 $152.3 million at March 31, 2010 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.

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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 $57.1 million at March 31, 2010. The Company had no short-term borrowings as of March 31, 2010. Operating activities used $10.5 million of cash flow in the first nine months of fiscal year 2010 compared to the $36.6 million of cash generated by operating activities in the first nine months of fiscal year 2009. During the first nine months of fiscal year 2010 as compared to the first nine months of fiscal year 2009, the negative cash impact of increased accounts receivable and inventory balances to support increased EMS sales were partially offset by increased accounts payable. During the first nine months of fiscal year 2010, the Company reinvested $26.6 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. The Company also had proceeds from the sale of assets of $12.3 million  during the first nine months of fiscal year 2010 primarily related to the sale of the Poland facility which is being replaced by the newly constructed EMS facility also in Poland. The proceeds from the sale of assets during the first nine months of fiscal year 2009 of $48.3 million were primarily related to the sale of the Company's undeveloped land holdings and timberlands. Financing cash flow activities for the first nine months of fiscal year 2010 included $12.2 million payments on the revolving credit facility as the Company opted to pay down the facility to a zero balance.  The Company also had $5.4 million in dividend payments, which was a decrease from the $17.6 million of dividends paid during the first nine 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 the remainder of fiscal year 2010 and 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 recover.

At March 31, 2010, the Company had no 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 likewise had no borrowings under these facilities as of March 31, 2010. At June 30, 2009, the Company had $12.7 million of short-term borrowings outstanding.

At March 31, 2010, the Company had approximately $4.8 million in letters of credit against the $100 million credit facility. Total availability to borrow under the $100 million credit facility was $95.2 million at March 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 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 March 31, 2010.

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.

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Covenant		At or For the Period Ended March 31, 2010		Limit As Specified in Credit Agreement		Excess
Minimum Net Worth		$385,731,000		$362,000,000		$23,731,000
Interest Coverage Ratio		32.4		3.0		29.4

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

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 $8.1 million U.S. dollars at March 31, 2010 exchange rates). These foreign credit facilities can be cancelled at any time by either the bank or the Company.

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 the remainder of fiscal year 2010 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 fiscal year 2010 was hampered by lower sales volumes and could also 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 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.

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 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.

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The Company invested in convertible promissory notes and stock warrants of a privately-held company during fiscal year 2010 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 in process. 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 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.

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 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 March 31, 2010 and June 30, 2009, the reserve for returns and allowances was $3.1 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 March 31, 2010 and June 30, 2009 was $1.9 million and $3.1 million, respectively. 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 at that time.

Excess and obsolete inventory - Inventories were valued using the lower of last-in, first-out (LIFO) cost or market value for approximately 9% and 14% of consolidated inventories at March 31, 2010 and June 30, 2009, respectively, including approximately 80% and 83% of the Furniture segment inventories at March 31, 2010 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 March 31, 2010 and June 30, 2009, the Company's accrued liabilities for self-insurance exposure were $4.4 million and $6.5 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 $3.5 million at both March 31, 2010 and June 30, 2009.

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 March 31, 2010 and June 30, 2009, the Company's goodwill, net of accumulated impairment losses, 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.

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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 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, 2009.

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 March 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 March 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 third quarter of fiscal year 2010. At March 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)

(10) Form of Employment Agreement dated March 8, 2010 between the Company and each of Donald W. Van Winkle and Stanley C. Sapp and dated May 1, 2006 between the Company and each of James C. Thyen, Douglas A. Habig, Robert F. Schneider, Donald D. Charron, John H. Kahle and Gary W. Schwartz (Incorporated by reference to Exhibit 10(c) to the Company's Form 10-Q for the period ended March 31, 2006)

(11)  Computation of Earnings Per Share

(18)  Preferability letter dated May 6, 2010 regarding change in classification of interest and penalties on uncertain tax positions

(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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