KBAL 10-Q Quarterly Report March 31, 2015

KIMBALL INTERNATIONAL INC

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10-Q 1 kbal03312015q310q.htm KIMBALL INTERNATIONAL, INC. FORM 10-Q KBAL 03.31.2015 Q3 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2015

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

For the transition period from to

Commission File Number 0-3279

KIMBALL INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



Indiana		35-0514506
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
1600 Royal Street, Jasper, Indiana		47549-1001
(Address of principal executive offices)		(Zip Code)

(812) 482-1600

Registrant's telephone number, including area code

Not Applicable

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares outstanding of the Registrant's common stock as of April 23, 2015 was:

Class A Common Stock - 832,492 shares

Class B Common Stock - 37,724,877 shares

KIMBALL INTERNATIONAL, INC.

FORM 10-Q

INDEX



		Page No.

PART I FINANCIAL INFORMATION

	Item 1. Financial Statements
	Condensed Consolidated Balance Sheets - March 31, 2015 (Unaudited) and June 30, 2014	3
	Condensed Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended March 31, 2015 and 2014	4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended March 31, 2015 and 2014	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended March 31, 2015 and 2014	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4. Controls and Procedures	30

PART II OTHER INFORMATION

	Item 1A. Risk Factors	31
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
	Item 6. Exhibits	33

SIGNATURES		34

EXHIBIT INDEX		35

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KIMBALL INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except for Share and Per Share Data)



	(Unaudited)
	March 31, 2015			June 30, 2014
ASSETS
Current Assets:
Cash and cash equivalents	$	49,968		$	136,624
Receivables, net of allowances of $2,256 and $2,345, respectively	44,692			175,695
Inventories	34,675			140,475
Prepaid expenses and other current assets	33,384			46,998
Total current assets	162,719			499,792
Property and Equipment, net of accumulated depreciation of $200,279 and $358,493, respectively	91,249			188,833
Goodwill	—			2,564
Other Intangible Assets, net of accumulated amortization of $36,204 and $61,912, respectively	2,647			4,191
Other Assets	15,387			26,766
Total Assets	$	272,002		$	722,146

LIABILITIES AND SHARE OWNERS' EQUITY
Current Liabilities:
Current maturities of long-term debt	$	27		$	25
Accounts payable	55,650			174,436
Dividends payable	1,947			1,883
Accrued expenses	49,740			77,256
Total current liabilities	107,364			253,600
Other Liabilities:
Long-term debt, less current maturities	244			268
Other	18,191			26,745
Total other liabilities	18,435			27,013
Share Owners' Equity:
Common stock-par value $0.05 per share:
Class A - Shares authorized: 50,000,000 Shares issued: 853,000 and 11,212,000, respectively	42			560
Class B - Shares authorized: 100,000,000 Shares issued: 42,172,000 and 31,813,000, respectively	2,109			1,591
Additional paid-in capital	2,990			6,269
Retained earnings	191,900			487,040
Accumulated other comprehensive income	1,193			2,440
Less: Treasury stock, at cost:
Class A - 0 and 3,505,000 shares, respectively	—			(42,198		)
Class B - 4,467,000 and 1,082,000 shares, respectively	(52,031		)	(14,169		)
Total Share Owners' Equity	146,203			441,533
Total Liabilities and Share Owners' Equity	$	272,002		$	722,146

See Notes to Condensed Consolidated Financial Statements

KIMBALL INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except for Per Share Data)



	(Unaudited)						(Unaudited)
	Three Months Ended						Nine Months Ended
	March 31						March 31
	2015			2014			2015			2014
Net Sales	$	145,943		$	125,108		$	441,807		$	405,959
Cost of Sales	101,936			88,491			304,021			281,290
Gross Profit	44,007			36,617			137,786			124,669
Selling and Administrative Expenses	38,508			37,692			125,435			122,606
Restructuring Expense	388			—			3,723			—
Operating Income (Loss)	5,111			(1,075		)	8,628			2,063
Other Income (Expense):
Interest income	61			36			151			144
Interest expense	(6		)	(6		)	(18		)	(19		)
Non-operating income, net	290			9			140			1,566
Other income, net	345			39			273			1,691
Income (Loss) from Continuing Operations Before Taxes on Income	5,456			(1,036		)	8,901			3,754
Provision (Benefit) for Income Taxes	574			(999		)	2,503			694
Income (Loss) from Continuing Operations	$	4,882		$	(37	)	$	6,398		$	3,060
Income from Discontinued Operations, Net of Tax	—			7,245			9,157			22,553
Net Income	$	4,882		$	7,208		$	15,555		$	25,613

Earnings Per Share of Common Stock:
Basic Earnings (Loss) Per Share from Continuing Operations:
Class A	$	0.12		$	(0.01	)	$	0.14		$	0.07
Class B	$	0.13		$	0.00		$	0.17		$	0.08
Diluted Earnings (Loss) Per Share from Continuing Operations:
Class A	$	0.12		$	(0.01	)	$	0.14		$	0.07
Class B	$	0.13		$	0.00		$	0.17		$	0.08
Basic Earnings Per Share:
Class A	$	0.12		$	0.18		$	0.38		$	0.65
Class B	$	0.13		$	0.19		$	0.40		$	0.67
Diluted Earnings Per Share:
Class A	$	0.12		$	0.18		$	0.37		$	0.65
Class B	$	0.13		$	0.19		$	0.40		$	0.66

Dividends Per Share of Common Stock:
Class A	$	0.050		$	0.045		$	0.145		$	0.135
Class B	$	0.050		$	0.050		$	0.150		$	0.150

Average Number of Shares Outstanding:
Class A and B Common Stock:
Basic	38,747			38,437			38,773			38,394
Diluted	39,115			38,437			39,102			38,838

See Notes to Condensed Consolidated Financial Statements

KIMBALL INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)



	Three Months Ended									Three Months Ended
	March 31, 2015									March 31, 2014
(Unaudited)	Pre-tax			Tax			Net of Tax			Pre-tax		Tax			Net of Tax
Net income							$	4,882							$	7,208
Other comprehensive income (loss):
Foreign currency translation adjustments	$	—		$	—		$	—		$	54	$	(33	)	$	21
Postemployment severance actuarial change	45			(17		)	28			451		(180		)	271
Derivative gain	—			—			—			362		(94		)	268
Reclassification to (earnings) loss:
Derivatives	—			—			—			468		(104		)	364
Amortization of prior service costs	41			(16		)	25			71		(28		)	43
Amortization of actuarial change	(69		)	27			(42		)	80		(33		)	47
Other comprehensive income (loss)	$	17		$	(6	)	$	11		$	1,486	$	(472	)	$	1,014
Total comprehensive income							$	4,893							$	8,222




	Nine Months Ended									Nine Months Ended
	March 31, 2015									March 31, 2014
(Unaudited)	Pre-tax			Tax			Net of Tax			Pre-tax			Tax			Net of Tax
Net income							$	15,555								$	25,613
Other comprehensive income (loss):
Foreign currency translation adjustments	$	(6,070	)	$	—		$	(6,070	)	$	4,937		$	(304	)	$	4,633
Postemployment severance actuarial change	698			(277		)	421			573			(229		)	344
Derivative gain (loss)	2,513			(416		)	2,097			(536		)	70			(466		)
Reclassification to (earnings) loss:
Derivatives	(1,484		)	291			(1,193		)	1,085			(211		)	874
Amortization of prior service costs	177			(70		)	107			214			(85		)	129
Amortization of actuarial change	(146		)	58			(88		)	274			(110		)	164
Other comprehensive income (loss)	$	(4,312	)	$	(414	)	$	(4,726	)	$	6,547		$	(869	)	$	5,678
Total comprehensive income							$	10,829								$	31,291

See Notes to Condensed Consolidated Financial Statements

KIMBALL INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)



	(Unaudited)
	Nine Months Ended
	March 31
	2015			2014
Cash Flows From Operating Activities:
Net income	$	15,555		$	25,613
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,527			23,588
Loss on sales of assets	916			344
Restructuring and asset impairment charges	930			1,509
Deferred income tax and other deferred charges	(1,434		)	(7,780		)
Stock-based compensation	5,217			5,071
Excess tax benefits from stock-based compensation	(1,157		)	(43		)
Other, net	1,220			404
Change in operating assets and liabilities:
Receivables	(4,292		)	6,553
Inventories	(18,969		)	(7,925		)
Prepaid expenses and other current assets	(6,122		)	(337		)
Accounts payable	8,449			5,780
Accrued expenses	(4,819		)	12,073
Net cash provided by operating activities	12,021			64,850
Cash Flows From Investing Activities:
Capital expenditures	(24,095		)	(24,848		)
Proceeds from sales of assets	2,302			1,724
Purchases of capitalized software	(1,178		)	(501		)
Other, net	(176		)	813
Net cash used for investing activities	(23,147		)	(22,812		)
Cash Flows From Financing Activities:
Transfer of cash and cash equivalents to Kimball Electronics, Inc.	(63,006		)	—
Change in capital leases and long-term debt	(22		)	(21		)
Dividends paid to Share Owners	(5,729		)	(5,625		)
Repurchases of common stock	(2,828		)	—
Excess tax benefits from stock-based compensation	1,157			43
Repurchase of employee shares for tax withholding	(3,842		)	(1,953		)
Net cash used for financing activities	(74,270		)	(7,556		)
Effect of Exchange Rate Change on Cash and Cash Equivalents	(1,260		)	264
Net (Decrease) Increase in Cash and Cash Equivalents	(86,656		)	34,746
Cash and Cash Equivalents at Beginning of Period	136,624			103,600
Cash and Cash Equivalents at End of Period	$	49,968		$	138,346
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Income taxes	$	11,908		$	12,189
Interest expense	$	30		$	28

See Notes to Condensed Consolidated Financial Statements

KIMBALL INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Kimball International, Inc. (the “Company,” “Kimball,” “we,” “us,” or “our”) have been prepared in accordance with the instructions to Form 10-Q. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. Intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.

Note 2. Spin-Off Transaction

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 the Company's Share Owners of record as of October 22, 2014 (“the Record Date”). On the Distribution Date, each of the Company's Share Owners received three shares of Kimball Electronics for every four shares of the Company held by such Share Owner on the Record Date. After the Distribution Date, the Company does not beneficially own any Kimball Electronics shares and Kimball Electronics is an independent publicly traded company. Kimball International, Inc. trades on the NASDAQ under the ticker symbol “KBAL” and Kimball Electronics, Inc. trades on the NASDAQ under the ticker symbol “KE”.

The following is a summary of the assets and liabilities distributed to Kimball Electronics on the Distribution Date or shortly thereafter:



(Amounts in Millions)
Assets:
Cash and cash equivalents	$	63
Receivables	133
Inventories	124
Prepaid expenses and other current assets	19
Net property and equipment	98
Goodwill	3
Net other intangible assets	1
Other long-term assets	15
	$	456
Liabilities:
Accounts payable	$	125
Accrued expenses	22
Other long-term liabilities	9
	$	156
Net Assets Distributed to Kimball Electronics, Inc.	$	300

The Company distributed $63 million of cash to Kimball Electronics, including the cash held by its foreign facilities, as Kimball Electronics began operation as an independent company. The cash distribution occurred in several installments immediately preceding the Distribution Date or shortly thereafter. In addition, $3.5 million of accumulated other comprehensive losses, net of tax, related to foreign translation, derivatives, and the postemployment benefit plan was transferred to Kimball Electronics.

The EMS segment was reclassified to discontinued operations in the Condensed Consolidated Statements of Income for all periods presented. Summarized financial results of discontinued operations through the October 31, 2014 spin-off date, were as follows:



	Three Months Ended				Nine Months Ended
	March 31				March 31
(Amounts in Thousands, Except Per Share Data)	2015		2014		2015		2014
Net Sales	$	—	$	185,680	$	275,551	$	542,580
Income Before Taxes on Income	—		9,559		13,098		28,926
Provision for Income Taxes	—		2,314		3,941		6,373
Income from Discontinued Operations, Net of Tax	$	—	$	7,245	$	9,157	$	22,553
Income From Discontinued Operations per Class B Diluted Share	$	—	$	0.19	$	0.23	$	0.58

In connection with the spin-off of Kimball Electronics, the Company and Kimball Electronics entered into several agreements covering administrative and tax matters to provide or obtain services on a transitional basis, as needed, for varying periods after the spin-off. The administrative agreements cover various services such as information technology, human resources, taxation, and finance. The Company expects all services to be substantially complete within one year after the spin-off. The Company has retained all liabilities for U.S. federal, state, and local income taxes on income prior to the spin-off, as well as certain non-income taxes attributable to Kimball Electronics’ business. Kimball Electronics generally will be liable for all other taxes attributable to its business. In connection with the spin-off, the Company has adjusted its employee stock compensation awards and separated its retirement and post-employment benefit plans.

On October 30, 2014, holders of a sufficient number of shares of Class A common stock converted such shares into Class B common stock such that the number of outstanding shares of Class A common stock is, after such conversions, less than 15% of the total number of issued and outstanding shares of both Class A common stock and Class B common stock. Pursuant to the Company’s Amended and Restated Articles of Incorporation if at any time the number of shares of Class A common stock issued and outstanding is less than 15% of the total number of issued and outstanding shares of both Class A common stock and Class B common stock, then all of the rights, preferences, limitations and restrictions relating to Class B common stock shall become the same as the rights, preferences, limitations and restrictions of Class A common stock, without any further action of or by its Share Owners, and all distinctions between Class A common stock and Class B common stock shall be eliminated so that all shares of Class B common stock are equal to shares of Class A common stock with respect to all matters, including without limitation, dividend payments and voting rights. The elimination of such distinctions, which occurred on October 30, 2014, is referred to as the “stock unification.” As a result of the stock unification, Class A common stock and Class B common stock now vote as a single class (except as otherwise required by applicable law) on all matters submitted to a vote of the Company’s Share Owners.

Note 3. Recent Accounting Pronouncements and Supplemental Information

Recent Accounting Pronouncements:

In April 2015, the Financial Accounting Standards Board (“FASB”) issued guidance on customer’s accounting for cloud computing fees and provided criteria for customers in a cloud computing arrangement to use to determine whether the arrangement includes a license of software. The guidance clarifies that a software license included in a cloud computing arrangement should be accounted for consistent with the acquisition of other software licenses, whereas a cloud computing arrangement that does not include a software license should be accounted for as a service contract. The guidance is effective for our first quarter of fiscal year 2017 financial statements, and allows for the use of either a prospective or retrospective transition method. We have not yet selected a transition method nor determined the effect of this guidance on our consolidated financial statements.

In June 2014, the FASB provided explicit guidance on how to account for share-based payments granted to employees in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The guidance will be applied prospectively for our first quarter fiscal year 2017 financial statements. We do not expect the adoption to have a material effect on our consolidated financial statements.

In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. To achieve this core principle, the guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance addresses several areas including transfer of control, contracts with multiple performance obligations, and costs to obtain and fulfill contracts. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In April 2015, the FASB proposed a deferral of the effective date for this new revenue standard by one year, which would make the guidance effective for our first quarter fiscal year 2019 financial statements using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients; or (ii) adoption with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures. We have not yet selected a transition method nor determined the effect of this guidance on our consolidated financial statements.

In April 2014, the FASB issued guidance on reporting discontinued operations and disclosures of disposals of components of an entity. Under the new guidance, a disposal that represents a strategic shift that has or will have a major effect on an entity's operations and financial results is a discontinued operation. The new guidance requires expanded disclosures that will provide more information about the assets, liabilities, income, and expenses of discontinued operations, and also requires disclosures of significant disposals that do not qualify for discontinued operations reporting. The guidance is effective prospectively for disposals or components of our business classified as held for sale during the first quarter of fiscal year 2016. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

In July 2013, the FASB issued guidance to eliminate the diversity in practice related to the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The guidance became effective prospectively for our first quarter fiscal year 2015 financial statements. The adoption did not have a material effect on our consolidated financial statements.

Notes Receivable and Trade Accounts Receivable:

Notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.

Our policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable includes analysis of such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for credit losses on the trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Our limited amount of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses.

Income Taxes:

In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.

Our 10.5% effective tax rate for the third quarter of fiscal year 2015 was favorably impacted by $1.1 million of releases of income tax reserves upon the expiration of statutes of limitation and $0.4 million of tax accrual adjustments. The third quarter fiscal year 2014 effective tax rate of 96.4% was favorably impacted by tax adjustments of $0.4 million on a pre-tax loss.

Our effective tax rate for the first nine months of fiscal year 2015 of 28.1% was favorably impacted by $1.1 million of releases of income tax reserves upon the expiration of statutes of limitation and $0.4 million of tax accrual adjustments, which were partially offset by a $0.4 million adjustment to deferred taxes as our combined state tax rate is lower post spin-off. Our effective tax rate for the first nine months of fiscal year 2014 of 18.5% was favorably impacted by both a $0.7 million decrease in a deferred tax asset valuation allowance and a $0.4 million tax accrual adjustment.

Non-operating Income, net:

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

Components of the Non-operating income, net line, from continuing operations were:



	Three Months Ended						Nine Months Ended
	March 31						March 31
(Amounts in Thousands)	2015			2014			2015			2014
Foreign Currency/Derivative Gain (Loss)	$	2		$	(40	)	$	(40	)	$	(56	)
Gain on Supplemental Employee Retirement Plan Investments	353			187			519			2,041
Other	(65		)	(138		)	(339		)	(419		)
Non-operating income, net	$	290		$	9		$	140		$	1,566

Note 4. Inventories

Inventory components were as follows:



(Amounts in Thousands)	March 31, 2015			June 30, 2014
Finished products	$	26,208		$	37,373
Work-in-process	1,955			13,808
Raw materials	20,907			103,083
Total FIFO inventory	49,070			154,264
LIFO reserve	(14,395		)	(13,789		)
Total inventory	$	34,675		$	140,475

For interim reporting, LIFO inventories are computed based on quantities as of the end of the quarter and interim changes in price levels. Changes in quantities and price levels are reflected in the interim financial statements in the period in which they occur, except in cases where LIFO inventory liquidations are expected to be reinstated by fiscal year end. The earnings impact of LIFO inventory liquidations during the three and nine -month periods ended March 31, 2015 and 2014 was immaterial. The reduction in FIFO inventory from June 30, 2014 to March 31, 2015 was due primarily to the spin-off of Kimball Electronics, Inc. from Kimball International, Inc. on October 31, 2014.

Note 5. Accumulated Other Comprehensive Income (Loss)

During the three months ended March 31, 2015 and 2014 , the changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows:



Accumulated Other Comprehensive Income (Loss)						Postemployment Benefits
(Amounts in Thousands)	Foreign Currency Translation Adjustments		Derivative Gain (Loss)			Prior Service Costs			Net Actuarial Gain (Loss)			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2014	$	—	$	—		$	(30	)	$	1,212		$	1,182
Other comprehensive income (loss) before reclassifications	—		—			—			28			28
Reclassification to (earnings) loss	—		—			25			(42		)	(17		)
Net current-period other comprehensive income (loss)	—		—			25			(14		)	11
Balance at March 31, 2015	$	—	$	—		$	(5	)	$	1,198		$	1,193

Balance at December 31, 2013	$	5,467	$	(4,583	)	$	(206	)	$	509		$	1,187
Other comprehensive income (loss) before reclassifications	21		268			—			271			560
Reclassification to (earnings) loss	—		364			43			47			454
Net current-period other comprehensive income (loss)	21		632			43			318			1,014
Balance at March 31, 2014	$	5,488	$	(3,951	)	$	(163	)	$	827		$	2,201

During the nine months ended March 31, 2015 and 2014 , the changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows:



Accumulated Other Comprehensive Income (Loss)							Postemployment Benefits
(Amounts in Thousands)	Foreign Currency Translation Adjustments			Derivative Gain (Loss)			Prior Service Costs			Net Actuarial Gain (Loss)			Accumulated Other Comprehensive Income (Loss)
Balance at June 30, 2014	$	4,909		$	(3,411	)	$	(120	)	$	1,062		$	2,440
Other comprehensive income (loss) before reclassifications	(6,070		)	2,097			—			421			(3,552		)
Reclassification to (earnings) loss	—			(1,193		)	107			(88		)	(1,174		)
Distribution of Kimball Electronics, Inc.	1,161			2,507			8			(197		)	3,479
Net current-period other comprehensive income (loss)	(4,909		)	3,411			115			136			(1,247		)
Balance at March 31, 2015	$	—		$	—		$	(5	)	$	1,198		$	1,193

Balance at June 30, 2013	$	855		$	(4,359	)	$	(292	)	$	319		$	(3,477	)
Other comprehensive income (loss) before reclassifications	4,633			(466		)	—			344			4,511
Reclassification to (earnings) loss	—			874			129			164			1,167
Net current-period other comprehensive income (loss)	4,633			408			129			508			5,678
Balance at March 31, 2014	$	5,488		$	(3,951	)	$	(163	)	$	827		$	2,201

The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Condensed Consolidated Statements of Income:



Reclassifications from Accumulated Other Comprehensive Income (Loss)	Three Months Ended						Nine Months Ended						Affected Line Item in the Condensed Consolidated Statements of Income
	March 31,						March 31,
(Amounts in Thousands)	2015			2014			2015			2014
Derivative Gain (Loss) ⁽¹⁾	$	—		$	(364	)	$	1,193		$	(874	)	Income from Discontinued Operations, Net of Tax

Postemployment Benefits:
Amortization of Prior Service Costs ⁽²⁾	$	(26	)	$	(35	)	$	(106	)	$	(119	)	Cost of Sales
	(15		)	(26		)	(58		)	(64		)	Selling and Administrative Expenses
	16			23			65			72			Provision (Benefit) for Income Taxes
	(25		)	(38		)	(99		)	(111		)	Income (Loss) from Continuing Operations
	$	—		$	(5	)	$	(8	)	$	(18	)	Income from Discontinued Operations, Net of Tax

Amortization of Actuarial Gain (Loss) ⁽²⁾	$	38		$	(44	)	$	68		$	(154	)	Cost of Sales
	31			(25		)	65			(74		)	Selling and Administrative Expenses
	(27		)	27			(52		)	90			Provision (Benefit) for Income Taxes
	42			(42		)	81			(138		)	Income (Loss) from Continuing Operations
	$	—		$	(5	)	$	7		$	(26	)	Income from Discontinued Operations, Net of Tax

Total Reclassifications for the Period	$	17		$	(80	)	$	(18	)	$	(249	)	Income (Loss) from Continuing Operations
	—			(374		)	1,192			(918		)	Income from Discontinued Operations, Net of Tax
	$	17		$	(454	)	$	1,174		$	(1,167	)	Net Income

Amounts in parentheses indicate reductions to income.

(1) See Note 10 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information on derivative instruments.

(2) See Note 12 - Postemployment Benefits of Notes to Condensed Consolidated Financial Statements for further information on postemployment benefit plans.

Note 6. Commitments and Contingent Liabilities

Standby letters of credit are issued to third-party suppliers, lessors, and insurance institutions and can only be drawn upon in the event of Kimball's failure to pay its obligations to a beneficiary. As of March 31, 2015 , we had a maximum financial exposure from unused standby letters of credit totaling $1.0 million . We are not aware of circumstances that would require us to perform under any of these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our consolidated financial statements. Accordingly, no liability has been recorded as

of March 31, 2015 with respect to the standby letters of credit. Kimball also enters into commercial letters of credit to facilitate payments to vendors and from customers.

We have a contractual commitment with one supplier in the normal course of business that requires us to purchase a minimum amount of components, which could potentially result in a future obligation. The minimum purchase commitment for calendar year 2015 is 0.2 million Euro (approximately $0.2 million at March 31, 2015 exchange rates). We expect our purchases to exceed the minimum amount, and therefore no additional liability has been recorded as of March 31, 2015 .

We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability in cases where specific warranty issues become known.

Changes in the product warranty accrual for the nine months ended March 31, 2015 and 2014 were as follows:



	Nine Months Ended
	March 31
(Amounts in Thousands)	2015			2014
Product Warranty Liability at the beginning of the period	$	3,221		$	2,384
Additions to warranty accrual (including changes in estimates)	625			2,356
Settlements made (in cash or in kind)	(564		)	(1,346		)
Distribution of Kimball Electronics, Inc.	(910		)	—
Product Warranty Liability at the end of the period	$	2,372		$	3,394

Note 7. Restructuring Expense

We recognized pre-tax restructuring expense related to continuing operations of $0.4 million and $3.7 million in the three and nine months ended March 31, 2015 , respectively, and recognized no restructuring expense related to continuing operations in the three and nine months ended March 31, 2014 . We utilize available market prices and management estimates to determine the fair value of impaired fixed assets. Restructuring charges are included in the Restructuring Expense line item on the Company's Condensed Consolidated Statements of Income.

For more information related to restructuring activities that are included in the discontinued operations line item on the Company's Condensed Consolidated Statements of Income, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 .

Capacity Utilization Restructuring Plan:

In November 2014, we announced a capacity utilization restructuring plan which includes 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.

Key factors in the decision to consolidate the Post Falls operation into the Indiana facilities include the improvement of customer delivery, supply chain dynamics, and transportation costs. The transfer of work involves the start-up of metal fabrication capabilities in a Company-owned facility, along with the transfer of certain assembly operations into two additional company-owned facilities, all located in southern Indiana. The manufacturing capacity realignment will be carefully managed to mitigate customer disruptions. The consolidation activities began immediately after the announcement in November 2014, and we are actively marketing for sale the Post Falls, Idaho facility. Incremental capital for equipment purchases to transfer this operation to Indiana is approximately $5 million , exclusive of the capital reduction that is estimated to occur upon the sale of the Post Falls facility. No changes in operating income are anticipated until the later quarters of the transfer of work. When fully implemented by September 2016, we anticipate pre-tax savings of approximately $5 million per year thereafter.

The reduction of our plane fleet from two jets to one reduces 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 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. The sale of the plane resulted in a $0.2 million pre-tax gain in the third quarter of fiscal year 2015 which partially offset the

impairment charge of $1.1 million recorded in the second quarter of fiscal year 2015. As a result of the aircraft fleet reduction, we expect to realize annual pre-tax savings of $0.8 million . In regards to the remaining jet, 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.

We currently estimate that the pre-tax restructuring charges will be approximately $9.9 million , with $3.7 million recorded in the nine months ended March 31, 2015 and the remainder expected to be incurred over the remaining anticipated transition period. The restructuring charges are expected to consist of approximately $5.6 million of transition, training, and other employee costs, $3.1 million of plant closure and other exit costs, and $1.2 million of non-cash asset impairment. Approximately 88% of the total cost estimate is expected to be cash expense.



Summary of Restructuring Plan:
	Accrued June 30, 2014		Nine Months Ended March 31, 2015									Total Charges Incurred Since Plan Announcement		Total Expected Plan Costs
(Amounts in Thousands)	Accrued June 30, 2014		Amounts Charged Cash		Amounts Charged Non-cash		Amounts Utilized/ Cash Paid			Accrued March 31, 2015 ⁽¹⁾		Total Charges Incurred Since Plan Announcement		Total Expected Plan Costs

Capacity Realignment and Post Falls, Idaho Exit
Transition and Other Employee Costs	$	—	$	2,006	$	—				$	2,006	$	2,006	$	5,432
Asset Write-downs	—		—		108		(108		)	—		108		334
Plant Closure and Other Exit Costs	—		563		—		(563		)	—		563		3,113
Total	$	—	$	2,569	$	108	$	(671	)	$	2,006	$	2,677	$	8,879
Plane Fleet Reduction
Transition and Other Employee Costs	$	—	$	224	$	—	$	(224	)	$	—	$	224	$	224
Asset Write-downs	—		—		822		(822		)	—		822		822
Total	$	—	$	224	$	822	$	(1,046	)	$	—	$	1,046	$	1,046
Total Restructuring Plan	$	—	$	2,793	$	930	$	(1,717	)	$	2,006	$	3,723	$	9,925


(1)	The accrued restructuring balance at March 31, 2015 includes $0.5 million recorded in current liabilities and $1.5 million recorded in other long-term liabilities.

Note 8. Assets Held for Sale

At March 31, 2015 , no assets were classified as held for sale. An aircraft which had been used primarily for management travel totaling $ 1.3 million was classified as held for sale during the second quarter of fiscal year 2015, and was subsequently sold during the third quarter of fiscal year 2015. We recognized a pre-tax gain of $0.2 million related to the sale of the aircraft during the third quarter of fiscal year 2015 which partially offsets the pre-tax impairment charge recorded in the second quarter of fiscal year 2015 of $1.1 million , due to the book value of the aircraft exceeding current fair market value estimates less selling costs. The impairment and gain are both recorded on the Restructuring Expense line of the Condensed Consolidated Statements of Income.

At June 30, 2014 , no assets were classified as held for sale.

Note 9. Fair Value

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


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


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


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

Our policy is to recognize transfers between these levels as of the end of each quarterly reporting period. There were no transfers between these levels during the nine months ended March 31, 2015 . There were also no changes in the inputs or valuation techniques used to measure fair values compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 .

Financial Instruments Recognized at Fair Value:

The following methods and assumptions were used to measure fair value:



Financial Instrument	Level	Valuation Technique/Inputs Used
Cash Equivalents	1	Market - Quoted market prices
Derivative Assets: Foreign exchange contracts	2	Market - Based on observable market inputs using standard calculations, such as time value, forward interest rate yield curves, and current spot rates, considering counterparty credit risk.
Trading securities: Mutual funds in nonqualified SERP	1	Market - Quoted market prices
Derivative Liabilities: Foreign exchange contracts	2	Market - Based on observable market inputs using standard calculations, such as time value, forward interest rate yield curves, and current spot rates adjusted for Kimball's non-performance risk.

Recurring Fair Value Measurements:

As of March 31, 2015 and June 30, 2014 , the fair values of financial assets and liabilities that are measured at fair value on a recurring basis using the market approach are categorized as follows:



	March 31, 2015
(Amounts in Thousands)	Level 1		Level 2		Total
Assets
Cash equivalents	$	23,407	$	—	$	23,407
Derivatives: Foreign exchange contracts	—		—		—
Trading Securities: Mutual funds in nonqualified SERP	18,709		—		18,709
Total assets at fair value	$	42,116	$	—	$	42,116
Liabilities
Derivatives: Foreign exchange contracts	$	—	$	—	$	—
Total liabilities at fair value	$	—	$	—	$	—

	June 30, 2014
(Amounts in Thousands)	Level 1		Level 2		Total
Assets
Cash equivalents	$	103,845	$	—	$	103,845
Derivatives: Foreign exchange contracts	—		800		800
Trading Securities: Mutual funds in nonqualified SERP	23,106		—		23,106
Total assets at fair value	$	126,951	$	800	$	127,751
Liabilities
Derivatives: Foreign exchange contracts	$	—	$	699	$	699
Total liabilities at fair value	$	—	$	699	$	699

The reduction in balances from June 30, 2014 to March 31, 2015 was due to the spin-off of the EMS segment on October 31, 2014. We had no purchases or sales of Level 3 assets during the three and nine months ended March 31, 2015 .

The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, a bond fund, and a money market fund. The SERP investment assets are offset by a SERP liability which represents Kimball's obligation to distribute SERP funds to participants. See Note 11 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.

Non-Recurring Fair Value Measurements:

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments when events or circumstances indicate a significant adverse effect on the fair value of the asset. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.



Non-recurring fair value adjustment	Level	Valuation Technique/Inputs Used
Impairment of long-lived assets (property and equipment)	2	Market - Quoted market prices for similar assets sold, adjusted for features specific to the asset

During the three months ended March 31, 2015 , we recognized a pre-tax gain of $0.2 million related to the sale of an aircraft which had been used primarily for management travel. During the nine months ended March 31, 2015 , we classified the aircraft as held for sale and accordingly recognized a pre-tax impairment charge of $1.1 million due to the book value of the aircraft exceeding current fair market value estimates less selling costs which was partially offset by the gain recognized upon sale of $0.2 million. During the three months ended March 31, 2014 , we had no fair value adjustments applicable to items that are subject to non-recurring fair value measurement after the initial measurement date. During the nine months ended March 31, 2014 , we classified another aircraft as held for sale and sold the aircraft, recognizing a pre-tax impairment of $1.2 million due to a significant downward shift in the market for private aviation aircraft.

Financial Instruments Not Carried At Fair Value:

Financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include the following:



Financial Instrument	Level	Valuation Technique/Inputs Used
Notes receivable	2	Market - Price approximated based on the assumed collection of receivables in the normal course of business, taking into account the customer's non-performance risk
Long-term debt (carried at amortized cost)	3	Income - Price estimated using a discounted cash flow analysis based on quoted long-term debt market rates, taking into account Kimball's non-performance risk

The carrying value of our cash deposit accounts, trade accounts receivable, trade accounts payable, and dividends payable approximates fair value due to the relatively short maturity and immaterial non-performance risk.

Note 10. Derivative Instruments

Foreign Exchange Contracts:

Our former EMS segment, classified as discontinued operations, operated internationally and was therefore exposed to foreign currency exchange rate fluctuations in the normal course of business. The primary means of managing this exposure was to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques did not fully offset currency risk, derivative instruments were used with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure included the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure was committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments were only utilized for risk management purposes and were not used for speculative or trading purposes.

Forward contracts designated as cash flow hedges were used to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency. Foreign exchange contracts were also used to hedge against foreign currency exchange rate risks related to intercompany balances denominated in currencies other than the functional currencies. In limited cases due to unexpected changes in forecasted transactions, cash flow hedges may have ceased to meet the criteria to be designated as cash flow hedges. Depending on the type of exposure hedged, either a derivative contract in the opposite position of the undesignated hedge may have been purchased or the hedge may have been retained until it matured if the hedge had continued to provide an adequate offset in earnings against the currency revaluation impact of foreign currency denominated liabilities.

As of March 31, 2015, after the spin-off of the EMS segment, we held no derivative instruments. As of June 30, 2014, the fair value of outstanding derivative instruments was recognized on the balance sheet as a derivative asset or liability. When derivatives were settled with the counterparty, the derivative asset or liability was relieved and cash flow was impacted for the net settlement. For derivative instruments that met the criteria of hedging instruments under FASB guidance, the effective portions of the gain or loss on the derivative instrument were initially recorded net of related tax effect in Accumulated Other Comprehensive Income (Loss), a component of Share Owners' Equity, and were subsequently reclassified into earnings in the period or periods during which the hedged transaction was recognized in earnings. The gain or loss associated with derivative instruments that were not designated as hedging instruments or that ceased to meet the criteria for hedging under FASB guidance was recognized in earnings.

See Note 9 - Fair Value of Notes to Condensed Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and the Condensed Consolidated Statements of Comprehensive Income for the changes in deferred derivative gains and losses. Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets and derivative gains and losses in the Condensed Consolidated Statements of Income are presented below.

Fair Value of Derivative Instruments on the Condensed Consolidated Balance Sheets



	Asset Derivatives					Liability Derivatives
		Fair Value As of					Fair Value As of
(Amounts in Thousands)	Balance Sheet Location	March 31, 2015		June 30, 2014		Balance Sheet Location	March 31, 2015		June 30, 2014
Derivatives designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	$	—	$	599	Accrued expenses	$	—	$	241

Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	—		201		Accrued expenses	—		458
Total derivatives		$	—	$	800		$	—	$	699

The Effect of Derivative Instruments on Other Comprehensive Income (Loss)



	Three Months Ended				Nine Months Ended
	March 31				March 31
(Amounts in Thousands)	2015		2014		2015		2014
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives (Effective Portion):
Foreign exchange contracts	$	—	$	362	$	2,513	$	(536	)

The Effect of Derivative Instruments on Condensed Consolidated Statements of Income



		Three Months Ended					Nine Months Ended
(Amounts in Thousands)		March 31					March 31
Derivatives in Cash Flow Hedging Relationships	Location of Gain or (Loss)	2015		2014			2015		2014
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion):
Foreign exchange contracts	Income from Discontinued Operations, Net of Tax	$	—	$	(468	)	$	1,484	$	(1,085	)

Derivatives Not Designated as Hedging Instruments
Amount of Pre-Tax Gain or (Loss) Recognized in Income on Derivatives:
Foreign exchange contracts	Income from Discontinued Operations, Net of Tax	$	—	$	174		$	740	$	(664	)
Stock warrants	Non-operating income, net	—		(13		)	—		(5		)
Total		$	—	$	161		$	740	$	(669	)

Total Derivative Pre-Tax Gain (Loss) Recognized in Income		$	—	$	(307	)	$	2,224	$	(1,754	)

Note 11. Investments

Kimball maintains a self-directed supplemental employee retirement plan (“SERP”) in which executive employees are eligible to participate. The SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. Kimball recognizes SERP investment assets on the Condensed Consolidated Balance Sheets at current fair value. A SERP liability of the same amount is recorded on the Condensed Consolidated Balance Sheets representing an obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income in the Other Income (Expense) category. Adjustments made to revalue the SERP liability are also recognized in income as selling and administrative expenses and offset valuation adjustments on SERP investment assets. Net unrealized holding losses recognized in continuing operations for the nine months ended March 31, 2015 and 2014 were, in thousands, $121 and $160 , respectively.

SERP asset and liability balances were as follows:



(Amounts in Thousands)	March 31, 2015		June 30, 2014
SERP investments - current asset	$	9,384	$	8,812
SERP investments - other long-term asset	9,325		14,294
Total SERP investments	$	18,709	$	23,106

SERP obligation - current liability	$	9,384	$	8,812
SERP obligation - other long-term liability	9,325		14,294
Total SERP obligation	$	18,709	$	23,106

The reduction in SERP investments and obligation from June 30, 2014 to March 31, 2015 was due primarily to the spin-off of Kimball Electronics on October 31, 2014.

Note 12. Postemployment Benefits

Kimball's domestic employees participate in severance plans. These plans cover domestic employees and provide severance benefits to eligible employees meeting the plans' qualifications, primarily involuntary termination without cause. In connection with the spin-off, the Company has transferred the post-employment obligation for EMS employees to Kimball Electronics.

The components of net periodic postemployment benefit cost applicable to our severance plans were as follows:



	Three Months Ended					Nine Months Ended
	March 31					March 31
(Amounts in Thousands)	2015			2014		2015			2014
Service cost	$	131		$	237	$	521		$	720
Interest cost	21			34		77			103
Amortization of prior service costs	41			71		177			214
Amortization of actuarial (income) loss	(69		)	80		(146		)	274
Net periodic benefit cost — Total cost	$	124		$	422	$	629		$	1,311
Less: Discontinued operations	—			81		81			265
Net periodic benefit cost — Continuing operations	$	124		$	341	$	548		$	1,046

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

Note 13. Stock Compensation Plan

In connection with the spin-off of the EMS segment the Company entered into the Amendment of Annual and/or Long-Term Performance Share Award Agreement, which adjusted employee performance share awards to preserve the fair value of the awards before and after the spin-off. This modification did not result in additional compensation expense.

During fiscal year 2015 , the following stock compensation was awarded to officers and key employees. All awards were granted under the Amended and Restated 2003 Stock Option and Incentive Plan. For more information on stock compensation awards, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 .



Performance Units ⁽¹⁾	Quarter Awarded	Units	Grant Date Fair Value ⁽⁴⁾
Relative Total Shareholder Return Awards	3rd Quarter	30,198		$11.48

Unrestricted Shares ⁽²⁾	Quarter Awarded	Shares	Grant Date Fair Value ⁽⁴⁾
Unrestricted Shares (Director Compensation)	1st Quarter	17,335		$16.01
Unrestricted Shares	2nd Quarter	17,529		$9.10

Restricted Share Units ⁽³⁾	Quarter Awarded	Shares	Grant Date Fair Value ⁽⁴⁾
Restricted Share Units	2nd Quarter	159,416		$9.10
Restricted Share Units	3rd Quarter	29,533	$9.06 - $10.08

(1) Performance units were awarded to key officers under the Company's Relative Total Shareholder Return (“RTSR”) program. Vesting occurs at June 30, 2017. Participants will earn from 0% to 200% of the target award depending upon how the compound annual growth rate of Kimball International common stock ranks within the peer group at the end of the performance period.

(2) Unrestricted shares were awarded to non-employee members of the Board of Directors as compensation for director's fees as a result of directors' elections to receive unrestricted shares in lieu of cash payment. Director's fees are expensed over the period that directors earn the compensation. Other unrestricted shares were awarded to key employees as consideration for service to the Company. Unrestricted shares do not have vesting periods, holding periods, restrictions on sale, or other restrictions.

(3) Restricted share units (“RSU”) were awarded to officers and key employees. Vesting occurs at June 30, 2015, June 30, 2016, and June 30, 2017. Upon vesting, the outstanding number of RSUs and the value of dividends accumulated over the vesting period are converted to shares of common stock.

(4) The grant date fair value of RTSR awards was calculated using a Monte Carlo simulation. This valuation technique includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends. The grant date fair value of the unrestricted shares and restricted share units was based on the stock price at the date of the award.

Note 14. Variable Interest Entities

Kimball's involvement with a variable interest entity (“VIE”) is limited to a situation in which we are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the VIE's economic performance. Thus, consolidation is not required.

Our involvement with the VIE is limited to a note receivable related to the sale of an Indiana facility. The carrying value of the note receivable, net of a $0.5 million allowance, was $0.9 million as of both March 31, 2015 and June 30, 2014 . For both periods, the short-term portion of the carrying value was included on the Receivables line and the long-term portion of the carrying value was included on the Other Assets line of our Condensed Consolidated Balance Sheets.

We have no obligation to provide additional funding to the VIE, and thus our exposure and risk of loss related to the VIE is limited to the carrying value of the notes receivable. Kimball did not provide additional financial support to the VIE during the quarter ended March 31, 2015 .

Note 15. Credit Quality and Allowance for Credit Losses of Notes Receivable

Kimball monitors credit quality and associated risks of notes receivable on an individual basis based on criteria such as financial stability of the party and collection experience in conjunction with general economic and market conditions. We hold collateral for the note receivable from the sale of an Indiana facility thereby mitigating the risk of loss. As of March 31, 2015 and June 30, 2014 , Kimball had no material past due outstanding notes receivable.



	As of March 31, 2015						As of June 30, 2014
(Amounts in Thousands)	Unpaid Balance		Related Allowance		Receivable Net of Allowance		Unpaid Balance		Related Allowance		Receivable Net of Allowance
Note Receivable from Sale of Indiana Facility	$	1,358	$	489	$	869	$	1,392	$	489	$	903
Other Notes Receivable	452		143		309		223		149		74
Total	$	1,810	$	632	$	1,178	$	1,615	$	638	$	977

Note 16. Credit Agreement

In connection with the spin-off, on October 31, 2014 Kimball entered into a new credit facility. The new Kimball credit agreement, which replaced its previously existing primary credit facility, has a maturity date of October 31, 2019 and allows for up to $30 million in borrowings, with an option to increase the amount available for borrowing to $55 million at the Company's request, subject to participating banks' consent. The complete credit agreement was filed as Exhibit 10.4 to our Current Report on Form 8-K filed on November 3, 2014.

At March 31, 2015 , we had $1.0 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility.

The revolving loans under the Credit Agreement may consist of, at the Company's election, advances in U.S. dollars or advances in any other currency that is agreed to by the lenders. The proceeds of the revolving loans are to be used for general corporate purposes of the Company including acquisitions. A portion of the credit facility, not to exceed $10 million of the principal amount, will be available for the issuance of letters of credit. A commitment fee on the unused portion of principal amount of the credit facility is payable at a rate that ranges from 20.0 to 25.0 basis points per annum as determined by the Company's ratio of consolidated total indebtedness to adjusted consolidated EBITDA.

The interest rate is dependent on the type of borrowings and will be one of the following two options:

•

The adjusted London Interbank Offered Rate (“Adjusted LIBO Rate” as defined in the Credit Agreement) in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period, plus the Eurocurrency Loans margin which can range from 125.0 to 175.0 basis points based on the Company's ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or


•	The Alternate Base Rate, which is defined as the highest of the fluctuating rate per annum equal to the higher of


a.	JPMorgan's prime rate;


b.	1% per annum above the Adjusted LIBO rate; or


c.	1/2% per annum above the Federal funds rate;

plus the ABR Loans spread which can range from 25.0 to 75.0 basis points based on the Company's ratio of consolidated total indebtedness to adjusted consolidated EBITDA.

The Company's financial covenants under the Credit Agreement require:


•	An adjusted leverage ratio of (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 its fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.0 to 1.0 , and

•

A fixed charge coverage ratio of (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 GAAP, determined as of the end of each of its fiscal quarters for the trailing four fiscal quarters then ending, to not be less than 1.10 to 1.00 .

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Kimball International, Inc. (the “Company,” “Kimball,” “we,” “us,” or “our”) is a leading manufacturer of design driven, technology savvy, high quality furnishings sold under the Company’s family of brands: National Office Furniture, Kimball Office and Kimball Hospitality. Our diverse portfolio provides solutions for the workplace, learning, healing, and hospitality environments. Customers can access our products globally through a variety of distribution channels. Recognized with a reputation for excellence as a trustworthy company by Forbes, Kimball International is committed to a high performance culture that is committed to sound ethics, continuous improvement, and social responsibility.

Key economic indicators currently point toward continued strengthening in the overall economy. However, events such as the decline in oil prices and the strengthening of the US dollar as well as other uncertainties may pose a threat to our future growth as they have the tendency to cause disruption in business strategy, execution, and timing in many of the markets in which we compete.

In relation to the office furniture industry, the Business and Institutional Furniture Manufacturer Association (“BIFMA”) forecast (by IHS as of February 2015) projects a year-over-year increase of 9% for calendar year 2015. The forecast for two of the leading indicators for the hospitality furniture market (January 2015 PwC and March 2015 PKF Hospitality Research reports) include an increase in occupancy rates of 1% to 2% and an increase in RevPAR (Revenue Per Available Room) of 7% for calendar year 2015 over calendar year 2014.

We invest in capital expenditures prudently for projects in support of both organic growth and potential acquisitions that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability. We 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 profit sharing incentive bonus plan is that it is linked to our worldwide, group, or business unit performance which is designed to adjust compensation expense as profits change.

We continue to maintain a strong balance sheet. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facility, was $79.0 million at March 31, 2015 .

In addition to the above discussion, management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:

•

Successful execution of the Company's restructuring plan is critical to the Company's future performance. The success of the restructuring initiatives is dependent on accomplishing the plans in a timely and effective manner. A critical component of the restructuring initiatives is the transfer of production among facilities which will result in some manufacturing inefficiencies and excess working capital during the transition period. The Company's restructuring plan is discussed below.


•	We continue to focus on mitigating the impact of raw material commodity pricing pressures.


•	Due to the contract and project nature of the furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business. 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.


•	While both the hospitality and office furniture markets are expanding, we continue to see volatility in order rates which in turn can impact our operating results.


•	Globalization continues to reshape not only the markets in which we operate but also our key customers and competitors. In addition, demand is increasing for hospitality furniture manufactured in the U.S., and we are shifting focus of underutilized manufacturing capacity to fill this need.


•	Employees throughout our business operations are an integral part of our ability to compete successfully, and the stability of the management team is critical to long-term Share Owner value. Our career development and succession planning processes help to maintain stability in management.

Spin-Off of Kimball Electronics reported as Discontinued Operations

On October 31, 2014 (“Distribution Date”), we completed the previously announced 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 the Company's Share Owners of record as of October 22, 2014 (the “Record Date”). On the Distribution Date, each of the Company's Share Owners received three shares of Kimball Electronics for every four shares of the Company held by such Share Owner on the Record Date. After the Distribution Date, the Company does not beneficially own any Kimball Electronics shares and Kimball Electronics is an independent publicly traded company. Kimball International, Inc. trades on the NASDAQ under the ticker symbol “KBAL” and Kimball Electronics, Inc. trades on the NASDAQ under the ticker symbol “KE”.

The EMS business was reclassified to discontinued operations for all periods presented. Financial results of the discontinued operations were as follows:



	Three Months Ended				Nine Months Ended
	March 31				March 31
(Amounts in Thousands, Except Per Share Data)	2015		2014		2015		2014
Net Sales of Discontinued Operations	$0		$185,680		$275,551		$542,580
Income from Discontinued Operations, Net of Tax	$0		$7,245		$9,157		$22,553
Income From Discontinued Operations per Class B Diluted Share	$	0.00	$	0.19	$	0.23	$	0.58

Financial Overview



	At or for the Three Months Ended								For the Nine Months Ended
	March 31								March 31
(Amounts in Millions)	2015			2014			% Change		2015			2014			% Change
Net Sales	$	145.9		$	125.1		16.7	%	$	441.8		$	406.0		8.8	%
Gross Profit	44.0			36.6			20.2	%	137.8			124.7			10.5	%
Selling and Administrative Expense	38.5			37.7			2.2	%	125.4			122.6			2.3	%
Restructuring Expense	0.4			—					3.7			—
Operating Income (Loss)	5.1			(1.1		)	575.4	%	8.6			2.1			318.2	%
Operating Income (Loss) %	3.5		%	(0.9		%)			2.0		%	0.5		%
Income (Loss) from Continuing Operations	4.9			—					6.4			3.1
Open Orders	$	104.5		$	85.6		22.1	%



Net Sales by End Market Vertical
	Three Months Ended						Nine Months Ended
	March 31						March 31
(Amounts in Millions)	2015		2014		% Change		2015		2014		% Change
Education	$	7.9	$	6.4	23	%	$	28.5	$	30.0	(5	%)
Finance	13.1		16.4		(20	%)	42.0		48.2		(13	%)
Government	18.6		17.3		8	%	73.1		65.1		12	%
Healthcare	14.5		13.1		11	%	43.9		44.9		(2	%)
Hospitality	42.0		30.9		36	%	102.7		88.3		16	%
Other Commercial	49.8		41.0		21	%	151.6		129.5		17	%
Total Net Sales	$	145.9	$	125.1	17	%	$	441.8	$	406.0	9	%

The following operating results discussions are based on income from continuing operations and therefore exclude all income statement activity of the discontinued operations.

Third quarter fiscal year 2015 consolidated net sales were $145.9 million compared to third quarter fiscal year 2014 net sales of $125.1 million , or a 17% increase. Increased sales within the hospitality, other commercial, education, healthcare, and government vertical markets more than offset lower sales within the finance vertical market. Consolidated net sales for the first nine months of fiscal year 2015 were $441.8 million compared to net sales of $406.0 million for the first nine months of fiscal year 2014 , or a 9% increase. For the year-to-date period increased sales within the other commercial, hospitality, and government vertical markets more than offset lower sales within the finance, education, and healthcare vertical markets. Increased volume and to a lesser extent the positive impact of price increases drove the net sales increase. For both the quarter and year-to-date periods, our hospitality vertical market sales improved over the prior year on strength in sales of non-custom hospitality furniture, and the government vertical market is showing momentum as government sales steadily recover from recession levels. The sales increase in our other commercial vertical market is broad based as business conditions remain strong in both day-to-day and project business fueled in part by new product and marketing initiatives. The sales decline in the finance vertical market is due in part to the trend toward smaller footprint offices and lower cost products being selected. Vertical market sales levels can fluctuate depending on the mix of projects in a given quarter.

In the third quarter of fiscal year 2015 we recorded income from continuing operations of $4.9 million and earnings per Class B diluted share of $0.13 , inclusive of $0.2 million , or $0.01 per Class B diluted share, of after-tax restructuring charges, and $0.2 million , or less than $0.01 cent per Class B diluted share, of after-tax costs related to the spin-off of our EMS segment which was completed on October 31, 2014. We recorded approximate break-even earnings from continuing operations, or zero cents per

Class B diluted share in the third quarter of fiscal year 2014 , inclusive of $0.4 million , or $0.01 per Class B diluted share, of after-tax costs related to the spin-off of our EMS segment.

In the first nine months of fiscal year 2015 we recorded income from continuing operations of $6.4 million , or $0.17 per Class B diluted share, inclusive of $2.3 million , or $0.05 per Class B diluted share, of after-tax restructuring charges, and $3.1 million , or $0.08 per Class B diluted share, of after-tax external costs related to the spin-off of our EMS segment. We recorded income from continuing operations of $3.1 million , or $0.08 per Class B diluted share in the first nine months of fiscal year 2014 , inclusive of $0.4 million , or $0.01 per Class B diluted share, of after-tax costs related to the spin-off of our EMS segment.

Open orders at March 31, 2015 increased 22% when compared to the open order level as of March 31, 2014 as demand for both office furniture and hospitality furniture products remained strong. Open orders at a point in time may not be indicative of future sales trends.

Gross profit as a percent of net sales increased 0.9 and 0.5 of a percentage point in the third quarter and year-to-date periods of fiscal year 2015 compared to the third quarter and year-to-date periods of fiscal year 2014 . The increase in gross profit as a percent of net sales was driven by the favorable impact of price increases and the benefit of leverage gained on higher sales volumes. The aforementioned improvements were partially offset by an unfavorable shift in sales mix to lower margin product and higher product discounting.

As a percent of net sales, selling and administrative expenses in the third quarter of fiscal year 2015 compared to the third quarter of fiscal year 2014 decreased 3.8 percentage points due to the increased sales volumes. In absolute dollars, selling and administrative expenses in the third quarter of fiscal year 2015 compared to the third quarter of fiscal year 2014 increased 2.2% . Increased commission expenses related to the increased sales volumes and higher costs related to new product introductions were partially offset by lower employee benefit expenses.

As a percent of net sales, selling and administrative expenses in the year-to-date period of fiscal year 2015 compared to the same period of fiscal year 2014 decreased 1.8 percentage points, due to the increased sales volumes. In absolute dollars, selling and administrative expenses in the year-to-date period of fiscal year 2015 compared to the same period of fiscal year 2014 increased 2.3% . Expenses of $3.1 million were incurred in the year-to-date period of fiscal year 2015 related to the spin-off of our EMS business, a majority of which were for legal services and asset impairment as compared to $0.4 million of spin-off related expenses in the year-to-date period of fiscal year 2014 . In addition, higher sales and marketing expenses, higher costs related to new product introductions, and higher commission expense related to the increased sales volumes contributed to the higher selling and administrative expenses. We had a favorable variance within selling and administrative expenses of $1.5 million for the year-to-date period related to the normal revaluation to fair value of our Supplemental Employee Retirement Plan (“SERP”) liability. The impact from the change in the SERP liability that was recognized in selling and administrative expenses was 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 income from continuing operations. Also impacting the year-to-date comparison, we had a favorable year-over-year variance driven by a $1.2 million impairment charge related to the decision to downsize the plane fleet from three jets to two in the first quarter of fiscal year 2014.

In November 2014, we approved a capacity utilization restructuring plan which includes 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 jet was sold in the third quarter of fiscal year 2015, and as a result of the aircraft fleet reduction, we expect to realize pre-tax annual savings of $0.8 million . The remaining jet is primarily used for customer tours of production facilities and showrooms. We recognized pre-tax restructuring expense related to continuing operations of $0.4 million and $3.7 million in the three and nine months ended March 31, 2015 , respectively, and recognized no restructuring expense in the three and nine months ended March 31, 2014 . See Note 7 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further information on restructuring.

Other Income (Expense) consisted of the following:



	Three Months Ended						Nine Months Ended
	March 31						March 31
(Amounts in Thousands)	2015			2014			2015			2014
Interest Income	$	61		$	36		$	151		$	144
Interest Expense	(6		)	(6		)	(18		)	(19		)
Foreign Currency/Derivative Gain (Loss)	2			(40		)	(40		)	(56		)
Gain on Supplemental Employee Retirement Plan Investments	353			187			519			2,041
Other	(65		)	(138		)	(339		)	(419		)
Other Income, net	$	345		$	39		$	273		$	1,691

Our effective tax rate for the first nine months of fiscal year 2015 of 28.1% was favorably impacted by $1.1 million of releases of income tax reserves upon the expiration of statutes of limitation and $0.4 million of tax accrual adjustments which both decreased our fiscal 2015 year-to-date tax expense and effective tax rate and were partially offset by a $0.4 million adjustment to deferred taxes as our combined state tax rate is lower post spin-off. Our effective tax rate for the first nine months of fiscal year 2014 of 18.5% was favorably impacted by both a $0.7 million decrease in our deferred tax asset valuation allowance and a $0.4 million tax accrual adjustment.

The June 30, 2014 balance sheet was prior to the spin-off transaction which was completed on October 31, 2014, thus includes the Kimball Electronics balances. Comparing the balance sheet as of March 31, 2015 to June 30, 2014, excluding the impact of the spin-off of Kimball Electronics, hospitality inventory levels increased primarily due to port congestion and lead time requirements of select customers.

Liquidity and Capital Resources

The June 30, 2014 balance sheet includes the discontinued operations resulting from the spin-off of Kimball Electronics while the March 31, 2015 balance sheet is post-spin and thus does not include the discontinued operations. Likewise the cash flow statement includes Kimball Electronics activity up to the October 31, 2014 completion of spin-off.

Our cash and cash equivalents position declined to $50.0 million at March 31, 2015 from $136.6 million at June 30, 2014 , primarily due to the transfer of $63.0 million of cash to Kimball Electronics in conjunction with the spin-off.

Working capital at March 31, 2015 was $55.4 million compared to working capital of $246.2 million at June 30, 2014 . The current ratio was 1.5 at March 31, 2015 and 2.0 at June 30, 2014 . The change in working capital and current ratio was primarily driven by the spin-off of Kimball Electronics.

Kimball's short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facilities, totaled $79.0 million at March 31, 2015 . We had no short-term borrowings outstanding as of March 31, 2015 or June 30, 2014 .

Cash Flows

Cash flows include Kimball Electronics cash flows through the October 31, 2014 spin-off date, as cash management was centralized prior to the spin-off. Cash flows from discontinued operations are combined with cash flows from continuing operations within each cash flow statement category on the Company’s Condensed Consolidated Statements of Cash Flows.

The following table reflects the major categories of cash flows for the first nine months of fiscal years 2015 and 2014 .



	Nine Months Ended
	March 31
(Amounts in millions)	2015			2014
Net cash provided by operating activities	$	12,021		$	64,850
Net cash used for investing activities	$	(23,147	)	$	(22,812	)
Net cash used for financing activities	$	(74,270	)	$	(7,556	)

Cash Flows from Operating Activities

For the first nine months of fiscal years 2015 and 2014 , net cash provided by operating activities was $12.0 million and $64.9 million , respectively. Changes in working capital balances used $25.8 million of cash in the first nine months of fiscal year 2015 and provided $16.1 million in the first nine months of fiscal year 2014 .

The $25.8 million usage of cash from changes in working capital balances in the first nine months of fiscal year 2015 was primarily driven by increases in our inventory balance. Approximately half of the $19.0 million usage of cash for inventory was driven by increased inventory levels in our furniture operations while the remainder was related to inventory fluctuations of the discontinued EMS business prior to the spin date. The $16.1 million cash provided by changes in working capital balances in the first nine months of fiscal year 2014 was driven by $12.1 million of increased accrued expenses largely due to higher accrued profit-based incentive compensation.

As estimated on a continuing operations basis, our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for the nine-month periods ended March 31, 2015 and March 31, 2014 was approximately 30 days and approximately 32 days, respectively. The favorable variance was driven by improved collection results. We define DSO as the average of monthly trade accounts and notes receivable divided by an average day's net sales. As estimated on a continuing operations basis, our Production Days Supply on Hand (“PDSOH”) of inventory measure for the nine-month period ended March 31, 2015 increased to approximately 44 days from approximately 39 days from the nine-month period ended March 31, 2014 . The PDSOH increase was driven by increased inventory levels to support growth and also resulting from port congestion. 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 the first nine months of both fiscal years 2015 and 2014 , we reinvested $25.3 million into capital investments for the future. The current year-to-date capital investments were primarily for improvements to a sales and marketing facility which will showcase product in a working environment, improvements to showrooms and manufacturing facilities, and manufacturing equipment in our continuing furniture business and to a lesser extent for manufacturing equipment in our discontinued EMS business prior to spin-off. The prior-year-to-date capital investments were primarily for manufacturing equipment in our discontinued EMS business and the continuing furniture business.

Cash Flows from Financing Activities

Kimball transferred $63.0 million of cash to Kimball Electronics in conjunction with the spin-off and paid $5.7 million of dividends in the nine -month period ended March 31, 2015 and paid $5.6 million of dividends in the nine -month period ended March 31, 2014 . Consistent with our historical dividend policy, the Company's Board of Directors evaluates the appropriate dividend payment on a quarterly basis. During fiscal year 2015, we repurchased shares pursuant to a previously announced stock repurchase program which drove cash outflow of $2.8 million.

Credit Facility

On the October 31, 2014 spin off date, we entered into a new $30 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 million at our request, subject to the consent of the participating banks. At both March 31, 2015 and June 30, 2014 , we had no short-term borrowings outstanding. At March 31, 2015 , we had $1.0 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. The complete credit agreement was filed as Exhibit 10.4 to our Current Report on Form 8-K filed on November 3, 2014.

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 its fiscal quarters for the then most recently ended four fiscal quarters, to 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 GAAP, determined as of the end of each of its fiscal quarters for the trailing four fiscal quarters then ending, to not be less than 1.10 to 1.00.

We were in compliance with all debt covenants of this current credit facility from October 31, 2014 through March 31, 2015 , and prior to October 31, 2014 we were also in compliance with the debt covenants of the credit facilities held at that time.

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	March 31, 2015		Credit Agreement	Excess
Adjusted Leverage Ratio	(1.14	)	3.00	4.14
Fixed Charge Coverage Ratio	512.54		1.10	511.44

Future Liquidity

We believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our credit facility will be sufficient to meet our working capital and other operating needs for at least the next 12 months. During the remainder of fiscal year 2015, we may continue to repurchase shares if conditions are favorable. We also expect to continue to invest in capital expenditures prudently, particularly for projects, including potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.

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, loss of key contract customers, 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.

Fair Value

During the third quarter of fiscal year 2015 , no level 1 or level 2 financial instruments were affected by a lack of market liquidity. For level 1 financial assets, readily available market pricing was used to value the financial instruments. Prior to the spin-off of Kimball Electronics, Inc., our foreign currency derivatives, which were classified as level 2 assets/liabilities, were independently valued using observable market inputs such as forward interest rate yield curves, current spot rates, and time value calculations. To verify the reasonableness of the independently determined fair values, these derivative fair values were compared to fair values calculated by the counterparty banks. Our own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency derivatives.

See Note 9 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.

Contractual Obligations

There have been no material changes outside the ordinary course of business to Kimball's summary of contractual obligations under the caption, “Contractual Obligations” in Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2014 which was the first quarter following the spin-off of our EMS segment on October 31, 2014.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements are limited to standby letters of credit and operating leases entered into in the normal course of business and a minimum purchase contract with a supplier. 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 6 - Commitments and Contingent Liabilities of Notes to Condensed Consolidated Financial Statements for more information on standby letters of credit. We do not have material exposures to trading activities of non-exchange traded contracts.

The preceding statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Certain factors could cause actual results to differ materially from forward-looking statements.

Critical Accounting Policies

Kimball's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the condensed 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 condensed consolidated financial statements and are the policies that are most critical in the portrayal of our financial position and results of operations. Management has discussed these critical accounting policies and estimates with the Audit Committee of the Company's Board of Directors and with the Company's independent registered public accounting firm.

Revenue recognition — 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.

•

Sales returns and allowances — Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time of the sales, resulting in a reduction of revenue. These estimates may change over time causing the provisions to be adjusted accordingly. At March 31, 2015 and June 30, 2014 , the reserve for returns and allowances was $0.8 million and $1.3 million , respectively. The returns and allowances reserve approximated 1% to 2% of gross trade receivables during the two-year period preceding March 31, 2015 .

•

Allowance for doubtful accounts — Our estimate for the allowance for credit losses on trade accounts receivable and notes receivable includes analysis of such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for credit losses on the trade accounts receivable and notes receivable. The allowance for doubtful accounts at March 31, 2015 and June 30, 2014 was $1.9 million and $1.8 million . During the two-year period preceding March 31, 2015 , this reserve approximated 1% of gross trade accounts receivable prior to the spin-off, and approximated 4% of post-spin gross trade accounts receivable.

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 increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At March 31, 2015 and June 30, 2014 , our accrued liabilities for self-insurance exposure were $2.6 million and $4.2 million, respectively.

Taxes — Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future 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 $2.8 million and $3.8 million at March 31, 2015 and June 30, 2014 , respectively. The reduction was driven by releases of reserves upon the expiration of statutes of limitation.

New Accounting Standards

See Note 3 - Recent Accounting Pronouncements and Supplemental Information of Notes to Condensed Consolidated Financial Statements for information regarding New Accounting Standards.

Forward-Looking Statements

Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. 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. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the ability to fully realize the expected benefits of the spin-off of our former EMS segment, the successful completion of the restructuring plan, the continuation of share repurchases, adverse changes in the global economic conditions, increased global competition, significant reduction in customer order patterns, loss of key customers or suppliers, financial stability of key customers and suppliers, relationships with strategic customers and product distributors, availability or cost of raw materials and components, increased competitive pricing pressures reflecting excess industry capacities, changes in the regulatory environment, or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of Kimball are contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 .

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Rate Risk: Our former EMS segment, classified as discontinued operations, operated internationally and was therefore exposed to foreign currency exchange rate fluctuations in the normal course of business. Our risk management strategy included the use of derivative financial instruments to hedge certain foreign currency exposures. Derivatives were used only to manage underlying exposures and were not used in a speculative manner. Further information on derivative financial instruments is provided in Note 10 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Kimball maintains controls and procedures designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed as of March 31, 2015 , our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

(b) Changes in internal control over financial reporting.

There have been no changes in Kimball's internal control over financial reporting that occurred during the quarter ended March 31, 2015 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

A comprehensive disclosure of risk factors related to Kimball can be found in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 . Below are two additional risk factors related to the spin-off of our Electronics Manufacturing Services (“EMS”) segment.

We may not realize the potential benefits that we expect to achieve subsequent to the spin-off of our EMS segment into a new independent publicly traded company. The spin-off was completed on October 31, 2014, but spin-off related matters will likely continue to require time and attention of our management, and we may not be able to realize the anticipated benefits. We may not realize the anticipated benefits from the spin-off as quickly as expected. Any such difficulties or distractions could adversely affect our financial position, results of operations, or cash flows.

If the distribution or certain internal transactions undertaken in anticipation of the spin-off do not qualify as tax-free transactions, the Company, its Share Owners as of the distribution date, and Kimball Electronics could be subject to substantial tax liabilities.

On October 10, 2014 the Company received a favorable written tax ruling from the Internal Revenue Service that the Company’s stock unification in connection with the spin-off will not cause the Company to recognize income or gain as a result of the unification. In addition, the Company has 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, the Company’s Share Owners 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 Internal Revenue Service 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) the Company would be subject to tax as if it sold the Kimball Electronics common stock in a taxable sale for its fair market value; and (ii) each Share Owner 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 Share Owner depending on the facts and circumstances.

Even if the spin-off does qualify as a tax-free transaction for U.S. federal income tax purposes, the distribution will be taxable to the Company (but not to the Company’s Share Owners) pursuant to Section 355(e) of the Code if there are one or more acquisitions (including issuances) of the stock of either the Company or Kimball Electronics, representing 50% or more, measured by vote or value, of the then-outstanding stock of either the Company or Kimball Electronics and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Any acquisition of our common stock within two years before or after the distribution (with exceptions, including public trading by less-than-5% Share Owners and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. The resulting tax liability may have a material adverse effect on our business, financial condition, results of operations and cash flows.

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; (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 the Company’s 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 or operations and cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

A share repurchase program authorized by the Board of Directors was announced on October 16, 2007 . The program allows for the repurchase of up to two million shares of common stock and will remain in effect until all shares authorized have been repurchased. At March 31, 2015 , 1.7 million shares remained available under the repurchase program.

The following table presents a summary of share repurchases made by the Company:



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 (January 1-January 31, 2015)	—	$	—	—	2,000,000
Month #2 (February 1-February 28, 2015)	53,859	$	9.48	53,859	1,946,141
Month #3 (March 1-March 31, 2015)	262,051	$	9.89	262,051	1,684,090
Total	315,910	$	9.82	315,910

Item 6. Exhibits

Exhibits (numbered in accordance with Item 601 of Regulation S-K)


3(a)	Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2012)


3(b)	Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed November 3, 2014)


10(a)*	Summary of Director and Named Executive Officer Compensation


10(b)*	Form of Performance Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed February 19, 2015)


11	Computation of Earnings Per Share


31.1	Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


31.2	Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


32.1	Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


32.2	Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


101.INS	XBRL Instance Document


101.SCH	XBRL Taxonomy Extension Schema Document


101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document


101.DEF	XBRL Taxonomy Extension Definition Linkbase Document


101.LAB	XBRL Taxonomy Extension Label Linkbase Document


101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

*Constitutes management contract or compensatory arrangement.

SIGNATURES

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



		KIMBALL INTERNATIONAL, INC.

	By:	/s/ ROBERT F. SCHNEIDER
		Robert F. Schneider Chief Executive Officer
		May 6, 2015


	By:	/s/ MICHELLE R. SCHROEDER
		Michelle R. Schroeder Vice President, Chief Financial Officer
		May 6, 2015

Kimball International, Inc.

Exhibit Index



Exhibit No.		Description
3(a)		Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2012)
3(b)		Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed November 3, 2014)
10(a)*		Summary of Director and Named Executive Officer Compensation
10(b)*		Form of Performance Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed February 19, 2015)
11		Computation of Earnings Per Share
31.1		Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*Constitutes management contract or compensatory arrangement.

TABLE OF CONTENTS

Part I. Financial Informationprint Item 1. Financial Statementsprint Note 1. Basis Of Presentationprint Note 2. Spin-off Transactionprint Note 3. Recent Accounting Pronouncements and Supplemental Informationprint Note 4. Inventoriesprint Note 5. Accumulated Other Comprehensive Income (loss)print Note 6. Commitments and Contingent Liabilitiesprint Note 7. Restructuring Expenseprint Note 8. Assets Held For Saleprint Note 9. Fair Valueprint Note 10. Derivative Instrumentsprint Note 11. Investmentsprint Note 12. Postemployment Benefitsprint Note 13. Stock Compensation Planprint Note 14. Variable Interest Entitiesprint Note 15. Credit Quality and Allowance For Credit Losses Of Notes Receivableprint Note 16. Credit Agreementprint Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operationsprint Item 3. Quantitative and Qualitative Disclosures About Market Riskprint Item 4. Controls and Proceduresprint Part II. Other Informationprint Item 1A. Risk Factorsprint Item 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 6. Exhibitsprint

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KBAL 10-Q Quarter ended March 31, 2015