0000055772-18-000022.txt : 20180828 0000055772-18-000022.hdr.sgml : 20180828 20180828164842 ACCESSION NUMBER: 0000055772-18-000022 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 137 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180828 DATE AS OF CHANGE: 20180828 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIMBALL INTERNATIONAL INC CENTRAL INDEX KEY: 0000055772 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 350514506 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03279 FILM NUMBER: 181042143 BUSINESS ADDRESS: STREET 1: 1600 ROYAL ST CITY: JASPER STATE: IN ZIP: 47549 BUSINESS PHONE: 8124821600 MAIL ADDRESS: STREET 1: 1600 ROYAL STREET CITY: JASPER STATE: IN ZIP: 47549 FORMER COMPANY: FORMER CONFORMED NAME: JASPER CORP DATE OF NAME CHANGE: 19740826 10-K 1 kbal10k06302018q4.htm KIMBALL INTERNATIONAL, INC. FORM 10-K Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018
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
kimballlogonobrand.jpg
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
 
Name of each exchange on which registered
Class B Common Stock, par value $0.05 per share
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes  o    No  x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o        Accelerated filer  x                    Non-accelerated filer o   Smaller reporting company  o Emerging growth company  o                                                            (Do not check if a smaller reporting company) 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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
Class A Common Stock is not publicly traded and, therefore, no market value is available, but it is convertible on a one-for-one basis into Class B Common Stock.  The aggregate market value of the Class B Common Stock held by non-affiliates, as of December 29, 2017 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $676.1 million, based on 97.2% of Class B Common Stock held by non-affiliates.

The number of shares outstanding of the Registrant’s common stock as of August 27, 2018 was:
          Class A Common Stock - 263,991 shares
          Class B Common Stock - 36,898,278 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareowners to be held on October 30, 2018, are incorporated by reference into Part III.





KIMBALL INTERNATIONAL, INC.
FORM 10-K INDEX
 
  
Page No.
 
 
PART I
  
 
PART II
 
 
PART III
 
 
PART IV
  


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PART I
Forward-Looking Statements
This document contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These are statements made by management, using their best business judgment based upon facts known at the time of the statements or reasonable estimates, about future results, plans, or future performance and business of the Company. Such statements involve risk and uncertainty, and their ultimate validity is affected by a number of factors, both specific and general. They should not be construed as a guarantee that such results or events will, in fact, occur or be realized as actual results may differ materially from those expressed in these forward-looking statements. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “seeks,” “likely,” “future,” “may,” “might,” “should,” “would,” “will,” and similar expressions. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historical results. We make no commitment to update these factors or to revise any forward-looking statements for events or circumstances occurring after the statement is issued, except as required in current and quarterly periodic reports filed with the Securities and Exchange Commission (“SEC”) or otherwise by law. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the outcome of a governmental review of our subcontractor reporting practices, adverse changes in global economic conditions, the impact of changes in tariffs, increased global competition, significant reduction in customer order patterns, loss of key suppliers, loss of, or significant volume reductions from, key contract customers, financial stability of key customers and suppliers, relationships with strategic customers and product distributors, availability or cost of raw materials, components, or services, changes in the regulatory environment, or similar unforeseen events. Additional risks and uncertainties discussed in Item 1A - Risk Factors of this report could also cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our results to differ materially from those expressed in forward-looking statements.
At any time when we make forward-looking statements, we desire to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 where factors could cause actual results to differ materially from forward-looking statements.
Item 1 - Business
As used herein, the terms “Company,” “Kimball International,” “we,” “us,” or “our” refer to Kimball International, Inc., the Registrant, and its subsidiaries. Reference to a year relates to a fiscal year, ended June 30 of the year indicated, rather than a calendar year unless the context indicates otherwise. Additionally, references to the first, second, third, and fourth quarters refer to those respective quarters of the fiscal year indicated.
Overview
Kimball International was incorporated in Indiana in 1939. Our corporate headquarters is located at 1600 Royal Street, Jasper, Indiana.
We create design driven, innovative furnishings sold through our family of brands: Kimball, National, and Kimball Hospitality. Our diverse portfolio offers solutions for the workplace, learning, healing, and hospitality environments. Our values and integrity are demonstrated daily by living our Guiding Principles and creating a culture of caring that establishes us as an employer of choice. “We Build Success” by establishing long-term relationships with customers, employees, suppliers, shareowners and the communities in which we operate.
We have been in the furniture business since 1950. Our core markets include the commercial, hospitality, healthcare, education, government, and finance markets. Through each of our brands, we offer a wide range of possibilities for creating functional environments that convey just the right image for each unique setting, as furniture solutions are tailored to the end user’s needs and demands. The workplace model is evolving to optimize human interaction, and Kimball and National provide furniture solutions which create spaces where people can connect. Our rich wood heritage and craftsmanship remain, while new products and mixed materials are integrated into our product portfolio, satisfying the marketplace’s need for multifunctional, open accommodations throughout all industries. Our furniture solutions are used in collaborative and open work space areas, conference and meeting/huddle rooms, training rooms, private offices, learning areas, classrooms, lobby/reception areas, and dining/café areas with a vast mix of wood, metal, laminate, paint, fabric, solid surface, and plastic options. In addition, we offer products designed specifically for the healthcare market such as patient/exam room and lounge seating and casegoods. In the hospitality industry, Kimball Hospitality works with leading designers, purchasing agents, and hotel owners to create furniture

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which extends the unique ambiance of a property into guest rooms and public spaces by providing furniture solutions for hotel properties and mixed use developments, including commercial and residential. Hospitality products include, but are not limited to, headboards, tables, seating, vanities, casegoods, lighting, and products that are enhanced with technology features with a broad mix of wood, metal, stone, laminate, finish, glass, and fabric options.
Production currently occurs in Company-owned or leased facilities located in the United States and Mexico. We also engage with third-party manufacturers within the U.S. as well as internationally to produce select finished goods and accessories for our brands. In the United States, we have manufacturing facilities and showrooms in nine states and the District of Columbia. Financial information by geographic area for each of the three years in the period ended June 30, 2018 is included in Note 14 - Geographic Information of Notes to Consolidated Financial Statements and is incorporated herein by reference.
Spin-Off of Kimball Electronics
On October 31, 2014 (“Distribution Date”), we completed the spin-off of our Electronic Manufacturing Services (“EMS”) segment by distributing the related shares of Kimball Electronics, Inc. (“Kimball Electronics”), on a pro rata basis, to our shareowners of record as of October 22, 2014. After the Distribution Date, we no longer beneficially own any Kimball Electronics shares and Kimball Electronics is an independent publicly traded company. Kimball International, Inc. trades on the Nasdaq Stock Market LLC (“Nasdaq”) under the ticker symbol “KBAL” and Kimball Electronics, Inc. trades on Nasdaq under the ticker symbol “KE”.
The disclosures within this Part I describe the continuing operations of Kimball International, Inc. after the spin-off.
Recent Business Changes
Acquisition of D’style, Inc.
During the second quarter of fiscal year 2018, we acquired certain assets of D’style, Inc. (“D’style”), headquartered in Chula Vista, California. This acquisition expanded our reach into hospitality public spaces and added an attractive product portfolio of solutions for the residential market through the acquired Allan Copley Designs brand. These offerings enable us to take advantage of the trend where hospitality, residential and commercial designs are merging. As part of this acquisition, we also acquired all of the capital stock of Diseños de Estilo S.A. de C.V. headquartered in Tijuana, Mexico, another member of the D’style group which manufactures exclusively for D’style, strengthening our North American manufacturing footprint and serving as a distribution channel to the Mexico and Latin America hospitality markets. The cash paid for the acquisition totaled $18.2 million. An earn-out of up to $2.2 million may be paid, which is contingent based upon fiscal year 2018 and 2019 D’style, Inc. operating income compared to a predetermined target for each fiscal year. See Note 2 - Acquisition of Notes to Consolidated Financial Statements for more information on the acquisition.
Capacity Utilization Restructuring Plan
In November 2014, we announced a capacity utilization restructuring plan which included the consolidation of our metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and the reduction of our Company plane fleet from two jets to one.
The transfer of work from our Idaho facility involved the start-up of metal fabrication capabilities in an existing Company-owned facility, along with the transfer of certain assembly operations into two additional existing Company-owned facilities, all located in southern Indiana. All production was transferred out of the Idaho facility as of March 2016, after which work continued in the Indiana facilities to train employees, ramp up production and eliminate the inefficiencies associated with the start-up of production in these facilities. The improvement of customer delivery, supply chain dynamics, and reduction of transportation costs began to generate pre-tax annual savings of approximately $5 million in fiscal year 2017. In addition, during the first quarter of fiscal year 2017, we sold our Post Falls, Idaho facility and land. See Note 4 - Property and Equipment of Notes to Consolidated Financial Statements for more information on the sale of the Idaho facility.
The reduction of our plane fleet from two jets to one reduced our cost structure while aligning the plane fleet size with our needs following the spin-off of Kimball Electronics on October 31, 2014. Previously, one of our jets was used primarily for the successful strategy of transporting customers to visit our showrooms, offices, research and development center, and manufacturing locations, while the remaining jet was used primarily for management travel. The plane used primarily for management travel was sold in the third quarter of fiscal year 2015, and as a result, we began realizing the expected annual pre-tax savings of $0.8 million. We believe that our location in rural Jasper, Indiana and the location of our manufacturing locations in small towns away from major metropolitan areas necessitates the need for the remaining jet to efficiently transport customers.

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Outsourcing of Shipping Function
During fiscal year 2018 we outsourced the remainder of our outbound shipping that was previously transported by our Company-owned shipping fleet to a dedicated freight provider and sold our fleet of over-the-road tractors and trailers. The outsourcing to a dedicated freight provider is expected to partially mitigate increasing transportation costs from non-dedicated freight carriers. In addition, we expect to minimize risks associated with operating an internal shipping fleet and to increase utilization of the outsourced transportation fleet over our previous internal fleet which was being impacted by driver shortages. The dedicated freight provider operates transportation equipment with our Company branding. We continue to operate Company-owned tractors and trailers to move products between our production facilities and distribution warehouses.
Seasonality
The impact of seasonality on our revenue includes lower sales in the third quarter of our fiscal year due to the buying season of the government, lower sales to educational institutions during our second and third fiscal quarters, and lower sales of hospitality furniture during times of high hotel occupancy such as the summer months.
Locations
As of June 30, 2018, our products were primarily produced at eleven plants: seven located in Indiana, two in Kentucky, one in Virginia, and one in Mexico. In addition, select finished goods are purchased from domestic and foreign sources. As described above, our facility in Idaho was sold in fiscal year 2017. We continually assess manufacturing capacity and adjust such capacity as necessary.
A facility in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom was sold near the end of fiscal year 2017. We leased a portion of the facility back until December 2017 to facilitate the transition of those functions to other existing Indiana locations. Furniture showrooms are currently maintained in eight cities in the United States. Office space is leased in Dongguan, Guangdong, China and Ho Chi Minh City, Vietnam to facilitate sourcing of select finished goods and components from the Asia Pacific Region. As a result of the acquisition of D’style, we also lease office and manufacturing space in Chula Vista, California and Tijuana, Mexico.
Marketing Channels
Our furniture is marketed to end users by both independent and employee sales representatives, office furniture dealers, wholesalers, brokers, designers, purchasing companies, and catalog houses throughout North America and on an international basis. Customers can access our products globally through a variety of distribution channels.
We categorize our sales by the following vertical markets:
Commercial - The largest portion of our business is in the commercial market. We are a full-facility provider offering products for a variety of commercial applications including: office, collaborative and open plan, lobby-lounge, conferencing and meeting/huddle, training, dining/café, learning, lobby and reception, and other public spaces.
Education - Whether K-12, higher education, vocational training or any other learning institution, we understand that furniture for education needs to enhance learning and social environments. We offer flexible, collaborative, and technology-driven furnishings designed to make students and faculty more productive and comfortable.
Healthcare - We are focused on better outcomes for patients, their families, the staff that heals them, and the environments surrounding them by offering products to value-conscious healthcare customers, including hospitals, clinics, physician office buildings, long-term care facilities, and assisted living facilities throughout the country.
Hospitality - We offer a complete package of products for guest rooms and public spaces plus service support to the hospitality industry. We partner with the most recognized hotel brands to meet their specific requirements for properties throughout the world by working with a worldwide manufacturing base to offer the best solution to fulfill the project.
Finance - Banking and financial offices require affordable, functional, and stylish environments. Our versatile and customizable furnishings offer sophisticated styles for reception areas, employee work spaces, executive offices, and boardrooms.
Government - We supply office furniture including desks, tables, seating, bookcases and filing and storage units for federal, state, and local government offices, as well as other government related entities. We hold two Federal Supply Service contracts with the General Services Administration (“GSA”) that are subject to government subcontract reporting requirements. We also partner with multiple general purchasing organizations which assist public agencies such as state and local governments with furniture purchases. The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. During fiscal year

5



2018, sales related to our GSA contracts were approximately 7.5% of our consolidated sales, with one contract accounting for approximately 5.3% of our consolidated sales and the other contract accounting for approximately 2.2% of our consolidated sales.
A table showing our net sales by end market vertical is included in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Major Competitive Factors
Our products are sold in the contract furniture and hospitality furniture industries. These industries have similar major competitive factors which include price in relation to quality and appearance, product design, the utility of the product, supplier lead time, reliability of on-time delivery, sustainability, and the ability to respond to requests for special and non-standard products. We offer payment terms similar to industry standards and in unique circumstances may grant alternate payment terms.
Certain industries are more price sensitive than others, but all expect on-time, damage-free delivery. In addition to the many options available on our standard furniture products, custom furniture is produced to customer specifications and shipping timelines on a project basis.
Competitors
There are numerous furniture manufacturers competing within the marketplace, with a significant number of competitors offering similar products.
Our competition includes furniture manufacturers such as Steelcase Inc., Herman Miller, Inc., Knoll, Inc., HNI Corporation, and a large number of smaller privately-owned furniture manufacturers, both domestic and foreign-based.
Working Capital
We do not believe that we, or the industry in general, have any special practices or special conditions affecting working capital items that are significant for understanding our furniture business. We do receive advance payments from customers on select furniture projects primarily in the hospitality industry. 
Raw Material Availability
Certain components used in the production of furniture are manufactured internally and are generally readily available, as are other raw materials used in the production of wood and non-wood furniture. Certain fabricated seating components, wood frame assemblies as well as finished furniture products, electrical components, stone, fabrics, and fabricated metal components, which are generally readily available, are sourced on a global scale in an effort to provide quality products at the lowest total cost. The cost and availability of both domestic and foreign sourced product could be impacted if tariffs are imposed on such products.
Order Backlog
The aggregate sales price of products pursuant to open orders, which may be canceled by the customer, was as follows:
(Amounts in Millions)
June 30,
2018
 
June 30,
2017
Order Backlog
$
148.9

 
$
131.6

Of the order backlog increase, $7.5 million was due to orders of D’style products in fiscal year 2018, and $2.0 million was due to the acceleration of orders into the fourth quarter of fiscal year 2018 in connection with a pricing increase for one of our brands announced during the fourth quarter of fiscal year 2018 that took effect on July 2, 2018. The open orders as of June 30, 2018 are expected to be filled within the next fiscal year. Open orders may not be indicative of future sales trends.
Research and Development
Research and development activities include the development of manufacturing processes, engineering and testing procedures, major process and technology improvements, new product development and product redesign, and information technology initiatives.

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Research and development costs were approximately:
 
Year Ended June 30
(Amounts in Millions)
2018
 
2017
 
2016
Research and Development Costs
$7
 
$7
 
$6
Intellectual Property
In connection with our business operations, we hold both trademarks and patents in various countries and continuously have additional pending trademarks and patents. The intellectual property which we believe to be the most significant to the Company includes: Kimball, National, D’style, Fringe, Waveworks, Xsite, Narrate, Pairings, and Dock, which are all registered trademarks. Our patents expire at various times depending on the patent’s date of issuance.
Environment and Energy Matters
Our operations are subject to various federal, state, local, and foreign laws and regulations with respect to environmental matters. We believe that we are in substantial compliance with present laws and regulations and that there are no material liabilities related to such items.
We are dedicated to excellence, leadership, and stewardship in matters of protecting the environment and communities in which we have operations. Reinforcing our commitment to the environment, six of our showrooms and one non-manufacturing location were designed under the guidelines of the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) for Commercial Interiors program. One manufacturing facility was designed under the LEED Operations and Maintenance program guidelines. Our National brand headquarters is Fitwel certified, which is a building certification that supports healthier workplace environments to improve occupant health and productivity.
We believe that continued compliance with foreign, federal, state, and local laws and regulations which have been enacted relating to the protection of the environment will not have a material effect on our capital expenditures, earnings, or competitive position. We believe capital expenditures for environmental control equipment during the next two fiscal years ending June 30, 2020, will not represent a material portion of total capital expenditures during those years.
Our manufacturing operations require the use of natural gas and electricity. Federal and state regulations may control the allocation of fuels available to us, but to date we have experienced no interruption of production due to such regulations. In our wood furniture manufacturing plants, a portion of energy requirements are satisfied internally by the use of our own scrap wood produced during the manufacturing of product.
Employees
 
June 30
2018
 
June 30
2017
United States
2,921

 
3,024

Foreign Countries
153

 
65

Total Employees
3,074

 
3,089

Our U.S. operations are not subject to collective bargaining arrangements. Outside of the U.S., approximately 52 employees are represented by worker’s unions that operate to promote the interests of workers. We believe that our employee relations are good.
Available Information
We make available free of charge through our website, https://www.kimballinternational.com/public-filings, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. All reports we file with the SEC are also available via the SEC website, http://www.sec.gov, or may be read and copied at the SEC Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Our Internet website and the information contained on, or accessible through, such website is not incorporated into this Annual Report on Form 10-K.

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Item 1A - Risk Factors
The following important risk factors could affect future results and events, causing results and events to differ materially from those expressed or implied in forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition, and results of operations and should be carefully considered before deciding to invest in, or retain, shares of our common stock. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also affect our business, financial condition, or results of operations. Because of these and other factors, past performance should not be considered an indication of future performance.
Changes to government regulations may significantly increase our operating costs in the United States and abroad. Legislative and regulatory reforms by the U.S. federal and foreign governments could significantly impact our profitability by burdening us with forced cost choices that are difficult to recover with increased pricing. For example:
We depend on suppliers globally to provide materials, parts, finished goods, and components for use in our products. We utilize both steel and aluminum in our products, most of which is sourced domestically. The U.S. recently imposed tariffs of 25% on steel and 10% on aluminum imported from several countries which could adversely impact our input costs. The government has also recently proposed to expand its list of products subject to tariffs to include furniture products, parts, and components, and if approved, the landed cost of our products could increase materially, which would reduce our net income if we are unable to mitigate the additional cost. Additional tariffs or changes in global trade agreements or in U.S. governmental import/export regulations could have an adverse impact on our financial condition, results of operations, or cash flows.
We conduct business with entities in Canada and Mexico; therefore, a modification or withdrawal from the North American Free Trade Agreement by the U.S. federal government could have an adverse impact on our financial condition, results of operations, or cash flows.
We import a portion of our wooden furniture products and are thus subject to an anti-dumping tariff specifically on wooden bedroom furniture supplied from China. The tariffs are subject to review and could result in retroactive and prospective tariff rate increases which could have an adverse impact on our financial condition, results of operations, or cash flows.
State and foreign regulations are increasing in many areas such as hazardous waste disposal, labor relations, employment practices and data privacy, such as the California Consumer Privacy Act. Compliance with these regulations could require us to update our processes and could have an adverse impact on our financial condition, results of operations, or cash flows.
We may be unable to purchase a sufficient amount of materials, parts, and components for use in our products at a competitive price, in a timely manner, or at all. We depend on suppliers globally to provide timely delivery of materials, parts, and components for use in our products. We monitor the financial stability of suppliers when feasible, as the loss of a significant supplier could have an adverse impact on our operations. Certain finished products and components we purchase are primarily manufactured in select regions of the world and issues in those regions could cause manufacturing delays. In addition, delays can occur related to the transport of products and components via container ships, which load and unload through various U.S. ports which sometimes experience congestion. Price increases of commodity components could have an adverse impact on our profitability if we cannot offset such increases with other cost reductions or by price increases to customers. New tariffs or trade regulations which have been and could be imposed by the U.S. federal government may adversely impact our access, price, and delivery of finished products and components from foreign sources, and therefore adversely affect our profitability. Materials we utilize are generally available, but future availability is unknown and could impact our ability to meet customer order requirements. If suppliers fail to meet commitments to us in terms of price, delivery, or quality, it could interrupt our operations and negatively impact our ability to meet commitments to customers.
Uncertain macroeconomic and industry conditions, or a sustained slowdown or significant downturn in our markets, could adversely impact demand for our products and adversely affect operating results. Market demand for our products, which impacts revenues and gross profit, is influenced by a variety of economic and industry factors such as:
global consumer confidence;
volatility and the cyclical nature of worldwide economic conditions;
weakness in the global financial markets;
general corporate profitability of the end markets to which we sell;
credit availability to the end markets to which we sell;
service-sector unemployment rates;
commercial property vacancy rates;

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new office construction and refurbishment rates;
deficit status of many governmental entities which may result in declining purchases of office furniture;
uncertainty surrounding potential reform of the Affordable Care Act; and
new hotel and casino construction and refurbishment rates.
We must make decisions based on order volumes in order to achieve manufacturing efficiency. These decisions include determining what level of additional business to accept, production schedules, component procurement commitments, and personnel requirements, among various other considerations. We must constantly monitor the changing economic landscape and may modify our strategic direction accordingly. If we do not react quickly enough to the changes in market or economic conditions, it could result in lost customers, decreased market share, and increased operating costs.
A shortage of capacity in the trucking industry could drive increases in freight costs. We outsource inbound and outbound shipping to third-party contract carriers, including a dedicated freight provider that operates transportation equipment with our Company branding, and other commercial contract carriers. We have experienced pressure on freight costs as the demand exceeds the capacity of available trucking fleets, particularly for commercial contract carriers. If capacity remains tight, and we are unable to mitigate a freight cost increase through our supply chain planning or by increasing prices on our products, it could adversely affect our profitability.
Changes in U.S. fiscal and tax policies may adversely affect our business. On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because Kimball International has a June 30 fiscal year-end, the lower corporate federal income tax rate was phased in, resulting in a U.S. federal statutory tax rate of 28.1% for our fiscal year ended June 30, 2018. The statutory federal tax rate will be 21% in subsequent fiscal years. Fiscal year 2018 included approximately $3.3 million in reduced income tax expense to reflect federal taxes on current year taxable income at the lower blended effective tax rate, partially offset by a discrete tax impact of $1.8 million in additional expense as a result of applying the new lower federal income tax rates to our net tax assets. The changes included in the Tax Act are broad and complex and future impacts may be dependent on interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, or changes in accounting standards for income taxes or related interpretations in response to the Tax Act. While the Tax Act reduced our current rate, future changes to the federal tax rate could have an adverse impact. In addition, states or foreign jurisdictions may amend their tax laws and policies in response to the Tax Act, which could have a material impact on our future results and our effective tax rate.
Fluctuations in our effective tax rate could have a significant impact on our financial position, results of operations, or cash flows. We are subject to income taxes as well as non-income based taxes, mainly in the United States. Judgment is required in determining the worldwide provision for income taxes, other tax liabilities, interest, and penalties. 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. We have also made assumptions about the realization of deferred tax assets. Changes in these assumptions could result in a valuation allowance for these assets. Final determination of tax audits or tax disputes may be different from what is currently reflected by our income tax provisions and accruals.
Our failure to retain our existing management team, maintain our engineering, technical, and manufacturing process expertise, or continue to attract qualified personnel could adversely affect our business. We depend significantly on our executive officers and other key personnel. Our success is also dependent on keeping pace with technological advancements and adapting services to provide manufacturing capabilities which meet customers’ changing needs. To do that, we must retain our qualified engineering and technical personnel and successfully anticipate and respond to technological changes in a cost effective and timely manner. Our culture and guiding principles focus on continuous training, motivation, and development of employees, and we strive to attract, motivate, and retain qualified personnel. Failure to retain our executive officers and retain and attract other key personnel could adversely affect our business. Mr. Schneider, our Chief Executive Officer, plans to retire effective October 31, 2018. The Board of Directors has created a Continuity Committee to facilitate our succession planning process relative to Mr. Schneider’s retirement; however, the change in executive leadership could impact the execution of our business strategy. If we encounter difficulties in the transition, that could affect our relationship with our customers and could adversely impact our financial results.
Our sales to the U.S. government are subject to compliance with regulatory and contractual requirements and noncompliance could expose us to liability or impede current or future business. The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting.

9



In March 2016, in connection with a renewal of one of our contracts with the GSA, we became aware of noncompliance and inaccuracies in our GSA subcontractor reporting. Accordingly, we retained outside legal counsel to assist in conducting an internal review of our reporting practices, and we self-reported the matter and the results of the internal review to the GSA. We have promptly responded to inquiries from the GSA since our initial reporting, have met with government officials as requested on two occasions, and intend to cooperate fully with any further inquiries or investigations. While we are not able to reasonably estimate the future financial impact, if any, of the possible sanctions at this time, any of them could, if imposed, have a material adverse impact on our business, future financial position, results of operations, or cash flows. The timing of the government’s review and determination of any outcome of these matters is uncertain and, therefore, it is unclear as to when and to what extent, if any, our previously issued financial targets might be impacted. We have incurred, and may incur additional, legal and related costs in connection with our internal review and the government’s response to this matter. During fiscal year 2018, sales related to our GSA contracts were approximately 7.5% of our consolidated sales, with one contract accounting for approximately 5.3% of our consolidated sales and the other contract accounting for approximately 2.2% of our consolidated sales.
We may pursue acquisitions that present risks and may not be successful. Our sales growth plans may occur through both organic growth and acquisitions. Acquisitions involve many risks that could have an adverse effect on our business, financial condition or results of operations, including:
difficulties in identifying suitable acquisition candidates and in negotiating and consummating acquisitions on terms attractive to us;
difficulties in the assimilation of the operations of the acquired company;
the diversion of resources, including diverting management’s attention from our current operations;
risks of entering new geographic or product markets in which we have limited or no direct prior experience;
the potential loss of key customers of the acquired company;
the potential loss of key employees of the acquired company;
the potential incurrence of indebtedness to fund the acquisition;
the potential issuance of common stock for some or all of the purchase price, which could dilute ownership interests of our current shareowners;
the acquired business not achieving anticipated revenues, earnings, cash flow, or market share;
excess capacity;
failure to achieve the expected synergies resulting from the acquisition;
inaccurate assessment of undisclosed, contingent, or other liabilities or problems and unanticipated costs associated with the acquisition;
incorrect estimates made in accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill that could adversely affect our financial results; and
dilution of earnings.
We may not be successful in launching start-up operations. We are committed to growing our business, and therefore from time to time, we may determine that it would be in our best interests to start up a new operation. Start-up operations involve a number of risks and uncertainties, such as funding the capital expenditures related to the start-up operation, developing a management team for the new operation, diversion of management focus away from current operations, and creation of excess capacity. Any of these risks could have a material adverse effect on our financial position, results of operations, or cash flows. 
Our business depends on information technology systems and digital capabilities which are implemented in a manner intended to minimize the risk of a cybersecurity breach or other such threat, including the misappropriation of assets or other sensitive information, or data corruption which could cause operational disruption. An ongoing commitment of significant resources is required to maintain and enhance existing information systems and implement the new and emerging technology necessary to meet customer expectations and compete in our markets. The techniques used to obtain unauthorized access change frequently and are not often recognized until after they have been launched. We recognize that any breach could disrupt our operations, damage our reputation, erode our share value, drive remediation expenses, or increase costs related to the mitigation of, response to, or litigation arising from any such issue. We cannot guarantee that our cybersecurity measures will completely prevent others from obtaining unauthorized access to our enterprise network, system and data.
Many states and the U.S. federal government are increasingly enacting laws and regulations to protect consumers against identity theft and to also protect their privacy. As our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions. If we are the target of a cybersecurity attack resulting in unauthorized disclosure of sensitive or confidential data, we may be required to execute costly notification procedures. Compliance with these laws will likely increase the costs of doing business. If we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential claims for damages and other remedies, which could harm our business.

10



If the distribution or certain internal transactions undertaken relating to the spin-off do not qualify as tax-free transactions, the Company, our shareowners as of the Distribution Date, and Kimball Electronics could be subject to substantial tax liabilities. On October 10, 2014 we received a favorable written tax ruling from the Internal Revenue Service (“IRS”) that our stock unification in connection with the spin-off will not cause us to recognize income or gain as a result of the unification. In addition, we have also received an opinion of Squire Patton Boggs (US) LLP to the effect that the distribution satisfies the requirements to qualify as a tax-free transaction (except for cash received in lieu of fractional shares) for U.S. federal income tax purposes to the Company, our shareowners and Kimball Electronics under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”).
The tax ruling and the tax opinion rely on the accuracy of certain factual representations and assumptions provided by the Company and Kimball Electronics in connection with obtaining the tax ruling and tax opinion, including with respect to post-spin-off operations and conduct of the parties. If these factual representations and assumptions are inaccurate or incomplete in any material respect, we will not be able to rely on the tax ruling and/or the tax opinion.
Furthermore, the tax opinion will not be binding on the IRS or the courts. Accordingly, the IRS or the courts may reach conclusions with respect to the spin-off that are different from the conclusions reached in the tax opinion. 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 Kimball Electronics common stock in a taxable sale for its fair market value; and (ii) each shareowner who received Kimball Electronics common stock would be treated as receiving a distribution of property in an amount equal to the fair market value of the Kimball Electronics common stock that would generally result in varied tax liabilities for each shareowner depending on the facts and circumstances.
We entered into a Tax Matters Agreement with Kimball Electronics that governs the respective rights, responsibilities and obligations of us and Kimball Electronics after the spin-off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local and foreign income taxes, other tax matters and related tax returns. The Tax Matters Agreement also provides special rules for allocating tax liabilities in the event that the spin-off or certain internal transactions undertaken in anticipation of the spin-off do not qualify as tax-free transactions. Though valid as between us and Kimball Electronics, the Tax Matters Agreement will not be binding on the IRS.
Pursuant to the Tax Matters Agreement, (i) we have agreed (a) not to enter into any transaction that could cause any portion of the spin-off to be taxable to Kimball Electronics, including under Section 355(e) of the Code; and (b) to indemnify Kimball Electronics for any tax liabilities resulting from such transactions entered into by us; and (ii) Kimball Electronics has agreed to indemnify us for any tax liabilities resulting from such transactions entered into by Kimball Electronics. In addition, under U.S. Treasury regulations, each member of our consolidated group at the time of the spin-off (including Kimball Electronics) would be jointly and severally liable for the resulting U.S. federal income tax liability if all or a portion of the spin-off does not or certain internal transactions undertaken in anticipation of the spin-off do not qualify as tax-free transactions. These obligations may discourage, delay or prevent a change of control of our Company.
If Kimball Electronics were to default in its obligation to us to pay taxes under the Tax Matters Agreement, we could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of tax liabilities. To the extent we are responsible for any liability under the Tax Matters Agreement, there could be a material adverse impact on our business, financial condition, results of operations and cash flows.
We may be exposed to the credit risk of our customers who are adversely affected by weakness in market conditions. Weakness in market conditions may drive an elevated risk of potential bankruptcy of our customers resulting in a greater risk of uncollectible outstanding accounts receivable. The realization of these risks could have a negative impact on our profitability.
Reduction of purchases by or the loss of a significant number of customers could reduce revenues and profitability. Significant declines in the level of purchases by customers or the loss of a significant number of customers could have a material adverse effect on our business. A reduction of, or uncertainty surrounding, government spending could also have an adverse impact on our sales levels. We can provide no assurance that we will be able to fully replace any lost sales, which could have an adverse effect on our financial position, results of operations, or cash flows.
We operate in a highly competitive environment and may not be able to compete successfully. The office and hospitality furniture industries are competitive due to numerous global manufacturers competing in the marketplace. In times of reduced demand for office furniture, large competitors may have greater efficiencies of scale or may apply more pressure to their aligned distribution to sell their products exclusively which could lead to reduced opportunities for our products. While we work toward reducing costs to respond to pricing pressures, if we cannot achieve the proportionate reductions in costs, profit margins may suffer.

11



Our operating results could be adversely affected by increases in the cost of fuel and other energy sources. The cost of energy is a critical component of freight expense and the cost of operating manufacturing facilities. Increases in the cost of energy could reduce our profitability.
We are subject to manufacturing inefficiencies due to the transfer of production among our facilities and other factors. At times we may experience labor or other manufacturing inefficiencies due to factors such as new product introductions, transfers of production among our manufacturing facilities, a sudden decline in sales, a new operating system, or turnover in personnel. Manufacturing inefficiencies could have an adverse impact on our financial position, results of operations, or cash flows.
A change in our sales mix among our diversified product offerings could have a negative impact on our gross profit margin. Changes in product sales mix could negatively impact our gross margin as margins of different products vary. We strive to improve the margins of all products, but certain products have lower margins in order to price the product competitively. An increase in the proportion of sales of products with lower margins could have an adverse impact on our financial position, results of operations, or cash flows.
Our international operations involve financial and operational risks. We have a manufacturing operation outside the United States in Mexico, and administrative offices in China and Vietnam which coordinate with suppliers in those countries. These international operations are subject to a number of risks, including the following:
economic and political instability;
warfare, riots, terrorism, and other forms of violence or geopolitical disruption;
compliance with laws, such as the Foreign Corrupt Practices Act, applicable to U.S. companies doing business outside the United States;
changes in foreign regulatory requirements and laws;
tariffs and other trade barriers;
potentially adverse tax consequences including the manner in which multinational companies are taxed in the U.S.; and
foreign labor practices.
These risks could have an adverse effect on our financial position, results of operations, or cash flows. In addition, fluctuations in exchange rates could impact our operating results. Our risk management strategy can include the use of derivative financial instruments to hedge certain foreign currency exposures. Any hedging techniques we implement contain risks and may not be entirely effective. Exchange rate fluctuations could also make our products more expensive than competitor's products not subject to these fluctuations, which could adversely affect our revenues and profitability in international markets.
If efforts to introduce new products or start-up new programs are not successful, this could limit sales growth or cause sales to decline. We regularly introduce new products to keep pace with workplace trends and evolving regulatory and industry requirements, including environmental, health, and safety standards such as sustainability and ergonomic considerations, and similar standards for the workplace and for product performance. Shifts in workforce demographics, working styles, and technology may impact the quantity and types of furniture products purchased by our customers as commercial office spaces occupy smaller footprints and collaborative, open-plan workstations gain popularity. The introduction of new products or start-up of new programs require the coordination of the design, manufacturing, and marketing of such products. The design and engineering required for certain new products or programs can take an extended period of time, and further time may be required to achieve customer acceptance. Accordingly, the launch of any particular product or program may be delayed or may be less successful than we originally anticipated. Difficulties or delays in introducing new products or programs, or lack of customer acceptance of new products or programs could limit sales growth or cause sales to decline.
If customers do not perceive our products and services to be innovative and of high quality, our brand and name recognition and reputation could suffer. We believe that establishing and maintaining good brand and name recognition and a good reputation is critical to our business. Promotion and enhancement of our name and brands will depend on the effectiveness of marketing and advertising efforts and on successfully providing design driven, innovative, and high quality products and superior services. If customers do not perceive our products and services to be design driven, innovative, and of high quality, our reputation, brand and name recognition could suffer, which could have a material adverse effect on our business.
A loss of independent sales representatives, dealers, or other sales channels could lead to a decline in sales. Our office furniture is marketed to end users through both independent and employee sales representatives, office furniture dealers, wholesalers, brokers, designers, purchasing companies, and catalog houses. Our hospitality furniture is marketed to end users using independent sales representatives. A significant loss within any of these sales channels could result in a sales decline and thus have an adverse impact on our financial position, results of operations, or cash flows.

12



Failure to effectively manage working capital may adversely affect our cash flow from operations. We closely monitor inventory and receivable efficiencies and continuously strive to improve these measures of working capital, but customer financial difficulties, cancellation or delay of customer orders, transfers of production among our manufacturing facilities, or manufacturing delays could adversely affect our cash flow from operations.
We may not be able to achieve maximum utilization of our manufacturing capacity. Fluctuations and deferrals of customer orders may have a material adverse effect on our ability to utilize our fixed capacity and thus negatively impact our operating margins.
We could incur losses due to asset impairment. As business conditions change, we must continually evaluate and work toward the optimum asset base. It is possible that certain assets such as, but not limited to, facilities, equipment, goodwill, or other intangible assets, could be impaired at some point in the future depending on changing business conditions. Goodwill and certain intangible assets are tested for impairment annually or when triggering events occur. Such resulting impairment could have an adverse impact on our financial position and results of operations.
A failure to comply with the financial covenants under our $30 million credit facility could adversely impact us. Our credit facility requires us to comply with certain financial covenants. We believe the most significant covenants under this credit facility are the adjusted leverage ratio and the fixed charge coverage ratio. More detail on these financial covenants is discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of Part II of this Annual Report on Form 10-K. As of June 30, 2018, we had no borrowings under this credit facility and we had $1.4 million in letters of credit outstanding which reduced our borrowing capacity on the credit facility. At June 30, 2018, our cash and cash equivalents totaled $87.3 million. In the future, a default on the financial covenants under our credit facility could cause an increase in the borrowing rates or could make it more difficult for us to secure future financing which could adversely affect the financial condition of the Company.
Failure to protect our intellectual property could undermine our competitive position. We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of patent, trademark, copyright, and trade secret laws, as well as licensing agreements and third-party non-disclosure and assignment agreements. Because of the differences in foreign laws concerning proprietary rights, our intellectual property rights do not generally receive the same degree of protection in foreign countries as they do in the United States, and therefore in some parts of the world, we have limited protections, if any, for our intellectual property. Competing effectively depends, to a significant extent, on maintaining the proprietary nature of our intellectual property. The degree of protection offered by our various patents and trademarks may not be broad enough to provide significant proprietary protection or competitive advantages to the Company, and patents or trademarks may not be issued on pending or contemplated applications. In addition, not all of our products are covered by patents. It is also possible that our patents and trademarks may be challenged, invalidated, canceled, narrowed, or circumvented.
We may be sued by third parties for alleged infringement of their intellectual property rights and incur substantial litigation or other costs. We could be notified of a claim regarding intellectual property rights which could lead us to spend time and money to defend or address the claim. Even if the claim is without merit, it could result in substantial costs and diversion of resources.
Our insurance may not adequately protect us from liabilities related to product defects. We maintain product liability and other insurance coverage that we believe to be generally in accordance with industry practices, but our insurance coverage does not extend to field visits to repair, retrofit or replace defective products, or to product recalls. As a result, our insurance coverage may not be adequate to protect us fully against substantial claims and costs that may arise from liabilities related to product defects, particularly if we have a large number of defective products that we must repair, retrofit, replace, or recall.
Increases in the cost of providing employee healthcare benefits could reduce our profitability. There may continue to be upward pressure on the cost of providing healthcare benefits to our employees. We are self-insured for healthcare benefits so we incur the cost of claims, including catastrophic claims that may occasionally occur, with employees bearing only a limited portion of healthcare costs through employee healthcare premium withholdings. There can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce our profitability.
We are subject to extensive environmental regulation and significant potential environmental liabilities. Our past and present operation and ownership of manufacturing plants and real property are subject to extensive federal, state, local, and foreign environmental laws and regulations, including those relating to discharges in air, water, and land, the handling and disposal of solid and hazardous waste, and the remediation of contamination associated with releases of hazardous substances. In addition, the increased prevalence of global climate issues may result in new regulations that may negatively impact us. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist with respect to our

13



facilities and real property. Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures, some of which could be material. In addition, any investigations or remedial efforts relating to environmental matters could involve material costs or otherwise result in material liabilities.
Turnover in personnel could cause manufacturing inefficiencies. The demand for manufacturing labor in certain geographic areas makes retaining experienced production employees difficult. Turnover could result in lost time due to inefficiencies and additional training that could impact our operating results.
Natural disasters or other catastrophic events may impact our production schedules and, in turn, negatively impact profitability. Natural disasters or other catastrophic events, including severe weather, terrorist attacks, power interruptions, and fires, could disrupt operations and likewise our ability to produce or deliver products. Our manufacturing operations require significant amounts of energy, including natural gas and oil, and governmental regulations may control the allocation of such fuels. Employees are an integral part of our business and events such as a pandemic could reduce the availability of employees reporting for work. In the event we experience a temporary or permanent interruption in our ability to produce or deliver product, revenues could be reduced, and our business could be materially adversely affected. In addition, catastrophic events, or the threat thereof, can adversely affect U.S. and world economies, and could result in delayed or lost sales of our products. In addition, any continuing disruption in our computer system could adversely affect the ability to receive and process customer orders, manufacture products, and ship products on a timely basis, and could adversely affect relations with our customers, potentially resulting in a reduction in orders from customers or loss of customers. We maintain insurance to help protect us from costs relating to some of these matters, but such insurance may not be sufficient or paid in a timely manner to us in the event of such an interruption.
The value of our common stock may experience substantial fluctuations for reasons over which we may have little control. The value of our common stock could fluctuate substantially based on a variety of factors, including, among others:
actual or anticipated fluctuations in operating results;
announcements concerning our Company, competitors, or industry;
overall volatility of the stock market;
changes in the financial estimates of securities analysts or investors regarding our Company, the industry, or competitors;
general market or economic conditions; and
proxy contests or other shareowner activism.
We also provide financial targets for our expected operating results for future periods. While the information is provided based on current and projected data about the markets we deliver to and our operational capacity and capabilities, the financial targets are subject to risks and uncertainties. If our future results do not match our financial targets for a particular period, or if the financial targets are reduced in future periods, the value of our common stock could decline.
Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in results of operations and general economic, political, and market conditions, may adversely affect the value of our common stock.
Item 1B - Unresolved Staff Comments
None.

14



Item 2 - Properties
The location, number, and use of our major facilities, including our executive and administrative offices, as of June 30, 2018, are as follows:
 
Number of Facilities
Use
North America
 
 
United States:
 
 
   Indiana
15
Manufacturing, Warehouse, Office
   Kentucky
2
Manufacturing, Office
   California
1
Warehouse, Office
   Virginia
1
Manufacturing, Warehouse, Office
Mexico
1
Manufacturing, Office
Asia
 
 
   China
1
Office
   Vietnam
1
Office
Total Facilities
22
 
The listed facilities occupy approximately 3,227,000 square feet in aggregate, of which approximately 3,050,000 square feet are owned, and 177,000 square feet are leased.
During fiscal year 2017, a facility in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom was sold. We leased a portion of the facility back to facilitate the transition of those functions to other existing Indiana locations. The lease expired in fiscal year 2018.
During the second quarter of fiscal year 2018, we acquired certain assets of D’style, headquartered in Chula Vista, California, and all of the capital stock of Diseños de Estilo S.A. de C.V., a Mexican corporation located in Tijuana, Mexico, which resulted in our acquisition of 27,000 square feet and 33,000 square feet of leased space, respectively.
Generally, properties are utilized at normal capacity levels on a multiple shift basis. At times, certain facilities utilize a reduced second or third shift. Due to sales fluctuations, not all facilities were utilized at normal capacity during fiscal year 2018. We continually assess our capacity needs and evaluate our operations to optimize our service levels by geographic region.
Significant loss of income resulting from a facility catastrophe would be partially offset by business interruption insurance coverage.
Operating leases for all facilities and related land, including twelve leased office furniture showroom facilities which are not included in the table above, total 265,000 square feet and expire from fiscal year 2019 to 2027 with many of the leases subject to renewal options. The leased showroom facilities are in six states and the District of Columbia. See Note 5 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for additional information concerning leases.
We own approximately 331 acres of land which includes land where various facilities reside, including approximately 115 acres of land in the Kimball Industrial Park, Jasper, Indiana.
Item 3 - Legal Proceedings
We and our subsidiaries are not parties to any pending legal proceedings, other than ordinary routine litigation incidental to the business. The outcome of current routine pending litigation, individually and in the aggregate, is not expected to have a material adverse impact.
Item 4 - Mine Safety Disclosures
Not applicable.

15



Executive Officers of the Registrant
Our executive officers as of August 28, 2018 are as follows: 
(Age as of August 28, 2018)
Name
 
Age
 
Office and
Area of Responsibility
 
Executive Officer
Since Calendar Year
Robert F. Schneider
 
57
 
Chairman of the Board, Chief Executive Officer, Kimball International
 
1992
Donald W. Van Winkle
 
57
 
President, Chief Operating Officer, Kimball International
 
2010
Michelle R. Schroeder
 
53
 
Vice President, Chief Financial Officer, Kimball International
 
2003
Michael S. Wagner
 
46
 
Vice President, Kimball International;
President, Kimball
 
2014
R. Gregory Kincer
 
60
 
Vice President, Corporate Development, Kimball International
 
2014
Julia E. Heitz Cassidy
 
53
 
Vice President, Chief Ethics & Compliance Officer, General Counsel and Secretary, Kimball International
 
2014
Lonnie P. Nicholson
 
54
 
Vice President, Chief Administrative Officer, Kimball International
 
2014
Kourtney L. Smith
 
48
 
Vice President, Kimball International;
President, National Office Furniture
 
2015
Kathy S. Sigler
 
55
 
Vice President, Kimball International;
President, Kimball Hospitality
 
2018
Executive officers are elected annually by the Board of Directors.
Mr. Schneider was appointed Chairman of the Board, Chief Executive Officer in November 2014 and was appointed to our Board of Directors in February 2014. He led the Kimball Hospitality subsidiary in 2013 and 2014, and was Executive Vice President, Chief Financial Officer (“CFO”) from July 1997 to November 2014. He has been with the Company for 30 years in various financial and executive positions. As leader of Kimball Hospitality, he oversaw the business as it returned to profitability in fiscal year 2014. He was also responsible for strategic planning, SEC reporting, finance, capital structure, insurance, tax, internal audit, and treasury services as CFO of the Company. Mr. Schneider plans to retire effective October 31, 2018. The Board of Directors created a Continuity Committee to facilitate the succession planning process.
Mr. Van Winkle was appointed President, Chief Operating Officer in November 2014. He previously served as Executive Vice President, President — Furniture Group from March 2014 to November 2014. He also served as Vice President, President — Office Furniture Group from February 2010 until November 2013 when he was appointed Executive Vice President, President — Office Furniture Group. He had previously served as Vice President, General Manager of National from October 2003 until February 2010, and prior to that served as Vice President, Chief Finance and Administrative Officer for the Furniture Brands Group as well as other key finance roles within our Furniture business since joining the Company in January 1991.
Ms. Schroeder was appointed Vice President, Chief Financial Officer in November 2014. She previously served as Vice President and Chief Accounting Officer, a position she assumed in May 2009. She was appointed to Vice President in December 2004, served as Corporate Controller from August 2002 until May 2009, and prior to that served as Assistant Corporate Controller and Director of Financial Analysis. As CFO, Ms. Schroeder has responsibility for the accounting, internal audit, investor relations, tax and treasury functions, as well as setting financial strategy and policies for the Company.
Mr. Wagner was appointed President, Kimball in November 2014 and was also appointed as a Vice President of Kimball International, Inc. in February 2015. Prior to that, he served as Vice President, General Manager of Kimball. Since joining the Company in October 2013, Mr. Wagner has led the extensive sales growth and aggressive cost reductions at Kimball. Prior to joining the Company, he most recently served as Senior Vice President of Sales and Marketing with OFS Brands, Inc. (an office furniture manufacturing company) from 2004 until October 2013. His career spans over 20 years of experience in the office furniture industry with leadership positions in sales, sales management, marketing, and strategic planning.
Mr. Kincer was appointed Vice President, Corporate Development in November 2014. Prior to that, he served as Vice President, Business Development, Treasurer since 2006 with responsibility for global treasury operations managing Company-wide liquidity, commercial banking relationships, corporate debt facilities, foreign exchange risk, and insurance programs as well as the evaluation of acquisition opportunities. He also served in various finance and leadership roles of progressing responsibility since joining the Company in 1994.

16



Ms. Heitz Cassidy was appointed Vice President, General Counsel and Secretary in November 2014 and to the additional role of Chief Compliance Officer in July 2016, which was adjusted to Chief Ethics and Compliance Officer in October 2016, where she has the responsibility to provide and oversee the provision of legal advice and guidance as needed by the Company, oversee compliance with laws, assist in instilling and maintaining an ethical corporate culture, and implement and maintain our compliance policies and program. She provides strategic-thinking leadership, advice and counsel to our executive management, and as Secretary, assists the Board of Directors. She previously served as Deputy General Counsel since August 2009, with responsibility for handling all day-to-day legal activities of the Company and was appointed to Vice President in October 2013. She joined the Company in 1996 as an associate corporate counsel and has held positions of increasing responsibility within the legal department during her career.
Mr. Nicholson was appointed Vice President, Chief Administrative Officer in February 2015 with responsibility for the human resources and information technology functions. He also served as Vice President, Chief Information Officer from January 2014 until March 2015. Throughout 2013 he served as Director, Business Analytics and then Vice President, Business Analytics, with oversight of strategic application of data analysis, social media and mobile computing in support of the growth of our information management into more predictive analysis in order to build greater responsiveness to customer needs and improvement of operational decision making. He also served as Director of Organizational Development from November 2011 until January 2013, and Director of Employee Engagement from November 2008 until November 2011 following other roles of advancing responsibility in the areas of application development, systems analysis, process re-engineering, lean/continuous improvement and enterprise resource planning since joining the Company in 1986.
Ms. Smith was appointed President, National Office Furniture in January 2018 and has served as Vice President of Kimball International, Inc. since October 2015. Prior to January 2018, she held the position of President, Kimball Hospitality from August 2015 until January 2018, where she was responsible for strategic growth and direction. Previously, she served as Vice President, Marketing for National Office Furniture, a position she assumed in 2010 where she led product development, marketing, sustainability, vertical markets, and increasing brand awareness in the architect and design community. Prior to that, she held various other roles of increasing responsibility in marketing, product development, sales and service. She has over 25 years of experience in the office and hospitality industries.
Ms. Sigler was appointed President, Kimball Hospitality and also appointed as a Vice President of Kimball International, Inc. in January 2018. She is responsible for the strategic growth and direction of Kimball Hospitality. Prior to that, she served as Vice President, Operations, for the Kimball brand from February 2015 until January 2018, where she was responsible for the strategic and day-to-day execution of all direct manufacturing and manufacturing support (engineering, global supply chain, quality and continuous improvement) functions. From December 2012 until February 2015, she served as Director of Operations of a Kimball brand manufacturing facility. From August 2004 to December 2012, she held operational leadership roles of increasing responsibility within the Kimball brand. Before her time with the Kimball brand, Ms. Sigler held numerous roles in Kimball Hospitality from 1992 to 2004, including customer service, master scheduling, sales operations management, demand management, and program management.


17



PART II

Item 5 - Market for Registrant’s Common Equity, Related Shareowner Matters and Issuer Purchases of Equity Securities
Market Prices
Our Class B common stock trades on the Global Select Market of Nasdaq under the symbol: KBAL. High and low sales prices by quarter for the last two fiscal years as quoted by the Nasdaq system were as follows:
 
2018
 
2017
 
High
 
Low
 
High
 
Low
First Quarter
$
20.24

 
$
15.60

 
$
13.46

 
$
10.99

Second Quarter
$
20.96

 
$
15.40

 
$
18.00

 
$
11.97

Third Quarter
$
20.17

 
$
15.70

 
$
17.98

 
$
15.66

Fourth Quarter
$
17.70

 
$
15.88

 
$
18.94

 
$
15.84

There is no established public trading market for our Class A common stock. However, Class A shares are convertible on a one-for-one basis into Class B shares.
Dividends
Dividends declared totaled $10.5 million and $9.0 million for fiscal years 2018 and 2017, respectively. Included in these figures are dividends computed and accrued on unvested restricted share units. Dividends on these restricted share units accumulate and, when the restricted share units vest, are paid in shares of our common stock, with the number of shares determined based on the closing price of our common stock on the vesting date. Dividends per share declared by quarter for fiscal year 2018 compared to fiscal year 2017 were as follows:
 
2018
 
2017
First Quarter
$
0.07

 
$
0.06

Second Quarter
0.07

 
0.06

Third Quarter
0.07

 
0.06

Fourth Quarter
0.07

 
0.06

Total Dividends
$
0.28

 
$
0.24


Shareowners
On August 27, 2018, our Class A common stock was owned by 108 shareowners of record, and our Class B common stock was owned by 1,291 shareowners of record, of which 50 also owned Class A common stock. 
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item concerning securities authorized for issuance under equity compensation plans is incorporated by reference to Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareowner Matters of Part III of this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
A share repurchase program authorized by the Board of Directors was announced on October 16, 2007. The program allowed for the repurchase of up to two million shares of common stock. During fiscal year 2017, we repurchased all remaining shares originally authorized.
On August 11, 2015 an additional two million shares of common stock were authorized by the Board of Directors for repurchase and will remain in effect until all shares authorized have been repurchased. The Board of Directors can discontinue this repurchase program at any time. At June 30, 2018, 1.2 million shares remained available under the repurchase program.

18



During each of fiscal years 2018 and 2017, we repurchased 0.5 million shares of our common stock. The following table presents a summary of our share repurchases during the fourth quarter of fiscal year 2018:
Period
 
Total Number
of Shares
Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1 (April 1 - April 30, 2018)
 
16,530

 
$
16.52

 
16,530

 
1,236,816
Month #2 (May 1 - May 31, 2018)
 
3,900

 
$
16.39

 
3,900

 
1,232,916
Month #3 (June 1 - June 30, 2018)
 
11,210

 
$
16.01

 
11,210

 
1,221,706
Total
 
31,640

 
$
16.32

 
31,640

 
 
Performance Graphs
The following performance graphs are not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate them by reference into such a filing.
The first graph below compares the cumulative total return to shareowners of our common stock from June 30, 2013 through June 30, 2018, the last business day in the respective fiscal years, to the cumulative total return of the Nasdaq Stock Market (U.S. and Foreign) and a peer group index for the same period of time.
The spin-off of Kimball Electronics is reflected as an increase in the total cumulative return to shareowners as a result of each shareowner receiving a distribution of three shares of Kimball Electronics for every four shares of the Company. The increase in the total cumulative return was calculated based on the value of Kimball Electronics stock, using a 30-day volume weighted average price calculation to eliminate the impact of stock price volatility immediately after the October 31, 2014 spin-off date.
Due to the diversity of our operations prior to the spin-off date, we are not aware of any public companies that are directly comparable. Therefore, the peer group index is comprised of publicly traded companies in both the furniture industry and in our former EMS segment, as follows:
Furniture peers:  HNI Corporation, Knoll, Inc., Steelcase Inc., Herman Miller, Inc.
EMS peers (applicable through the October 31, 2014 spin-off):  Benchmark Electronics, Inc., Jabil, Inc., Plexus Corp.
In order to reflect the segment allocation of Kimball International prior to the October 31, 2014 spin-off date, a market capitalization-weighted index was first computed for each peer group, then a composite peer group index was calculated based on each segment’s proportion of net sales to total consolidated sales for fiscal year 2014 and for fiscal year 2015 through the October 31, 2014 spin-off date. After the spin-off date, only the Furniture peer companies were used in the capitalization-weighted peer group index. The public companies included in the peer groups have a larger revenue base than our furniture business and our former EMS business.

19



The graph assumes $100 is invested in our common stock and each of the two indexes at the closing market quotations on June 30, 2013 and that dividends and the Kimball Electronics spin-off stock distribution are reinvested in Kimball International. The performances shown on the graph are not necessarily indicative of future price performance.
chart-2d8e17c04817559ebf2.jpg

 
2013
2014
2015
2016
2017
2018
Kimball International, Inc.
$
100.00

$
174.54

$
230.35

$
220.16

$
327.85

$
322.46

Nasdaq Stock Market (U.S. & Foreign)
$
100.00

$
131.17

$
150.10

$
147.58

$
189.34

$
234.02

Peer Group Index
$
100.00

$
113.84

$
127.88

$
118.66

$
113.09

$
118.06


20



The spin-off of Kimball Electronics, which represented more than half of our Company in sales and the majority of earnings, makes comparable long-term stock price performance very difficult. Publicly available stock price analyses, such as five-year stock price trends, are not representative of our performance as stock prices in the pre-spin period are not comparable to stock prices in the post-spin period. To aid in trending our performance, below is a cumulative total return performance graph from the spin-off date forward.
comparisioncumquart.jpg


21



Item 6 - Selected Financial Data
 
Year Ended June 30
 (Amounts in Thousands, Except for Per Share Data)
2018
 
2017
 
2016
 
2015
 
2014
Net Sales
$
685,600

 
$
669,934

 
$
635,102

 
$
600,868

 
$
543,817

Income from Continuing Operations
$
34,439

 
$
37,506

 
$
21,156

 
$
11,143

 
$
3,419

Earnings Per Share from Continuing Operations:
 
 

 
 

 
 

 
 

Basic:
$
0.92

 
$
1.00

 
$
0.56

 
 
 
 
Class A
 
 
 
 
 
 
$
0.25

 
$
0.07

Class B
 
 
 
 
 
 
$
0.29

 
$
0.09

Diluted:
$
0.92

 
$
0.99

 
$
0.56

 
 
 
 
Class A
 
 
 
 
 
 
$
0.25

 
$
0.07

Class B
 
 
 
 
 
 
$
0.29

 
$
0.09

Total Assets
$
330,168

 
$
313,747

 
$
273,570

 
$
265,279

 
$
722,146

Long-Term Debt, Less Current Maturities
$
161

 
$
184

 
$
212

 
$
241

 
$
268

Cash Dividends Per Share:
$
0.28

 
$
0.24

 
$
0.22

 
 

 
 

Class A
 
 
 
 
 
 
$
0.195

 
$
0.18

Class B
 
 
 
 
 
 
$
0.20

 
$
0.20

On October 31, 2014, we completed the spin-off of our EMS segment. The EMS segment was reclassified to discontinued operations in the Consolidated Statements of Income for all periods presented. Discontinued operations did not have an impact on the financial results of fiscal years 2018, 2017 and 2016. The preceding table excludes all income statement activity of the discontinued operations. The balance sheet data in the preceding table includes the EMS segment for fiscal years prior to 2015.
Fiscal year 2017 income from continuing operations included $1.1 million ($0.03 per diluted share) of after-tax restructuring gains driven by the sale of the Idaho facility.
Fiscal year 2016 income from continuing operations included $4.5 million ($0.12 per diluted share) of after-tax restructuring expenses.
Fiscal year 2015 income from continuing operations included $3.2 million ($0.08 per diluted share) of after-tax restructuring expenses and $3.2 million ($0.08 per diluted share) of after-tax expense related to the spin-off.
Fiscal year 2014 income from continuing operations included an after-tax gain of $1.1 million ($0.03 per diluted share) for the sale of an idle Furniture segment manufacturing facility and land located in Jasper, Indiana, after-tax impairment of $0.7 million ($0.02 per diluted share) for an aircraft which was subsequently sold, and $1.4 million ($0.04 per diluted share) of after-tax expense related to the spin-off.

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Kimball International, Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) creates design driven, innovative furnishings sold through our family of brands: Kimball, National, and Kimball Hospitality. Our diverse portfolio offers solutions for the workplace, learning, healing, and hospitality environments. Our values and integrity are demonstrated daily by living our Guiding Principles and creating a culture of caring, that establishes us as an employer of choice. “We Build Success” by establishing long-term relationships with customers, employees, suppliers, shareowners and the communities in which we operate.
We closely monitor key indicators for the markets in which we compete. As reported by the Business and Institutional Furniture Manufacturer Association (“BIFMA”), the forecast by IHS as of April 2018 for the U.S. commercial furniture market, which they define as including office, education, and healthcare furniture products, projects a year-over-year increase of 1.9% for calendar year 2018 and 3.6% for calendar year 2019. The forecast for two of the leading indicators for the hospitality furniture market (May 2018 PwC Hospitality Directions U.S. report) includes a projected increase in RevPAR (Revenue Per Available

22



Room) of 3.0% for calendar year 2018 and 2.8% for calendar year 2019, while the occupancy levels for calendar year 2018 and 2019 continue to hover at peak levels.
Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
On November 6, 2017, we successfully completed the acquisition of certain assets of D’style, Inc. (“D’style”) and all of the capital stock of Diseños de Estilo S.A. de C.V., which have administrative and sales offices and warehousing in Chula Vista, California and a manufacturing location in Tijuana, Mexico. The acquisition expands our hospitality offerings beyond guest rooms to public spaces and provides new mixed material manufacturing capabilities. The cash paid for the acquisition totaled $18.2 million, inclusive of a $0.4 million post-closing working capital adjustment. An earn-out of up to $2.2 million may be paid, which is contingent based upon fiscal year 2018 and 2019 D’style operating income compared to a predetermined target for each fiscal year. As of June 30, 2018, the fair value of the earn-out was $1.1 million. See Note 2 - Acquisition of Notes to Consolidated Financial Statements for additional information.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because Kimball International has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ending June 30, 2018. The statutory federal tax rate will be 21% in subsequent fiscal years. Our fiscal year 2018 included approximately $3.3 million in reduced income tax expense reflecting federal taxes on current year taxable income at the lower blended effective tax rate, partially offset by a fiscal year 2018 discrete tax impact of $1.8 million in additional expense as a result of applying the new lower federal income tax rates to our net tax assets. The changes included in the Tax Act are broad and complex. The Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We have finalized and recorded the related tax impacts as of June 30, 2018. We expect the lower statutory tax rate to generate significantly lower tax expense in future periods, which will be partially offset by the loss of the deductibility of certain expenses.
The impact of higher transportation and commodity prices is expected to intensify as pricing pressure from our vendors increases. We utilize both steel and aluminum in our products, most of which is sourced domestically. The U.S. recently imposed tariffs of 25% on steel and 10% on aluminum imported from several countries which could adversely impact our input costs. The government has also recently proposed to expand its list of products subject to tariffs to include furniture products, parts, and components, and if approved, the landed cost of our products could increase materially, which would reduce our net income if we are unable to mitigate the additional cost. We are monitoring this situation, but at this time we are uncertain of the potential impact that these tariffs may have on our results of operations. We strive to offset increases in the cost of these materials through supplier negotiations, global sourcing initiatives, product re-engineering and parts standardization, and price increases on our products. We are also exposed to fluctuation in transportation costs which vary based upon freight carrier capacity and fuel prices. Transportation costs are managed by optimizing logistics and supply chain planning, and increasing prices on our products is sometimes necessary. Our National brand recently implemented a price increase that was effective on April 6, 2018, while our Kimball brand announced a price increase effective on July 2, 2018.
On May 7, 2018, Robert F. Schneider informed the Board of Directors of Kimball International of his decision to retire as our Chief Executive Officer and Chairman of the Board. Mr. Schneider plans to retire effective October 31, 2018. The Board of Directors created a Continuity Committee to facilitate the appointment of a new CEO.
During the latter portion of our fiscal year 2017, we sold a facility in Indiana which housed the education center for dealer and employee training, a research and development center, and a product showroom for proceeds of $3.8 million. We leased a portion of the facility through December 2017 to facilitate the short-term transition of those functions to other existing Indiana locations. The sale of the facility did not qualify for sale-leaseback accounting during fiscal year 2017, and thus the $1.7 million pre-tax gain on the sale was not recognized in selling and administrative expenses until fiscal year 2018.
The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting. In March 2016, in connection with a renewal of one of our two contracts with the General Services Administration (“GSA”), we became aware of noncompliance and inaccuracies in our GSA subcontractor reporting. Accordingly, we retained outside legal counsel to assist in conducting an internal review of our reporting practices, and we self-reported the matter and the results of the internal review to the GSA. We have promptly responded to

23



inquiries from the GSA since our initial reporting, have met with government officials as requested on two occasions, and intend to cooperate fully with any further inquiries or investigations. We cannot reasonably predict the outcome of a government investigation at this time. During fiscal year 2018, sales related to our GSA contracts were approximately 7.5% of our consolidated sales, with one contract accounting for approximately 5.3% of our consolidated sales and the other contract accounting for approximately 2.2% of our consolidated sales.
Due to the contract and project nature of furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business which in turn impacts our operating results. Effective management of our manufacturing capacity is and will continue to be critical to our success. See below for further details regarding current sales and open order trends.
We expect to continue to invest in capital expenditures prudently, including potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
We have a strong focus on cost control and 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 our Annual Cash Incentive plan is that it is linked to our Company-wide and business unit performance which is designed to adjust compensation expense as profits change.
We continue to maintain a strong balance sheet. Our short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of our credit facility, was $115.9 million at June 30, 2018.


24



Fiscal Year 2018 Results of Operations
 
At or for the
Year Ended
 
 
 
June 30
 
 
(Amounts in Millions)
2018
 
2017
 
% Change
Net Sales
$
685.6

 
$
669.9

 
2
%
Gross Profit
221.4

 
223.3

 
(1
%)
Selling and Administrative Expenses
170.4

 
168.5

 
1
%
Restructuring Gain

 
(1.8
)
 
 
Operating Income
51.1

 
56.7

 
(10
%)
Operating Income %
7.4
%
 
8.5
%
 
 
Adjusted Operating Income *
$
51.1

 
$
54.8

 
(7
%)
Adjusted Operating Income % *
7.4
%
 
8.2
%
 
 
Net Income 
$
34.4

 
$
37.5

 
(8
%)
Adjusted Net Income *
34.4

 
36.4

 
(5
%)
Diluted Earnings Per Share
$
0.92

 
$
0.99

 
 
Adjusted Diluted Earnings Per Share *
$
0.92

 
$
0.96

 
 
Open Orders
$
148.9

 
$
131.6

 
13
%
* Items indicated represent Non-GAAP (Generally Accepted Accounting Principles) measurements for fiscal year 2017. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Net Sales by End Market Vertical
 
 
 
 
 
 
Year Ended
 
 
 
June 30
 
 
(Amounts in Millions)
2018
 
2017
 
% Change
Commercial
$
201.7

 
$
198.5

 
2
%
Education
82.8

 
78.0

 
6
%
Finance
66.6

 
68.1

 
(2
%)
Government
81.3

 
75.5

 
8
%
Healthcare
86.6

 
96.0

 
(10
%)
Hospitality
166.6

 
153.8

 
8
%
Total Net Sales
$
685.6

 
$
669.9

 
2
%
Fiscal year 2018 consolidated net sales were $685.6 million compared to fiscal year 2017 net sales of $669.9 million, a 2% increase, as $13.0 million of net sales resulting from the D’style acquisition and price increases net of higher discounting more than offset decreased organic sales volume.
During fiscal year 2018 we redefined our vertical market reporting to better reflect the end markets that we serve. The largest shifts among vertical markets were sales to certain government-affiliated medical facilities, which were previously classified in the government and commercial vertical markets and are now classified in the healthcare vertical market. Prior period information was estimated to reflect the new vertical market definitions on a comparable basis.
Key explanatory comments for our sales by vertical market follow:
For fiscal year 2018 compared to fiscal year 2017, increased hospitality vertical market sales were driven by the acquisition of the D’style business and increases in organic non-custom business, which more than offset a sales decline in our custom business.
Government vertical market sales for fiscal year 2018 increased as state and local government sales increased while sales to the federal government decreased.

25



Our sales to the education vertical market increased due to our greater focus on this market, despite educational funding being diverted to safety and security products which negatively impacted the timing and size of furniture orders received.
Although sales in the healthcare vertical market declined in fiscal year 2018 compared to fiscal year 2017, we have experienced a rebound in quoting activity which led to increased shipments and orders in the fourth quarter of our fiscal year 2018.
Each of our vertical market sales levels can fluctuate depending on the mix of projects in a given period.
Open orders at June 30, 2018 increased 13% when compared to the open order level as of June 30, 2017 primarily due to higher hospitality furniture backlog driven by both the D’style acquisition and growth in organic hospitality orders. Excluding an approximate $2.0 million positive impact from a price increase for one of our brands which took effect on July 2, 2018 and accelerated orders into our fiscal year 2018, office furniture backlog as of June 30, 2018 was flat. Open orders at a point in time may not be indicative of future sales trends.
In fiscal year 2018 we recorded net income of $34.4 million, or $0.92 per diluted share. In fiscal year 2017 we recorded net income of $37.5 million, or $0.99 per diluted share, inclusive of $1.1 million, or $0.03 per diluted share, of after-tax restructuring gain from the sale of the Idaho facility. Excluding the non-recurring gain, our adjusted net income for fiscal year 2017 was $36.4 million, or $0.96 per diluted share. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Gross profit as a percent of net sales decreased 100 basis points in fiscal year 2018 compared to fiscal year 2017, as increased product pricing and lower employee benefit expenses such as healthcare were more than offset by a shift in sales mix to lower margin products, freight cost increases, higher discounting, and an increase in our LIFO inventory reserve. See Note 3 - Inventories of Notes to Consolidated Financial Statements for more information on LIFO inventory.
As a percent of net sales, selling and administrative expenses in fiscal year 2018 compared to fiscal year 2017 decreased 20 basis points due to the increased sales volumes. In absolute dollars selling and administrative spending increased 1% as the additional selling and administrative expenses of the D’style acquisition, higher salary expense, and higher marketing expenditures to grow the business were partially offset by lower incentive compensation costs. During fiscal year 2018 we recognized a $1.7 million pre-tax gain on the sale of an administrative building, and in fiscal year 2017 we recognized $1.2 million of gains on the sale of land.
Fiscal year 2017 included a pre-tax restructuring gain of $1.8 million which included a gain on the sale of our Post Falls, Idaho facility and land of $2.1 million partially offset by restructuring expense of $0.3 million. See Note 17 - Restructuring Expense of Notes to Consolidated Financial Statements for further information on restructuring.
Other Income (Expense) consisted of the following:
Other Income (Expense)
Year Ended
 
June 30
(Amounts in Thousands)
2018
 
2017
Interest Income
$
1,057

 
$
536

Interest Expense
(221
)
 
(37
)
Foreign Currency (Loss) Gain
(93
)
 
18

Gain on Supplemental Employee Retirement Plan Investments
980

 
1,215

Other
(461
)
 
(377
)
Other Income (Expense), net
$
1,262

 
$
1,355

Our fiscal year 2018 results of operations included the impact of the enactment of the Tax Act, which was signed into law on December 22, 2017. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because Kimball International has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ending June 30, 2018. The statutory federal tax rate will be 21% for subsequent fiscal years. Our fiscal year 2018 included approximately $3.3 million in reduced income tax expense to reflect federal taxes on current year taxable income at the lower blended effective tax rate, partially offset by a discrete tax impact of $1.8 million in additional expense as a result of applying the new lower federal income tax rates to our net tax assets.

26



Our fiscal year 2018 effective tax rate was 34.2%, as the benefits of the Tax Act were partially offset by the negative tax impact of applying the lower federal income tax rates to our net deferred tax assets. Our fiscal year 2018 effective tax rate also included a $0.6 million benefit resulting from a domestic manufacturing deduction. Our fiscal year 2017 effective tax rate was 35.4% and included the benefit of $1.5 million resulting from a domestic manufacturing deduction. The Tax Act repealed the domestic manufacturing deduction; thus future fiscal years will not have this benefit.
The changes included in the Tax Act are broad and complex. The transition impacts of the Tax Act may differ from the above estimate, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, and any changes in accounting standards for income taxes or related interpretations in response to the Tax Act. The Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Based on current interpretations, we have finalized our transition and recorded all resulting adjustments as of June 30, 2018.
Comparing the balance sheet as of June 30, 2018 to June 30, 2017, goodwill increased $8.8 million and intangible assets increased $9.7 million relating to the acquisition of D’style. Our prepaid expenses and other current assets line increased by $10.5 million primarily due to an overpayment of estimated income taxes for the fiscal year and also due to a shift in the Supplemental Employee Retirement Plan (“SERP”) balance from long term to short term in conjunction with the pending retirement of our Chief Executive Officer. Our deferred tax assets balance declined by $9.6 million as we accelerated the timing of certain incentive compensation payments and capital expenditures in order for them to be deductible in fiscal year 2018 before our statutory tax rate further decreases in fiscal year 2019.

Fiscal Year 2017 Results of Operations
 
At or for the
Year Ended
 
 
 
June 30
 
 
(Amounts in Millions)
2017
 
2016
 
% Change
Net Sales
$
669.9

 
$
635.1

 
5
%
Gross Profit
223.3

 
203.8

 
10
%
Selling and Administrative Expenses
168.5

 
163.0

 
3
%
Restructuring (Gain) Expense
(1.8
)
 
7.3

 
 
Operating Income
56.7

 
33.5

 
69
%
Operating Income %
8.5
%
 
5.3
%
 
 
Adjusted Operating Income *
$
54.8

 
$
40.8

 
34
%
Adjusted Operating Income % *
8.2
%
 
6.4
%
 
 
Net Income 
$
37.5

 
$
21.2

 
77
%
Adjusted Net Income *
36.4

 
25.7

 
42
%
Diluted Earnings Per Share
$
0.99

 
$
0.56

 
 
Adjusted Diluted Earnings Per Share *
$
0.96

 
$
0.68

 
 
Open Orders
$
131.6

 
$
129.9

 
1
%
* Items indicated represent Non-GAAP measurements. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.

27



Net Sales by End Market Vertical
 
 
 
 
 
 
Year Ended
 
 
 
June 30
 
 
(Amounts in Millions)
2017
 
2016
 
% Change
Commercial
$
198.5

 
$
194.0

 
2
%
Education
78.0

 
69.5

 
12
%
Finance
68.1

 
60.5

 
13
%
Government
75.5

 
66.6

 
13
%
Healthcare
96.0

 
96.5

 
(1
%)
Hospitality
153.8

 
148.0

 
4
%
Total Net Sales
$
669.9

 
$
635.1

 
5
%
Fiscal year 2017 consolidated net sales were $669.9 million compared to fiscal year 2016 net sales of $635.1 million, a 5% increase. Increased volume across five of our verticals was the primary driver while the positive impact of price increases contributed to a lesser extent.
During fiscal year 2018 we redefined our vertical market reporting to better reflect the end markets that we serve. The largest shifts among vertical markets were sales to certain government-affiliated medical facilities, which were previously classified in the government and commercial vertical markets and are now classified in the healthcare vertical market. The net sales by vertical market was estimated for fiscal years 2017 and 2016 to reflect the new vertical market definitions on a comparable basis.
Key explanatory comments for our sales by vertical market follow:
Our education vertical market sales grew as we continued our focus on education products and distribution.
Our finance vertical market sales increase was driven by focus on strategic accounts and assisting financial institutions with refreshing their image and adding collaborative spaces.
Our sales in the government vertical market increased as we experienced improved order activity on awarded blanket purchase agreements and had success with larger projects relative to fiscal year 2016.
The hospitality vertical market sales increase was primarily driven by increased non-custom business.
Each of our vertical market sales levels can fluctuate depending on the mix of projects in a given period.
Open orders at June 30, 2017 increased 1% when compared to the open order level as of June 30, 2016 as demand for office furniture increased and hospitality furniture open orders declined slightly.
In fiscal year 2017 we recorded net income of $37.5 million, or $0.99 per diluted share, inclusive of a $1.1 million after-tax restructuring gain, or $0.03 per diluted share, from the sale of the Idaho facility. In fiscal year 2016 we recorded net income of $21.2 million, or $0.56 per diluted share, inclusive of $4.5 million, or $0.12 per diluted share, of after-tax restructuring expense. Excluding these non-recurring gains or expenses, our adjusted net income for fiscal year 2017 improved to $36.4 million, or $0.96 per diluted share, compared to adjusted net income for fiscal year 2016 of $25.7 million, or $0.68 per diluted share. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Gross profit as a percent of net sales increased 120 basis points in fiscal year 2017 compared to fiscal year 2016. The improvement was driven by the favorable impact of price increases, the benefit of leverage gained on higher sales volumes, and the benefits from our restructuring plan involving the transfer of metal fabrication production from Idaho into facilities in Indiana. Higher employee benefit costs in fiscal year 2017, retirement expense in particular, partially offset the aforementioned improvements.
As a percent of net sales, selling and administrative expenses in fiscal year 2017 compared to fiscal year 2016 decreased 50 basis points due to increased sales volumes. In absolute dollars selling and administrative spending increased 3% primarily due to higher incentive compensation costs as a result of higher earnings levels and higher salary expense. We also had an unfavorable variance within selling and administrative expenses of $1.2 million for fiscal year 2017 compared to fiscal year 2016 related to the normal revaluation to fair value of our SERP liability. The impact from the change in the SERP liability that was recognized in selling and administrative expenses was offset with the change in fair value of the SERP investments which was recorded in Other Income (Expense), and thus there was no effect on net income. During fiscal year 2017 we also recognized $1.2 million of gains on the sale of land.

28



Fiscal year 2017 includes a pre-tax restructuring gain of $1.8 million which included a gain on the sale of our Post Falls, Idaho facility and land of $2.1 million partially offset by restructuring expense of $0.3 million. We recognized pre-tax restructuring expense of $7.3 million in fiscal year 2016. The improvement of customer delivery, supply chain dynamics, and reduction of transportation costs were expected to generate annual pre-tax savings of approximately $5 million per year, and we achieved savings of approximately $4.7 million in fiscal year 2017 as savings began to ramp up during our first quarter. See Note 17 - Restructuring Expense of Notes to Consolidated Financial Statements for further information on restructuring.
Other Income (Expense) consisted of the following:
Other Income (Expense)
Year Ended
 
June 30
(Amounts in Thousands)
2017
 
2016
Interest Income
$
536

 
$
275

Interest Expense
(37
)
 
(22
)
Foreign Currency Gain (Loss)
18

 
(17
)
Gain (Loss) on SERP Investments
1,215

 
(13
)
Other
(377
)
 
(330
)
Other Income (Expense), net
$
1,355

 
$
(107
)
Our fiscal year 2017 effective tax rate was 35.4% as higher taxable income generated a $1.2 million higher domestic manufacturing deduction than fiscal year 2016. Our fiscal year 2016 effective tax rate was 36.6% and did not include any material unusual items.
Liquidity and Capital Resources
Our cash position, which is comprised of cash, cash equivalents, and short-term investments, decreased to $87.3 million at June 30, 2018 from $98.6 million at June 30, 2017, primarily due to an $18.2 million cash outflow for the D’style acquisition, capital expenditures of $22.3 million in fiscal year 2018, and the return of capital to shareowners in the form of stock repurchases and dividends totaling $19.0 million in fiscal year 2018, which more than offset $46.9 million of cash flows from operations during fiscal year 2018.
Working capital at June 30, 2018 was $85.1 million compared to working capital of $82.5 million at June 30, 2017. The current ratio was 1.7 at both June 30, 2018 and June 30, 2017.
Our short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of our credit facility, totaled $115.9 million at June 30, 2018. At June 30, 2018, we had $1.4 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. We had no credit facility borrowings outstanding as of June 30, 2018 or June 30, 2017.
During fiscal year 2017 we sold a facility in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom for proceeds of $3.8 million. We were leasing a portion of the facility back to facilitate the short-term transition of those functions to other existing Indiana locations. The sale of the facility did not qualify for sale-leaseback accounting thus the book value of the building remained on the property and equipment line of our Consolidated Balance Sheet as of June 30, 2017 and the related sale-leaseback financing obligation was a current liability on our Consolidated Balance Sheet as of June 30, 2017. During fiscal year 2018, the lease terminated and the sales transaction was recognized, resulting in a $1.7 million pre-tax gain which was recorded in selling and administrative expense.
Cash Flows
The following table reflects the major categories of cash flows for fiscal years 2018, 2017, and 2016.
 
 
Year Ended
 
 
June 30
(Amounts in thousands)
 
2018
 
2017
 
2016
Net cash provided by operating activities
 
$
46,866

 
$
64,844

 
$
49,352

Net cash used for investing activities
 
$
(35,216
)
 
$
(36,176
)
 
$
(16,883
)
Net cash used for financing activities
 
$
(21,869
)
 
$
(13,362
)
 
$
(19,554
)

29



Cash Flows from Operating Activities
For fiscal years 2018 and 2017, net cash provided by operating activities was $46.9 million and $64.8 million, respectively, fueled by net income of $34.4 million and $37.5 million, respectively. In fiscal year 2018, changes in working capital balances used $15.2 million and a reduction in deferred income tax and other deferred charges increased cash flow by $9.1 million. Changes in working capital balances provided $10.1 million of cash in fiscal year 2017. Cash generated from operating activities in fiscal year 2016 totaled $49.4 million, which was impacted by net income of $21.2 million, and changes in working capital provided $4.6 million of cash.
The $15.2 million of cash used as a result of changes in working capital balances in fiscal year 2018 was partially driven by an increase of $6.7 million in prepaid expenses and other current assets primarily due to an overpayment of estimated income taxes for fiscal year 2018. Statutory federal tax rates declined in the latter half of our fiscal year as the Tax Act was enacted, and we accelerated certain deductions into the current fiscal year to take advantage of higher tax rates in fiscal year 2018 versus fiscal year 2019. Also contributing was an increase of $5.7 million in our accounts receivable balance primarily driven by increased sales toward the end of fiscal year 2018 compared to fiscal year 2017.
The $10.1 million of cash provided by changes in working capital balances in fiscal year 2017 was primarily driven by a combined $5.7 million increase in accrued annual cash incentive compensation and accrued retirement plan contributions.
The $4.6 million of cash provided by changes in working capital balances in fiscal year 2016 was primarily due to the $4.9 million source of cash driven by a decrease in our accounts receivable balance as the collection process was improved at a select location.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for both fiscal years ended June 30, 2018 and June 30, 2017 was 27.0 days. We define DSO as the average of monthly trade accounts and notes receivable divided by an average day’s net sales. Our Production Days Supply on Hand (“PDSOH”) of inventory measure for both fiscal years ended June 30, 2018 and June 30, 2017 was 47.0 days. We define PDSOH as the average of the monthly gross inventory divided by an average day’s cost of sales.
Cash Flows from Investing Activities
During fiscal year 2018, we invested $42.5 million in available-for-sale securities, and $42.8 million matured. During fiscal year 2017, we invested $42.1 million in available-for-sale securities, and $5.9 million matured. Our short-term investments included municipal bonds, certificates of deposit purchased in the secondary market, and U.S. Treasury and federal agency securities. During fiscal year 2018, we had a cash outflow of $18.2 million upon the D’style acquisition. During fiscal years 2018 and 2017, we received proceeds from the sale of assets net of selling expenses of $5.8 million and $13.2 million, respectively, the majority of which related to the sale of our fleet of over-the-road tractors and trailers in fiscal year 2018 and the sale of our Idaho facility in fiscal year 2017, respectively. During fiscal years 2018, 2017, and 2016 we reinvested $22.3 million, $12.7 million, and $16.2 million, respectively, into capital investments for the future. The capital investments in the current year were primarily for facility improvements such as renovations to our corporate headquarters and showrooms, and various manufacturing equipment upgrades to increase automation in production facilities. The capital investments during fiscal year 2017 were primarily for facility improvements such as renovations to showrooms and the corporate headquarters, various manufacturing equipment, and replacements of tractors and trailers in our fleet. The fiscal year 2016 capital investments were primarily for manufacturing equipment such as an automated finish technology upgrade and equipment related to the transition of the metal fabrication capabilities and assembly operations to certain Indiana facilities and various facility and showroom improvements.
Cash Flows from Financing Activities
We paid $10.1 million of dividends in fiscal year 2018 compared to paying $8.8 million of dividends in fiscal year 2017 and $8.1 million of dividends in fiscal year 2016. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. We repurchased shares pursuant to a previously announced stock repurchase program which drove cash outflow of $8.9 million in fiscal year 2018, $6.7 million in fiscal year 2017, and $9.7 million in fiscal year 2016.
Credit Facility
We maintain a $30.0 million credit facility with a maturity date of October 2019 that allows for both issuances of letters of credit and cash borrowings. This facility provides an option to increase the amount available for borrowing to $55.0 million at our request, subject to the consent of the participating banks. At June 30, 2018, we had $1.4 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. At both June 30, 2018 and June 30, 2017, we had no borrowings outstanding.

30



The credit facility requires us to comply with certain debt covenants, the most significant of which are the adjusted leverage ratio and the fixed charge coverage ratio. The adjusted leverage ratio is defined as (a) consolidated total indebtedness minus unencumbered U.S. cash on hand in the U.S. in excess of $15,000,000 to (b) consolidated EBITDA, determined as of the end of each of our fiscal quarters for the then most recently ended four fiscal quarters, and may not be greater than 3.0 to 1.0. The fixed charge coverage ratio is defined as (a) the sum of (i) consolidated EBITDA, minus (ii) 50% of depreciation expense, minus (iii) taxes paid, minus (iv) dividends and distributions paid, to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii) interest expense, calculated on a consolidated basis in accordance with U.S. GAAP, determined as of the end of each of our fiscal quarters for the trailing four fiscal quarters then ending, and may not be less than 1.10 to 1.00. We were in compliance with all debt covenants of the credit facility during fiscal year 2018.
The table below compares the adjusted leverage ratio and fixed charge coverage ratio with the limits specified in the credit agreement.
 
 
At or For the Period Ended
 
Limit As Specified in
 
 
Covenant
 
June 30, 2018
 
Credit Agreement
 
Excess
Adjusted Leverage Ratio
 
(0.55
)
 
3.00

 
3.55

Fixed Charge Coverage Ratio
 
135.72

 
1.10

 
134.62

Future Liquidity
We believe our principal sources of liquidity from available funds on hand and short-term investments, cash generated from operations, and the availability of borrowing under our credit facility will be sufficient to fund future dividends and meet our working capital and other operating needs for at least the next 12 months. During fiscal year 2019, we anticipate cash outflow of approximately $11.3 million for accrued cash incentive compensation related to our fiscal year 2018 performance. We will continue to evaluate market conditions in determining future share repurchases. At June 30, 2018, 1.2 million shares remained available under the repurchase program. During fiscal year 2019 we expect to continue investments in capital expenditures, particularly for projects such as our headquarters renovation, showroom renovations, machinery and equipment upgrades and automation, and potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
Our ability to generate cash from operations to meet our liquidity obligations 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 services, the impact of changes in tariffs, loss of key contract customers, including government subcontract customers, or the outcome of a governmental review of our GSA subcontractor reporting practices, 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.

31



Non-GAAP Financial Measures and Other Key Performance Indicators
This Management’s Discussion and Analysis (“MD&A”) contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the United States in the statements of income, statements of comprehensive income, balance sheets, or statements of cash flows of the company. The non-GAAP financial measures used within this MD&A include (1) adjusted operating income defined as operating income excluding restructuring; (2) adjusted net income defined as net income excluding restructuring; and (3) adjusted diluted earnings per share defined as diluted earnings per share excluding restructuring. Reconciliations of the reported GAAP numbers to these non-GAAP financial measures are included in the table below. Management believes it is useful for investors to understand how its core operations performed without gains or expenses incurred in executing its restructuring plan. Excluding these amounts allows investors to meaningfully trend, analyze, and benchmark the performance of our core operations. Many of our internal performance measures that management uses to make certain operating decisions exclude these gains/expenses to enable meaningful trending of core operating metrics. These non-GAAP financial measures should not be viewed as an alternative to the GAAP measures and are presented as supplemental information.
Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators
 
 
(Amounts in Thousands, Except for Per Share Data)
 
 
 
 
 
 
Year Ended
 
June 30
 
2018
 
2017
 
2016
Operating Income
$
51,063

 
$
56,663

 
$
33,497

     Pre-tax Restructuring (Gain) Expense

 
(1,832
)
 
7,328

Adjusted Operating Income
$
51,063

 
$
54,831

 
$
40,825

Net Sales
$
685,600

 
$
669,934

 
$
635,102

Adjusted Operating Income %
7.4
%
 
8.2
%
 
6.4
%
 
 
 
 
 
 
Net Income
$
34,439

 
$
37,506

 
$
21,156

     Pre-tax Restructuring (Gain) Expense

 
(1,832
)
 
7,328

     Tax on Restructuring (Gain) Expense

 
713

 
(2,825
)
After-tax Restructuring (Gain) Expense

 
(1,119
)
 
4,503

Adjusted Net Income
$
34,439

 
$
36,387

 
$
25,659

 
 
 
 
 
 
Diluted Earnings Per Share
$
0.92

 
$
0.99

 
$
0.56

     Impact of Restructuring (Gain) Expense

 
(0.03
)
 
0.12

Adjusted Diluted Earnings Per Share
$
0.92

 
$
0.96

 
$
0.68

The open orders metric is a key performance indicator representing firm orders placed by our customers which have not yet been fulfilled and are expected to be recognized as revenue during future quarters. The timing of shipments can vary, but generally open orders are expected to ship within a twelve-month period. Adjusted operating income percentage is also a key performance indicator, which is defined as adjusted operating income as a percentage of net sales.
Fair Value
During fiscal year 2018, no financial instruments were affected by a lack of market liquidity. Financial assets classified as level 1 assets were valued using readily available market pricing. For commercial paper and available-for-sale securities classified as level 2 assets, the fair values are determined based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information. We evaluated the inputs used to value the instruments and validated the accuracy of the instrument fair values based on historical evidence. The investment in stock warrants and non-marketable equity securities of a privately-held company are classified as level 3 financial assets. The stock warrants are accounted for as a derivative instrument valued on a recurring basis considering the pricing of recent purchases or sales, if any, of the investment as well as positive and negative qualitative evidence, while the non-marketable equity securities are accounted for as a cost-method investment which carries the securities at cost, except in the event of impairment. Our foreign currency derivatives, which were classified as level 2 liabilities, were valued using observable market inputs such as forward interest rate yield

32



curves, current spot rates, and time value calculations. To verify the reasonableness of the determined fair values, these derivative fair values were compared to fair values calculated by the counterparty banks. Our own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency derivatives. The contingent earn-out liability incurred in the acquisition of D’style is classified as a level 3 financial liability and is valued based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the D’style acquisition and a discount rate that captures the risk associated with the liability.
See Note 10 - Fair Value of Notes to Consolidated Financial Statements for more information.
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2018.
 
Payments Due During Fiscal Years Ending June 30
(Amounts in Millions)
Total
 
2019
 
2020-2021
 
2022-2023
 
Thereafter
Recorded Contractual Obligations: (a)
 

 
 

 
 
 

 
 
 

 
 
 

Long-Term Debt Obligations (b)
$
0.2

 
$

 
 
$
0.1

 
 
$
0.1

 
 
$

Other Long-Term Liabilities Reflected on the Balance
Sheet (c) (d) (e)
19.4

 
5.6

 
 
3.8

 
 
2.7

 
 
7.3

Unrecorded Contractual Obligations:
 
 
 

 
 
 

 
 
 

 
 
 

Operating Leases (e)
22.5

 
4.0

 
 
6.9

 
 
5.7

 
 
5.9

Purchase Obligations (f)
56.0

 
40.2

 
 
8.3

 
 
7.5

 
 

Other (b)
0.1

 

 
 
0.1

 
 

 
 

Total
$
98.2

 
$
49.8

 
 
$
19.2

 
 
$
16.0

 
 
$
13.2

(a)
As of June 30, 2018, we had no Capital Lease Obligations.
(b)
Refer to Note 6 - Long-Term Debt and Credit Facilities of Notes to Consolidated Financial Statements for more information regarding Long-Term Debt Obligations. Accrued interest is also included on the Long-Term Debt Obligations line. The fiscal year 2019 amount includes less than $0.1 million of long-term debt obligations due in fiscal year 2019 which were recorded as a current liability. The estimated interest not yet accrued related to debt is included in the Other line item within the Unrecorded Contractual Obligations.
(c)
The timing of payments of certain items included on the “Other Long-Term Liabilities Reflected on the Balance Sheet” line above is estimated based on the following assumptions:
The timing of long-term SERP payments is estimated based on an assumed retirement age of 62 with payout based on the prior distribution elections of participants. The fiscal year 2019 amount includes $3.9 million for SERP payments recorded as current liabilities.
The timing of severance plan payments is estimated based on the average remaining service life of employees. The fiscal year 2019 amount includes $0.5 million for severance payments recorded as a current liability.
The timing of warranty payments is estimated based on historical data. The fiscal year 2019 amount includes $0.7 million for short-term warranty payments recorded as a current liability.
The timing of earn-out liability is contingent based upon fiscal year 2018 and 2019 D’style operating income compared to a predetermined target for each fiscal year. The fiscal year 2019 amount includes $0.5 million for earn-out payments recorded as a current liability.
(d)
Excludes $1.7 million of long-term unrecognized tax benefits and associated accrued interest and penalties along with deferred tax liabilities and miscellaneous other long-term tax liabilities which are not tied to a contractual obligation and for which we cannot make a reasonably reliable estimate of the period of future payments.
(e)
Refer to Note 5 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for more information regarding Operating Leases and certain Other Long-Term Liabilities.
(f)
Purchase Obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. The amounts listed above for purchase obligations include contractual commitments for items such as raw materials, supplies, capital expenditures, services, and software acquisitions/license commitments. Cancellable purchase obligations that we intend to fulfill are also included in the purchase obligations amount listed above through fiscal year 2023.

33



Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to standby letters of credit, a performance bond, 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 our financial condition, results of operations, liquidity, capital expenditures, or capital resources. See Note 5 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for more information on the standby letters of credit and the performance bond. We do not have material exposures to trading activities of non-exchange traded contracts.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. 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 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 our Board of Directors and with our independent registered public accounting firm.
Revenue recognition - We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the title and the risk of loss passes to the customer according to the terms of the contract. Title and risk of loss are transferred upon shipment to or receipt at our customers’ locations, or in limited circumstances, as determined by other specific sales terms of the transaction. 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. Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time of the sale, resulting in a reduction of revenue.
Self-insurance reserves - We are 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 a result of increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At June 30, 2018 and June 30, 2017, our accrued liabilities for self-insurance exposure were $4.1 million and $4.3 million, respectively.
Taxes - Deferred income taxes 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. The deferred taxes 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 taxable income 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 positions are effectively settled, the tax provision will be adjusted accordingly. The liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions, was $1.9 million at June 30, 2018 and $2.8 million at June 30, 2017.
Goodwill - Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test. We compare the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. If the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date. During fiscal year 2018 no goodwill impairment was recognized. At June 30, 2018, goodwill totaled $8.8 million.

34



New Accounting Standards
See Note 1 - Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for information regarding New Accounting Standards.  
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk: We hold an investment portfolio of available-for-sale securities, comprised of municipal bonds, certificates of deposit purchased in the secondary market, U.S. Treasury and federal agency securities. As of June 30, 2018, the fair value of the investment portfolio was $34.6 million. Our investment policy dictates that municipal bonds, U.S. Treasury and federal agency securities must be investment grade quality, and all certificates of deposit are Federal Deposit Insurance Corporation insured. These securities are fixed income instruments and will decline in value if market interest rates increase. A hypothetical 100 basis point increase in an annual period in market interest rates from levels at June 30, 2018 would cause the fair value of these investments to decline by an immaterial amount. Further information on investments is provided in Note 12 - Investments of Notes to Consolidated Financial Statements.
We also hold a total investment of $2.0 million in a privately-held company, consisting of $0.5 million in non-marketable equity securities and $1.5 million in stock warrants. The fair value of the investment may fluctuate due to events and changes in circumstances, but we have incurred no impairment during fiscal year 2018 or 2017.
Commodity Risk: We are exposed to market risk with respect to commodity price fluctuations for components used in the manufacture of our products, primarily related to wood and wood-related components, steel, aluminum, and plastics. These components are impacted by global pricing pressures and general economic conditions. The U.S. recently imposed tariffs of 25% on steel and 10% on aluminum imported from several countries, which could adversely impact our input costs. The government has also recently proposed to expand its list of products subject to tariffs to include furniture products, parts, and components, and if approved, the landed cost of our products could increase materially, which would reduce our net income if we are unable to mitigate the additional cost. We are monitoring this situation, but at this time we are uncertain of the potential impact that these tariffs may have on our results of operations. We strive to offset increases in the cost of these materials through supplier negotiations, global sourcing initiatives, product re-engineering and parts standardization, and price increases on our products. We are also exposed to fluctuation in transportation costs which vary based upon freight carrier capacity and fuel prices. Transportation costs are managed by optimizing logistics and supply chain planning, and increasing prices on our products.
Foreign Exchange Rate Risk: We have minimal foreign currency risk and held an immaterial amount of derivative instruments as of June 30, 2018, and none as of June 30, 2017. Further information on derivative financial instruments is provided in Note 11 - Derivative Instruments of Notes to Consolidated Financial Statements.

35



Item 8 - Financial Statements and Supplementary Data


36



MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Kimball International, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting and for the preparation and integrity of the accompanying financial statements and other related information in this report. The consolidated financial statements of the Company and its subsidiaries, including the footnotes, were prepared in accordance with accounting principles generally accepted in the United States of America and include judgments and estimates, which in the opinion of management are applied appropriately. We maintain a system of internal and disclosure controls intended to provide reasonable assurance that assets are safeguarded from loss or material misuse, transactions are authorized and recorded properly, and that the accounting records may be relied upon for the preparation of the financial statements. This system is tested and evaluated regularly for adherence and effectiveness by employees who work within the internal control processes, by our staff of internal auditors, as well as by the independent registered public accounting firm in connection with their annual audit.
Management’s assessment of the effectiveness of internal control over financial reporting excluded D’style, an acquisition completed in November 2017 which consisted of certain assets of D’style, Inc. and all of the capital stock of Diseños de Estilo, S.A. de C.V. This acquisition represented 7% and 2% of consolidated total assets and consolidated net sales, respectively, of the Company as of and for the year ended June 30, 2018. Under guidelines established by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their first assessment of internal control over financial reporting within one year of the date of the acquisition.
The Audit Committee of the Board of Directors, which is comprised of directors who are not employees of the Company, meets regularly with management, our internal auditors, and the independent registered public accounting firm to review our financial policies and procedures, our internal control structure, the objectivity of our financial reporting, and the independence of the independent registered public accounting firm. The internal auditors and the independent registered public accounting firm have free and direct access to the Audit Committee, and they meet periodically, without management present, to discuss appropriate matters.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.
These consolidated financial statements are subject to an evaluation of internal control over financial reporting conducted under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, conducted under the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, management concluded that our internal control over financial reporting was effective as of June 30, 2018.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued an audit report on our internal control over financial reporting which is included herein.

 
/s/ ROBERT F. SCHNEIDER
 
Robert F. Schneider
 
Chairman of the Board,
 
Chief Executive Officer
 
August 28, 2018
 
 
 
/s/ MICHELLE R. SCHROEDER
 
Michelle R. Schroeder
 
Vice President,
 
Chief Financial Officer
 
August 28, 2018


37



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of Kimball International, Inc.
Jasper, Indiana

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Kimball International, Inc. and subsidiaries (the “Company”) as of June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and shareowners’ equity, for each of the three years in the period ended June 30, 2018, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at D’style (consisting of certain assets of D’style, Inc. and all of the capital stock of Diseños de Estilo, S.A. de C.V.), which was acquired in November 2017 and whose financial statements constitute 7% of total assets and 2% of net sales of the consolidated financial statement amounts as of and for the year ended June 30, 2018. Accordingly, our audit did not include the internal control over financial reporting at D’style.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and

38



expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


 
/s/ Deloitte & Touche LLP
 
DELOITTE & TOUCHE LLP
 
Indianapolis, Indiana
 
August 28, 2018
We have served as the Company's auditor since 2002.



39



KIMBALL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data)
 
June 30,
2018
 
June 30,
2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
52,663

 
$
62,882

Short-term investments
34,607

 
35,683

Receivables, net of allowances of $1,317 and $1,626, respectively
60,984

 
53,909

Inventories
39,509

 
38,062

Prepaid expenses and other current assets
18,523

 
8,050

Assets held for sale
281

 
4,223

Total current assets
206,567

 
202,809

Property and Equipment, net of accumulated depreciation of $180,059 and $182,803, respectively
84,487

 
80,069

Goodwill
8,824

 

Other Intangible Assets, net of accumulated amortization of $36,757 and $35,148, respectively
12,607

 
2,932

Deferred Tax Assets
4,916

 
14,487

Other Assets
12,767

 
13,450

Total Assets
$
330,168

 
$
313,747

 
 
 
 
LIABILITIES AND SHAREOWNERS’ EQUITY
 

 
 

Current Liabilities:
 

 
 

Current maturities of long-term debt
$
23

 
$
27

Accounts payable
48,214

 
44,730

Customer deposits
21,253

 
20,516

Sale-leaseback financing obligation

 
3,752

Dividends payable
2,662

 
2,296

Accrued expenses
49,294

 
49,018

Total current liabilities
121,446

 
120,339

Other Liabilities:
 

 
 

Long-term debt, less current maturities
161

 
184

Other
15,537

 
17,020

Total other liabilities
15,698

 
17,204

Shareowners’ Equity:
 

 
 

Common stock-par value $0.05 per share:
 

 
 

Class A - Shares authorized: 50,000,000
               Shares issued: 264,000 and 280,000, respectively
13

 
14

Class B - Shares authorized: 100,000,000
               Shares issued: 42,761,000 and 42,744,000, respectively
2,138

 
2,137

Additional paid-in capital
1,881

 
2,971

Retained earnings
249,945

 
230,763

Accumulated other comprehensive income
1,816

 
1,115

Less: Treasury stock, at cost, 5,901,000 shares and 5,726,000 shares, respectively
(62,769
)
 
(60,796
)
Total Shareowners’ Equity
193,024

 
176,204

Total Liabilities and Shareowners’ Equity
$
330,168

 
$
313,747


40



KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
 
Year Ended June 30
 
2018
 
2017
 
2016
Net Sales
$
685,600

 
$
669,934

 
$
635,102

Cost of Sales
464,154

 
446,629

 
431,298

Gross Profit
221,446

 
223,305

 
203,804

Selling and Administrative Expenses
170,383

 
168,474

 
162,979

Restructuring (Gain) Expense

 
(1,832
)
 
7,328

Operating Income
51,063

 
56,663

 
33,497

Other Income (Expense):
 

 
 

 
 

Interest income
1,057

 
536

 
275

Interest expense
(221
)
 
(37
)
 
(22
)
Non-operating income
953

 
1,276

 
79

Non-operating expense
(527
)
 
(420
)
 
(439
)
Other income (expense), net
1,262

 
1,355

 
(107
)
Income Before Taxes on Income
52,325

 
58,018

 
33,390

Provision for Income Taxes
17,886

 
20,512

 
12,234

Net Income
$
34,439

 
$
37,506

 
$
21,156

 
 
 
 
 
 
Earnings Per Share of Common Stock:
 
 
 
 
 
Basic Earnings Per Share
$
0.92

 
$
1.00

 
$
0.56

Diluted Earnings Per Share
$
0.92

 
$
0.99

 
$
0.56

 
 
 
 
 
 
Class A and B Common Stock:
 
 
 
 
 
Average Number of Shares Outstanding - Basic
37,314

 
37,334

 
37,462

Average Number of Shares Outstanding - Diluted
37,494

 
37,833

 
37,852


41



KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)

 
Year Ended June 30, 2018
 
Year Ended June 30, 2017
 
Year Ended June 30, 2016
 
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
34,439

 
 
 
 
 
$
37,506

 
 
 
 
 
$
21,156

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
$
(11
)
 
$
3

 
$
(8
)
 
$
(34
)
 
$
13

 
$
(21
)
 
$

 
$

 
$

Postemployment severance actuarial change
895

 
(296
)
 
599

 
186

 
(72
)
 
114

 
576

 
(225
)
 
351

Derivative gain (loss)
(10
)
 
3

 
(7
)
 

 

 

 

 

 

Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
4

 
(1
)
 
3

 

 

 

 

 

 

Amortization of actuarial change
(260
)
 
84

 
(176
)
 
(473
)
 
184

 
(289
)
 
(441
)
 
172

 
(269
)
Other comprehensive income (loss)
$
618

 
$
(207
)
 
$
411

 
$
(321
)
 
$
125

 
$
(196
)
 
$
135

 
$
(53
)
 
$
82

Total comprehensive income
 

 
 

 
$
34,850

 
 

 
 

 
$
37,310

 
 

 
 

 
$
21,238




42



KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
 
Year Ended June 30
 
2018
 
2017
 
2016
Cash Flows From Operating Activities:
 
 
 
 
 
Net income
$
34,439

 
$
37,506

 
$
21,156

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

 
 

Depreciation and amortization
15,470

 
15,553

 
14,996

(Gain) Loss on sales of assets
(2,050
)
 
(3,148
)
 
181

Restructuring and asset impairment charges

 
241

 
153

Deferred income tax and other deferred charges
9,082

 
(1,580
)
 
2,523

Stock-based compensation
4,179

 
6,303

 
5,558

Other, net
984

 
(125
)
 
201

Change in operating assets and liabilities:
 
 
 
 
 
Receivables
(5,682
)
 
(3,550
)
 
4,874

Inventories
8

 
2,876

 
(3,304
)
Prepaid expenses and other current assets
(6,741
)
 
2,694

 
459

Accounts payable
3,062


1,998


2,874

Customer deposits
(2,347
)
 
1,891

 
7

Accrued expenses
(3,538
)
 
4,185

 
(326
)
Net cash provided by operating activities
46,866

 
64,844

 
49,352

Cash Flows From Investing Activities:
 

 
 

 
 

Capital expenditures
(21,575
)
 
(11,751
)
 
(15,028
)
Proceeds from sales of assets
5,817

 
13,200

 
290

Cash paid for acquisition
(18,201
)
 

 

Purchases of capitalized software
(724
)
 
(982
)
 
(1,138
)
Purchases of available-for-sale securities
(42,497
)
 
(42,059
)
 

Maturities of available-for-sale securities
42,839

 
5,941

 

Other, net
(875
)
 
(525
)
 
(1,007
)
Net cash used for investing activities
(35,216
)
 
(36,176
)
 
(16,883
)
Cash Flows From Financing Activities:
 

 
 

 
 

Net change in capital leases and long-term debt
(27
)
 
(30
)
 
(27
)
Proceeds from sale-leaseback financing obligation

 
3,752

 

Dividends paid to Shareowners
(10,084
)
 
(8,783
)
 
(8,078
)
Repurchases of Common Stock
(8,936
)
 
(6,665
)
 
(9,665
)
Repurchase of employee shares for tax withholding
(2,822
)
 
(1,636
)
 
(1,784
)
Net cash used for financing activities
(21,869
)
 
(13,362
)
 
(19,554
)
Net (Decrease) Increase in Cash and Cash Equivalents
(10,219
)
 
15,306

 
12,915

Cash and Cash Equivalents at Beginning of Year
62,882

 
47,576

 
34,661

Cash and Cash Equivalents at End of Year
$
52,663

 
$
62,882

 
$
47,576


43



KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS’ EQUITY
(Amounts in Thousands, Except for Share and Per Share Data)
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock
 
Total Shareowners’ Equity
 
Class A
 
Class B
 
Amounts at June 30, 2015
$
19

 
$
2,132

 
$
3,445

 
$
194,372

 
$
1,229

 
$
(59,692
)
 
$
141,505

Adjustment of Kimball Electronics, Inc. distribution
 
 
 
 


 
(4
)
 


 
 
 
(4
)
Net income
 
 
 
 
 
 
21,156

 
 
 
 
 
21,156

Other comprehensive income
 
 
 
 
 
 
 
 
82

 
 
 
82

Issuance of non-restricted stock (44,000 shares)
 
 
 
 
(1,058
)
 
 
 
 
 
950

 
(108
)
Conversion of Class A to Class B
common stock (94,000 shares)
(5
)
 
5

 


 
 
 
 
 
 
 

Compensation expense related to stock incentive plans
 
 
 
 
5,558

 
 
 
 
 
 
 
5,558

Performance share issuance (235,000 shares)
 
 
 
 
(3,445
)
 
(2,132
)
 
 
 
4,424

 
(1,153
)
Restricted share units issuance (56,000 shares)
 
 
 
 
(1,583
)
 
 
 
 
 
1,389

 
(194
)
Repurchase of Common Stock (736,000 shares)
 
 
 
 
 
 
 
 
 
 
(8,686
)
 
(8,686
)
Dividends declared ($0.22 per share)
 
 
 
 
 
 
(8,288
)
 
 
 
 
 
(8,288
)
Amounts at June 30, 2016
$
14

 
$
2,137

 
$
2,917

 
$
205,104

 
$
1,311

 
$
(61,615
)
 
$
149,868

Net income
 
 
 
 
 
 
37,506

 
 
 
 
 
37,506

Other comprehensive income
 
 
 
 
 
 
 
 
(196
)
 
 
 
(196
)
Issuance of non-restricted stock (49,000 shares)
 
 
 
 
(1,205
)
 
 
 
 
 
1,204

 
(1
)
Conversion of Class A to Class B
common stock (11,000 shares)