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KIMBALL INTERNATIONAL INC - Quarter Report: 2012 December (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number    0-3279
KIMBALL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Indiana
 
35-0514506
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
1600 Royal Street, Jasper, Indiana
 
47549-1001
(Address of principal executive offices)
 
(Zip Code)
(812) 482-1600
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes  x    No o

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

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

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

The number of shares outstanding of the Registrant's common stock as of January 17, 2013 was:
Class A Common Stock - 8,265,089 shares
Class B Common Stock - 29,814,849 shares



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

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

 
December 31,
2012
 
June 30,
2012
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
88,091

 
$
75,197

Receivables, net of allowances of $1,623 and $1,367, respectively
127,543

 
139,467

Inventories
137,306

 
117,681

Prepaid expenses and other current assets
38,511

 
44,636

Assets held for sale
1,709

 
1,709

Total current assets
393,160

 
378,690

Property and Equipment, net of accumulated depreciation of $366,592 and $357,808, respectively
188,853

 
186,099

Goodwill
2,529

 
2,480

Other Intangible Assets, net of accumulated amortization of $66,977 and $65,824, respectively
5,703

 
6,206

Other Assets
23,072

 
22,041

Total Assets
$
613,317

 
$
595,516

 
 
 
 
LIABILITIES AND SHARE OWNERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt
$
17

 
$
14

Accounts payable
144,777

 
137,423

Dividends payable
1,862

 
1,843

Accrued expenses
46,305

 
48,460

Total current liabilities
192,961

 
187,740

Other Liabilities:
 
 
 
Long-term debt, less current maturities
268

 
273

Other
23,143

 
21,275

Total other liabilities
23,411

 
21,548

Share Owners' Equity:
 
 
 
Common stock-par value $0.05 per share:
 
 
 
Class A - Shares authorized: 50,000,000
               Shares issued: 12,151,000 and 14,359,000, respectively
607

 
718

Class B - Shares authorized: 100,000,000
               Shares issued: 30,873,000 and 28,666,000, respectively
1,544

 
1,433

Additional paid-in capital
1,627

 
635

Retained earnings
455,943

 
452,093

Accumulated other comprehensive loss
(1,195
)
 
(4,963
)
Less: Treasury stock, at cost:

 

Class A - 3,843,000 and 4,020,000 shares, respectively
(47,152
)
 
(49,235
)
Class B - 1,102,000 and 1,104,000 shares, respectively
(14,429
)
 
(14,453
)
Total Share Owners' Equity
396,945

 
386,228

Total Liabilities and Share Owners' Equity
$
613,317

 
$
595,516

See Notes to Condensed Consolidated Financial Statements

3


KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
 
2012
 
2011
 
2012
 
2011
Net Sales
$
295,136

 
$
296,904

 
$
583,326

 
$
567,539

Cost of Sales
239,979

 
242,584

 
472,964

 
466,249

Gross Profit
55,157

 
54,320

 
110,362

 
101,290

Selling and Administrative Expenses
49,006

 
48,597

 
97,244

 
94,565

Restructuring Expense
31

 
1,480

 
91

 
1,593

Operating Income
6,120

 
4,243

 
13,027

 
5,132

Other Income (Expense):
 
 
 
 
 
 
 
Interest income
121

 
100

 
231

 
220

Interest expense
(8
)
 
(7
)
 
(15
)
 
(16
)
Non-operating income (expense), net
(1,470
)
 
1,349

 
(1,286
)
 
36

Other income (expense), net
(1,357
)
 
1,442

 
(1,070
)
 
240

Income Before Taxes on Income
4,763

 
5,685

 
11,957

 
5,372

Provision for Income Taxes
584

 
2,488

 
2,817

 
2,321

Net Income 
$
4,179

 
$
3,197

 
$
9,140

 
$
3,051

 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock:
 

 
 

 
 
 
 
Basic Earnings Per Share:
 

 
 

 
 
 
 
Class A
$
0.11

 
$
0.08

 
$
0.23

 
$
0.07

Class B
$
0.11

 
$
0.09

 
$
0.24

 
$
0.08

Diluted Earnings Per Share:
 
 
 
 
 
 
 
Class A
$
0.11

 
$
0.08

 
$
0.22

 
$
0.07

Class B
$
0.11

 
$
0.09

 
$
0.24

 
$
0.08

 
 
 
 
 
 
 
 
Dividends Per Share of Common Stock:
 
 
 
 
 
 
 
Class A
$
0.045

 
$
0.045

 
$
0.090

 
$
0.090

Class B
$
0.050

 
$
0.050

 
$
0.100

 
$
0.100

 
 
 
 
 
 
 
 
Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Class A and B Common Stock:
 
 
 
 
 
 
 
Basic
38,077

 
37,891

 
38,047

 
37,863

Diluted
38,295

 
37,979

 
38,469

 
37,973

See Notes to Condensed Consolidated Financial Statements


4


KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
 
Three Months Ended
 
Three Months Ended
 
December 31, 2012
 
December 31, 2011
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
4,179

 
 
 
 
 
$
3,197

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
2,013

 
$
(120
)
 
$
1,893

 
$
(2,971
)
 
$
(191
)
 
$
(3,162
)
Postemployment severance actuarial change
282

 
(112
)
 
170

 
387

 
(155
)
 
232

Derivative gain (loss)
(106
)
 
39

 
(67
)
 
240

 
(39
)
 
201

Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
(707
)
 
186

 
(521
)
 
752

 
(232
)
 
520

Amortization of prior service costs
72

 
(29
)
 
43

 
72

 
(29
)
 
43

Amortization of actuarial change
80

 
(32
)
 
48

 
243

 
(97
)
 
146

Other comprehensive income (loss)
$
1,634

 
$
(68
)
 
$
1,566

 
$
(1,277
)
 
$
(743
)
 
$
(2,020
)
Total comprehensive income
 
 
 
 
$
5,745

 
 
 
 
 
$
1,177

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
Six Months Ended
 
December 31, 2012
 
December 31, 2011
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
9,140

 
 
 
 
 
$
3,051

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
3,120

 
$
(187
)
 
$
2,933

 
$
(8,525
)
 
$
2,016

 
$
(6,509
)
Postemployment severance actuarial change
696

 
(277
)
 
419

 
1,027

 
(409
)
 
618

Derivative gain (loss)
1,295

 
(322
)
 
973

 
(2,200
)
 
819

 
(1,381
)
Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
—

 
—

 
—

 
(493
)
 
—

 
(493
)
Derivatives
(967
)
 
221

 
(746
)
 
716

 
(189
)
 
527

Amortization of prior service costs
143

 
(57
)
 
86

 
143

 
(57
)
 
86

Amortization of actuarial change
172

 
(69
)
 
103

 
503

 
(201
)
 
302

Other comprehensive income (loss)
$
4,459

 
$
(691
)
 
$
3,768

 
$
(8,829
)
 
$
1,979

 
$
(6,850
)
Total comprehensive income (loss)
 
 
 
 
$
12,908

 
 
 
 
 
$
(3,799
)
See Notes to Condensed Consolidated Financial Statements


5


KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
 
(Unaudited)
 
Six Months Ended
 
December 31
 
2012
 
2011
Cash Flows From Operating Activities:
 
 
 
Net income
$
9,140

 
$
3,051

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
15,143

 
15,548

(Gain) loss on sales of assets
(26
)
 
90

Restructuring
—

 
15

Deferred income tax and other deferred charges
(1,448
)
 
757

Stock-based compensation
2,176

 
566

Excess tax benefits from stock-based compensation
(567
)
 
(42
)
Other, net
2,039

 
525

Change in operating assets and liabilities:
 
 
 
Receivables
13,021

 
(7,747
)
Inventories
(18,776
)
 
10,585

Prepaid expenses and other current assets
6,601

 
2,159

Accounts payable
4,438

 
(5,955
)
Accrued expenses
(1,779
)
 
(18,367
)
Net cash provided by operating activities
29,962

 
1,185

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(13,337
)
 
(16,760
)
Proceeds from sales of assets
293

 
2,058

Purchases of capitalized software
(627
)
 
(723
)
Other, net
277

 
45

Net cash used for investing activities
(13,394
)
 
(15,380
)
Cash Flows From Financing Activities:
 
 
 
Payments on long-term debt
(2
)
 
(11
)
Dividends paid to Share Owners
(3,705
)
 
(3,677
)
Excess tax benefits from stock-based compensation
567

 
42

Repurchase of employee shares for tax withholding
(870
)
 
(320
)
Net cash used for financing activities
(4,010
)
 
(3,966
)
Effect of Exchange Rate Change on Cash and Cash Equivalents
336

 
(1,651
)
Net Increase (Decrease) in Cash and Cash Equivalents
12,894

 
(19,812
)
Cash and Cash Equivalents at Beginning of Period
75,197

 
51,409

Cash and Cash Equivalents at End of Period
$
88,091

 
$
31,597

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
883

 
$
1,063

Interest expense
$
29

 
$
31

See Notes to Condensed Consolidated Financial Statements

6


KIMBALL INTERNATIONAL, INC.
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. (the "Company," "Kimball," "we," us," or "our") have been prepared in accordance with the instructions to Form 10-Q. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. 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 our latest annual report on Form 10-K.
Notes Receivable and Trade Accounts Receivable:
Kimball's notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.
Our 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. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for credit losses on the trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Our limited number of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses.
Non-operating Income (Expense), net:
The non-operating income (expense), net line item 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, investment gain or loss, non-production rent income, bank charges, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain (loss) on SERP investments is 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
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands)
2012
 
2011
 
2012
 
2011
Foreign Currency/Derivative Gain (Loss)
$
(124
)
 
$
378

 
$
(516
)
 
$
1,152

Gain (Loss) on Supplemental Employee Retirement Plan Investments
283

 
1,087

 
986

 
(875
)
Impairment Loss on Privately-Held Investment
(735
)
 
—

 
(735
)
 
—

Loss on Stock Warrants
(751
)
 
(11
)
 
(752
)
 
(41
)
Other
(143
)
 
(105
)
 
(269
)
 
(200
)
Non-operating income (expense), net
$
(1,470
)
 
$
1,349

 
$
(1,286
)
 
$
36

 Income Taxes:
In determining the quarterly provision for income taxes, Kimball 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 we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.

7


Our effective tax rate was 12.3% and 23.6%, respectively, for the three and six months ended December 31, 2012, as compared to 43.8% and 43.2%, respectively, for the three and six months ended December 31, 2011. The effective tax rate was favorably impacted by earnings in foreign jurisdictions which have a lower statutory tax rate than the U.S. in both the three and six months ended December 31, 2012. The effective tax rate for the three and six months ended December 31, 2011 included unfavorable net tax accrual adjustments of $0.4 million and $0.6 million, respectively.

New Accounting Standard:
In June 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminated the option to present the components of other comprehensive income as part of the Statement of Share Owners' Equity. Instead, we must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The guidance became effective for our first quarter fiscal year 2013 financial statements on a retrospective basis. As this guidance only amended the presentation of the components of comprehensive income, the adoption did not impact our consolidated financial position, results of operations, or cash flows.

Note 2. Inventories
Inventory components were as follows:
(Amounts in Thousands)
December 31, 2012
 
June 30,
2012
Finished products
$
39,783

 
$
26,552

Work-in-process
13,241

 
12,582

Raw materials
96,693

 
91,105

Total FIFO inventory
$
149,717

 
$
130,239

LIFO reserve
(12,411
)
 
(12,558
)
Total inventory
$
137,306

 
$
117,681

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. LIFO inventory liquidations during the three and six month periods ended December 31, 2012 were immaterial. During the three and six month periods ended December 31, 2011, LIFO inventory liquidations increased net income by, in thousands, $264 and $280, respectively.

Note 3. Segment Information
Management organizes Kimball 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, 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.

8


Unallocated corporate assets include cash and cash equivalents, 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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.
 
Three Months Ended
 
 
Six Months Ended
 
 
December 31
 
 
December 31
 
(Amounts in Thousands) 
2012
 
 
2011
 
 
2012
 
 
2011
 
Net Sales:
 

 
 
 

 
 
 

 
 
 

 
Electronic Manufacturing Services
$
164,181

 
 
$
148,112

 
 
$
328,356

 
 
$
290,940

 
Furniture
130,955

 
 
148,792

 
 
254,970

 
 
276,599

 
Consolidated
$
295,136

 
 
$
296,904

 
 
$
583,326

 
 
$
567,539

 
Net Income (Loss):
 

 
 
 

 
 
 

 
 
 

 
Electronic Manufacturing Services
$
3,932

 
 
$
315

 
 
$
7,215

 
 
$
(788
)
 
Furniture
1,504

 
 
3,438

 
 
3,172

 
 
4,613

 
Unallocated Corporate and Eliminations
(1,257
)
 
 
(556
)
 
 
(1,247
)
 
 
(774
)
 
Consolidated
$
4,179

(1)
 
$
3,197

(2)
 
$
9,140

(1)
 
$
3,051

(2)

(1)
Net Income (Loss) included after-tax restructuring charges, in thousands, of $19 and $55 in the three and six months ended December 31, 2012, respectively. The EMS segment recorded, in the three and six months ended December 31, 2012, in thousands, $18 and $57 of after-tax restructuring charges, respectively, with the negligible remaining amount recorded in Unallocated Corporate and Eliminations. The Furniture segment did not record restructuring during the three and six months ended December 31, 2012. See Note 5 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion. 
(2)
Net Income (Loss) included after-tax restructuring charges, in thousands, of $890 and $958 in the three and six months ended December 31, 2011, respectively. The EMS segment recorded, in the three and six months ended December 31, 2011, in thousands, $874 and $931 of after-tax restructuring charges, respectively. Unallocated Corporate and Eliminations recorded, in the three and six months ended December 31, 2011, in thousands, $16 and $27 of after-tax restructuring charges, respectively. The Furniture segment did not record restructuring during the three and six months ended December 31, 2011. See Note 5 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion.

(Amounts in Thousands)
December 31,
2012
 
June 30,
2012
Total Assets:
 
 
 
Electronic Manufacturing Services
$
338,353

 
$
332,115

Furniture
183,933

 
183,415

Unallocated Corporate and Eliminations
91,031

 
79,986

Consolidated
$
613,317

 
$
595,516


Note 4. 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 Kimball's failure to pay its obligations to a beneficiary. As of December 31, 2012, we had a maximum financial exposure from unused standby letters of credit totaling $4.3 million. We are not aware of circumstances that would require us to perform under any of these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our consolidated financial statements. Accordingly, no liability has been recorded as of December 31, 2012 with respect to the standby letters of credit. Kimball also enters into commercial letters of credit to facilitate payments to vendors and from customers.
We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability in cases where specific warranty issues become known.

9


Changes in the product warranty accrual for the six months ended December 31, 2012 and 2011 were as follows:
 
Six Months Ended
 
December 31
(Amounts in Thousands)
2012
 
2011
Product Warranty Liability at the beginning of the period
$
2,251

 
$
2,109

Additions to warranty accrual (including changes in estimates)
511

 
285

Settlements made (in cash or in kind)
(441
)
 
(494
)
Product Warranty Liability at the end of the period
$
2,321

 
$
1,900


Note 5. Restructuring Expense
We recognized an immaterial amount of pre-tax restructuring charges in the second quarter and year-to-date periods of fiscal year 2013, which was primarily related to the EMS Fremont and Gaylord restructuring plans. These plans were substantially completed prior to fiscal year 2013 but continue to incur miscellaneous exit costs related the facility closures. We do not expect these plans to have a significant amount of restructuring charges in the future.
During the second quarter and year-to-date periods of fiscal year 2012, we recognized $1.5 million and $1.6 million of pre-tax restructuring charges, respectively. Second quarter and fiscal year-to-date 2012 charges primarily included plant closure charges related to the EMS Fremont restructuring plan, and employee transition and plant closure expenses related to the EMS European Consolidation Plan which was completed in fiscal year 2012.
Restructuring charges are included in the Restructuring Expense line item of our Condensed Consolidated Statements of Income.
Accrued restructuring at December 31, 2012 and June 30, 2012 of $0.2 million and $0.3 million, respectively, was recorded in current liabilities. Accrued restructuring is related to the remaining lease payments due for the EMS Fremont facility.
For more information on these restructuring plans, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Note 6. Fair Value
Kimball categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
•
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
•
Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•
Level 3: Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.
Our policy is to recognize transfers between these levels as of the end of each quarterly reporting period. There were no transfers between these levels during the six months ended December 31, 2012. There were also no changes in the inputs or valuation techniques used to measure fair values compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

10


Financial Instruments Recognized at Fair Value:
The following methods and assumptions were used to measure fair value:
Financial Instrument
 
Level
 
Valuation Technique/Inputs Used
Cash Equivalents
 
1
 
Market - Quoted market prices
Derivative Assets: Foreign exchange contracts
 
2
 
Market - Based on observable market inputs using standard calculations, such as time value, forward interest rate yield curves, and current spot rates, considering counterparty credit risk
Derivative Assets: Stock warrants
 
3
 
Market - Based on a probability-weighted Black-Scholes option pricing model with the following inputs (level 3 input values indicated in parenthesis): risk-free interest rate (0.14%), historical stock price volatility (103.8%) and weighted average expected term (6 months). Enterprise value was estimated using a discounted cash flow calculation.

Stock warrants are revalued and analyzed for reasonableness on a quarterly basis. The level 3 inputs used are the standard inputs used in the Black-Scholes model. Input values are based on publicly available information (Federal Reserve interest rates) and internally-developed information (historical stock price volatility of comparable investments) and remaining expected term of warrants.
  
Significant increases (decreases) in the historical stock price volatility, expected life, and enterprise value in isolation would result in a significantly higher (lower) fair value measurement. The inputs do not have any interrelationships.
Trading securities: Mutual funds held by nonqualified supplemental employee retirement plan
 
1
 
Market - Quoted market prices
Derivative Liabilities: Foreign exchange contracts
 
2
 
Market - Based on observable market inputs using standard calculations, such as time value, forward interest rate yield curves, and current spot rates adjusted for Kimball's non-performance risk



11


Recurring Fair Value Measurements:
As of December 31, 2012 and June 30, 2012, the fair values of financial assets and liabilities that are measured at fair value on a recurring basis using the market approach are categorized as follows:
 
December 31, 2012
(Amounts in Thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
57,000

 
$
—

 
$
—

 
$
57,000

Derivatives: Foreign exchange contracts
—

 
1,054

 
—

 
1,054

Derivatives: Stock warrants
—

 
—

 
158

 
158

Trading Securities: Mutual funds held by nonqualified supplemental employee retirement plan
18,356

 
—

 
—

 
18,356

Total assets at fair value
$
75,356

 
$
1,054

 
$
158

 
$
76,568

Liabilities
 

 
 

 
 

 
 

Derivatives: Foreign exchange contracts
$
—

 
$
1,350

 
$
—

 
$
1,350

Total liabilities at fair value
$
—

 
$
1,350

 
$
—

 
$
1,350

 
 

 
 

 
 

 
 

 
June 30, 2012
(Amounts in Thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Derivatives: Foreign exchange contracts
$
—

 
$
2,278

 
$
—

 
$
2,278

Derivatives: Stock warrants
—

 
—

 
911

 
911

Trading Securities: Mutual funds held by nonqualified supplemental employee retirement plan
16,922

 
—

 
—

 
16,922

Total assets at fair value
$
16,922

 
$
2,278

 
$
911

 
$
20,111

Liabilities
 

 
 

 
 

 
 

Derivatives: Foreign exchange contracts
$
—

 
$
799

 
$
—

 
$
799

Total liabilities at fair value
$
—

 
$
799

 
$
—

 
$
799

Kimball currently holds non-marketable equity securities and stock warrants of a privately-held company. The investment in non-marketable equity securities is accounted for as a cost-method investment and is described in the Financial Instruments Not Carried At Fair Value section that follows. During the second quarter of fiscal year 2013, we identified certain events and changes in circumstances that had a significant adverse effect on the fair value of the investment in the privately-held company. As a result, the equity securities were revalued, resulting in an impairment loss of $0.7 million on the equity securities and a $0.8 million derivative loss on the stock warrants during the quarter.
No purchases or sales of Level 3 assets occurred during the six months ended December 31, 2012 and 2011.
The nonqualified supplemental employee retirement plan (SERP) assets consist primarily of equity funds, balanced funds, a bond fund, and a money market fund. The SERP investment assets are exactly offset by a SERP liability which represents Kimball's obligation to distribute SERP funds to participants. See Note 8 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.
Non-Recurring Fair Value Measurements:
As referred to above, our investment in non-marketable equity securities of a privately-held company was revalued during the second quarter of fiscal year 2013, resulting in an impairment loss. The investment in non-marketable equity securities is accounted for as a cost-method investment and is described in the Financial Instruments Not Carried At Fair Value section that follows.

12


Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include the following:
Financial Instrument
 
Level
 
Valuation Technique/Inputs Used
Notes receivable
 
2
 
Market - Price approximated based on the assumed collection of receivables in the normal course of business, taking into account the customer's non-performance risk
Non-marketable equity securities (cost-method investments, which carry shares at cost except in the event of impairment)
 
3
 
Cost Method, with Impairment Recognized Using a Market-Based Valuation Technique - See the explanation below the table regarding the method used to periodically estimate the fair value of cost-method investments.

For the impairment recognized in the second quarter of 2013, the valuation was based on a probability-weighted Black-Scholes option pricing model with the following inputs (level 3 input values indicated in parenthesis): risk-free interest rate (0.14%), historical stock price volatility (103.8%) and weighted average expected term (6 months). Enterprise value was estimated using a discounted cash flow calculation.

The level 3 inputs used are the standard inputs used in the Black-Scholes model. Input values are based on publicly available information (Federal Reserve interest rates) and internally-developed information (historical stock price volatility of comparable investments) and remaining expected holding period of securities.
  
Significant increases (decreases) in the historical stock price volatility, expected life, and enterprise value in isolation would result in a significantly higher (lower) fair value measurement. The inputs do not have any interrelationships.
Long-term debt (carried at amortized cost)
 
3
 
Income - Price estimated using a discounted cash flow analysis based on quoted long-term debt market rates, taking into account Kimball's non-performance risk

Investments in non-marketable equity securities are accounted for using the cost method if Kimball does not have the ability to exercise significant influence over the operating and financial policies of the investee. On a periodic basis, but no less frequently than quarterly, these investments are assessed for impairment when there are events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. If a significant adverse effect on the fair value of the investment has occurred and is deemed to be other-than-temporary, the fair value of the investment is estimated, and the amount by which the carrying value of the cost-method investment exceeds its fair value is recorded as an impairment loss.

The carrying value of our short-term financial instruments, including cash deposit accounts, trade accounts receivable, prepaid and deposit accounts, trade accounts payable, accrued expenses and dividends payable, approximate fair value due to the relatively short maturity and immaterial non-performance risk of such instruments. These financial instruments are categorized as Level 2 financial instruments.


13


Note 7. Derivative Instruments
Foreign Exchange Contracts:
We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of business. Our primary means of managing this exposure is to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques do not fully offset currency risk, we use derivative instruments with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure is committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments are only utilized for risk management purposes and are not used for speculative or trading purposes.
We use forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency. Foreign exchange contracts are also used to hedge against foreign currency exchange rate risks related to intercompany balances denominated in currencies other than the functional currencies. As of December 31, 2012, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $23.9 million and to hedge currencies against the Euro in the aggregate notional amount of 40.7 million EUR. The notional amounts are indicators of the volume of derivative activities but are not indicators of the potential gain or loss on the derivatives.
In limited cases due to unexpected changes in forecasted transactions, cash flow hedges may cease to meet the criteria to be designated as cash flow hedges. Depending on the type of exposure hedged, we may either purchase a derivative contract in the opposite position of the undesignated hedge or may retain the hedge until it matures if the hedge continues to provide an adequate offset in earnings against the currency revaluation impact of foreign currency denominated liabilities.
The fair value of outstanding derivative instruments is recognized on the balance sheet as a derivative asset or liability. When derivatives are settled with the counterparty, the derivative asset or liability is relieved and cash flow is impacted for the net settlement. For derivative instruments that meet the criteria of hedging instruments under FASB guidance, the effective portions of the gain or loss on the derivative instrument are initially recorded net of related tax effect in Accumulated Other Comprehensive Loss, a component of Share Owners' Equity, and are subsequently reclassified into earnings in the period or periods during which the hedged transaction is recognized in earnings. The ineffective portion of the derivative gain or loss is reported in the Non-operating income (expense), net line item on the Condensed Consolidated Statements of Income immediately. The gain or loss associated with derivative instruments that are not designated as hedging instruments or that cease to meet the criteria for hedging under FASB guidance is also reported in the Non-operating income (expense), net line item on the Condensed Consolidated Statements of Income immediately.
Based on fair values as of December 31, 2012, we estimate that $0.4 million of pre-tax derivative gains deferred in Accumulated Other Comprehensive Loss will be reclassified into earnings, along with the earnings effects of related forecasted transactions, within the next 12 months. Gains on foreign exchange contracts are generally offset by losses in operating income in the income statement when the underlying hedged transaction is recognized in earnings. Because gains or losses on foreign exchange contracts fluctuate partially based on currency spot rates, the future effect on earnings of the cash flow hedges alone is not determinable, but in conjunction with the underlying hedged transactions, the result is expected to be a decline in currency risk. The maximum length of time we had hedged our exposure to the variability in future cash flows was 12 months as of both December 31, 2012 and June 30, 2012.
 
Stock Warrants:
Kimball holds common stock warrants which provide the right to purchase a privately-held company's equity securities at a specified exercise price. Specifically, we hold stock warrants to purchase 13,750,000 shares of common stock at a $0.15 per share exercise price. The value of the stock warrants fluctuates primarily in relation to the value of the privately-held company's underlying securities, either providing an appreciation in value or potentially expiring with no value. The stock warrants expire in June 2017.
During the second quarter of fiscal year 2013, we identified certain events and changes in circumstances that had a significant adverse effect on the fair value of the common stock warrants. As a result, the warrants were revalued, resulting in a $0.8 million derivative loss on the stock warrants during the quarter. Gains and losses on the revaluation of stock warrants are recognized in the Non-operating income (expense), net line item on the Condensed Consolidated Statements of Income.

14


See Note 6 - Fair Value of Notes to Condensed Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and the Condensed Consolidated Statements of Comprehensive Income for the changes in deferred derivative gains and losses.
Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets and derivative gains and losses in the Condensed Consolidated Statements of Income are presented below.

Fair Values of Derivative Instruments on the Condensed Consolidated Balance Sheets
 
Asset Derivatives
 
Liability Derivatives
(Amounts in Thousands)
 
Fair Value As of
 
 
 
Fair Value As of
 
Balance Sheet Location
 
December 31,
2012
 
June 30,
2012
 
Balance Sheet Location
 
December 31,
2012
 
June 30,
2012
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expenses and other current assets
 
$
1,054

 
$
1,058

 
Accrued expenses
 
$
551

 
$
799

 
 
 
 

 
 

 
 
 
 

 
 

Derivatives not designated as hedging instruments:
 
 

 
 
 
 

 
 

Foreign exchange contracts
Prepaid expenses and other current assets
 
—

 
1,220

 
Accrued expenses
 
799

 
—

Stock warrants
Other assets (long-term)
 
158

 
911

 
 
 
 

 
 

Total derivatives
 
 
$
1,212

 
$
3,189

 
 
 
$
1,350

 
$
799



The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 31
 
December 31
(Amounts in Thousands)
 
 
 
2012
 
2011
 
2012
 
2011
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives (Effective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
$
(106
)
 
$
240

 
$
1,295

 
$
(2,200
)


15


The Effect of Derivative Instruments on Condensed Consolidated Statements of Income
 
 
 
 
Three Months Ended
 
Six Months Ended
(Amounts in Thousands)
 
 
 
December 31
 
December 31
Derivatives in Cash Flow Hedging Relationships
 
Location of Gain or (Loss) 
 
2012
 
2011
 
2012
 
2011
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Cost of Sales
 
$
814

 
$
(797
)
 
$
1,169

 
$
(833
)
Foreign exchange contracts
 
Non-operating income (expense)
 
(107
)
 
45

 
(199
)
 
117

Total
 
 
 
$
707

 
$
(752
)
 
$
970

 
$
(716
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income (Ineffective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Non-operating income (expense)
 
$
—

 
$
—

 
$
(3
)
 
$
—

 
 
 
 
 

 
 

 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 

 
 

 
 
 
 
Amount of Pre-Tax Gain or (Loss) Recognized in Income on Derivatives:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Non-operating income (expense)
 
$
(365
)
 
$
814

 
$
(561
)
 
$
2,109

Stock warrants
 
Non-operating income (expense)
 
(751
)
 
(11
)
 
(752
)
 
(41
)
Total
 
 
 
$
(1,116
)
 
$
803

 
$
(1,313
)
 
$
2,068

 
 
 
 
 

 
 

 
 
 
 
Total Derivative Pre-Tax Gain (Loss) Recognized in Income
 
$
(409
)
 
$
51

 
$
(346
)
 
$
1,352


Note 8. Investments
Non-marketable Equity Securities:
Kimball currently holds non-marketable equity securities of a privately-held company. During the second quarter of fiscal year 2013, we identified certain events and changes in circumstances that had a significant adverse effect on the fair value of this investment. As a result, the equity securities were revalued and we recorded a $0.7 million impairment loss during the quarter. The equity securities had a carrying value of $0.4 million and $1.1 million as of December 31, 2012 and June 30, 2012, respectively.
The non-marketable equity securities are included in the Other Assets line of the Condensed Consolidated Balance Sheets. See Note 6 - Fair Value of Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities. The investment does not rise to the level of a material variable interest or a controlling interest in the privately-held company which would require consolidation.

16


Supplemental Employee Retirement Plan Investments:
Kimball maintains a self-directed supplemental employee retirement plan (SERP) for executive employees. The SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. Kimball recognizes SERP investment assets on the balance sheet at current fair value. A SERP liability of the same amount is recorded on the balance sheet representing an obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income in the Other Income (Expense) category. Adjustments made to revalue the SERP liability are also recognized in income as selling and administrative expenses and exactly offset valuation adjustments on SERP investment assets. The change in net unrealized holding gains (losses) for the six months ended December 31, 2012 and 2011 was, in thousands, $446, and $(1,207), respectively. SERP asset and liability balances were as follows:
(Amounts in Thousands)
December 31
2012
 
June 30
2012
SERP investment - current asset
$
6,466

 
$
5,899

SERP investment - other long-term asset
11,890

 
11,023

    Total SERP investment
$
18,356

 
$
16,922

 
 
 
 
SERP obligation - current liability
$
6,466

 
$
5,899

SERP obligation - other long-term liability
11,890

 
11,023

    Total SERP obligation
$
18,356

 
$
16,922


Note 9. Assets Held for Sale
At both December 31, 2012 and June 30, 2012, in thousands, assets totaling $1,709 were classified as held for sale and consisted of $588 for a facility and land related to the Gaylord, Michigan exited operation within the EMS segment and $1,121 for an idle Furniture segment manufacturing facility and land located in Jasper, Indiana. The Gaylord, Michigan facility and land were reported as unallocated corporate assets for segment reporting purposes. The idle Jasper, Indiana manufacturing facility and land were reported as Furniture segment assets for segment reporting purposes.

Note 10. Postemployment Benefits
Kimball 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 our severance plans were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands)
2012
 
2011
 
2012
 
2011
Service cost
$
192

 
$
199

 
$
392

 
$
405

Interest cost
48

 
50

 
98

 
101

Amortization of prior service costs
72

 
72

 
143

 
143

Amortization of actuarial (gain) loss
80

 
243

 
172

 
503

Net periodic benefit cost
$
392

 
$
564

 
$
805

 
$
1,152


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


17


Note 11. Stock Compensation Plan
During fiscal year 2013, the following stock compensation was awarded to officers and key employees. All awards were granted under the 2003 Stock Option and Incentive Plan. For more information on similar performance share awards, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.
Performance Shares
 
Quarter Awarded
 
Shares
 
Grant Date Fair Value (4)
Annual Performance Shares – Class A (1)
 
1st Quarter
 
244,000

 

$10.92

Long-Term Performance Shares – Class A (2)
 
1st Quarter
 
437,800

 

$10.92

 
 
 
 
 
 
 
Unrestricted Shares
 
Quarter Awarded
 
Shares
 
Grant Date Fair Value (4)
Unrestricted Shares (Director Compensation) – Class B (3)
 
1st Quarter
 
1,843

 

$11.40



(1)
Annual performance shares were awarded to officers. Payouts will be based upon the fiscal year 2013 cash incentive payout percentages calculated under Kimball'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 Kimball'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 target 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.

Note 12. Variable Interest Entities
Kimball's involvement with variable interest entities (VIEs) is limited to situations in which we are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the VIE's economic performance. Thus, consolidation is not required.
We are involved with VIEs consisting of an investment in common stock and stock warrants of a privately-held company, a note receivable related to the sale of an Indiana facility, and notes receivable resulting from loans provided to an electronics engineering services firm. Kimball also has a business development cooperation agreement with the electronic engineering services firm. For information related to our investment in the privately-held company, see Note 8 - Investments and Note 7 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements. The combined carrying value of the notes receivable was $2.3 million and $2.6 million as of December 31, 2012 and June 30, 2012, respectively, with no reserve, and with the short-term portion recorded on the Receivables line and the long-term portion recorded on the Other Assets line of our Condensed Consolidated Balance Sheet.
We have no obligation to provide additional funding to the VIEs, and thus our exposure and risk of loss related to the VIEs is limited to the carrying value of the investments and notes receivable. Kimball did not provide additional financial support to the VIEs during the quarter ended December 31, 2012.


18


Note 13. Credit Quality and Allowance for Credit Losses of Notes Receivable

Kimball monitors credit quality and associated risks of notes receivable on an individual basis based on criteria such as financial stability of the party and collection experience in conjunction with general economic and market conditions. We hold collateral for the note receivable from the sale of an Indiana facility thereby mitigating the risk of loss. As of December 31, 2012 and June 30, 2012, there were no material past due outstanding notes receivable.
 
As of December 31, 2012
 
As of June 30, 2012
(Amounts in Thousands)
Unpaid Balance
 
Related Allowance
 
Receivable Net of Allowance
 
Unpaid Balance
 
Related Allowance
 
Receivable Net of Allowance
Note Receivable from Sale of Indiana Facility
$
1,411

 
$
—

 
$
1,411

 
$
1,409

 
$
—

 
$
1,409

Notes Receivable from an Electronics Engineering Services Firm
876

 
—

 
876

 
1,221

 
—

 
1,221

Other Notes Receivable
193

 
160

 
33

 
322

 
214

 
108

Total
$
2,480

 
$
160

 
$
2,320

 
$
2,952

 
$
214

 
$
2,738


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Kimball International, Inc. (the "Company," "Kimball," "we," us," or "our") 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, and public safety industries. The Furniture segment provides furniture for the office and hospitality industries, sold under Kimball's family of brand names.
Volatility in the macroeconomic environment and mixed signals from key economic indicators continue to drive uncertainty. The European debt crisis and the looming U.S. debt ceiling and potential spending cuts are also weighing on the economy. The uncertainty has the tendency to cause disruption in business strategy, execution, and timing in many of the markets in which we compete.
Various EMS industry reports project growth of 5% to 12% for calendar year 2013 over calendar year 2012. Kimball's focus is on the four key vertical markets of medical, automotive, industrial, and public safety within our EMS segment. Our EMS segment's overall sense is that of moderate growth, but with mixed demand. The automotive end market is benefiting from relative strength in the U.S. market and an uptick in the Chinese automotive market, while demand in other geographies such as Europe continues to be less certain due to the impact of the European debt crisis. The industrial market demand is improving but continues to reflect a lower demand for heating, cooling, and ventilation (HVAC) products than historical levels.  Demand in the medical and public safety markets remains stable.
As of November 2012, the Business and Institutional Furniture Manufacturer Association (BIFMA) forecasted a year-over-year increase in the office furniture industry for calendar year 2013 of 4%. The hospitality furniture market forecasts (November 2012 PricewaterhouseCoopers LLP report and December 2012 PKF Hospitality Research report) project an increase in occupancy rates of 1.0% and an increase in RevPAR (Revenue Per Available Room) of 5% to 6% for calendar year 2013.
Competitive pricing pressures continue to burden the operating margins of select areas within both segments of our operations.
We are committed to ensuring that we sustain the cost efficiencies and process improvements undertaken during the recession. In addition, a long-standing component of Kimball's profit sharing incentive bonus plan is that it is linked to our worldwide, group, or business unit performance which adjusts compensation expense as profits change. The focus on cost control continues. At the same time, we plan to continue to invest in capital expenditures prudently for projects in support of both organic growth and potential acquisitions that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability. We also continue to closely monitor market changes and our liquidity in order to proactively adjust our operating costs, discretionary capital spending, and dividend levels as needed. Managing working capital in conjunction with fluctuating demand levels is likewise key.

19


We continued to maintain a strong balance sheet as of December 31, 2012, which included minimal long-term debt of $0.3 million and Share Owners' equity of $396.9 million. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our revolving credit facility, was $158.8 million at December 31, 2012.
In addition to the above discussion related to the current market conditions, management currently considers the following events, trends, and uncertainties to be most important to understanding Kimball's financial condition and operating performance:
•
Inflation has moderated and does not appear to be a significant risk in the near-term, but we continue to focus on mitigating the impact of raw material commodity pricing pressures.
•
The healthcare reform legislation that was signed into law in March 2010 and upheld by the Supreme Court in June 2012 is expected to increase our healthcare and related administrative expenses as the provisions of the law become effective over the next couple of years.
•
Globalization continues to reshape not only the industries in which we operate but also our key customers and competitors.
•
Kimball's employees throughout the business operations are an integral part of our ability to compete successfully, and the stability of the management team is critical to long-term Share Owner value. Our career development and succession planning processes help to maintain stability in management.
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. Additional information on risks is contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.
Financial Overview - Consolidated
Second quarter fiscal year 2013 consolidated net sales were $295.1 million compared to second quarter fiscal year 2012 net sales of $296.9 million, a 1% decrease, driven by a net sales decrease in the Furniture segment of 12% which more than offset a net sales increase in the EMS segment of 11%. In the second quarter of fiscal year 2013 Kimball recorded net income of $4.2 million, or $0.11 per Class B diluted share, compared to net income of $3.2 million, or $0.09 per Class B diluted share in the second quarter of fiscal year 2012, inclusive of $0.9 million, or $0.02 per Class B diluted share, of after-tax restructuring charges primarily related to the EMS segment European consolidation plan.
Net sales for the six-month period ended December 31, 2012 of $583.3 million increased 3% from net sales of $567.5 million for the same period of the prior fiscal year resulting from a 13% net sales increase in the EMS segment which more than offset an 8% net sales decrease in the Furniture segment. Net income for the six-month period ended December 31, 2012 totaled $9.1 million, or $0.24 per Class B diluted share. Net income for the six-month period ended December 31, 2011 totaled $3.1 million, or $0.08 per Class B diluted share, inclusive of $1.0 million, or $0.03 per Class B diluted share, of after-tax restructuring charges primarily related to the EMS segment European consolidation plan.
Consolidated gross profit as a percent of net sales increased to 18.7% for the second quarter of fiscal year 2013 from 18.3% for the second quarter of fiscal year 2012. For the year-to-date period of fiscal year 2013, gross profit as a percent of net sales improved to 18.9% compared to 17.8% for the year-to-date period of fiscal year 2012. The consolidated gross margin improvement for the second quarter and year-to-date period of fiscal year 2013 was driven by margin improvement in both the EMS and Furniture segments. The margin improvement within the segments was partially offset by a shift in sales mix (as depicted in the table below) toward the EMS segment which operates at a lower gross profit percentage than the Furniture segment. Gross profit is discussed in more detail in the following segment discussions.
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
 
2012
 
2011
 
2012
 
2011
EMS segment net sales as % of total
56%
 
50%
 
56%
 
51%
Furniture segment net sales as % of total
44%
 
50%
 
44%
 
49%
Second quarter fiscal year 2013 consolidated selling and administrative expenses increased 1% in absolute dollars and increased 0.2 percentage points as a percent of net sales compared to the second quarter of fiscal year 2012. Second quarter fiscal year 2013 increased consolidated incentive compensation costs and higher salary expenses were partially offset by lower Furniture segment sales and marketing expenses and lower Furniture segment commission expense. In addition, during the second quarters

20


of fiscal year 2013 and 2012, we recorded expense of $0.3 million and $1.1 million, respectively, related to the normal revaluation to fair value of our Supplemental Employee Retirement Plan (SERP) liability. The result was a favorable variance within selling and administrative expenses of $0.8 million. The impact from the increase in the SERP liability that was recognized in selling and administrative expenses was exactly offset by a gain on the SERP investment for which the revaluation was recorded in Other Income (Expense), and thus there was no effect on net income. Employee contributions comprise approximately 90% of the SERP investment.
Consolidated selling and administrative expenses for the first six months of fiscal year 2013 increased 3% in absolute dollars and were flat as a percent of net sales compared to the first six months of fiscal year 2012. During the year-to-date periods of fiscal year 2013 and 2012, the Company recorded $1.0 million expense and $0.9 million income, respectively, related to the normal revaluation to fair value of its SERP liability. The result was an unfavorable variance in selling and administrative expenses of $1.9 million. Compared to the year-to-date period of fiscal year 2012, the selling and administrative expenses for the first six months of fiscal year 2013 were also impacted by increased consolidated incentive compensation costs which were offset by lower Furniture segment sales and marketing expenses and lower Furniture segment commission expense.
Other Income (Expense) consisted of the following:
Other Income (Expense)
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands)
2012
 
2011
 
2012
 
2011
Interest Income
$
121

 
$
100

 
$
231

 
$
220

Interest Expense
(8
)
 
(7
)
 
(15
)
 
(16
)
Foreign Currency/Derivative Gain (Loss)
(124
)
 
378

 
(516
)
 
1,152

Gain (Loss) on Supplemental Employee Retirement Plan Investments
283

 
1,087

 
986

 
(875
)
Impairment Loss on Privately-Held Investment
(735
)
 
—

 
(735
)
 
—

Loss on Stock Warrants
(751
)
 
(11
)
 
(752
)
 
(41
)
Other
(143
)
 
(105
)
 
(269
)
 
(200
)
Other Income (Expense), net
$
(1,357
)
 
$
1,442

 
$
(1,070
)
 
$
240

The impairment loss on privately-held investment and the loss on stock warrants listed in the table above both relate to the Company's investment in one privately-held company. See the Note 7 - Derivative Instruments and Note 8 - Investments of Notes to the Consolidated Financial Statements for more detailed information.
The fiscal year 2013 year-to-date effective tax rate of 23.6% was favorably impacted by earnings in foreign jurisdictions which have lower statutory tax rates than the U.S. The fiscal year 2012 year-to-date effective tax rate was 43.2% which was higher than the statutory rate primarily due to unfavorable net tax accrual adjustments of $0.6 million, none of which were individually significant.
Comparing the balance sheet as of December 31, 2012 to June 30, 2012, our accounts receivable balance decreased due to improved collections within the Furniture segment coupled with the timing of net sales during the quarter. Our inventory balance increased primarily to support projected higher sales levels at select business units and to support normal planned variations in production schedules at this time of the year. Our accounts payable balance increased primarily in conjunction with the higher inventory levels.


21


Electronic Manufacturing Services Segment
EMS segment results follow:
 
At or for the
Three Months Ended
 
 
 
For the
Six Months Ended
 
 
 
December 31
 
 
 
December 31
 
 
(Amounts in Millions)
2012
 
2011
 
% Change

 
2012
 
2011
 
% Change
Net Sales
$
164.2

 
$
148.1

 
11
 %
 
$
328.4

 
$
290.9

 
13
 %
Operating Income (Loss)
$
5.0

 
$
0.2

 
2,120
%
 
$
10.0

 
$
(2.0
)
 
594
 %
Operating Income (Loss) %
3.0
%
 
0.2
%
 
 
 
3.1
%
 
(0.7
)%
 
 
Net Income (Loss)
$
3.9

 
$
0.3

 
1,148
%
 
$
7.2

 
$
(0.8
)
 
1,016
 %
Restructuring Expense, net of tax
$
—

 
$
0.9

 
(98
)%
 
$
0.1

 
$
0.9

 
(94
)%
Open Orders
$
180.8

 
$
170.3

 
6
 %
 
 
 
 
 
 
Second quarter and year-to-date fiscal year 2013 EMS segment net sales to customers in the automotive, industrial, and public safety industries increased compared to the second quarter and year-to-date periods of fiscal year 2012 which more than offset a decline in net sales to customers in the medical industry. Open orders for our EMS products were up 6% as of December 31, 2012 compared to December 31, 2011. 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.
Second quarter and year-to-date fiscal year 2013 EMS segment gross profit as a percent of net sales improved 2.1 and 2.8 percentage points when compared to the second quarter and year-to-date periods of fiscal year 2012, respectively. The improvement in gross profit as a percent of net sales was primarily the result of leverage gained on higher revenue as well as benefits gained from global purchasing efforts and operating efficiencies related to continuous improvement initiatives. EMS segment gross profit was also favorably impacted in the current fiscal year by the benefits realized from restructuring activities in which two facilities were closed during the second quarter of fiscal year 2012. EMS segment gross profit was unfavorably impacted as the Company recorded a $1.1 million inventory reserve in the second quarter of fiscal year 2013 relating to a customer that notified us they are going out of business.  Sales to this customer were immaterial. 
EMS segment selling and administrative expenses in the second quarter and year-to-date period ended December 31, 2012 compared to the same periods ended December 31, 2011 increased 12% and 7% in absolute dollars, respectively, primarily due to increased incentive compensation costs related to the significant improvement in segment earnings. As a percent of net sales, selling and administrative costs in the EMS segment increased 0.1 percentage point for the second quarter of fiscal year 2013 compared to 2012 and declined 0.4 percentage points for the year-to-date period of fiscal year 2013 compared to 2012.
The previously announced exit of the Company's small assembly facility located in Fremont, California was completed during the second quarter of fiscal year 2012 along with the associated move of a majority of that business to the Jasper, Indiana facility. In addition, the previously announced consolidation of the Company's European EMS facilities was likewise completed during the second quarter of fiscal year 2012.
EMS segment Other Income (Expense) for the second quarter and first half of fiscal year 2013 totaled expense of $0.4 million and $1.0 million, respectively, compared to income of $0.3 million and $0.7 million recorded during the second quarter and first half of fiscal year 2012. The variance in Other Income (Expense) was primarily related to net foreign currency exchange movement.
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.
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 and customer financial stability, the contract nature of this industry, the concentration of sales to large customers, and the potential for customers to choose a dual sourcing strategy or to in-source a greater portion of their electronics manufacturing. The continuing success of this segment is dependent upon our 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 Kimball's Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

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Furniture Segment
Furniture segment results follow:
 
At or for the
Three Months Ended
 
 
 
For the
Six Months Ended
 
 
 
December 31
 
 
 
December 31
 
 
(Amounts in Millions)
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
Net Sales
$
131.0

 
$
148.8

 
(12
)%
 
$
255.0

 
$
276.6

 
(8
)%
Operating Income
$
1.9

 
$
5.4

 
(64
)%
 
$
4.7

 
$
7.2

 
(34
)%
Operating Income %
1.5
%
 
3.6
%
 
 
 
1.9
%
 
2.6
%
 
 
Net Income
$
1.5

 
$
3.4

 
(56
)%
 
$
3.2

 
$
4.6

 
(31
)%
Open Orders
$
77.9

 
$
85.9

 
(9
)%
 
 
 
 
 
 
The net sales decline in the Furniture segment for the second quarter and year-to-date period of fiscal year 2013 compared to the same periods of fiscal year 2012 was driven by decreased net sales of both hospitality furniture and office furniture. The lower hospitality furniture net sales were due to two unusually large orders which began shipping in the second quarter of fiscal year 2012. The decrease in office furniture net sales during the second quarter and year-to-date period of fiscal year 2013 was due to decreased sales volumes which more than offset the positive impact of select price increases. The largest driver of the decreased office furniture sales volumes was lower sales to the federal government. Net sales of newly introduced office furniture products which have been sold for less than twelve months approximated $1.9 million and $4.3 million for the second quarter and year-to-date period ended December 31, 2012, respectively. Open orders for furniture products at December 31, 2012 decreased 9% when compared to the open order level as of December 31, 2011 as open orders declined for hospitality furniture which more than offset an increase in open orders for office furniture. The decline in hospitality orders was a result of elevated open order levels as of December 31, 2011 for two large contract projects in process at that time. Open orders at a point in time may not be indicative of future sales trends.
Furniture segment gross profit as a percent of net sales increased 0.7 percentage points and 1.1 percentage points in the second quarter and year-to-date periods of fiscal year 2013, respectively, when compared to same periods of fiscal year 2012. The gross profit improvement was driven by sales price increases on select product and lower commodity costs, which were partially offset by the loss of leverage due to lower sales volumes.
Second quarter and year-to-date fiscal year 2013 Furniture segment selling and administrative expenses increased as a percent of net sales on the lower sales volumes, but selling and administrative expenses decreased 1% in absolute dollars in both periods compared to the second quarter and year-to-date periods of fiscal year 2012 as lower sales and marketing costs and lower commission costs due to the decline in revenue were partially offset by higher incentive compensation costs.
Risk factors within this segment include, but are not limited to, general economic and market conditions, increased global competition, financial stability of customers and suppliers, 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 Kimball's Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Liquidity and Capital Resources
Working capital at December 31, 2012 was $200.2 million compared to working capital of $191.0 million at June 30, 2012. The current ratio was 2.0 at both December 31, 2012 and June 30, 2012.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (DSO), for the six-month period ended December 31, 2012 was 44.1 days as compared to 46.9 days for the six-month period ended December 31, 2011. Our DSO improvement was primarily due to a shift in payment practices by three large customers in the latter half of fiscal year 2012 in the EMS segment and improved collections within the Furniture segment. We define DSO as the average of monthly accounts and notes receivable divided by an average day's net sales. Our Production Days Supply on Hand (PDSOH) of inventory measure for the six-month period ended December 31, 2012 decreased to 57.1 days from 61.9 days for the six-month period ended December 31, 2011. The improved PDSOH resulted from ongoing successful EMS inventory reduction initiatives and the

23


elimination of excess inventory related to the EMS facility consolidation plans in the prior year period. We define PDSOH as the average of the monthly gross inventory divided by an average day's cost of sales.
Kimball's short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our revolving credit facility, declined to $158.8 million at December 31, 2012 compared to $170.9 million at June 30, 2012 as a result of the lower borrowing limit on the amended credit facility as explained in greater detail below.
Our cash and cash equivalents position increased to $88.1 million at December 31, 2012 from $75.2 million at June 30, 2012. We had no short-term borrowings outstanding as of December 31, 2012 or June 30, 2012. Operating activities provided $30.0 million of cash in the six-month period ended December 31, 2012 compared to $1.2 million in the six-month period ended December 31, 2011. During the six-month period ended December 31, 2012, we reinvested $14.0 million into capital investments for the future with the largest investments being made for manufacturing equipment in both segments. Kimball also paid $3.7 million in dividends in both of the six-month periods ended December 31, 2012 and December 31, 2011. Consistent with our historical dividend policy, the Company's Board of Directors will evaluate the appropriate dividend payment on a quarterly basis. During fiscal year 2013, we expect to continue to invest in capital expenditures prudently, particularly for projects including potential acquisitions that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
During the second quarter of fiscal year 2013, Kimball entered into a credit agreement which amended, restated, and extended the Company's existing five-year credit facility, which was scheduled to mature April 23, 2013. The Company elected to decrease the borrowing limit to $75 million from the $100 million under the previous agreement. The Company believes its principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under this Credit Facility will be sufficient for the foreseeable future.
At both December 31, 2012 and June 30, 2012, we had no short-term borrowings outstanding under either credit facility and no borrowings outstanding under any of our smaller foreign credit facilities described in more detail below. At December 31, 2012, we had $4.3 million in letters of credit against the $75 million credit facility leaving total availability to borrow of $70.7 million.
The $75 million credit facility has a maturity date of December 18, 2017, and this credit facility allows for both issuances of letters of credit and cash borrowings. The $75 million credit facility provides an option to increase the amount available for borrowing to $115 million at our request, subject to the consent of the participating banks. The $75 million credit facility requires us to comply with certain debt covenants, the most significant of which are the ratio of consolidated indebtedness to consolidated EBITDA (debt to EBITDA) and minimum net worth (excluding accumulated other comprehensive income). We were in compliance with the respective debt covenants of each credit facility during the six-month period ended December 31, 2012.
The table below compares the actual net worth and debt to EBITDA ratio with the limits specified in the credit agreement.
 
 
At or For the Period Ended
 
Limit As Specified in
 
 
Covenant
 
December 31, 2012
 
Credit Agreement
 
Excess
Minimum Net Worth 
 
$
398,141,000

 
$
362,000,000

 
$
36,141,000

Debt to EBITDA Ratio
 
0.08

 
3.00

 
2.92

The debt to EBITDA ratio is calculated on a rolling four-quarter basis as defined in the credit agreement.
In addition to the $75 million credit facility, Kimball can opt to utilize foreign credit facilities which are available to satisfy short-term cash needs at a specific foreign location rather than funding from intercompany sources. We maintain a foreign credit facility for our EMS segment operation in Thailand which is backed by the $75 million revolving credit facility. We have a credit facility for our EMS segment operation in Poland, which allows for multi-currency borrowings up to 6 million Euro equivalent (approximately $7.9 million U.S. dollars at December 31, 2012 exchange rates). These foreign credit facilities can be canceled at any time by either the bank or us.
One of Kimball's sources of funds has been our ability to generate cash from operations to meet our liquidity obligations, which could be adversely affected in the future by factors such as general economic and market conditions, lack of availability of raw material components in the supply chain, a decline in demand for our products, loss of key contract customers, the ability of Kimball to generate profits, and other unforeseen circumstances. In particular, should demand for our products decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted. Another source of funds is the Company's credit facilities.

24


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 2013, no level 1 or level 2 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 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.
Kimball currently holds non-marketable equity securities and stock warrants of a privately-held company. During the second quarter of fiscal year 2013, we identified certain events and changes in circumstances that had a significant adverse effect on the fair value of the investments in the privately-held company. As a result, the equity securities were revalued, resulting in an impairment loss of $0.7 million on the equity securities and a $0.8 million derivative loss on the stock warrants during the quarter.
The investment in non-marketable equity securities is accounted for as a cost-method investment which carries the securities at cost. In the event of impairment, the valuation uses a probability-weighted Black-Scholes option pricing model. The stock warrants are classified as derivative instruments and are valued on a recurring basis using a market-based approach which utilizes a probability-weighted Black-Scholes option pricing model. The fair value measurements for stock warrants and non-marketable equity securities were calculated using unobservable inputs and were classified as level 3 financial assets.
See Note 6 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.

Contractual Obligations
There have been no material changes outside the ordinary course of business to Kimball's summary of contractual obligations under the caption, "Contractual Obligations" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Off-Balance Sheet Arrangements
We have 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 Kimball's financial condition, results of operations, liquidity, capital expenditures, or capital resources. See Note 4 - Commitments and Contingent Liabilities of Notes to Condensed Consolidated Financial Statements for more information on standby letters of credit. Kimball 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
Kimball'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 our consolidated financial statements and are the policies that are most critical in the portrayal of our financial position and results of operations. Management has discussed these critical accounting policies and estimates with the Audit Committee of the Company's Board of Directors and with the Company's independent registered public accounting firm.

25


Revenue recognition - Kimball 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. We recognize 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, 2012 and June 30, 2012, the reserve for returns and allowances was $2.1 million and $2.5 million, respectively. The returns and allowances reserve approximated 1% to 2% of gross trade receivables during the two-year period preceding December 31, 2012.
•
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 December 31, 2012 and at June 30, 2012 was $1.2 million and $0.8 million, respectively. During the two-year period preceding December 31, 2012, this reserve had approximated 1% of gross trade accounts receivable.
Excess and obsolete inventory - Inventories were valued using the lower of last-in, first-out (LIFO) cost or market value for approximately 15% and 10% of consolidated inventories at December 31, 2012 and June 30, 2012, respectively, including approximately 87% and 78% of the Furniture segment inventories at December 31, 2012 and June 30, 2012, respectively. The remaining inventories were valued at lower of first-in, first-out (FIFO) cost or market value. Inventories recorded on our balance sheet are adjusted for excess and obsolete inventory. In general, we purchase materials and finished goods for contract-based business from customer orders and projections, primarily in the case of long lead time items, and we have a general philosophy to only purchase materials to the extent covered by a written commitment from our 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. We 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 - Kimball 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. Our policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims, and other analyses, which are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At December 31, 2012 and June 30, 2012, our accrued liabilities for self-insurance exposure were $4.3 million and $3.9 million, respectively.
Taxes - Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management's assessment.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. However, we believe we have made adequate provision for income and other taxes for all years that are subject to audit. As tax 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 $3.8 million at both December 31, 2012 and June 30, 2012.


26


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, changes in the regulatory environment, or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of Kimball are contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Kimball currently holds non-marketable equity securities and stock warrants of a privately-held company. During the second quarter of fiscal year 2013, we identified certain events and changes in circumstances that had a significant adverse effect on the fair value of the investments in the privately-held company. As a result, the equity securities were revalued, resulting in an impairment loss of $0.7 million on the equity securities and a $0.8 million derivative loss on the stock warrants during the quarter. The non-marketable equity investment had a carrying amount of $0.4 million and $1.1 million as of December 31, 2012 and June 30, 2012, respectively, and the stock warrants had a carrying amount of $0.2 million and $0.9 million as of December 31, 2012 and June 30, 2012, respectively.
There have been no other material changes to market risks from the information disclosed in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures.
Kimball maintains controls and procedures designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed as of December 31, 2012, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.
(b)Changes in internal control over financial reporting.
There have been no changes in Kimball's internal control over financial reporting that occurred during the quarter ended December 31, 2012 that have materially affected, or that are reasonably likely to materially affect, our 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

27


shares authorized have been repurchased. Kimball did not repurchase any shares under the repurchase program during the second quarter of fiscal year 2013. At December 31, 2012, two million shares remained available under the repurchase program.


28


Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
3(a)
Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2012)
3(b)
Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed October 23, 2009)
10(a)
Amended and Restated Credit Agreement, dated as of December 18, 2012, among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A. as Agent and Letter of Credit Issuer (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed December 20, 2012)
10(b)
Supplemental Employee Retirement Plan (2012 Revision) (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed November 29, 2012)
11
Computation of Earnings Per Share
31.1
Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document *
101.SCH
XBRL Taxonomy Extension Schema Document *
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB
XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document *
* These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

29


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
KIMBALL INTERNATIONAL, INC.
 
 
 
 
By:
/s/ JAMES C. THYEN
 
 
James C. Thyen
President,
Chief Executive Officer
 
 
February 4, 2013
 
 
 
 
 
 
 
By:
/s/ ROBERT F. SCHNEIDER
 
 
Robert F. Schneider
Executive Vice President,
Chief Financial Officer
 
 
February 4, 2013

30


Kimball International, Inc.
Exhibit Index
Exhibit No.
 
Description
3(a)
 
Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2012)
3(b)
 
Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed October 23, 2009)
10(a)
 
Amended and Restated Credit Agreement, dated as of December 18, 2012, among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A., as Agent and Letter of Credit Issuer (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed December 20, 2012)
10(b)
 
Supplemental Employee Retirement Plan (2012 Revision) (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed November 29, 2012)
11
 
Computation of Earnings Per Share
31.1
 
Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document *
101.SCH
 
XBRL Taxonomy Extension Schema Document *
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document *
 
 
* These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.


31