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KIMBALL INTERNATIONAL INC - Quarter Report: 2013 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, 2013
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 23, 2014 was:
Class A Common Stock - 7,990,950 shares
Class B Common Stock - 30,443,397 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,
2013
 
June 30,
2013
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
129,592

 
$
103,600

Receivables, net of allowances of $3,122 and $2,791, respectively
163,088

 
160,767

Inventories
130,983

 
123,998

Prepaid expenses and other current assets
43,838

 
39,013

Assets held for sale
1,121

 
1,521

Total current assets
468,622

 
428,899

Property and Equipment, net of accumulated depreciation of $354,493 and $371,232, respectively
187,835

 
185,744

Goodwill
2,564

 
2,511

Other Intangible Assets, net of accumulated amortization of $62,113 and $62,147, respectively
4,386

 
5,276

Other Assets
24,505

 
22,089

Total Assets
$
687,912

 
$
644,519

 
 
 
 
LIABILITIES AND SHARE OWNERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt
$
25

 
$
23

Accounts payable
168,403

 
155,709

Dividends payable
1,882

 
1,863

Accrued expenses
65,939

 
56,856

Total current liabilities
236,249

 
214,451

Other Liabilities:
 
 
 
Long-term debt, less current maturities
273

 
294

Other
26,120

 
25,268

Total other liabilities
26,393

 
25,562

Share Owners' Equity:
 
 
 
Common stock-par value $0.05 per share:
 
 
 
Class A - Shares authorized: 50,000,000
               Shares issued: 11,500,000 and 12,025,000, respectively
575

 
601

Class B - Shares authorized: 100,000,000
               Shares issued: 31,525,000 and 31,000,000, respectively
1,576

 
1,550

Additional paid-in capital
2,599

 
4,448

Retained earnings
475,750

 
462,957

Accumulated other comprehensive income (loss)
1,187

 
(3,477
)
Less: Treasury stock, at cost:

 

Class A - 3,505,000 and 3,843,000 shares, respectively
(42,198
)
 
(47,152
)
Class B - 1,086,000 and 1,101,000 shares, respectively
(14,219
)
 
(14,421
)
Total Share Owners' Equity
425,270

 
404,506

Total Liabilities and Share Owners' Equity
$
687,912

 
$
644,519

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
 
2013
 
2012
 
2013
 
2012
Net Sales
$
320,313

 
$
295,136

 
$
637,752

 
$
583,326

Cost of Sales
253,467

 
239,979

 
509,582

 
472,964

Gross Profit
66,846

 
55,157

 
128,170

 
110,362

Selling and Administrative Expenses
56,664

 
49,006

 
110,881

 
97,244

Other General Income

 

 
(5,022
)
 

Restructuring Expense

 
31

 
402

 
91

Operating Income
10,182

 
6,120

 
21,909

 
13,027

Other Income (Expense):
 
 
 
 
 
 
 
Interest income
65

 
121

 
133

 
231

Interest expense
(7
)
 
(8
)
 
(14
)
 
(15
)
Non-operating income (expense), net
1,171

 
(1,470
)
 
2,129

 
(1,286
)
Other income (expense), net
1,229

 
(1,357
)
 
2,248

 
(1,070
)
Income Before Taxes on Income
11,411

 
4,763

 
24,157

 
11,957

Provision for Income Taxes
2,189

 
584

 
5,752

 
2,817

Net Income
$
9,222

 
$
4,179

 
$
18,405

 
$
9,140

 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock:
 

 
 

 
 
 
 
Basic Earnings Per Share:
 

 
 

 
 
 
 
Class A
$
0.24

 
$
0.11

 
$
0.47

 
$
0.23

Class B
$
0.24

 
$
0.11

 
$
0.48

 
$
0.24

Diluted Earnings Per Share:
 
 
 
 
 
 
 
Class A
$
0.23

 
$
0.11

 
$
0.47

 
$
0.22

Class B
$
0.24

 
$
0.11

 
$
0.48

 
$
0.24

 
 
 
 
 
 
 
 
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
38,434

 
38,077

 
38,372

 
38,047

Diluted
38,613

 
38,295

 
38,760

 
38,469

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, 2013
 
December 31, 2012
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
9,222

 
 
 
 
 
$
4,179

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
1,781

 
$
(97
)
 
$
1,684

 
$
2,013

 
$
(120
)
 
$
1,893

Postemployment severance actuarial change
(330
)
 
131

 
(199
)
 
282

 
(112
)
 
170

Derivative gain (loss)
(393
)
 
49

 
(344
)
 
(106
)
 
39

 
(67
)
Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
267

 
(56
)
 
211

 
(707
)
 
186

 
(521
)
Amortization of prior service costs
72

 
(29
)
 
43

 
72

 
(29
)
 
43

Amortization of actuarial change
104

 
(41
)
 
63

 
80

 
(32
)
 
48

Other comprehensive income (loss)
$
1,501

 
$
(43
)
 
$
1,458

 
$
1,634

 
$
(68
)
 
$
1,566

Total comprehensive income
 
 
 
 
$
10,680

 
 
 
 
 
$
5,745

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
Six Months Ended
 
December 31, 2013
 
December 31, 2012
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
18,405

 
 
 
 
 
$
9,140

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
4,883

 
$
(271
)
 
$
4,612

 
$
3,120

 
$
(187
)
 
$
2,933

Postemployment severance actuarial change
122

 
(49
)
 
73

 
696

 
(277
)
 
419

Derivative gain (loss)
(898
)
 
164

 
(734
)
 
1,295

 
(322
)
 
973

Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
617

 
(107
)
 
510

 
(967
)
 
221

 
(746
)
Amortization of prior service costs
143

 
(57
)
 
86

 
143

 
(57
)
 
86

Amortization of actuarial change
194

 
(77
)
 
117

 
172

 
(69
)
 
103

Other comprehensive income (loss)
$
5,061

 
$
(397
)
 
$
4,664

 
$
4,459

 
$
(691
)
 
$
3,768

Total comprehensive income
 
 
 
 
$
23,069

 
 
 
 
 
$
12,908

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
 
2013
 
2012
Cash Flows From Operating Activities:
 
 
 
Net income
$
18,405

 
$
9,140

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
15,727

 
15,143

(Gain) loss on sales of assets
41

 
(26
)
Restructuring and asset impairment charges
1,509

 

Deferred income tax and other deferred charges
(4,676
)
 
(1,448
)
Stock-based compensation
3,254

 
2,176

Excess tax benefits from stock-based compensation
(43
)
 
(567
)
Other, net
143

 
2,039

Change in operating assets and liabilities:
 
 
 
Receivables
(131
)
 
13,021

Inventories
(5,401
)
 
(18,776
)
Prepaid expenses and other current assets
(507
)
 
6,601

Accounts payable
9,351

 
4,438

Accrued expenses
7,388

 
(1,779
)
Net cash provided by operating activities
45,060

 
29,962

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(15,664
)
 
(13,337
)
Proceeds from sales of assets
1,473

 
293

Purchases of capitalized software
(90
)
 
(627
)
Other, net
607

 
277

Net cash used for investing activities
(13,674
)
 
(13,394
)
Cash Flows From Financing Activities:
 
 
 
Net change in capital leases and long-term debt
(19
)
 
(2
)
Dividends paid to Share Owners
(3,743
)
 
(3,705
)
Excess tax benefits from stock-based compensation
43

 
567

Repurchase of employee shares for tax withholding
(1,947
)
 
(870
)
Net cash used for financing activities
(5,666
)
 
(4,010
)
Effect of Exchange Rate Change on Cash and Cash Equivalents
272

 
336

Net Increase in Cash and Cash Equivalents
25,992

 
12,894

Cash and Cash Equivalents at Beginning of Period
103,600

 
75,197

Cash and Cash Equivalents at End of Period
$
129,592

 
$
88,091

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
4,763

 
$
883

Interest expense
$
27

 
$
29

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.
Other General Income:
We recorded no Other General Income during the second quarter of fiscal year 2014. Other General Income in the year-to-date period of fiscal year 2014 included pre-tax distributions of $5.0 million related to two class action lawsuits in which Kimball was a class member. The lawsuits alleged that certain suppliers of the Electronic Manufacturing Services (EMS) segment conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to purchasers of those components.
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 on SERP investments is exactly offset by a change in the SERP liability that is recognized in selling and administrative expenses.

7



Components of Non-operating income (expense), net:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands)
2013
 
2012
 
2013
 
2012
Foreign Currency/Derivative Gain (Loss)
$
116

 
$
(124
)
 
$
230

 
$
(516
)
Gain on Supplemental Employee Retirement Plan Investments
1,278

 
283

 
2,329

 
986

Impairment Loss on Privately-Held Investment

 
(735
)
 

 
(735
)
Gain (Loss) on Stock Warrants
4

 
(751
)
 
8

 
(752
)
Other
(227
)
 
(143
)
 
(438
)
 
(269
)
Non-operating income (expense), net
$
1,171

 
$
(1,470
)
 
$
2,129

 
$
(1,286
)
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.
In September 2013, the United States Treasury Department and the Internal Revenue Service (IRS) issued final regulations effective for our first quarter of fiscal year 2015, that provide guidance on a number of matters with regard to tangible property, including whether expenditures qualify as deductible repairs, the treatment of materials and supplies, capitalization of tangible property, dispositions of property, and related elections.  We continue to review the regulations, but we do not expect them to have a material effect on our consolidated financial statements when they are fully adopted.  Future transitional guidance in the form of revenue procedures issued by the IRS, and the finalization of other proposed regulations, could impact our current estimates.
New Accounting Standards:
In July 2013, the Financial Accounting Standards Board (FASB) issued guidance to eliminate the diversity in practice related to the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The guidance is effective prospectively for our first quarter fiscal year 2015 financial statements. We are currently evaluating this guidance, but we do not expect it to have a material effect on our consolidated financial statements.
In February 2013, the FASB issued guidance on the presentation of comprehensive income. This guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments became effective prospectively for our first quarter fiscal year 2014 financial statements. As this guidance only impacted how comprehensive income is disclosed, the adoption did not impact our consolidated financial position, results of operations, or cash flows.

8



Note 2. Inventories
Inventory components were as follows:
(Amounts in Thousands)
December 31, 2013
 
June 30,
2013
Finished products
$
36,979

 
$
33,956

Work-in-process
11,580

 
12,746

Raw materials
95,422

 
90,167

Total FIFO inventory
$
143,981

 
$
136,869

LIFO reserve
(12,998
)
 
(12,871
)
Total inventory
$
130,983

 
$
123,998

For interim reporting, LIFO inventories are computed based on quantities as of the end of the quarter and interim changes in price levels. Changes in quantities and price levels are reflected in the interim financial statements in the period in which they occur, except in cases where LIFO inventory liquidations are expected to be reinstated by fiscal year end. The earnings impact of LIFO inventory liquidations during the three and six-month periods ended December 31, 2013 and 2012 was immaterial.

Note 3. Segment Information
Management organizes Kimball into segments based upon differences in products and services offered in each segment. The EMS segment provides engineering and manufacturing services which utilize common production and support capabilities to a variety of industries globally. The EMS segment focuses on electronic assemblies that have high durability requirements and are sold on a contract basis and produced to customers' specifications. The EMS segment currently sells primarily to customers in the automotive, medical, 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.
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, 2013.
 
Three Months Ended
 
 
Six Months Ended
 
 
December 31
 
 
December 31
 
(Amounts in Thousands) 
2013
 
 
2012
 
 
2013
 
 
2012
 
Net Sales:
 

 
 
 

 
 
 

 
 
 

 
Electronic Manufacturing Services
$
181,264

 
 
$
164,181

 
 
$
356,900

 
 
$
328,356

 
Furniture
139,049

 
 
130,955

 
 
280,852

 
 
254,970

 
Consolidated
$
320,313

 
 
$
295,136

 
 
$
637,752

 
 
$
583,326

 
Net Income (Loss):
 

 
 
 

 
 
 

 
 
 

 
Electronic Manufacturing Services
$
5,225

 
 
$
3,932

 
 
$
12,687

 
 
$
7,215

 
Furniture
4,457

 
 
1,504

 
 
7,356

 
 
3,172

 
Unallocated Corporate and Eliminations
(460
)
 
 
(1,257
)
 
 
(1,638
)
 
 
(1,247
)
 
Consolidated
$
9,222

(1)
 
$
4,179

(2)
 
$
18,405

(1)
 
$
9,140

(2)

(1)
No restructuring charges were recorded in the three months ended December 31, 2013. Net Income (Loss) included after-tax restructuring charges, in thousands, of $242 in the six months ended December 31, 2013. In the six months ended December 31, 2013, the EMS segment recorded, in thousands, $44 of after-tax restructuring charges and Unallocated Corporate and Eliminations recorded, in thousands, $198 of after-tax restructuring charges. See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion. Additionally, the EMS segment recorded in the six months ended December 31, 2013, $3.0 million of after-tax income related to two class action lawsuits in which Kimball was a class member. Also during the six months ended December 31, 2013, we

9



recorded within Unallocated Corporate and Eliminations, in thousands, $720 of after-tax impairment charges for an aircraft which was classified as held for sale in the first quarter of fiscal year 2014 and subsequently sold.
(2)
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. See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion. 
(Amounts in Thousands)
December 31,
2013
 
June 30,
2013
Total Assets:
 
 
 
Electronic Manufacturing Services
$
361,948

 
$
353,425

Furniture
194,794

 
185,925

Unallocated Corporate and Eliminations
131,170

 
105,169

Consolidated
$
687,912

 
$
644,519


Note 4. Accumulated Other Comprehensive Income (Loss)
During the six months ended December 31, 2013, the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, were as follows:
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Postemployment Benefits
 
 
(Amounts in Thousands)
Foreign Currency Translation Adjustments
 
Derivative Gain (Loss)
 
Prior Service Costs
 
Net Actuarial Gain (Loss)
 
Accumulated Other Comprehensive Income (Loss)
Balance at June 30, 2013
$
855

 
$
(4,359
)
 
$
(292
)
 
$
319

 
$
(3,477
)
Other comprehensive income (loss) before reclassifications
4,612

 
(734
)
 

 
73

 
3,951

Reclassification to (earnings) loss

 
510

 
86

 
117

 
713

Net current-period other comprehensive income (loss)
4,612

 
(224
)

86


190

 
4,664

Balance at December 31, 2013
$
5,467

 
$
(4,583
)
 
$
(206
)
 
$
509

 
$
1,187


10




The following reclassifications were made from accumulated other comprehensive income (loss) to the Condensed Consolidated Statements of Income:
Reclassifications from Accumulated Other Comprehensive Income (Loss)
 
Three Months Ended
 
Six Months Ended
 
Affected Line Item in the Condensed Consolidated Statements of Income
 
December 31,
 
December 31,
 
(Amounts in Thousands)
 
2013
 
2013
 
Derivative Gain (Loss) (1)
 
$
(212
)
 
$
(383
)
 
Cost of Sales
 
 
(55
)
 
(234
)
 
Non-operating income (expense), net
 
 
56

 
107

 
Benefit (Provision) for Income Taxes
 
 
$
(211
)
 
$
(510
)
 
Net of Tax
Postemployment Benefits:
 
 
 
 
 
 
Amortization of Prior Service Costs (2)
 
$
(49
)
 
$
(98
)
 
Cost of Sales
 
 
(23
)
 
(45
)
 
Selling and Administrative Expenses
 
 
29

 
57

 
Benefit (Provision) for Income Taxes
 
 
$
(43
)
 
$
(86
)
 
Net of Tax
 
 
 
 
 
 
 
Amortization of Actuarial Gain (Loss) (2)
 
$
(71
)
 
$
(133
)
 
Cost of Sales
 
 
(33
)
 
(61
)
 
Selling and Administrative Expenses
 
 
41

 
77

 
Benefit (Provision) for Income Taxes
 
 
$
(63
)
 
$
(117
)
 
Net of Tax
 
 
 
 
 
 
 
Total Reclassifications for the Period
 
$
(317
)
 
$
(713
)
 
Net of Tax
Amounts in parentheses indicate reductions to income.
(1) See Note 8 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information on derivative instruments.
(2) See Note 11 - Postemployment Benefits of Notes to Condensed Consolidated Financial Statements for further information on postemployment benefit plans.


11



Note 5. Commitments and Contingent Liabilities
Standby letters of credit are issued to third-party suppliers, lessors, and insurance institutions and can only be drawn upon in the event of Kimball's failure to pay its obligations to a beneficiary. As of December 31, 2013, we had a maximum financial exposure from unused standby letters of credit totaling $1.1 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, 2013 with respect to the standby letters of credit. Kimball also enters into commercial letters of credit to facilitate payments to vendors and from customers.
We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability in cases where specific warranty issues become known.
Changes in the product warranty accrual for the six months ended December 31, 2013 and 2012 were as follows:
 
Six Months Ended
 
December 31
(Amounts in Thousands)
2013
 
2012
Product Warranty Liability at the beginning of the period
$
2,384

 
$
2,251

Additions to warranty accrual (including changes in estimates)
1,900

 
511

Settlements made (in cash or in kind)
(879
)
 
(441
)
Product Warranty Liability at the end of the period
$
3,405

 
$
2,321


Note 6. Restructuring Expense
We recognized no pre-tax restructuring charges during the second quarter of fiscal year 2014, and recognized $0.4 million of pre-tax restructuring charges during the year-to-date period of fiscal year 2014. The year-to-date charges were primarily related to the sale of a facility and land located in Gaylord, Michigan, which resulted in a $0.3 million pre-tax loss within Unallocated Corporate. The remaining year-to-date charges were miscellaneous exit costs related to the EMS Fremont and EMS European Consolidation plans. The lease of the EMS Fremont facility expired in August 2013. During the second quarter and year-to-date periods of fiscal year 2013, we recognized an immaterial amount of pre-tax restructuring charges primarily related to EMS Fremont and Gaylord miscellaneous plant closure charges. All restructuring activities related to previously announced restructuring plans are complete.
Restructuring charges are included in the Restructuring Expense line item of our Condensed Consolidated Statements of Income.
There was no accrued restructuring at December 31, 2013. At June 30, 2013 there was an immaterial amount of accrued restructuring recorded in current liabilities, which was 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, 2013.

Note 7. 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.

12



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, 2013. 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, 2013.
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 (0.09%), historical stock price volatility (102.0%) 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.


13



Recurring Fair Value Measurements:
As of December 31, 2013 and June 30, 2013, 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, 2013
(Amounts in Thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
103,029

 
$

 
$

 
$
103,029

Derivatives: Foreign exchange contracts

 
389

 

 
389

Derivatives: Stock warrants

 

 
33

 
33

Trading Securities: Mutual funds held by nonqualified supplemental employee retirement plan
21,860

 

 

 
21,860

Total assets at fair value
$
124,889

 
$
389

 
$
33

 
$
125,311

Liabilities
 

 
 

 
 

 
 

Derivatives: Foreign exchange contracts
$

 
$
1,997

 
$

 
$
1,997

Total liabilities at fair value
$

 
$
1,997

 
$

 
$
1,997

 
 

 
 

 
 

 
 

 
June 30, 2013
(Amounts in Thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
83,516

 
$

 
$

 
$
83,516

Derivatives: Foreign exchange contracts

 
273

 

 
273

Derivatives: Stock warrants

 

 
25

 
25

Trading Securities: Mutual funds held by nonqualified supplemental employee retirement plan
19,600

 

 

 
19,600

Total assets at fair value
$
103,116

 
$
273

 
$
25

 
$
103,414

Liabilities
 

 
 

 
 

 
 

Derivatives: Foreign exchange contracts
$

 
$
1,662

 
$

 
$
1,662

Total liabilities at fair value
$

 
$
1,662

 
$

 
$
1,662

The change in fair value of Level 3 investment assets during the six months ended December 31, 2013 was immaterial, and no purchases or sales of Level 3 assets occurred during the period.
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 9 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.
Non-Recurring Fair Value Measurements:
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments when events or circumstances indicate a significant adverse effect on the fair value of the asset. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
Non-recurring fair value adjustment
 
Level
 
Valuation Technique/Inputs Used
Impairment of long-lived assets (property & equipment)
 
3
 
Market - Estimated potential net selling price.


14



During the three months ended December 31, 2013, we had no fair value adjustments applicable to items that are subject to non-recurring fair value measurement after the initial measurement date. During the six months ended December 31, 2013, we classified an aircraft as held for sale and accordingly recognized pre-tax impairment of $1.2 million due to a significant downward shift in the market for private aviation aircraft.
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.
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.

Note 8. 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, 2013, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $22.7 million and to hedge currencies against the Euro in the aggregate notional amount of 40.6 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.

15



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 Income (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, 2013, we estimate that $1.2 million of pre-tax derivative losses 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. Losses on foreign exchange contracts are generally offset by gains 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, 2013 and June 30, 2013.
 
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. 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. 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.
See Note 7 - 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 Value of Derivative Instruments on the Condensed Consolidated Balance Sheets
 
Asset Derivatives
 
Liability Derivatives
 
 
 
Fair Value As of
 
 
 
Fair Value As of
(Amounts in Thousands)
Balance Sheet Location
 
December 31,
2013
 
June 30,
2013
 
Balance Sheet Location
 
December 31,
2013
 
June 30,
2013
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expenses and other current assets
 
$
389

 
$
265

 
Accrued expenses
 
$
1,424

 
$
1,097

 
 
 
 

 
 

 
 
 
 

 
 

Derivatives not designated as hedging instruments:
 
 

 
 
 
 

 
 

Foreign exchange contracts
Prepaid expenses and other current assets
 

 
8

 
Accrued expenses
 
573

 
565

Stock warrants
Other assets (long-term)
 
33

 
25

 
 
 
 

 
 

Total derivatives
 
 
$
422

 
$
298

 
 
 
$
1,997

 
$
1,662




16



The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 31
 
December 31
(Amounts in Thousands)
 
 
 
2013
 
2012
 
2013
 
2012
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives (Effective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
$
(393
)
 
$
(106
)
 
$
(898
)
 
$
1,295


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) 
 
2013
 
2012
 
2013
 
2012
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Cost of Sales
 
$
(212
)
 
$
814

 
$
(383
)
 
$
1,169

Foreign exchange contracts
 
Non-operating income (expense)
 
(55
)
 
(107
)
 
(234
)
 
(199
)
Total
 
 
 
$
(267
)
 
$
707

 
$
(617
)
 
$
970

 
 
 
 
 
 
 
 
 
 
 
Amount of Pre-Tax 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)
 
$
(294
)
 
$
(365
)
 
$
(838
)
 
$
(561
)
Stock warrants
 
Non-operating income (expense)
 
4

 
(751
)
 
8

 
(752
)
Total
 
 
 
$
(290
)
 
$
(1,116
)
 
$
(830
)
 
$
(1,313
)
 
 
 
 
 

 
 

 
 
 
 
Total Derivative Pre-Tax Loss Recognized in Income
 
$
(557
)
 
$
(409
)
 
$
(1,447
)
 
$
(346
)

Note 9. Investments
Non-marketable Equity Securities:
Kimball currently holds non-marketable equity securities of a privately-held company. The equity securities were valued at $0.1 million at both December 31, 2013 and June 30, 2013, and are included in the Other Assets line of the Condensed Consolidated Balance Sheets. During the second quarter of fiscal year 2013, we recorded a $0.7 million impairment loss on the equity securities as a result of certain events and changes in circumstances that had a significant adverse effect on the fair value of this investment. See Note 7 - 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.

17



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, 2013 and 2012 was, in thousands, $(78), and $446, respectively. SERP asset and liability balances were as follows:
(Amounts in Thousands)
December 31,
2013
 
June 30,
2013
SERP investment - current asset
$
8,269

 
$
7,031

SERP investment - other long-term asset
13,591

 
12,569

    Total SERP investment
$
21,860

 
$
19,600

 
 
 
 
SERP obligation - current liability
$
8,269

 
$
7,031

SERP obligation - other long-term liability
13,591

 
12,569

    Total SERP obligation
$
21,860

 
$
19,600


Note 10. Assets Held for Sale
At December 31, 2013, in thousands, assets totaling $1,121 were classified as held for sale and consisted of an idle Furniture segment manufacturing facility and land located in Jasper, Indiana. An underutilized aircraft totaling, in thousands, $1,525 was classified as held for sale during the first quarter of fiscal year 2014, and was subsequently sold during the second quarter of 2014. Also during the first quarter of fiscal year 2014, an EMS segment facility and land in Gaylord, Michigan was sold. During the six months ended December 31, 2013, we recognized pre-tax losses, in thousands, of $1,198 for impairment on the aircraft and $311 related to the sale of the Gaylord, Michigan facility and land. The pre-tax impairment loss on the aircraft was recorded on the Selling and Administrative Expenses line of the Condensed Consolidated Statements of Income and the pre-tax loss on the sale of the Gaylord, Michigan facility and land was recognized in the Restructuring Expense line of the Condensed Consolidated Statements of Income. The loss on sale of the Gaylord, Michigan facility and land and the impairment loss on the aircraft were both reported in unallocated corporate for segment reporting purposes.
At June 30, 2013, in thousands, assets totaling $1,521 were classified as held for sale and consisted of $400 for the facility and land related to the Gaylord, Michigan exited operation and $1,121 for the 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.


18



Note 11. 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)
2013
 
2012
 
2013
 
2012
Service cost
$
246

 
$
192

 
$
483

 
$
392

Interest cost
35

 
48

 
69

 
98

Amortization of prior service costs
72

 
72

 
143

 
143

Amortization of actuarial loss
104

 
80

 
194

 
172

Net periodic benefit cost
$
457

 
$
392

 
$
889

 
$
805

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

Note 12. Stock Compensation Plan
During fiscal year 2014, the following stock compensation was awarded to officers and key employees. All awards were granted under the Amended and Restated 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, 2013.
Performance Shares
 
Quarter Awarded
 
Shares
 
Grant Date Fair Value (4)
Annual Performance Shares – Class A (1)
 
1st Quarter
 
229,500

 

$11.05

Long-Term Performance Shares – Class A (2)
 
1st Quarter
 
405,500

 

$11.05

Annual Performance Shares – Class A (1)
 
2nd Quarter
 
4,958

 
$10.95 - $11.07

Long-Term Performance Shares – Class A (2)
 
2nd Quarter
 
18,102

 
$10.95 - $11.07

 
 
 
 
 
 
 
Unrestricted Shares
 
Quarter Awarded
 
Shares
 
Grant Date Fair Value (4)
Unrestricted Shares (Director Compensation) – Class B (3)
 
1st Quarter
 
15,017

 

$10.09

Unrestricted Shares – Class B (3)
 
1st Quarter
 
1,000

 

$10.01


(1)
Annual performance shares were awarded to officers. Payouts will be based upon the fiscal year 2014 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. Other unrestricted shares were awarded to a key employee as consideration for service to the Company. Unrestricted shares do not have vesting periods, holding periods, restrictions on sale, or other restrictions.

19



(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 13. 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 9 - Investments and Note 8 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements. The combined carrying value of the notes receivable, net of a $0.1 million allowance, was $1.4 million as of December 31, 2013. As of June 30, 2013, the combined carrying value of the notes receivable was $1.5 million, net of a $0.4 million allowance. For both periods, the combined carrying value was included on the Receivables line of our Condensed Consolidated Balance Sheet as the entire balance is classified as short-term.
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, 2013.

Note 14. Credit Quality and Allowance for Credit Losses of Notes Receivable
Kimball monitors credit quality and associated risks of notes receivable on an individual basis based on criteria such as financial stability of the party and collection experience in conjunction with general economic and market conditions. The allowance on the notes receivable from an electronics engineering services firm was reduced as payments were received during the year-to-date period of fiscal year 2014. We hold collateral for the note receivable from the sale of an Indiana facility thereby mitigating the risk of loss. As of December 31, 2013 and June 30, 2013, Kimball had no material past due outstanding notes receivable.
 
As of December 31, 2013
 
As of June 30, 2013
(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
$
1,404

 
$

 
$
1,404

 
$
1,413

 
$

 
$
1,413

Notes Receivable from an Electronics Engineering Services Firm
154

 
136

 
18

 
521

 
440

 
81

Other Notes Receivable
67

 
20

 
47

 
127

 
85

 
42

Total
$
1,625

 
$
156

 
$
1,469

 
$
2,061

 
$
525

 
$
1,536



20



Note 15. Subsequent Event
On January 20, 2014, the Company announced that its Board of Directors unanimously approved a plan to spin off its EMS segment.  The separation will result in two independent publicly-traded companies:  Kimball International, Inc., an industry leader in the sale and manufacture of quality office and hospitality furniture; and Kimball Electronics, Inc., a leading global provider of electronic manufacturing services to the automotive, medical, industrial, and public safety markets. The Company expects the spin-off, which is intended to be tax-free to Share Owners, to be completed in approximately 8 - 12 months. 
Execution of the transaction requires further work on structure, management, governance and other significant matters.  The completion of the spin-off is subject to certain customary conditions, including receipt of a legal opinion as to the tax-free nature of the spin-off and regulatory approvals, as well as certain other matters.  The Company can make no assurance that any spin-off transaction will ultimately occur, or, if one does occur, its terms or timing.
The disclosures within these condensed consolidated financial statements do not take into account the proposed spin-off of the EMS segment.

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 our 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 automotive, medical, industrial, and public safety industries. The Furniture segment provides furniture for the office and hospitality industries, sold under Kimball's family of brand names.
The pace of the economic recovery has been improving. However, key economic indicators continue to show mixed trends, and major fiscal uncertainties are a threat to future growth which has the tendency to cause disruption in business strategy, execution, and timing in many of the markets in which we compete.
Within the EMS segment, our focus is on the four key vertical markets of automotive, medical, industrial, and public safety. Our overall expectation for the EMS market is that of moderate growth, but with mixed demand. The automotive end market is benefiting from relative strength in the U.S. market and improvement in the Chinese market, while demand in other geographies such as Europe continues to be less certain due to the lingering 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 public safety market is being negatively impacted by lower spending and delays in ordering by government agencies coupled with a change in the mix of product within the public safety marketplace. Demand in the medical market remains stable.
In relation to the office furniture industry, the Business and Institutional Furniture Manufacturer Association (BIFMA) forecast (by IHS as of November 2013) projects a year-over-year increase of 5% for calendar year 2014. The hospitality furniture market forecast (November 2013 PwC and December 2013 PKF Hospitality Research reports) projects an increase in occupancy rates of 1% and an increase in RevPAR (Revenue Per Available Room) of 6% to 7% for calendar year 2014 over calendar year 2013.
The Company's 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. 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 is designed to adjust compensation expense as profits change.
We continue to maintain a strong balance sheet, which included minimal long-term debt of $0.3 million and Share Owners' equity of $425.3 million as of December 31, 2013. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facilities, was $211.8 million at December 31, 2013.

21



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:
We continue to focus on mitigating the impact of raw material commodity pricing pressures.
Due to the contract and project nature of the EMS and Furniture industries, fluctuation in the demand for the Company's products and variation in the gross margin on those projects is inherent to our business. Effective management of the manufacturing capacity is and will continue to be critical to our success. See the EMS and Furniture segment discussions below for further details regarding current sales and open order trends.
The Affordable Care Act is expected to increase our healthcare and related administrative expenses as the provisions of the law continue to 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.
Recent Developments
On January 20, 2014, the Company announced that its Board of Directors unanimously approved a plan to spin off its EMS segment.  The separation will result in two independent publicly-traded companies:  Kimball international, Inc., an industry leader in the sale and manufacture of quality office and hospitality furniture; and Kimball Electronics, Inc., a leading global provider of electronic manufacturing services to the automotive, medical, industrial, and public safety markets. The Company expects the spin-off, which is intended to be tax-free to Share Owners, to be completed in approximately 8 - 12 months.   

Execution of the transaction requires further work on structure, management, governance and other significant matters.  The completion of the spin-off is subject to certain customary conditions, including receipt of a legal opinion as to the tax-free nature of the spin-off and regulatory approvals, as well as certain other matters.  The Company can make no assurance that any spin-off transaction will ultimately occur, or, if one does occur, its terms or timing.

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, the successful completion of the spin-off, adverse changes in the global 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, 2013.
Financial Overview - Consolidated
Second quarter fiscal year 2014 consolidated net sales were $320.3 million compared to second quarter fiscal year 2013 net sales of $295.1 million, a 9% increase, driven by a net sales increase in the EMS segment of 10%, and a net sales increase in the Furniture segment of 6%. In the second quarter of fiscal year 2014 Kimball recorded net income of $9.2 million, or $0.24 per Class B diluted share compared to net income of $4.2 million, or $0.11 per Class B diluted share in the second quarter of fiscal year 2013.
Net sales for the six-month period ended December 31, 2013 of $637.8 million increased 9% from net sales of $583.3 million for the same period of the prior fiscal year due to a 10% net sales increase in the Furniture segment and a 9% net sales increase in the EMS segment. Net income for the six-month period ended December 31, 2013 totaled $18.4 million, or $0.48 per Class B diluted share, inclusive of $3.0 million, or $0.08 per Class B diluted share of after-tax distributions resulting from the settlement of two anti-trust class action lawsuits of which the Company was a class member. Net income for the six-month period ended December 31, 2012 totaled $9.1 million, or $0.24 per Class B diluted share.

22



Consolidated gross profit as a percent of net sales improved to 20.9% for the second quarter of fiscal year 2014 compared to 18.7% for the second quarter of fiscal year 2013 on improved margins in both the EMS and Furniture segments. For the year-to-date period of fiscal year 2014, gross profit as a percent of net sales improved to 20.1% compared to 18.9% for the year-to-date period of fiscal year 2013 primarily due to improved margins in the Furniture segment. Sales mix (as depicted in the table below) had a negligible impact on the consolidated gross margin. Gross profit is discussed in more detail in the following segment discussions.
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
 
2013
 
2012
 
2013
 
2012
EMS segment net sales as % of total
57%
 
56%
 
56%
 
56%
Furniture segment net sales as % of total
43%
 
44%
 
44%
 
44%
Second quarter fiscal year 2014 consolidated selling and administrative expenses as a percent of net sales increased 1.1 percentage points and 16% in absolute dollars compared to the second quarter of fiscal year 2013 primarily due to increased incentive compensation costs, increased warranty reserves, and higher sales and marketing expenses. In addition, we had an unfavorable variance within selling and administrative expenses of $1.0 million related to the normal revaluation to fair value of our Supplemental Employee Retirement Plan (SERP) liability. The impact from the change in the SERP liability that was recognized in selling and administrative expenses was exactly offset within the SERP investment for which the revaluation was recorded in Other Income (Expense), and thus there was no effect on net income.
For the first six months of fiscal year 2014 consolidated selling and administrative expenses as a percent of net sales increased 0.7 of a percentage point and increased 14% in absolute dollars compared to the first six months of fiscal year 2013, primarily due to increased incentive compensation costs, increased salary expenses, higher sales and marketing expenses, increased warranty reserves and a $1.2 million pre-tax impairment charge on an aircraft which was classified as held for sale in the first quarter of fiscal year 2014 and subsequently sold. In addition, we had an unfavorable variance with selling and administrative expenses of $1.3 million related to the normal revaluation to fair value of our Supplemental Employee Retirement Plan (SERP) liability.
Other General Income in the first half of fiscal year 2014 included $5.0 million of pre-tax income resulting from settlement proceeds related to two antitrust class action lawsuits of which Kimball was a class member. The lawsuits alleged that certain EMS segment suppliers conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to purchasers of those components. We recorded no Other General Income during the first half of fiscal year 2013.
Kimball recognized $0.4 million of pre-tax restructuring charges in the first half of fiscal year 2014 primarily related to the sale of the Gaylord, Michigan facility, which resulted in a $0.3 million pre-tax loss. During the first half of fiscal year 2013, we recognized $0.1 million of pre-tax restructuring charges primarily related to EMS Fremont and Gaylord miscellaneous plant closure charges. All restructuring activities related to previously announced restructuring plans are complete.
Other Income (Expense) consisted of the following:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands)
2013
 
2012
 
2013
 
2012
Interest Income
$
65

 
$
121

 
$
133

 
$
231

Interest Expense
(7
)
 
(8
)
 
(14
)
 
(15
)
Foreign Currency/Derivative Gain (Loss)
116

 
(124
)
 
230

 
(516
)
Gain on Supplemental Employee Retirement Plan Investments
1,278

 
283

 
2,329

 
986

Impairment Loss on Privately-Held Investment

 
(735
)
 

 
(735
)
Gain (Loss) on Stock Warrants
4

 
(751
)
 
8

 
(752
)
Other
(227
)
 
(143
)
 
(438
)
 
(269
)
Other Income (Expense), net
$
1,229

 
$
(1,357
)
 
$
2,248

 
$
(1,070
)
The prior year 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 Note 8 - Derivative Instruments and Note 9 - Investments of Notes

23



to the Condensed Consolidated Financial Statements for more detailed information. The variance in the Foreign Currency/Derivative Gain (Loss) was primarily driven by foreign exchange movement that impacted the EMS segment.
Our effective tax rate for the first half of fiscal year 2014 was 23.8% compared to 23.6% for the first half of fiscal year 2013. The effective tax rate for the six month period ended December 31, 2013 was favorably impacted by two adjustments within the EMS segment which included a $0.7 million adjustment related to a tax law change in Mexico and a $0.5 million adjustment to a foreign deferred tax asset valuation allowance. Fiscal year-to-date 2013 included a higher mix of earnings in foreign jurisdictions which have lower statutory tax rates than the U.S.
Comparing the balance sheet as of December 31, 2013 to June 30, 2013, the accounts payable balance increase was primarily driven by an increase in deposits received on custom orders. The accrued expenses balance increase was driven by an increase in income tax accruals primarily as a result of higher taxable income, and higher accrued compensation as a result of Kimball's improved profitability under its profit sharing incentive bonus plan.

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)
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
Net Sales
$
181.3

 
$
164.2

 
10
%
 
$
356.9

 
$
328.4

 
9
%
Operating Income
$
5.4

 
$
5.0

 
8
%
 
$
15.4

 
$
10.0

 
53
%
Operating Income %
3.0
%
 
3.0
%
 
 
 
4.3
%
 
3.1
%
 
 
Net Income
$
5.2

 
$
3.9

 
33
%
 
$
12.7

 
$
7.2

 
76
%
Open Orders
$
151.3

 
$
180.8

 
(16
)%
 
 
 
 
 
 
Second quarter and year-to-date fiscal year 2014 EMS segment net sales increased 10% and 9%, respectively, compared to the second quarter and year-to-date period of fiscal year 2013 on solid sales growth to customers in the automotive and industrial markets. Second quarter and year-to-date fiscal year 2014 net sales to the public safety and medical industries declined compared to the same periods of fiscal year 2013. Open orders for our EMS products were down 16% as of December 31, 2013 compared to December 31, 2012 with the majority of the decline related to Johnson Controls, Inc., as explained below. 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 fiscal year-to-date 2014 EMS segment gross profit as a percent of net sales improved 0.4 and 0.1 percentage points when compared to the second quarter and year-to-date periods of fiscal year 2013, respectively, primarily due to the impact of a $1.1 million inventory write-down related to a single customer in the prior year second quarter which favorably impacted the year-over-year comparisons. Gross profit as a percent of net sales was positively impacted by a favorable shift in product mix during both the second quarter and fiscal year-to-date 2014 periods.
EMS segment selling and administrative expenses in the second quarter ended December 31, 2013 compared to the same period ended December 31, 2012 increased 0.5 of a percentage point as a percent of net sales and increased 18% in absolute dollars primarily due to increased incentive compensation costs related to the improved earnings. For the first six months of fiscal year 2014 EMS segment selling and administrative expenses as a percent of net sales increased 0.3 of a percentage point and increased 13% in absolute dollars compared to the first six months of fiscal year 2013, primarily due to increased incentive compensation costs and increased salary expenses.
EMS segment Other General Income in the first half of fiscal year 2014 included $5.0 million of pre-tax income, or $3.0 million after-tax, resulting from settlement proceeds related to two antitrust class action lawsuits of which Kimball was a class member. We recorded no Other General Income during the first half of fiscal year 2013.
EMS segment Other Income (Expense) for the second quarter and year-to date periods of fiscal year 2014 totaled expense of $0.1 million and $0.2 million, respectively, compared to expense of $0.4 million and $1.0 million recorded during the second quarter

24



and year-to-date periods of fiscal year 2013, respectively. The variances were primarily related to net foreign currency exchange movement.
EMS segment net income in the second quarter of fiscal year 2014 was favorably impacted by a $0.7 million adjustment related to a tax law change in Mexico. Fiscal 2014 year-to-date EMS segment net income was also favorably impacted by a $0.5 million adjustment to the foreign deferred tax asset valuation allowance.
Included in this segment are a significant amount of sales to Johnson Controls, Inc. (JCI) which accounted for the following portions of consolidated net sales and EMS segment net sales:
 
Three Months Ended
 
Six Months Ended
  
December 31
 
December 31
 
2013
 
2012
 
2013
 
2012
Johnson Controls, Inc. sales as a percent of consolidated net sales
8
%
 
10
%
 
9
%
 
9
%
Johnson Controls, Inc. sales as a percent of EMS segment net sales
14
%
 
18
%
 
16
%
 
17
%
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 customers 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. Volumes for one of our largest contracts with JCI, which accounted for approximately $12 million and $24 million in sales in the second quarter and first half of fiscal year 2014, respectively, are expected to decline beginning in fiscal year 2015 as certain JCI programs reach end-of-life. In addition, during the second quarter of our fiscal year 2014, due to available capacity JCI decided to in-source other programs that are currently manufactured by our EMS segment which accounted for approximately $8 million and $18 million in sales in the second quarter and first half of fiscal year 2014, respectively. The transition to JCI's in-sourcing will occur in stages and is expected to begin in our fourth quarter of fiscal year 2014 with the final transfer expected to be substantially complete by January 2015. Gross profit as a percent of net sales on the JCI product approximates the overall segment gross margin.
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 our performance are contained in Kimball's Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

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)
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
Net Sales
$
139.0

 
$
131.0

 
6
%
 
$
280.9

 
$
255.0

 
10
%
Operating Income
$
6.5

 
$
1.9

 
233
%
 
$
11.2

 
$
4.7

 
137
%
Operating Income %
4.6
%
 
1.5
%
 
 
 
4.0
%
 
1.9
%
 
 
Net Income
$
4.5

 
$
1.5

 
196
%
 
$
7.4

 
$
3.2

 
132
%
Open Orders
$
99.4

 
$
77.9

 
28
%
 
 
 
 
 
 
The net sales improvement in the Furniture segment for the second quarter and year-to-date period of fiscal year 2014 compared to the second quarter and year-to-date period of fiscal year 2013 was driven by increased net sales of both hospitality furniture and office furniture. The increase in furniture net sales during the second quarter and year-to-date period of fiscal year 2014 was due to increased sales volumes as well as the positive impact of price increases net of discounting.

25



Sales to all vertical markets within the office furniture industry increased compared to the second quarter and year-to-date periods of fiscal year 2013 except for a decline in sales to the federal government. Open orders for furniture products at December 31, 2013 increased 28% when compared to the open order level as of December 31, 2012 as open orders increased for hospitality furniture and open orders for office furniture also increased, but to a lesser extent. 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 4.8 percentage points in the second quarter of fiscal year 2014 compared to the second quarter of fiscal year 2013. The improvement was driven by sales price increases, our increased focus on project execution and process discipline, and operational improvements.
Furniture segment gross profit as a percent of net sales increased by 2.3 percentage points for the year-to-date period of fiscal year 2014 when compared to the same period of fiscal year 2013. Benefits realized in fiscal year-to-date 2014 from sales price increases, our increased focus on project execution and process discipline, and operational improvements were partially offset by an unfavorable shift in sales mix.
Compared to the second quarter of fiscal year 2013, second quarter fiscal year 2014 Furniture segment selling and administrative expenses as a percent of net sales increased 1.7 percentage points and increased 13% in absolute dollars. The higher costs were primarily driven by increased incentive compensation costs, increased warranty reserves, and higher sales and marketing costs. For the first six months of fiscal year 2014 Furniture segment selling and administrative expenses as a percent of net sales increased 0.2 of a percentage point and increased 11% in absolute dollars compared to the first six months of fiscal year 2013, primarily due to increased incentive compensation costs, increased warranty reserves, higher sales and marketing expenses, increased salary expenses, and higher commissions resulting from the higher sales.
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, 2013.

Liquidity and Capital Resources
Working capital at December 31, 2013 was $232.4 million compared to working capital of $214.4 million at June 30, 2013. The current ratio was 2.0 at both December 31, 2013 and June 30, 2013.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (DSO), for the six-month period ended December 31, 2013 was 46.7 days as compared to 44.1 days for the six-month period ended December 31, 2012. The DSO increase was primarily driven by the mix of sales among customers in the EMS 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, 2013 decreased to 53.1 days from 57.1 days for the six-month period ended December 31, 2012. The PDSOH improvement was driven by EMS segment success in managing inventory levels as the business grows. 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 credit facilities, totaled $211.8 million at December 31, 2013 compared to $185.2 million at June 30, 2013.
Our cash and cash equivalents position improved to $129.6 million at December 31, 2013 from $103.6 million at June 30, 2013, with $115.8 million held in the U.S. as of December 31, 2013. We had no short-term borrowings outstanding as of December 31, 2013 or June 30, 2013. Operating activities provided $45.1 million of cash in the six-month period ended December 31, 2013 compared to $30.0 million in the six-month period ended December 31, 2012. During the six-month period ended December 31, 2013, we reinvested $15.8 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 of dividends in the six-month period ended December 31, 2013. Consistent with our historical dividend policy, the Company's Board of Directors will evaluate the appropriate dividend payment on a quarterly basis. During the remainder of fiscal year 2014 and the foreseeable future, 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.
The Company maintains a $75 million credit facility (the "primary facility") with a maturity date of December 2017 that allows for both issuances of letters of credit and cash borrowings. The primary 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.

26



At both December 31, 2013 and June 30, 2013, we had no short-term borrowings outstanding under the primary facility. At December 31, 2013, we had $1.1 million in letters of credit against the primary facility.
The primary 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 debt covenants of the credit facility during the six-month period ended December 31, 2013.
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, 2013
 
Credit Agreement
 
Excess
Minimum Net Worth 
 
$
424,083,000

 
$
362,000,000

 
$
62,083,000

Debt to EBITDA Ratio
 
0.02

 
3.00

 
2.98

The debt to EBITDA ratio is calculated on a rolling four-quarter basis as defined in the credit agreement.
The Company believes its principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under the primary facility will be sufficient for the foreseeable future.
In addition to the $75 million primary facility, Kimball can opt to utilize a foreign credit facility to satisfy short-term cash needs of its EMS segment operation in Poland rather than funding from intercompany sources. This foreign credit facility allows for multi-currency borrowings up to 6 million Euro equivalent (approximately $8.3 million U.S. dollars at December 31, 2013 exchange rates) which can be canceled at any time by either the bank or by us. We had no borrowings outstanding under this foreign credit facility as of December 31, 2013 or June 30, 2013.
Total availability to borrow in USD equivalent under both of our credit facilities totaled $82.2 million at December 31, 2013.
Another source of funds in addition to our credit facilities 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/programs, 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.
The preceding statements include 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 2014, no level 1 or level 2 financial instruments 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. 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 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.


27



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, 2013.

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 5 - 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. 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.
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, 2013 and June 30, 2013, the reserve for returns and allowances was $1.1 million and $1.7 million, respectively. The returns and allowances reserve approximated 1% to 2% of gross trade receivables during the two-year period preceding December 31, 2013.
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, 2013 and June 30, 2013 was $2.3 million and $1.8 million, respectively. During the two-year period preceding December 31, 2013, this reserve 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 17% and 16% of consolidated inventories at December 31, 2013 and June 30, 2013, respectively, including approximately 88% and 87% of the Furniture segment inventories at December 31, 2013 and June 30, 2013, 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

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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, 2013 and June 30, 2013, our accrued liabilities for self-insurance exposure were $4.3 million and $3.5 million, respectively.
Taxes - Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. 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 $4.0 million and $3.9 million at December 31, 2013 and June 30, 2013, respectively.

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

Forward-Looking Statements
Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of words such as "believes," "estimates," "projects," "expects," "intends," "anticipates," "forecasts," and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the successful completion of the spin-off of the EMS segment, adverse changes in 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, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to market risks from the information disclosed in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.



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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, 2013, 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, 2013 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1A. Risk Factors
A comprehensive disclosure of risk factors related to Kimball can be found in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. Below are two additional risk factors related to the recently announced spin-off of our Electronics Manufacturing Services (EMS) segment.
We recently announced that we are pursuing a plan to spin off our EMS segment into a new, independent publicly traded company. This will likely require significant time and attention of our management and we may not be able to complete the transaction or, if completed, realize the anticipated benefits. On January 20, 2014 we announced a plan to separate into two independent companies through a spin-off of our EMS segment. Completion of the transaction will be contingent upon final approval of our Board of Directors, our receipt of a tax opinion of counsel that the spin-off will qualify as a tax-free distribution to us and our Share Owners, the effectiveness of a Registration Statement on Form 10 and other conditions. Additionally, our ability to complete the spin-off in a timely manner, if at all, could be affected by unanticipated developments or changes in market conditions. For these and other reasons, we may not be able to complete the spin-off within the expected time frame or at all. Even if completed, we may not realize the anticipated benefits from the spin-off and the spin-off may result in additional operating expenses for both companies in the aggregate. Any such difficulties could adversely affect our financial position, results of operations, or cash flows.
The proposed spin-off of our EMS segment could result in substantial tax liability to us and our Share Owners. Among the conditions for completing the spin-off will be our receipt of a tax opinion of counsel substantially to the effect that, for U.S. federal income tax purposes, the spin-off will qualify as a tax-free distribution under certain sections of the Internal Revenue Code. If any of the factual representations and assumptions made in connection with obtaining the tax opinion are inaccurate or incomplete in any material respect, then we will not be able to rely on the tax opinion. Furthermore, the tax opinion will not be binding on the Internal Revenue Service (IRS) or the courts. Accordingly, the IRS or the courts may challenge the conclusions stated in the tax opinion and such challenge could prevail.
If, notwithstanding our receipt of the tax opinion, the spin-off is determined to be taxable, then (i) we would be subject to tax as if we sold the stock distributed in the spin-off in a taxable sale for its fair market value; and (ii) each Share Owner who receives stock distributed in the spin-off would be treated as receiving a distribution of property in an amount equal to the fair market value of such stock that would generally result in varied tax liabilities for each Share Owner depending on the facts and circumstances at the time of the spin-off, which may be substantial.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
A share repurchase program authorized by the Board of Directors was announced on October 16, 2007. The program allows for the repurchase of up to two million shares of any combination of Class A and Class B shares and will remain in effect until all shares authorized have been repurchased. Kimball did not repurchase any shares under the repurchase program during the second quarter of fiscal year 2014. At December 31, 2013, two million shares remained available under the repurchase program.
Item 5. Other Information
Kimball announced the appointment of Dean M. Vonderheide, 60, to the Company's executive committee effective February 1, 2014.
Since 2008, Mr. Vonderheide has served the Company as Vice President Organizational Effectiveness with responsibility for the ongoing development of the corporate culture and improvement in organizational effectiveness with specific emphasis on attraction, engagement, development and retention of our talent. Included in the scope of his responsibilities are the areas of human resources, employee safety, facility security, sustainable environmental practices and regulatory compliance.
The Company and Mr. Vonderheide have entered into an employment agreement as indicated in Exhibit 10(a) to this Form 10-Q.


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Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
3(a)
Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2012)
3(b)
Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed February 25, 2013)
10(a)*
Form of Employment Agreements dated January 1, 2014 between the Company and Lonnie P. Nicholson and dated February 1, 2014 between the Company and Dean M. Vonderheide (Similar to the Employment Agreements signed by other Executive Officers and incorporated by reference to Exhibit 10(h) to the Company's Form 10-K for the year ended June 30, 2011)
11
Computation of Earnings Per Share
31.1
Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
* Constitutes management contract or compensatory arrangement

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

 
 
KIMBALL INTERNATIONAL, INC.
 
 
 
 
By:
/s/ JAMES C. THYEN
 
 
James C. Thyen
President,
Chief Executive Officer
 
 
February 5, 2014
 
 
 
 
 
 
 
By:
/s/ ROBERT F. SCHNEIDER
 
 
Robert F. Schneider
Executive Vice President,
Chief Financial Officer
 
 
February 5, 2014

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Kimball International, Inc.
Exhibit Index
Exhibit No.
 
Description
3(a)
 
Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2012)
3(b)
 
Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed February 25, 2013)
10(a)*
 
Form of Employment Agreements dated January 1, 2014 between the Company and Lonnie P. Nicholson and dated February 1, 2014 between the Company and Dean M. Vonderheide (Similar to the Employment Agreements signed by other Executive Officers and incorporated by reference to Exhibit 10(h) to the Company's Form 10-K for the year ended June 30, 2011)
11
 
Computation of Earnings Per Share
31.1
 
Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
* Constitutes management contract or compensatory arrangement


34