KBAL 10-Q Quarterly Report March 31, 2019

KIMBALL INTERNATIONAL INC

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10-Q 1 kbal10q03312019q3.htm KIMBALL INTERNATIONAL, INC. FORM 10-Q Document

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, 2019

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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x

Non-accelerated filer o Smaller reporting company o

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

Yes o No x

Securities registered pursuant to Section 12(b) of the Act:



Title of each Class	Trading Symbol(s)	Name of each exchange on which registered
Class B Common Stock, par value $0.05 per share	KBAL	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

The number of shares outstanding of the Registrant’s common stock as of May 1, 2019 was:

Class A Common Stock - 251,420 shares

Class B Common Stock - 36,470,742 shares

KIMBALL INTERNATIONAL, INC.

FORM 10-Q

INDEX



		Page No.

PART I FINANCIAL INFORMATION

	Item 1. Financial Statements
	Condensed Consolidated Balance Sheets - March 31, 2019 (Unaudited) and June 30, 2018	3
	Condensed Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended March 31, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended March 31, 2019 and 2018	6
	Condensed Consolidated Statements of Shareowners’ Equity (Unaudited) - Three and Nine Months Ended March 31, 2019 and 2018	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	37
	Item 4. Controls and Procedures	37

PART II OTHER INFORMATION

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	38
	Item 6. Exhibits	39

SIGNATURES		40

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, 2019			June 30, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	49,489		$	52,663
Short-term investments	41,821			34,607
Receivables, net of allowances of $1,352 and $1,317, respectively	55,722			62,276
Inventories	45,140			39,509
Prepaid expenses and other current assets	12,578			18,523
Assets held for sale	281			281
Total current assets	205,031			207,859
Property and Equipment, net of accumulated depreciation of $183,529 and $180,059, respectively	89,910			84,487
Goodwill	11,153			8,824
Other Intangible Assets, net of accumulated amortization of $38,002 and $36,757, respectively	11,957			12,607
Deferred Tax Assets	9,494			4,916
Other Assets	12,969			12,767
Total Assets	$	340,514		$	331,460

LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt	$	25		$	23
Accounts payable	41,377			48,214
Customer deposits	27,624			21,253
Dividends payable	3,075			2,662
Accrued expenses	45,818			50,586
Total current liabilities	117,919			122,738
Other Liabilities:
Long-term debt, less current maturities	136			161
Other	15,462			15,537
Total other liabilities	15,598			15,698
Shareowners’ Equity:
Common stock-par value $0.05 per share:
Class A - Shares authorized: 50,000,000 Shares issued: 257,000 and 264,000, respectively	13			13
Class B - Shares authorized: 100,000,000 Shares issued: 42,768,000 and 42,761,000, respectively	2,138			2,138
Additional paid-in capital	3,590			1,881
Retained earnings	269,254			249,945
Accumulated other comprehensive income	1,881			1,816
Less: Treasury stock, at cost, 6,313,000 shares and 5,901,000 shares, respectively	(69,879		)	(62,769		)
Total Shareowners’ Equity	206,997			193,024
Total Liabilities and Shareowners’ Equity	$	340,514		$	331,460

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
	2019			2018			2019			2018
Net Sales	$	177,369		$	160,897		$	572,500		$	514,871
Cost of Sales	120,808			110,933			385,077			343,480
Gross Profit	56,561			49,964			187,423			171,391
Selling and Administrative Expenses	47,508			41,454			151,178			134,919
Operating Income	9,053			8,510			36,245			36,472
Other Income (Expense):
Interest income	492			258			1,339			726
Interest expense	(40		)	(55		)	(146		)	(160		)
Non-operating income (expense), net	970			(205		)	71			344
Other income (expense), net	1,422			(2		)	1,264			910
Income Before Taxes on Income	10,475			8,508			37,509			37,382
Provision for Income Taxes	2,521			2,658			9,274			13,197
Net Income	$	7,954		$	5,850		$	28,235		$	24,185

Earnings Per Share of Common Stock:
Basic Earnings Per Share	$	0.22		$	0.16		$	0.77		$	0.65
Diluted Earnings Per Share	$	0.22		$	0.16		$	0.76		$	0.64

Dividends Per Share of Common Stock	$	0.08		$	0.07		$	0.24		$	0.21

Class A and B Common Stock:
Average Number of Shares Outstanding - Basic	36,712			37,259			36,871			37,388
Average Number of Shares Outstanding - Diluted	36,909			37,539			37,260			37,713

See Notes to Condensed Consolidated Financial Statements

KIMBALL INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)



	(Unaudited)									(Unaudited)
	Three Months Ended									Three Months Ended
	March 31, 2019									March 31, 2018
(Unaudited)	Pre-tax			Tax			Net of Tax			Pre-tax			Tax			Net of Tax
Net income							$	7,954								$	5,850
Other comprehensive income (loss):
Available-for-sale securities	$	27		$	(7	)	$	20		$	—		$	(4	)	$	(4	)
Postemployment severance actuarial change	100			(26		)	74			87			(30		)	57
Reclassification to (earnings) loss:
Available-for-sale securities	—			—			—			1			—			1
Amortization of actuarial change	(100		)	26			(74		)	(58		)	19			(39		)
Other comprehensive income (loss)	$	27		$	(7	)	$	20		$	30		$	(15	)	$	15
Total comprehensive income							$	7,974								$	5,865



	(Unaudited)									(Unaudited)
	Nine Months Ended									Nine Months Ended
	March 31, 2019									March 31, 2018
(Unaudited)	Pre-tax			Tax			Net of Tax			Pre-tax			Tax			Net of Tax
Net income							$	28,235								$	24,185
Other comprehensive income (loss):
Available-for-sale securities	$	42		$	(11	)	$	31		$	(30	)	$	8		$	(22	)
Postemployment severance actuarial change	338			(87		)	251			593			(218		)	375
Derivative gain (loss)	(11		)	2			(9		)	—			—			—
Reclassification to (earnings) loss:
Available-for-sale securities	—			—			—			4			(1		)	3
Amortization of actuarial change	(302		)	78			(224		)	(191		)	62			(129		)
Derivatives	21			(5		)	16			—			—			—
Other comprehensive income (loss)	$	88		$	(23	)	$	65		$	376		$	(149	)	$	227
Total comprehensive income							$	28,300								$	24,412

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
	2019			2018
Cash Flows From Operating Activities:
Net income	$	28,235		$	24,185
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	11,077			10,232
Amortization	1,455			1,280
Gain on sales of assets	(1,140		)	(2,124		)
Deferred income tax and other deferred charges	(4,571		)	5,464
Stock-based compensation	4,749			3,326
Other, net	(1,319		)	443
Change in operating assets and liabilities:
Receivables	6,848			8,311
Inventories	(2,863		)	480
Prepaid expenses and other current assets	5,769			(7,690		)
Accounts payable	(7,534		)	(5,525		)
Customer deposits	6,371			1,784
Accrued expenses	(4,397		)	(13,767		)
Net cash provided by operating activities	42,680			26,399
Cash Flows From Investing Activities:
Capital expenditures	(15,577		)	(15,332		)
Proceeds from sales of assets	1,277			5,660
Cash paid for acquisitions	(4,850		)	(17,800		)
Purchases of capitalized software	(805		)	(510		)
Purchases of available-for-sale securities	(39,778		)	(33,825		)
Maturities of available-for-sale securities	32,550			30,737
Other, net	(3		)	(154		)
Net cash used for investing activities	(27,186		)	(31,224		)
Cash Flows From Financing Activities:
Net change in capital leases and long-term debt	(23		)	(27		)
Dividends paid to shareowners	(8,498		)	(7,480		)
Repurchases of Common Stock	(9,132		)	(8,120		)
Repurchase of employee shares for tax withholding	(1,035		)	(2,426		)
Net cash used for financing activities	(18,688		)	(18,053		)
Net Decrease in Cash, Cash Equivalents, and Restricted Cash ⁽¹⁾	(3,194		)	(22,878		)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period ⁽¹⁾	53,321			63,088
Cash, Cash Equivalents, and Restricted Cash at End of Period ⁽¹⁾	$	50,127		$	40,210
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Income taxes	$	6,758		$	13,635
Interest expense	$	82		$	160

(1) The following table reconciles cash, cash equivalents, and restricted cash per the statements of cash flows to the balance sheets. The restricted cash included in other assets on the balance sheet represents amounts pledged as collateral for a long-term financing arrangement as contractually required by a lender. The restriction will lapse when the related long-term debt is paid off. Beginning in the second quarter of fiscal year 2018, restricted cash also included customer deposits held due to a foreign entity being classified as a restricted entity by a government agency subsequent to our receipt of the deposit.



(Amounts in Thousands)	March 31, 2019		June 30, 2018		March 31, 2018		June 30, 2017
Cash and Cash Equivalents	$	49,489	$	52,663	$	39,554	$	62,882
Restricted cash included in Other Assets	638		658		656		206
Total Cash, Cash Equivalents, and Restricted Cash at end of period	$	50,127	$	53,321	$	40,210	$	63,088

See Notes to Condensed Consolidated Financial Statements

KIMBALL INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS’ EQUITY

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



	Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Treasury Stock			Total Shareowners’ Equity
Three months ended March 31, 2019 (Unaudited)	Class A			Class B
Amounts at December 31, 2018	$	13		$	2,138	$	2,607		$	264,267		$	1,861	$	(70,015	)	$	200,871
Net income									7,954								7,954
Other comprehensive income (loss)												20					20
Issuance of non-restricted stock (11,000 shares)						(138		)						138			—
Compensation expense related to stock incentive plans						1,121											1,121
Repurchase of Common Stock														(2		)	(2		)
Dividends declared ($0.08 per share)									(2,967		)						(2,967		)
Amounts at March 31, 2019	$	13		$	2,138	$	3,590		$	269,254		$	1,881	$	(69,879	)	$	206,997

Three months ended March 31, 2018 (Unaudited)
Amounts at December 31, 2017	$	14		$	2,137	$	1,566		$	239,354		$	1,327	$	(56,625	)	$	187,773
Net income									5,850								5,850
Other comprehensive income (loss)												15					15
Issuance of non-restricted stock (10,000 shares)						(120		)						121			1
Conversion of Class A to Class B common stock (13,000 shares)	(1		)	1													—
Compensation expense related to stock incentive plans						815											815
Performance share issuance									(1		)						(1		)
Repurchase of Common Stock (398,000 shares)														(6,639		)	(6,639		)
Dividends declared ($0.07 per share)									(2,612		)						(2,612		)
Amounts at March 31, 2018	$	13		$	2,138	$	2,261		$	242,591		$	1,342	$	(63,143	)	$	185,202

Nine months ended March 31, 2019 (Unaudited)
Amounts at June 30, 2018	$	13		$	2,138	$	1,881		$	249,945		$	1,816	$	(62,769	)	$	193,024
Net income									28,235								28,235
Other comprehensive income (loss)												65					65
Issuance of non-restricted stock (32,000 shares)						(426		)						414			(12		)
Conversion of Class A to Class B common stock (7,000 shares)	—			—													—
Compensation expense related to stock incentive plans						4,749											4,749
Performance share issuance (81,000 shares)						(1,709		)						1,057			(652		)
Restricted share units issuance (15,000 shares)						(382		)						201			(181		)
Relative total shareholder return performance units issuance (27,000 shares)						(523		)						350			(173		)
Repurchase of Common Stock (567,000 shares)														(9,132		)	(9,132		)
Dividends declared ($0.24 per share)									(8,926		)						(8,926		)
Amounts at March 31, 2019	$	13		$	2,138	$	3,590		$	269,254		$	1,881	$	(69,879	)	$	206,997

Nine months ended March 31, 2018 (Unaudited)
Amounts at June 30, 2017	$	14		$	2,137	$	2,971		$	230,763		$	1,115	$	(60,796	)	$	176,204
Net income									24,185								24,185
Other comprehensive income (loss)												227					227
Issuance of non-restricted stock (29,000 shares)						(492		)						494			2
Conversion of Class A to Class B common stock (14,000 shares)	(1		)	1													—
Compensation expense related to stock incentive plans						3,326											3,326
Performance share issuance (226,000 shares)						(2,261		)	(4,463		)			4,622			(2,102		)
Relative total shareholder return performance units issuance (38,000 shares)						(1,283		)						957			(326		)
Repurchase of Common Stock (505,000 shares)														(8,420		)	(8,420		)
Dividends declared ($0.21 per share)									(7,894		)						(7,894		)
Amounts at March 31, 2018	$	13		$	2,138	$	2,261		$	242,591		$	1,342	$	(63,143	)	$	185,202

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 International,” “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.

Prior Period Reclassifications

Our prior period financial statements were recast for the full retrospective adoption of guidance on the recognition of revenue from contracts with customers. Certain prior period amounts on the Condensed Consolidated Statements of Cash Flows have also been recast to incorporate restricted cash flows and restricted cash balances, as a result of the retrospective adoption of new accounting guidance.

Note 2. Recent Accounting Pronouncements and Supplemental Information

Recently Adopted Accounting Pronouncements:

In August 2018, the Securities and Exchange Commission adopted disclosure and simplification amendments which update certain disclosure requirements that were redundant, duplicative, overlapping, outdated, or superseded. The amendments require a shareowners’ equity statement provided in interim financial statements or in a note. The adoption resulted in the addition of an interim Condensed Consolidated Statements of Shareowners’ Equity.

In June 2018, the Financial Accounting Standards Board (“FASB”) issued guidance to improve the accounting for and to reduce the cost and complexity of share-based payments to nonemployees for goods and services. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted, but it may not be adopted earlier than our adoption of the new revenue standard. We early adopted the guidance in our first quarter of fiscal year 2019 in advance of the October 2018 retirement of our former Chief Executive Officer and Chairman of the Board of Directors, who will have stock compensation awards vesting after his retirement. The adoption did not have a material effect on our condensed consolidated financial statements.

In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance was adopted during our first quarter of fiscal year 2019 and was applied prospectively to awards modified on or after the adoption date. The adoption of the guidance did not have a material effect on our condensed consolidated financial statements.

In March 2017, the FASB issued guidance that requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic benefit cost in operating expenses, which will impact the presentation of our postemployment benefit plan. Employers are required to present all other components of Net periodic benefit cost separate from the service costs and disclose the line item in which the components of Net periodic benefit cost other than the service cost are included. Due to the immaterial amounts in prior periods we did not apply the rule retrospectively. The guidance was adopted during our first quarter of fiscal year 2019 and did not have a material effect on our condensed consolidated financial statements.

In February 2017, the FASB issued guidance that clarifies the scope of guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. This new guidance is meant to clarify the scope of the original guidance that was issued in connection with the guidance relating to the recognition of revenue from contracts with customers, as defined below, which addresses recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The guidance was adopted during our first quarter of fiscal year 2019 concurrently with the adoption of the guidance on recognition of revenue from contracts with customers. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In November 2016, the FASB issued guidance which requires an entity to include in their cash and cash equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The guidance was adopted during our first quarter of fiscal year 2019 and was applied retrospectively to each prior reporting period. The guidance resulted in certain prior period amounts being reclassified to conform with the current period presentation, including the addition of restricted cash to cash and cash equivalents on the Condensed Consolidated Statements of Cash Flows.

In January 2016, the FASB issued guidance which is intended to improve the recognition and measurement of financial instruments. The guidance revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance was adopted during our first quarter of fiscal year 2019 and did not have a material effect on our condensed 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 July 2015, the FASB decided to defer the effective date for this new revenue standard by one year, which made the guidance effective for our first quarter of fiscal year 2019 financial statements using either of two acceptable adoption methods: (i) full 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. In March 2016, the FASB issued additional guidance which further clarified assessing whether an entity is a principal or an agent in a revenue transaction, and impacted whether an entity reports revenue on a gross or net basis; in April 2016, the FASB issued additional guidance that addressed identifying performance obligations and implementing licensing guidance; and in May 2016, the FASB issued additional guidance that clarified collectability, noncash consideration, and other transition issues. The amendments had the same effective date and transition requirements as the new revenue standard. We adopted the standard at the beginning of fiscal year 2019 using the full retrospective approach which required that we recast prior year comparative periods to provide comparable financial reporting for all reported fiscal years. All changes required by the new standard, including accounting policies, controls, and disclosures, have been identified and implemented as of the beginning of fiscal 2019. We applied the transition practical expedient related to remaining performance obligations for reporting periods presented before the date of initial application. See Note 4 - Revenue in the Notes to Condensed Consolidated Financial Statements for more information on revenue recognition.

Recently Issued Accounting Pronouncements Not Yet Adopted:

In August 2018, the FASB issued guidance on a customer’s accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The guidance is effective for our first quarter of fiscal year 2021 with early adoption permitted. Entities can choose to adopt the guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. We have not yet determined the effect of this guidance on our condensed consolidated financial statements.

In August 2018, the FASB issued guidance to add, remove, and clarify disclosure requirements related to defined pension benefit and other postretirement plans. The guidance is effective for our first quarter of fiscal year 2021 with early adoption permitted and should be applied retrospectively. We have not yet determined the effect of this guidance on our condensed consolidated financial statements.

In August 2018, the FASB issued guidance which changes the fair value measurement disclosure requirements. The guidance modifies and removes certain disclosures related to the fair value hierarchy, and adds new disclosure requirements such as disclosing the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance is effective for our first quarter of fiscal year 2021 with early adoption permitted and should be applied retrospectively except for certain disclosures. We have not yet determined the effect of this guidance on our condensed consolidated financial statements.

In March 2017, the FASB issued guidance that will shorten the amortization period for certain callable debt securities held at a premium to the earliest call date. This guidance does not require an accounting change for securities held at a discount. This guidance is to be applied on a modified retrospective basis, with a cumulative-effect adjustment recorded directly to retained earnings as of the beginning of the period of adoption. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted. We have not yet determined the effect of this guidance on our condensed consolidated financial statements.

In June 2016, the FASB issued guidance on the measurement of credit losses on financial instruments. Under the guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The guidance is also intended to reduce the complexity by decreasing the number of credit impairment models that entities use to account for debt instruments. The guidance is effective for our first quarter of fiscal year 2021 with early adoption in our fiscal year 2020 permitted. We have not yet determined the effect of this guidance on our condensed consolidated financial statements.

In February 2016, the FASB issued guidance that revises the accounting for leases. The guidance is intended to improve financial reporting of leasing transactions by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Leases will continue to be classified as either operating or finance leases, with the classification affecting the pattern of expense recognition in the statement of income. The guidance will also require additional disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In January 2018, the FASB issued additional guidance for land easements which permits entities to forgo the evaluation of existing land easement arrangements to determine if they contain a lease. New land easement arrangements, or modifications to existing arrangements, after the adoption of the lease standard will be evaluated to determine if they meet the definition of a lease. In July 2018, the FASB amended the new standard to clarify certain aspects of the guidance, and they also issued another new standard in July 2018 that allows the option to apply the transition provisions at the adoption date instead of at the earliest comparative period in the condensed consolidated financial statements. In March 2019, the FASB issued clarifying guidance regarding interim transition disclosures. The lease guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted. We have assessed our portfolio of leases and compiled a central repository of active leases. We are also evaluating key policy elections under the standard which we will use to develop an internal policy to address the new standard requirements. While we continue to assess the impact on our accounting policies, internal control processes, and related disclosures required under the new guidance, we will be required to record a right-of-use asset and a lease liability for all leases with a lease term of greater than twelve months. We do not expect this standard to materially affect our consolidated net income. These conclusions could change as we continue to evaluate the new standard or if our lease portfolio changes. We anticipate electing certain of the available practical expedients, including the transition option, upon adoption on July 1, 2019.

Goodwill and Other Intangible Assets:

Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Goodwill is assigned to and the fair value is tested at the reporting unit level. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test which compares the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. Under the quantitative assessment, if the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date. During the quarter and year-to-date period ended March 31, 2019 , no goodwill impairment was recognized.

During fiscal year 2019, we recorded $2.1 million in goodwill from the acquisition of David Edward. During fiscal year 2018, we recorded $8.8 million and $10.7 million , respectively, in goodwill and other intangible assets from the acquisition of D’style, Inc. (“D’style”). We recorded an additional $0.2 million of goodwill during fiscal year 2019 as a result of a working capital adjustment related to the acquisition of D’style. See Note 3 - Acquisition in the Notes to Condensed Consolidated Financial Statements for more information on this acquisition.

Other Intangible Assets reported on the Condensed Consolidated Balance Sheets consist of capitalized software, product rights, customer relationships, trade names, and non-compete agreements. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. A summary of intangible assets subject to amortization is as follows:



	March 31, 2019						June 30, 2018
(Amounts in Thousands)	Cost		Accumulated Amortization		Net Value		Cost		Accumulated Amortization		Net Value
Capitalized Software	$	39,239	$	36,590	$	2,649	$	38,482	$	35,922	$	2,560
Product Rights	—		—		—		162		162		—
Customer Relationships	7,050		878		6,172		7,050		422		6,628
Trade Names	3,570		506		3,064		3,570		238		3,332
Non-Compete Agreements	100		28		72		100		13		87
Other Intangible Assets	$	49,959	$	38,002	$	11,957	$	49,364	$	36,757	$	12,607

Amortization expense related to intangible assets was, in thousands, $496 and $1,455 during the quarter and year-to-date period ended March 31, 2019 , and was, in thousands, $534 and $1,280 during the quarter and year-to-date period ended March 31, 2018 . Amortization expense in future periods is expected to be, in thousands, $512 for the remainder of fiscal year 2019, and $2,052 , $1,668 , $1,300 , and $1,056 in the four years ending June 30, 2023, and $5,369 thereafter. The estimated useful life of capitalized software ranges from 3 to 10 years . The amortization period for customer relationship intangible assets is 20 years . The estimated useful life of trade names is 10 years . The estimated useful life of non-compete agreements is 5 years .

Capitalized software is stated at cost less accumulated amortization and is amortized using the straight-line method. During the software application development stage, capitalized costs include external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process re-engineering costs are expensed in the period in which they are incurred.

Trade names and non-compete agreements are amortized on a straight-line basis over their estimated useful lives. Capitalized customer relationships are amortized based on estimated attrition rates of customers. We have no intangible assets with indefinite useful lives which are not subject to amortization.

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. Customary terms require payment within 30 days , with terms beyond 30 days being considered extended.

Non-operating Income (Expense), net:

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

Components of the Non-operating income (expense), net line, were:



	Three Months Ended						Nine Months Ended
	March 31						March 31
(Amounts in Thousands)	2019			2018			2019			2018
Gain (Loss) on SERP Investments	$	1,032		$	(8	)	$	306		$	756
Other	(62		)	(197		)	(235		)	(412		)
Non-operating income (expense), net	$	970		$	(205	)	$	71		$	344

Note 3. Acquisition

David Edward

On October 26, 2018, we acquired substantially all the assets and assumed certain specified limited liabilities of David Edward headquartered in Baltimore, Maryland. David Edward is a premier designer and manufacturer of contract furniture, sold in the healthcare, corporate, education, and premium hospitality markets. David Edward sells primarily in the North American and Middle Eastern markets. David Edward’s products are generally specified by architects and designers, represented through a network of independent representatives, and sold through authorized furniture dealerships. The David Edward product portfolio consists of classic and contemporary designs, focused primarily in the seating, tables, and ancillary furniture categories. In conjunction with the asset acquisition, we leased the two existing David Edward production facilities in Baltimore, Maryland and Red Lion, Pennsylvania. The acquisition purchase price totaled $4.9 million . The purchase price is subject to certain post-closing working capital adjustments.

A summary of the preliminary purchase price allocation is as follows:



Purchase Price Allocation
(Amounts in Thousands)
Assets:
Receivables	$	330
Inventories	2,768
Prepaid expenses and other current assets	284
Net property and equipment	934
Goodwill	2,103
	$	6,419
Liabilities:
Accounts payable	$	1,447
Accrued expenses	122
	$	1,569
	$	4,850

The operating results of this acquisition are included in our condensed consolidated financial statements beginning on October 26, 2018. For the quarter ended March 31, 2019 , net sales and net loss related to David Edward were $3.4 million and $0.6 million , respectively. For the year-to-date period ended March 31, 2019 , net sales and net loss related to David Edward were $6.0 million and $1.0 million , respectively. Direct costs of the acquisition during the year-to-date period ended March 31, 2019 , of approximately $0.5 million , were expensed as incurred and were included on the Selling and Administrative Expenses line of our Condensed Consolidated Statements of Income. There were no acquisition costs during the quarter ended March 31, 2019 .

Goodwill is primarily attributable to the anticipated revenue and supply chain synergies expected from the operations of the combined company. For tax purposes, goodwill is tax deductible over 15 years . See Note 2 - Recent Accounting Pronouncements and Supplemental Information in the Notes to Condensed Consolidated Financial Statements for more information on goodwill. The following summarizes our goodwill activity:



Goodwill related to David Edward Acquisition
(Amounts in Thousands)
Goodwill - June 30, 2018	$	—
Goodwill - at acquisition date	1,960
Adjustments to purchase price allocation	143
Goodwill - March 31, 2019	$	2,103

The purchase price allocation is provisional pending final valuations and purchase accounting adjustments, which were not final as of March 31, 2019. We utilized management estimates to assist in the valuation process.

D’style

On November 6, 2017, we acquired certain assets of D’style and all of the capital stock of Diseños de Estilo S.A. de C.V. headquartered in Tijuana, Mexico, a member of the D’style group which manufactures exclusively for D’style, strengthening our North American manufacturing footprint. The purchase price allocation is final as of March 31, 2019. During the quarter ended March 31, 2019, the fair value of the contingent earn-out liability was adjusted to $0.2 million relating to an adjustment of the contingent earn-out liability that is based upon fiscal year 2019 D’style, Inc. operating income compared to a predetermined target.

Note 4. Revenue

At the beginning of fiscal year 2019, we adopted new accounting guidance on the recognition of revenue from contracts with customers using the full retrospective approach and adjusted fiscal year 2018 to provide comparable financial reporting for all reported fiscal years. The primary impact of the new revenue standard was a reclassification of certain items on the statement of income. For contracts involving products that are sold directly to end customers, fees paid to dealer agents for facilitating the sale and performing certain services are recognized as either cost of sales or selling expense rather than being netted against revenue. In addition, any commissions or fees paid to third-party purchasing organizations are recognized as a selling expense rather than being netted against revenue. The result of these changes was increases in net sales, cost of sales, and selling expenses. On a net basis these changes had no impact to operating income dollars but did reduce operating income as a percent of net sales. The new standard also required several less significant changes including classifying the reserve for returns and allowance as a liability rather than a contra-receivable, recognizing a recovery asset for potential product returns, and capitalizing costs to obtain sales contracts. There was no cumulative effect of adopting the standard at the date of initial application in retained earnings.

The following tables present the effects of the adoption of the new standard on prior period financial statements:



Impact to Condensed Consolidated Statements of Income
	Three Months Ended March 31, 2018
(Amounts in Thousands)	As Originally Reported			Adoption of New Revenue Standard		As Adjusted
Net Sales	$	157,897		$	3,000	$	160,897
Cost of Sales	110,142			791		110,933
Gross Profit	47,755			2,209		49,964
Selling and Administrative Expenses	39,245			2,209		41,454
Operating Income	8,510			—		8,510
Operating Income as of Percent of Net Sales	5.4		%			5.3		%

	Nine Months Ended March 31, 2018
(Amounts in Thousands)	As Originally Reported			Adoption of New Revenue Standard		As Adjusted
Net Sales	$	501,088		$	13,783	$	514,871
Cost of Sales	339,808			3,672		343,480
Gross Profit	161,280			10,111		171,391
Selling and Administrative Expenses	124,808			10,111		134,919
Operating Income	36,472			—		36,472
Operating Income as of Percent of Net Sales	7.3		%			7.1		%



Impact to Condensed Consolidated Balance Sheet
	As of June 30, 2018
(Amounts in Thousands)	As Originally Reported		Adoption of New Revenue Standard		As Adjusted
Receivables, net of allowances	$	60,984	$	1,292	$	62,276
Accrued Expenses	49,294		1,292		50,586

Performance Obligations

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring distinct goods or providing services to customers. Our revenue consists substantially of product sales, and is reported net of sales discounts, rebates, incentives, returns, and other allowances offered to customers. We recognize revenue when performance obligations under the terms of contracts with our customers are satisfied, which occurs when control passes to a customer to enable them to direct the use of and obtain benefit from a product. This typically occurs when a customer obtains legal title, obtains the risks and rewards of ownership, has received the goods according to the contractual shipping terms either at the shipping point or destination, and is obligated to pay for the product. Customary terms require payment within 30 days , and for certain customers, deposits may be required in advance of shipment.

We sell products both to independent dealers and directly to end customers. Sales to independent dealers typically include products only, as the independent dealer provides additional value-added services to end customers. Direct sales to end customers include products and may include related services such as installation and design services. These services are distinct from the delivered products within the context of the contract, and therefore revenue is recognized for products, installation, and design on a discrete basis. The performance of services may be outsourced to independent dealers or other third parties, but we typically retain the primary responsibility for performance of the services when selling directly to end customers. For services, revenue is recognized when the service is performed and we have an enforceable right to payment. Service revenue does not represent a significant portion of our total sales.

We provide an assurance-type warranty that guarantees our product complies with agreed-upon specifications. This warranty is not sold separately and does not convey any additional services to the customer; therefore, our warranty is not considered a separate performance obligation. We estimate the costs that may be incurred under warranties and record a liability at the time product revenue is recognized. See Note 8 - Commitments and Contingent Liabilities in the Notes to Condensed Consolidated Financial Statements for additional information on warranty obligations.

Disaggregation of Revenue

The following table provides information about revenue by vertical market:



	Three Months Ended				Nine Months Ended
	March 31				March 31
(Amounts in Millions)	2019		2018		2019		2018
Commercial	$	50.9	$	50.2	$	171.1	$	151.8
Education	13.5		12.7		66.2		61.8
Finance	16.9		17.8		53.2		48.9
Government	19.1		17.6		55.0		68.9
Healthcare	28.7		19.5		81.6		63.7
Hospitality	48.3		43.1		145.4		119.8
Total Net Sales	$	177.4	$	160.9	$	572.5	$	514.9

We report revenue under a single aggregated reportable segment consisting of three operating segments which have similar products and services in nature, utilize similar production and distribution processes, and share similar long-term economic characteristics.

Contract Balances

Receivables in the Condensed Consolidated Balance Sheets represent the amount of consideration to which we are entitled in exchange for the goods or services sold to our customers, net of allowances for doubtful accounts. Receivables are recorded when the right to consideration from the customer becomes unconditional, which is generally upon billing or upon satisfaction of a performance obligation, whichever is earlier. During the three and nine months ended March 31, 2019 , impairment losses on doubtful accounts receivable were $0.0 million and $0.4 million , respectively. During both the three and nine months ended March 31, 2018 , impairment losses (income) on doubtful accounts receivable were $(0.1) million .

We also receive deposits from certain customers before revenue is recognized, resulting in the recognition of a contract liability reported as Customer Deposits in the Condensed Consolidated Balance Sheets. Changes in the customer deposits during the nine months ended March 31, 2019 are as follows:



(Amounts in Millions)	Customer Deposits
Balance as of June 30, 2018	$	21.3
Increases due to deposits received, net of other adjustments	92.0
Revenue recognized	(85.7		)
Balance as of March 31, 2019	$	27.6

Customer deposits are typically utilized within a year of the receipt of the deposit. The amount of revenue recognized during the three and nine months ended March 31, 2019 that was included in the June 30, 2018 customer deposit balance was $0.0 million and $20.9 million , respectively. The amount of revenue recognized during the three and nine months ended March 31, 2018 that was included in the June 30, 2017 customer deposit balance was $1.0 million and $20.2 million , respectively.

Additionally, funds paid to certain independent dealers in exchange for their multi-year commitment to market and sell our product represent costs of obtaining contracts. These incremental costs of obtaining contracts are capitalized to the extent we expect to recover them in the Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018 , with $0.2 million and $0.3 million , respectively, reported in Prepaid Expenses and Other Current Assets and $0.2 million and $0.3 million , respectively, reported in Other Assets. The capitalized costs are amortized over the term of the contract. Amortization expense

recognized in Selling and Administrative Expenses was $0.1 million and $0.2 million for the three and nine months ended March 31, 2019 , and $0.0 million and $0.2 million for the three and nine months ended March 31, 2018 .

Significant Judgments

We use significant judgment in estimating the reduction in net sales driven by customer rebate and incentive programs. Judgments primarily include an estimate of the most likely sales levels to be achieved and the corresponding rebate and incentive amounts expected to be earned by dealers and salespersons. In the three and nine months ended March 31, 2019 and 2018 , we had an immaterial amount of adjustments to estimates for cumulative growth rebates and incentives that related to the preceding fiscal years. We also use judgment in estimating a reserve for returns and allowances recorded at the time of the sale, resulting in a reduction of revenue, based on estimated product returns and price concessions.

Accounting Policies and Practical Expedients Elected

For shipping and handling activities, we are applying an accounting policy election which allows an entity to account for shipping and handling activities as fulfillment activities rather than a promised good or service when the activities are performed, even if those activities are performed after the control of the good has been transferred to the customer. Therefore, we expense shipping and handling costs at the time revenue is recognized. We classify shipping and handling expenses in Cost of Sales in the Condensed Consolidated Statements of Income.

We are also applying an accounting policy election which allows an entity to exclude from revenue any amounts collected from customers on behalf of third parties, such as sales taxes and other similar taxes we collect concurrent with revenue-producing activities. Therefore, we present revenue net of sales taxes and similar revenue-based taxes.

For incremental costs of obtaining a contract, we elected a practical expedient which permits an entity to recognize incremental costs to obtain a contract as an expense when incurred if the amortization period is less than one year. This election had an immaterial effect on our condensed consolidated financial statements.

For significant financing components, we elected a practical expedient which allows an entity to recognize the promised amount of consideration without adjusting for the time value of money if the contract has a duration of one year or less, or if the reason the contract extended beyond one year is because the timing of delivery of the product is at the customer’s discretion. As our contracts typically are less than one year in length and do not have significant financing components, we have not presented revenue on a present value basis.

Note 5. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because Kimball International has a June 30 fiscal year-end, the lower corporate federal income tax rate was phased in, resulting in a blended U.S. federal statutory tax rate of 28.1% for our fiscal year ended June 30, 2018, and 21% for fiscal year 2019. Prior to the effective date of the Tax Act, the U.S. federal statutory tax rate was 35% .

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 effective tax rate was 24.1% and 24.7% , respectively, for the three and nine and months ended March 31, 2019 , which was less than the combined federal and state statutory tax rate in part due to the R&D tax credit. Our effective tax rate was 31.2% and 35.3% , respectively, for the three and nine months ended March 31, 2018 .

Note 6. Inventories

Inventory components were as follows:



(Amounts in Thousands)	March 31, 2019			June 30, 2018
Finished products	$	24,776		$	23,756
Work-in-process	2,764			1,378
Raw materials	33,910			29,158
Total FIFO inventory	61,450			54,292
LIFO reserve, net	(16,310		)	(14,783		)
Total inventory	$	45,140		$	39,509

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, 2019 and 2018 was immaterial. Our FIFO inventory increased from June 30, 2018 to March 31, 2019 in large part as a result of the David Edward acquisition.

Note 7. Accumulated Other Comprehensive Income

During the three months ended March 31, 2019 and 2018 , the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:



Accumulated Other Comprehensive Income
(Amounts in Thousands)	Unrealized Investment Gain (Loss)			Postemployment Benefits Net Actuarial Gain (Loss)			Derivative Gain (Loss)		Accumulated Other Comprehensive Income
Balance at December 31, 2018	$	(20	)	$	1,881		$	—	$	1,861
Other comprehensive income (loss) before reclassifications	20			74			—		94
Reclassification to (earnings) loss	—			(74		)	—		(74		)
Net current-period other comprehensive income (loss)	20			—			—		20
Balance at March 31, 2019	$	—		$	1,881		$	—	$	1,881

Balance at December 31, 2017	$	(37	)	$	1,364		$	—	$	1,327
Other comprehensive income (loss) before reclassifications	(4		)	57			—		53
Reclassification to (earnings) loss	1			(39		)	—		(38		)
Net current-period other comprehensive income (loss)	(3		)	18			—		15
Balance at March 31, 2018	$	(40	)	$	1,382		$	—	$	1,342

During the nine months ended March 31, 2019 and 2018 , the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:




Accumulated Other Comprehensive Income
(Amounts in Thousands)	Unrealized Investment Gain (Loss)			Postemployment Benefits Net Actuarial Gain (Loss)			Derivative Gain (Loss)			Accumulated Other Comprehensive Income
Balance at June 30, 2018	$	(31	)	$	1,854		$	(7	)	$	1,816
Other comprehensive income (loss) before reclassifications	31			251			(9		)	273
Reclassification to (earnings) loss	—			(224		)	16			(208		)
Net current-period other comprehensive income (loss)	31			27			7			65
Balance at March 31, 2019	$	—		$	1,881		$	—		$	1,881

Balance at June 30, 2017	$	(21	)	$	1,136		$	—		$	1,115
Other comprehensive income (loss) before reclassifications	(22		)	375			—			353
Reclassification to (earnings) loss	3			(129		)	—			(126		)
Net current-period other comprehensive income (loss)	(19		)	246			—			227
Balance at March 31, 2018	$	(40	)	$	1,382		$	—		$	1,342

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



Reclassifications from Accumulated Other Comprehensive Income	Three Months Ended						Nine Months Ended						Affected Line Item in the Condensed Consolidated Statements of Income
	March 31,						March 31,
(Amounts in Thousands)	2019			2018			2019			2018
Realized Investment Gain (Loss) on available-for-sale securities ⁽¹⁾	$	—		$	(1	)	$	—		$	(4	)	Non-operating income (expense), net
	—			—			—			1			Benefit (Provision) for Income Taxes
	$	—		$	(1	)	$	—		$	(3	)	Net Income

Postemployment Benefits amortization of actuarial gain ⁽²⁾	$	—		$	37		$	—		$	124		Cost of Sales
	—			21			—			67			Selling and Administrative Expenses
	100			—			302			—			Non-operating income (expense), net
	(26		)	(19		)	(78		)	(62		)	Benefit (Provision) for Income Taxes
	$	74		$	39		$	224		$	129		Net Income

Derivative Gain (Loss) ⁽³⁾	$	—		$	—		$	(21	)	$	—		Non-operating income (expense), net
	—			—			5			—			Benefit (Provision) for Income Taxes
	$	—		$	—		$	(16	)	$	—		Net Income

Total Reclassifications for the Period	$	74		$	38		$	208		$	126		Net Income

Amounts in parentheses indicate reductions to income.

(1) See Note 11 - Investments in the Notes to Condensed Consolidated Financial Statements for further information on available-for-sale securities.

(2) See Note 13 - Postemployment Benefits in the Notes to Condensed Consolidated Financial Statements for further information on postemployment benefit plans.

(3) See Note 12 - Derivative Instruments in the Notes to Condensed Consolidated Financial Statements for further information on derivative instruments.

Note 8. Commitments and Contingent Liabilities

Guarantees:

Standby letters of credit were issued to lessors and insurance institutions and can only be drawn upon in the event of our failure to pay our obligations to a beneficiary. As of March 31, 2019 , we had a maximum financial exposure from unused standby letters of credit totaling $1.5 million . We are not aware of circumstances that would require us to perform under 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 condensed consolidated financial statements. Accordingly, no liability has been recorded as of March 31, 2019 with respect to the standby letters of credit. We also enter into commercial letters of credit to facilitate payments to vendors and from customers.

Product Warranties:

We provide an assurance-type warranty that guarantees our product complies with agreed-upon specifications. This warranty is not sold separately and does not convey any additional services to the customer. 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 periodically based on changes in historical cost trends and in certain cases where specific warranty issues become known.

Changes in the product warranty accrual for the nine months ended March 31, 2019 and 2018 were as follows:



	Nine Months Ended
	March 31
(Amounts in Thousands)	2019			2018
Product Warranty Liability at the beginning of the period	$	2,294		$	1,992
Additions to warranty accrual (including changes in estimates)	420			1,043
Settlements made (in cash or in kind)	(797		)	(773		)
Product Warranty Liability at the end of the period	$	1,917		$	2,262

Note 9. Earnings Per Share

Basic earnings per share are based on the weighted average number of shares outstanding during the period. Diluted earnings per share are based on the weighted average number of shares outstanding plus the assumed issuance of common shares for all potentially dilutive securities.



	Three Months Ended				Nine Months Ended
	March 31				March 31
(Amounts in Thousands, Except for Per Share Data)	2019		2018		2019		2018
Net Income	$	7,954	$	5,850	$	28,235	$	24,185

Average Shares Outstanding for Basic EPS Calculation	36,712		37,259		36,871		37,388
Dilutive Effect of Average Outstanding Compensation Awards	197		280		389		325
Average Shares Outstanding for Diluted EPS Calculation	36,909		37,539		37,260		37,713

Basic Earnings Per Share	$	0.22	$	0.16	$	0.77	$	0.65
Diluted Earnings Per Share	$	0.22	$	0.16	$	0.76	$	0.64

Note 10. Fair Value

We categorize 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, 2019 . 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, 2018 .

We hold a total investment of $2.0 million in a privately-held company, consisting of $0.5 million in equity securities without readily determinable fair value and $1.5 million in stock warrants. The investment in equity securities without readily determinable fair value is classified as a Level 3 financial asset, as explained in the Financial Instruments Not Carried At Fair Value section below. The investment in stock warrants is also classified as a Level 3 financial asset and is accounted for as a derivative instrument valued on a recurring basis, as explained in the Financial Instruments Recognized at Fair Value section

below. See Note 11 - Investments in the Notes to Condensed Consolidated Financial Statements for further information regarding the investment in equity securities without readily determinable fair value, and Note 12 - Derivative Instruments in the Notes to Condensed Consolidated Financial Statements for further information regarding the investment in stock warrants. No purchases or sales of Level 3 assets occurred during the nine months ended March 31, 2019 .

Related to the prior year acquisition of D'style, we determine the fair value of our long-lived and intangible assets on a non-recurring basis in connection with our periodic evaluations of such assets for potential impairment and record impairment charges when such fair value estimates are lower than the carrying values of the assets. The fair value of the contingent earn-out liability as of June 30, 2018 of $1.1 million was reduced to $0.7 million as of September 30, 2018 due to payment of $0.4 million for the earn-out relating to fiscal year 2018. During the quarter ended March 31, 2019, the fair value of the contingent earn-out liability was adjusted to $0.2 million , and we recognized $0.3 million of income within Selling and Administrative Expense which was partially offset by Interest Expense. The adjustment was attributable to fiscal year 2019 D’style operating income compared to a predetermined target for the fiscal year.

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: Money market funds	1	Market - Quoted market prices
Cash Equivalents: Commercial paper	2	Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information.
Available-for-sale securities: Secondary market certificates of deposit	2	Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information.
Available-for-sale securities: Municipal bonds	2	Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information.
Available-for-sale securities: U.S. Treasury and federal agencies	2	Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information.
Trading securities: Mutual funds held in nonqualified SERP	1	Market - Quoted market prices
Derivative Assets: Stock warrants	3	Market - The privately-held company is currently in an early stage of start-up. The pricing of recent purchases or sales of the investment are considered, if any, as well as positive and negative qualitative evidence, in the assessment of fair value.
Derivative Liability: 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 International's non-performance risk.
Contingent earn-out liability	3	Income - Based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the acquisition and a discount rate that captures the risk associated with the liability.

Recurring Fair Value Measurements:

As of March 31, 2019 and June 30, 2018 , the fair values of financial assets that are measured at fair value on a recurring basis using the market approach are categorized as follows:



	March 31, 2019
(Amounts in Thousands)	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents: Money market funds	$	21,954	$	—	$	—	$	21,954
Cash equivalents: Commercial paper	—		25,055		—		25,055
Available-for-sale securities: Secondary market certificates of deposit	—		13,637		—		13,637
Available-for-sale securities: Municipal bonds	—		2,445		—		2,445
Available-for-sale securities: U.S. Treasury and federal agencies	—		25,739		—		25,739
Trading Securities: Mutual funds in nonqualified SERP	12,505		—		—		12,505
Derivatives: Stock warrants	—		—		1,500		1,500
Total assets at fair value	$	34,459	$	66,876	$	1,500	$	102,835
Liabilities
Contingent earn-out liability	—		—		156		156
Total liabilities at fair value	$	—	$	—	$	156	$	156

	June 30, 2018
(Amounts in Thousands)	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents: Money market funds	$	24,407	$	—	$	—	$	24,407
Cash equivalents: Commercial paper	—		25,918		—		25,918
Available-for-sale securities: Secondary market certificates of deposit	—		11,850		—		11,850
Available-for-sale securities: Municipal bonds	—		16,508		—		16,508
Available-for-sale securities: U.S. Treasury and federal agencies	—		6,249		—		6,249
Trading Securities: Mutual funds in nonqualified SERP	12,114		—		—		12,114
Derivatives: Stock warrants	—		—		1,500		1,500
Total assets at fair value	$	36,521	$	60,525	$	1,500	$	98,546
Liabilities
Derivatives: Foreign exchange contracts	$	—	$	10	$	—	$	10
Contingent earn-out liability	—		—		1,056		1,056
Total liabilities at fair value	$	—	$	10	$	1,056	$	1,066

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

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.
Equity securities without readily determinable fair value	3	Cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Impairment is assessed qualitatively.

On a periodic basis, but no less frequently than quarterly, the investment in equity securities without readily determinable fair value is qualitatively assessed for impairment when there are events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. If a significant adverse effect on the fair value of the investment were to occur and was deemed to be other-than-temporary, the fair value of the investment would be estimated, and the amount by which the carrying value of the investment exceeds its fair value would be recorded as an impairment loss. See Note 11 - Investments in the Notes to Condensed Consolidated Financial Statements for the carrying amount of this investment.

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 11. Investments

Investment Portfolio:

Our investment portfolio consists of municipal bonds, certificates of deposit purchased in the secondary market, and U.S. Treasury and federal agency securities. Municipal bonds include general obligation bonds and revenue bonds, some of which are pre-refunded. U.S. Treasury securities represent Treasury Bills and Notes of the U.S. government. Federal agency securities represent debt securities of a U.S. government sponsored agency, and certain of these securities are callable. Our investment policy dictates that municipal bonds, U.S. Treasury and federal agency securities must be investment grade quality. Our secondary market certificates of deposit are classified as investment securities, being purchased in the secondary market through a broker and available to be sold in the secondary market. All certificates of deposit are FDIC insured.

Our investment portfolio is available for use in current operations, therefore investments are recorded within Current Assets in the Condensed Consolidated Balance Sheets. The contractual maturities of our investment portfolio were as follows (maturity dates for municipal bonds are based on pre-refunded dates and maturity dates for government agency securities are based on the first available call date, if applicable):



	March 31, 2019
(Amounts in Thousands)	Certificates of Deposit		Municipal Bonds		U.S. Treasury and Federal Agencies
Within one year	$	9,172	$	2,445	$	23,335
After one year through two years	4,465		—		2,404
Total Fair Value	$	13,637	$	2,445	$	25,739

All investments are classified as available-for-sale securities which are recorded at fair value. See Note 10 - Fair Value in the Notes to Condensed Consolidated Financial Statements for more information on the fair value of available-for-sale securities. The amortized cost basis reflects the original purchase price, with discounts and premiums amortized over the life of the available-for-sale securities. Unrealized losses on available-for-sale securities are recognized in earnings when there is intent to sell or it is likely to be required to sell before recovery of the loss, or when the available-for-sale securities have incurred a credit loss. Otherwise, unrealized gains and losses are recorded net of the tax-related effect as a component of Shareowners’ Equity.



	March 31, 2019
(Amounts in Thousands)	Certificates of Deposit		Municipal Bonds			U.S. Treasury and Federal Agencies
Amortized cost basis	$	13,637	$	2,446		$	25,737
Unrealized holding gains	—		—			7
Unrealized holding losses	—		(1		)	(5		)
Fair Value	$	13,637	$	2,445		$	25,739

	June 30, 2018
(Amounts in Thousands)	Certificates of Deposit		Municipal Bonds			U.S. Treasury and Federal Agencies
Amortized cost basis	$	11,850	$	16,532		$	6,266
Unrealized holding gains	—		—			—
Unrealized holding losses	—		(24		)	(17		)
Fair Value	$	11,850	$	16,508		$	6,249

An immaterial amount of investments were in a continuous unrealized loss position for greater than twelve months as of March 31, 2019 . Realized gains and losses as a result of sales in the three and nine months ended March 31, 2019 and March 31, 2018 were also immaterial.

Supplemental Employee Retirement Plan Investments:

We maintain 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. We recognize 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) section of the Condensed Consolidated Statements of Income. 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 gains (losses) for the nine months ended March 31, 2019 and 2018 were, in thousands, $(104) and $450 , respectively.

SERP asset and liability balances were as follows:



(Amounts in Thousands)	March 31, 2019		June 30, 2018
SERP investments - current asset	$	3,409	$	3,868
SERP investments - other long-term asset	9,096		8,246
Total SERP investments	$	12,505	$	12,114

SERP obligation - current liability	$	3,409	$	3,868
SERP obligation - other long-term liability	9,096		8,246
Total SERP obligation	$	12,505	$	12,114

Equity securities without readily determinable fair value:

We hold a total investment of $2.0 million in a privately-held company, including $0.5 million in equity securities without readily determinable fair value. The investment in equity securities without readily determinable fair value is included in the Other Assets line of the Condensed Consolidated Balance Sheets. See Note 10 - Fair Value in the Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities. We do not hold a majority voting interest and are not the variable interest primary beneficiary of the privately-held company, thus consolidation is not required.

Note 12. Derivative Instruments

We hold a total investment of $2.0 million in a privately-held company, including $1.5 million in stock warrants. The investment in stock warrants is accounted for as a derivative instrument and is included in the Other Assets line of the Condensed Consolidated Balance Sheets. The stock warrants are convertible into equity shares of the privately-held company upon achieving certain milestones. The value of the stock warrants will fluctuate primarily in relation to the value of the privately-held company's underlying securities, either providing an appreciation in value or potentially expiring with no value. During the quarter ended March 31, 2019 , the change in fair value of the stock warrants was not significant. See Note 10 - Fair Value in the Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities. Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets are presented below.

All foreign exchange contracts were settled as of the quarter ended March 31, 2019 .



Fair Values 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 2019		June 30 2018		Balance Sheet Location	March 31 2019		June 30 2018
Derivatives designated as hedging instruments:
Foreign exchange contracts						Accrued expenses	$	—	$	10

Derivatives not designated as hedging instruments:
Stock warrants	Other Assets	$	1,500	$	1,500
Total derivatives		$	1,500	$	1,500		$	—	$	10

Note 13. Postemployment Benefits

Our domestic employees participate in severance plans which provide severance benefits to eligible employees meeting the plans’ qualifications, primarily for involuntary termination without cause.

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)	2019			2018			2019			2018
Service cost	$	126		$	132		$	379		$	398
Interest cost	23			20			70			62
Amortization of actuarial income	(100		)	(58		)	(302		)	(191		)
Net periodic benefit cost	$	49		$	94		$	147		$	269

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.

During fiscal year 2019, we reported service cost in the Cost of Sales and Selling and Administrative Expenses lines of the Condensed Consolidated Statement of Income, interest cost in the Interest Expense line, and amortization of actuarial income in the Non-Operating income (expense), net line. During fiscal year 2018, all costs were recognized in the Cost of Sales and Selling and Administrative Expenses lines and were not segregated between the operating and non-operating sections of the Condensed Consolidated Statement of Income because the impact was immaterial.

Note 14. Stock Compensation

Stock-based compensation expense during the quarter and year-to-date period ended March 31, 2019 , was $1.1 million and $4.7 million , respectively, and during the quarter and year-to-date period ended March 31, 2018 , was $0.8 million and $3.3 million , respectively. The total income tax benefit for stock compensation arrangements during the quarter and year-to-date period ended March 31, 2019 , was $0.3 million and $1.2 million , respectively, and during the quarter and year-to-date period ended March 31, 2018 , was $0.3 million and $1.7 million , respectively. Included in the income tax benefit for the year-to-date period ended March 31, 2018 was a $0.6 million benefit for excess tax benefits from the vesting of stock awards, while the year-to-date period ended March 31, 2019 , had an immaterial amount of excess tax benefits.

During fiscal year 2019 , the following stock compensation was awarded to officers and other key employees and to members of the Board of Directors who are not employees. All awards were granted under the 2017 Stock 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, 2018 .



Type of Award	Quarter Awarded	Shares or Units	Grant Date Fair Value ⁽⁵⁾
Annual Performance Shares ⁽¹⁾	1st Quarter	34,176	$16.12
Annual Performance Shares ⁽¹⁾	2nd Quarter	23,889	$16.15	-	$16.17
Annual Performance Shares ⁽¹⁾	3rd Quarter	234	$14.93
Relative Total Shareholder Return Awards ⁽²⁾	1st Quarter	9,703	$21.16
Relative Total Shareholder Return Awards ⁽²⁾	2nd Quarter	60,754	$21.46	-	$21.49
Restricted Stock Units ⁽³⁾	1st Quarter	170,686	$15.99	-	$16.39
Restricted Stock Units ⁽³⁾	2nd Quarter	138,844	$16.46	-	$16.48
Restricted Stock Units ⁽³⁾	3rd Quarter	9,291	$15.24
Unrestricted Shares ⁽⁴⁾	1st Quarter	12,318	$16.39
Unrestricted Shares ⁽⁴⁾	2nd Quarter	9,522	$16.48	-	$16.49
Unrestricted Shares ⁽⁴⁾	3rd Quarter	10,498	$14.44

(1) Annual performance shares were awarded to officers and other key employees. The number of annual performance shares to be issued will be dependent upon the Company’s return on capital during fiscal year 2019, with a percentage payout ranging from 0% to 200% of the target number set forth above. The maximum number of shares that can be issued under these awards is 116,598 . Annual performance shares vest on June 30, 2019.

(2) Performance units were awarded to key officers under the Company’s Relative Total Shareholder Return program. Vesting occurs at June 30, 2020 and June 30, 2021. 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. The maximum number of units that can be issued under these awards is 140,914 .

(3) Restricted stock units were awarded to officers and key employees. Vesting occurs at June 30, 2019, June 30, 2020, and June 30, 2021. Upon vesting, the outstanding number of restricted stock units and the value of dividends accumulated over the vesting period are converted to shares of common stock.

(4) Unrestricted shares were awarded to non-employee members of the Board of Directors and key employees as consideration for service to Kimball International and do not have vesting periods, holding periods, restrictions on sale, or other restrictions.

(5) The grant date fair value of annual performance shares is based on the stock price at the date of the award, reduced by the present value of dividends normally paid over the vesting period which are not payable on outstanding annual performance share awards. The grant date fair value of the Relative Total Shareholder Return 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 restricted share units and unrestricted shares was based on the stock price at the date of the award.

Note 15. Variable Interest Entities

Our involvement with variable interest entities (“VIEs”) is limited to situations in which we are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the VIE’s economic performance. Thus, consolidation is not required. Our involvement with VIEs consists of an investment in a privately-held company consisting of equity securities without readily determinable fair value and stock warrants, and notes receivable related to independent dealership financing.

The equity securities without readily determinable fair value and stock warrants were valued at $0.5 million and $1.5 million , respectively, at both March 31, 2019 and June 30, 2018 and were included in the Other Assets line of the Condensed Consolidated Balance Sheets. For more information related to our investment in the privately-held company, see Note 10 - Fair Value in the Notes to Condensed Consolidated Financial Statements.

The carrying value of the notes receivable for independent dealership financing were $1.0 million , net of a $0.1 million allowance, and $0.6 million , net of a $0.1 million allowance as of March 31, 2019 and June 30, 2018 , respectively, and were included on the Receivables and Other Assets lines of our Condensed Consolidated Balance Sheets.

We have no obligation to provide additional funding to the VIEs, and thus our exposure and risk of loss related to the VIEs is limited to the carrying value of the investment and notes receivable. Financial support provided by Kimball International to the VIEs was limited to the items discussed above during the quarter ended March 31, 2019 .

Note 16. Credit Quality and Allowance for Credit Losses of Notes Receivable

We monitor 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. As of March 31, 2019 and June 30, 2018 , we had no material past due outstanding notes receivable.



	As of March 31, 2019						As of June 30, 2018
(Amounts in Thousands)	Unpaid Balance		Related Allowance		Receivable Net of Allowance		Unpaid Balance		Related Allowance		Receivable Net of Allowance
Independent Dealership Financing	$	1,099	$	88	$	1,011	$	666	$	50	$	616
Other Notes Receivable	173		173		—		183		183		—
Total	$	1,272	$	261	$	1,011	$	849	$	233	$	616

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

Business Overview

Kimball International, Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) creates design driven, innovative furnishings sold through our family of brands: Kimball, National, and Kimball Hospitality. Our diverse portfolio offers solutions for the workplace, learning, healing, and hospitality environments. Our values and integrity are demonstrated daily by living our Guiding Principles and creating a culture of caring, that establishes us as an employer of choice. “We Build Success” by establishing long-term relationships with customers, employees, suppliers, shareowners and the communities in which we operate.

We closely monitor key indicators for the markets in which we compete. As reported by the Business and Institutional Furniture Manufacturer Association (“BIFMA”), the forecast by IHS as of January 2019 for the North American commercial furniture market, which they define as including office, education, and healthcare furniture products, projects a year-over-year increase of 3.3% for calendar year 2019. The forecast for two of the leading indicators for the hospitality furniture market (January 2019 PwC Hospitality Directions U.S. report) includes a projected increase in RevPAR (Revenue Per Available Room) of 2.3% for calendar year 2019, while occupancy which has been hovering at peak levels is forecasted to decrease 0.4% in calendar year 2019.

Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:

•

On October 23, 2018, the Board of Directors (“Board”) appointed Kristine L. Juster as the Chief Executive Officer of the Company effective November 1, 2018 to succeed Robert F. Schneider who retired as Chief Executive Officer and Chairman of the Board on October 31, 2018, as previously announced. Ms. Juster served as an independent member of the Board since April 2016 and was a member of the Audit Committee. Ms. Juster served for over 20 years as a Global Executive at Newell Brands, Inc., a leading global consumer goods and commercial products company (“Newell”), until her retirement in April 2018. During her tenure at Newell, Ms. Juster served as President of the Global Writing Segment from May 2014 until her retirement in April 2018, as President of Newell’s Baby and Parent Segment from November 2011 to April 2014, and in other roles of increasing responsibility since joining Newell in 1995, including serving as President of Newell’s Home Décor Segment and President of Newell’s Culinary Lifestyles Segment. Throughout her career, Ms. Juster drove significant growth for the businesses she led through brand innovation, distribution channel expansion including e-commerce, and a global mindset. Ms. Juster has a proven track record of scaling growth strategies, while preserving the core values that are critical to the long-term sustainability of a business.

•

Productivity and lean initiatives are projected to result in $10 million of cost savings in our fiscal year 2019 compared to the prior year. These initiatives include investments in equipment and automation at our production facilities to improve production flow and increase efficiency, improvements in transportation and warehousing processes, and other various lean initiatives across all areas of our Company.

•

On October 26, 2018, we acquired substantially all the assets and assumed certain specified limited liabilities of David Edward headquartered in Baltimore, Maryland. David Edward is a premier designer and manufacturer of contract furniture, sold in the healthcare, corporate, education, and premium hospitality markets. David Edward sells primarily in the North American and Middle Eastern markets. David Edward’s products are generally specified by architects and designers, represented through a network of independent representatives, and sold through authorized furniture dealerships. The David Edward product portfolio consists of classic and contemporary designs, focused primarily in the seating, tables, and ancillary furniture categories. In conjunction with the asset acquisition, we leased the two existing David Edward production facilities in Baltimore, Maryland and Red Lion, Pennsylvania. See Note 3 - Acquisition in the Notes to Condensed Consolidated Financial Statements for additional information.

•

On November 6, 2017, we successfully completed the acquisition of certain assets of D’style, Inc. (“D’style”) and all of the capital stock of Diseños de Estilo S.A. de C.V., which have administrative and sales offices and warehousing in Chula Vista, California and a manufacturing location in Tijuana, Mexico. The acquisition expands our hospitality offerings beyond guest rooms to public spaces and provides new mixed material manufacturing capabilities. See Note 3 - Acquisition in the Notes to Condensed Consolidated Financial Statements for additional information.

•

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because Kimball International has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ended June 30, 2018. The statutory federal tax rate is 21% for our fiscal year 2019 and subsequent years. The changes included in the Tax Act are broad and complex.

•

Commodity prices are expected to moderate, but we will continue to be exposed to fluctuation in transportation costs which vary based upon freight carrier capacity and fuel prices. We utilize both steel and aluminum in our products, most of which is sourced domestically. The U.S. originally imposed tariffs of 25% on steel and 10% on aluminum imported from several countries effective June 2018. The government expanded its list of products subject to tariffs to include furniture products, parts, and components at a 10% rate effective September 2018. The U.S. government continues to evaluate the ongoing need for tariffs, and if further tariffs are assessed the landed cost of our products could increase materially, which would reduce our net income if we are unable to mitigate the additional cost. We are actively striving to offset increases in the cost of these materials through supplier negotiations, global sourcing initiatives, product re-engineering and parts standardization, and price increases on our products.

•

On February 4, 2019, we received notification from the U.S. General Services Administration Office of Inspector General (“GSA OIG”) in response to our self-reporting in 2016 of subcontractor reporting noncompliance and inaccuracies. The GSA OIG Contractor Reporting Program reviewed the information we provided and has determined that the government’s interest is sufficiently protected and the review of the matter against Kimball International has been terminated.

•

Due to the contract and project nature of furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business which in turn impacts our operating results. Effective management of our manufacturing capacity is and will continue to be critical to our success. See below for further details regarding current sales and open order trends.


•	We expect to continue to invest in capital expenditures prudently, including potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.

•

We have a strong focus on cost control and closely monitor market changes and our liquidity in order to proactively adjust our operating costs, discretionary capital spending, and dividend levels as needed. Managing working capital in conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of our Annual Cash Incentive plan is that it is linked to our Company-wide and business unit performance which is designed to adjust compensation expense as profits change.


•	We continue to maintain a strong balance sheet. Our short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of our credit facility, was $119.8 million at March 31, 2019 .

Financial Overview

Our fiscal year 2018 results have been recast to reflect the impact of the adoption of guidance on the recognition of revenue from contracts with customers using a full retrospective transition method.



	At or for the Three Months Ended								For the Nine Months Ended
	March 31								March 31
(Amounts in Millions)	2019			2018			% Change		2019			2018			% Change
Net Sales	$	177.4		$	160.9		10	%	$	572.5		$	514.9		11	%
Gross Profit	56.6			50.0			13	%	187.4			171.4			9	%
Selling and Administrative Expenses	47.5			41.5			15	%	151.2			134.9			12	%
Operating Income	9.1			8.5			6	%	36.2			36.5			(1	%)
Operating Income %	5.1		%	5.3		%			6.3		%	7.1		%
Adjusted Operating Income *	$	10.3		$	8.5		22	%	$	38.4		$	37.2		3	%
Adjusted Operating Income % **	5.8		%	5.3		%			6.7		%	7.2		%
Net Income	$	8.0		$	5.9		36	%	$	28.2		$	24.2		17	%
Adjusted Net Income *	8.1			5.9			39	%	29.6			24.2			22	%
Diluted Earnings Per Share	$	0.22		$	0.16				$	0.76		$	0.64
Adjusted Diluted Earnings Per Share *	$	0.22		$	0.16				$	0.79		$	0.64
Adjusted EBITDA *	$	14.5		$	12.3		18	%	$	50.7		$	48.3		5	%
Open Orders **	$	149.2		$	129.0		16	%

* Items indicated represent Non-GAAP (Generally Accepted Accounting Principles) measurements for fiscal year 2019.

** Items indicated represent Key Performance Indicators.

See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.



Net Sales by End Vertical Market
	Three Months Ended						Nine Months Ended
	March 31						March 31
(Amounts in Millions)	2019		2018		% Change		2019		2018		% Change
Commercial	$	50.9	$	50.2	1	%	$	171.1	$	151.8	13	%
Education	13.5		12.7		6	%	66.2		61.8		7	%
Finance	16.9		17.8		(5	%)	53.2		48.9		9	%
Government	19.1		17.6		9	%	55.0		68.9		(20	%)
Healthcare	28.7		19.5		47	%	81.6		63.7		28	%
Hospitality	48.3		43.1		12	%	145.4		119.8		21	%
Total Net Sales	$	177.4	$	160.9	10	%	$	572.5	$	514.9	11	%

Third quarter fiscal year 2019 consolidated net sales were $177.4 million compared to third quarter fiscal year 2018 net sales of $160.9 million , or a 10% increase including $3.4 million of net sales resulting from the David Edward acquisition. The increase in organic sales was primarily driven by both volume and increased prices. Net sales for the nine -month period ended March 31, 2019 of $572.5 million increased 11% compared to net sales of $514.9 million for the nine -month period ended March 31, 2018 primarily driven by volume and to lesser extent by increased prices. The David Edward acquisition contributed $6.0 million of net sales for the year-to-date period ended March 31, 2019 .

Key explanatory comments for our sales by vertical market for the third quarter and year-to-date period of fiscal year 2019 compared to the third quarter and year-to-date period of fiscal year 2018 follow:


•	Sales growth to the healthcare vertical market was driven by our strategic focus in this marketplace which included aligning resources, building relationships, and introducing new healthcare products. The healthcare market continues to show stability and growth.


•	We continue to see strength in the hospitality industry driving increased sales in both custom and non-custom projects driven by our marketing campaigns. The D’style acquisition also contributed to the year-to-date sales increase.


•	New products and continued development of our strategic relationships drove the higher sales in the commercial vertical market.


•	Our sales to the finance vertical market increased for the year-to-date period as large financial institutions continue to update their office environments.


•	Our sales to the education vertical market increased due to continued focus on target accounts and were positively impacted early in our fiscal year as the timing of the normal education buying season was delayed and deferred sales into our first quarter.


•	Government vertical market sales increased in the third quarter on higher federal government sales and declined in the year to date period primarily due to decreased federal government sales as we shipped fewer large projects in the current year.


•	Each of our vertical market sales levels can fluctuate depending on the mix of projects in a given period.

Open orders at March 31, 2019 increased 16% , or 14% on an organic basis, when compared to the open order level as of March 31, 2018 due to increases in both the hospitality furniture order backlog and office furniture order backlog. The office furniture order backlog increase was primarily due to organic increases while the David Edward order backlog contributed to a lesser extent. Open orders at a point in time may not be indicative of future sales trends.

In the third quarter of fiscal year 2019 we recorded net income of $8.0 million , or diluted earnings per share of $0.22 , inclusive of after-tax CEO transition costs of $0.2 million , or less than $0.01 diluted earnings per share. In the third quarter of fiscal year 2018 we recorded net income of $5.9 million and diluted earnings per share of $0.16 . Excluding the CEO transition costs, adjusted net income for the third quarter of fiscal year 2019 was $8.1 million , or $0.22 per diluted share. In the first nine months of fiscal year 2019 we recorded net income of $28.2 million and diluted earnings per share of $0.76 , inclusive of $1.3 million , or $0.03 per diluted share, of after-tax CEO transition costs. Excluding the CEO transition costs, our adjusted net income for the first nine

months of fiscal year 2019 improved to $29.6 million , or $0.79 per diluted share, compared to net income for the first nine months of fiscal year 2018 of $24.2 million , or $0.64 per diluted share. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.

Gross profit as a percent of net sales increased 80 basis points in the third quarter of fiscal year 2019 compared to the third quarter of fiscal year 2018 . Increased product pricing, the savings realized from our cost reduction initiatives, the leverage gained on higher sales volumes, and favorable sales mix were partially offset by commodity cost increases. The David Edward acquisition also negatively impacted our gross profit in the third quarter, as expected, and will continue to in the short-term until productivity improvements and synergies are realized. Gross profit as a percent of net sales decreased 60 basis points in the first nine months of fiscal year 2019 compared to the first nine months of fiscal year 2018 . Increased product pricing, the savings realized from our cost reduction initiatives, and the leverage gained on higher sales volumes were more than offset by increases in transportation, commodity and tariff costs and the negative impact of David Edward on gross margin.

Selling and administrative expenses in the third quarter of fiscal year 2019 compared to the third quarter of fiscal year 2018 as a percent of net sales increased 100 basis points, and increased 15% in absolute dollars. Contributing to the third quarter fiscal year 2019 increased selling and administrative expense was $0.3 million of CEO transition costs. In addition, the selling and administrative expense increase was driven by higher commission expense related to the higher sales levels, higher salary, retirement, and incentive compensation expenses, strategic growth investments, and the incremental selling and administrative expenses of the David Edward operations.

For the first nine months of fiscal year 2019 compared to the first nine months of fiscal year 2018, as a percent of net sales, selling and administrative expenses increased 20 basis points. In absolute dollars, selling and administrative expenses in the first nine months of fiscal year 2019 compared to the same period of fiscal year 2018 increased 12% primarily due to the CEO transition costs, higher salary expense, higher retirement and incentive compensation costs as a result of higher earnings levels, and higher commission expense resulting from the higher sales levels. In addition, the prior year included a $1.0 million higher gain on sale of assets than the current year-to-date period.

Also contributing to the higher selling and administrative expenses were unfavorable variances within selling and administrative expenses of $1.0 million for the third quarter and a $0.5 million favorable variance for the year-to-date period of fiscal year 2019 compared to the third quarter and year-to-date period of fiscal year 2018 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 net income.

Other Income (Expense) consisted of the following:



	Three Months Ended						Nine Months Ended
	March 31						March 31
(Amounts in Thousands)	2019			2018			2019			2018
Interest Income	$	492		$	258		$	1,339		$	726
Interest Expense	(40		)	(55		)	(146		)	(160		)
Gain (Loss) on Supplemental Employee Retirement Plan Investments	1,032			(8		)	306			756
Other	(62		)	(197		)	(235		)	(412		)
Other Income (Expense), net	$	1,422		$	(2	)	$	1,264		$	910

Our third quarter and year-to-date period of fiscal year 2019 results of operations included the impact of the enactment of the Tax Act, which was signed into law on December 22, 2017. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because Kimball International has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ended June 30, 2018, and 21% for our fiscal year 2019 and subsequent fiscal years. Our nine months ended March 31, 2018 included approximately $2.0 million year-to-date in reduced income tax expense to reflect federal taxes on taxable income at the lower blended effective tax rate, offset by a fiscal year-to-date discrete tax impact of $1.9 million expense as a result of applying the new lower federal income tax rates to our net deferred tax assets. The third quarter fiscal year 2018 tax impact was approximately $0.4 million income to reflect federal taxes on current year taxable income at the lower blended effective tax rate, and $0.1 million income as a result of adjusting deferred tax assets to lower federal tax rates.

Our effective tax rate of 24.1% and 24.7% for the three and nine months ended March 31, 2019, respectively, was less than the combined federal and state statutory tax rate in part due to the R&D tax credit. Our effective tax rate was 31.2% and 35.3% , respectively, for the three and nine months ended March 31, 2018.

Liquidity and Capital Resources

Our total cash, cash equivalents, and short-term investments, increased to $91.3 million at March 31, 2019 from $87.3 million at June 30, 2018 , primarily due to $42.7 million of cash flows from operations which were partially offset by capital expenditures of $16.4 million , the acquisition of David Edward for $4.9 million, and the return of capital to shareowners in the form of stock repurchases and dividends totaling $17.6 million during the first nine months of fiscal year 2019 .

Working capital at March 31, 2019 and June 30, 2018 was $87.1 million and $85.1 million , respectively. The current ratio was 1.7 at both March 31, 2019 and June 30, 2018 .

Our short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of our credit facility, totaled $119.8 million at March 31, 2019 . At March 31, 2019 , we had $1.5 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. We had no credit facility borrowings outstanding as of March 31, 2019 or June 30, 2018 .

Cash Flows

The following table reflects the major categories of cash flows for the first nine months of fiscal years 2019 and 2018 .



	Nine Months Ended
	March 31
(Amounts in thousands)	2019			2018
Net cash provided by operating activities	$	42,680		$	26,399
Net cash used for investing activities	$	(27,186	)	$	(31,224	)
Net cash used for financing activities	$	(18,688	)	$	(18,053	)

Cash Flows from Operating Activities

For the first nine months of fiscal year 2019 net cash provided by operating activities was $42.7 million fueled by $28.2 million of net income while the first nine months of fiscal year 2018 net cash provided by operating activities was $26.4 million inclusive of $24.2 million of net income.

Changes in working capital balances provided $4.2 million of cash in the first nine months of fiscal year 2019 . Changes in working capital balances used $16.4 million of cash in the first nine months of fiscal year 2018 and was primarily due to a reduction in our accrued expenses balance as our accrued cash incentive compensation and the retirement profit sharing contribution which were both related to our fiscal year 2017 performance were paid out. Also contributing was a prepayment of estimated income taxes for fiscal year 2018 which are included in the prepaid expenses and other current assets line. These cash outflows were partially offset by a reduction in our accounts receivable balance due to the seasonally lower sales in our third quarter.

Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for the nine -month periods ended March 31, 2019 and March 31, 2018 were 28 and 27 days, respectively. We define DSO as the average of monthly accounts and notes receivable divided by an average day’s net sales. Our Production Days Supply on Hand (“PDSOH”) of inventory measure for the nine -month periods ended March 31, 2019 and March 31, 2018 were 44 and 43 days, respectively. We define PDSOH as the average of the monthly net inventory divided by an average day’s cost of sales.

Cash Flows from Investing Activities

During the first nine months of fiscal year 2019 , we invested $39.8 million in available-for-sale securities, and $32.6 million matured. During the first nine months of fiscal year 2018 , we invested $33.8 million in available-for-sale securities, and $30.7 million matured. Our short-term investments included municipal bonds, certificates of deposit purchased in the secondary market, and U.S. Treasury and federal agency securities. During the first nine months of fiscal year 2019 we had a cash outflow of $4.9 million for the David Edward acquisition and during the first nine months of fiscal year 2018 we had cash outflow of $17.8 million for the D’style acquisition. During the first nine months of fiscal years 2019 and 2018 , we received proceeds from the sale of assets net of selling expenses of $1.3 million and $5.7 million , respectively, the majority of which relates to the sale of Internet protocol addresses in fiscal year 2019 and the majority of which relates to the sale of our fleet of over-the-road tractors and trailers in fiscal year 2018 . During the first nine months of fiscal years 2019 and 2018 , we reinvested $16.4 million and $15.8 million , respectively, into capital investments for the future. The capital investments in both the current and prior year were primarily for facility improvements such as renovations to our corporate headquarters and showrooms, and various manufacturing equipment upgrades to increase automation in production facilities which is expected to yield future benefits.

Cash Flows from Financing Activities

We paid dividends of $8.5 million and $7.5 million in the nine -month periods ended March 31, 2019 and March 31, 2018 , respectively. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. During the first nine months of fiscal years 2019 and 2018 , we repurchased shares pursuant to a previously announced stock repurchase program which drove cash outflow of $9.1 million and $8.1 million , respectively.

Credit Facility

We maintain a $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 March 31, 2019 , we had $1.5 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. At both March 31, 2019 and June 30, 2018 , we had no borrowings outstanding.

The credit facility requires us to comply with certain debt covenants, the most significant of which are the adjusted leverage ratio and the fixed charge coverage ratio. The adjusted leverage ratio is defined as (a) consolidated total indebtedness minus unencumbered U.S. cash on hand in the U.S. in excess of $15,000,000 to (b) consolidated EBITDA, determined as of the end of each of our fiscal quarters for the then most recently ended four fiscal quarters, and may not be greater than 3.0 to 1.0. The fixed charge coverage ratio is defined as (a) the sum of (i) consolidated EBITDA, minus (ii) 50% of depreciation expense, minus (iii) taxes paid, minus (iv) dividends and distributions paid, to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii) interest expense, calculated on a consolidated basis in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), determined as of the end of each of our fiscal quarters for the trailing four fiscal quarters then ending, and may not be less than 1.10 to 1.00. We were in compliance with all debt covenants of the credit facility during the nine -month period ended March 31, 2019 .

The table below compares the adjusted leverage ratio and the 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, 2019		Credit Agreement	Excess
Adjusted Leverage Ratio	(0.47	)	3.00	3.47
Fixed Charge Coverage Ratio	173.94		1.10	172.84

Future Liquidity

We believe our principal sources of liquidity from available funds on hand and short-term investments, cash generated from operations, and the availability of borrowing under our credit facility will be sufficient to fund future dividends and meet our working capital and other operating needs for at least the next 12 months. During the third quarter of fiscal year 2019, our Board of Directors declared a quarterly dividend of $0.08 per share, to be paid during our fourth quarter of fiscal year 2019. We will continue to evaluate market conditions in determining future share repurchases. At March 31, 2019 , 2.7 million shares remained available under the repurchase program. During fiscal year 2019 we expect to continue investments in capital expenditures, particularly for projects such as our headquarters renovation, showroom renovations, machinery and equipment upgrades and

automation, and potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.

Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by factors such as general economic and market conditions, the impact of changes in tariffs, lack of availability of raw material components in the supply chain, a decline in demand for our products, 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.

Non-GAAP Financial Measures and Other Key Performance Measures

This Management’s Discussion and Analysis (“MD&A”) contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the United States in the statements of income, statements of comprehensive income, balance sheets, or statements of cash flows of the company. The non-GAAP financial measures used within this MD&A include (1) adjusted operating income defined as operating income excluding CEO transition costs and market value adjustments related to the SERP liability; (2) adjusted net income defined as net income excluding CEO transition costs; (3) adjusted diluted earnings per share defined as diluted earnings per share excluding CEO transition costs; and (4) adjusted EBITDA defined as earnings before interest, taxes, depreciation, and amortization excluding CEO transition costs. Reconciliations of the reported GAAP numbers to these non-GAAP financial measures are included in the table below. Management believes it is useful for investors to understand how its core operations performed without expenses incurred for the CEO transition and market value adjustments related to the SERP liability. Excluding these amounts allows investors to meaningfully trend, analyze, and benchmark the performance of our core operations. Many of our internal performance measures that management uses to make certain operating decisions exclude these expenses to enable meaningful trending of core operating metrics. These non-GAAP financial measures should not be viewed as an alternative to the GAAP measures and are presented as supplemental information.



Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators

	Three Months Ended						Nine Months Ended
	March 31						March 31
(Amounts in Thousands, Except for Per Share Data)	2019			2018			2019			2018
Operating Income	$	9,053		$	8,510		$	36,245		$	36,472
Pre-tax Expense (Income) Adjustment to SERP Liability	1,032			(8		)	306			756
Pre-tax CEO Transition Costs	252			—			1,809			—
Adjusted Operating Income	$	10,337		$	8,502		$	38,360		$	37,228
Net Sales	$	177,369		$	160,897		$	572,500		$	514,871
Adjusted Operating Income %	5.8		%	5.3		%	6.7		%	7.2		%

Net Income	$	7,954		$	5,850		$	28,235		$	24,185
Pre-tax CEO Transition Costs	252			—			1,809			—
Tax on CEO Transition Costs	(65		)	—			(466		)	—
After-tax CEO Transition Costs	187			—			1,343			—
Adjusted Net Income	$	8,141		$	5,850		$	29,578		$	24,185

Diluted Earnings Per Share	$	0.22		$	0.16		$	0.76		$	0.64
After-tax CEO Transition Costs	—			—			0.03			—
Adjusted Diluted Earnings Per Share	$	0.22		$	0.16		$	0.79		$	0.64



Earnings Before Interest, Taxes, Depreciation, and Amortization excluding CEO Transition Costs (“Adjusted EBITDA”)
	Three Months Ended						Nine Months Ended
	March 31,						March 31,
(Amounts in Thousands)	2019			2018			2019			2018
Net Income	$	7,954		$	5,850		$	28,235		$	24,185
Provision for Income Taxes	2,521			2,658			9,274			13,197
Income Before Taxes on Income	10,475			8,508			37,509			37,382
Interest Expense	40			55			146			160
Interest Income	(492		)	(258		)	(1,339		)	(726		)
Depreciation and Amortization	4,212			3,970			12,532			11,512
Pre-tax CEO Transition Costs	252			—			1,809			—
Adjusted EBITDA	$	14,487		$	12,275		$	50,657		$	48,328

The open orders metric is a key performance indicator representing firm orders placed by our customers which have not yet been fulfilled and are expected to be recognized as revenue during future quarters. The timing of shipments can vary, but generally open orders are expected to ship within a twelve-month period. Adjusted operating income percentage is also a key performance indicator, which is defined as adjusted operating income as a percentage of net sales.

Fair Value

Financial assets classified as level 1 assets were valued using readily available market pricing. For commercial paper and available-for-sale securities classified as level 2 assets, the fair values are determined based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information. We evaluated the inputs used to value the instruments and validated the accuracy of the instrument fair values based on historical evidence. The investment in stock warrants and equity securities without readily determinable fair value of a privately-held company are classified as level 3 financial assets. The stock warrants are accounted for as a derivative instrument valued on a recurring basis considering the pricing of recent purchases or sales of the investment as well as positive and negative qualitative evidence, while the equity securities without readily determinable fair value are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The contingent earn-out liability is classified as a Level 3 financial liability and is valued based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the acquisition and a discount rate that captures the risk associated with the liability.

See Note 10 - Fair Value in the Notes to Condensed Consolidated Financial Statements for additional information.

Contractual Obligations

There have been no material changes outside the ordinary course of business to our summary of contractual obligations under the caption, “Contractual Obligations” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

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. 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 8 - Commitments and Contingent Liabilities in the Notes to Condensed Consolidated Financial Statements for more information on the 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

Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the condensed consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. Management continually reviews the accounting policies and financial information disclosures. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. During the first nine months of fiscal year 2019 , there were no material changes in the accounting policies and assumptions previously disclosed other than our Revenue Recognition policy which is described below.

Revenue recognition - Effective at the beginning of fiscal year 2019, we adopted guidance on the recognition of revenue from contracts with customers, using a full retrospective method. Under the new guidance, revenue is measured as the amount of consideration we expect to receive in exchange for transferring distinct goods or providing services to customers. Our revenue consists substantially of product sales, and is reported net of sales discounts, rebates, incentives, returns, and other allowances offered to customers. We recognize revenue when performance obligations under the terms of contracts with our customers are satisfied, which occurs when control passes to a customer to enable them to direct the use of and obtain benefit from the product. This typically occurs when a customer obtains legal title, obtains the risks and rewards of ownership, has received the goods according to the contractual shipping terms either at the shipping point or destination, and is obligated to pay for the product. Shipping and handling activities are recognized as fulfillment activities and are expensed at the time revenue is recognized. We recognize sales net of applicable sales taxes and similar revenue-based taxes.

We use judgment in estimating the reduction in net sales driven by customer rebate and incentive programs. Judgments primarily include expected sales levels to be achieved and the corresponding rebate and incentive amounts expected to be earned by dealers and salespersons.

We also use judgment in estimating a reserve for returns and allowances which is recorded at the time of the sale, based on estimated product returns and price concessions. The reserve for returns and allowances is recorded in Accrued Expenses on the Condensed Consolidated Balance Sheets, and the expense is recorded as a reduction of Net Sales in the Condensed Consolidated Statements of Income.

We perform ongoing credit evaluations of our customers and impair receivable balances by recording specific allowances for bad debts based on judgment using factors such as current trends, the length of time the receivables are past due, and historical collection experience. The allowance for accounts receivable balances that are determined likely to be uncollectible are a reduction in the Receivables line of the Condensed Consolidated Balance Sheets, and the expense is recorded in Selling and Administrative Expenses in the Condensed Consolidated Statements of Income.

New Accounting Standards

See Note 2 - Recent Accounting Pronouncements and Supplemental Information in the 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, adverse changes in the global economic conditions, the impact of changes in tariffs, increased global competition, significant reduction in customer order patterns, loss of key suppliers, loss of or significant volume reductions from key contract customers, financial stability of key customers and suppliers, relationships with strategic customers and product distributors, availability or cost of raw materials and components, 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 International are contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 .

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk with respect to commodity price fluctuations for components used in the manufacture of our products, primarily related to wood and wood-related components, steel, aluminum, and plastics. These components are impacted by global pricing pressures and general economic conditions. The U.S. originally imposed tariffs of 25% on steel and 10% on aluminum imported from several countries effective June 2018. The government expanded its list of products subject to tariffs to include furniture products, parts, and components at a 10% rate effective September 2018. The U.S. government continues to evaluate the ongoing need for tariffs, and if further tariffs are assessed the landed cost of our products could increase materially, which would reduce our net income if we are unable to mitigate the additional cost. We are actively striving to offset increases in the cost of these materials through supplier negotiations, global sourcing initiatives, product re-engineering and parts standardization, and price increases on our products. We are also exposed to fluctuation in transportation costs which vary based upon freight carrier capacity and fuel prices. Transportation costs are managed by optimizing logistics and supply chain planning, and increasing prices on our products.

There have been no material changes to other market risks, including interest rate and foreign exchange rate risks, from the information disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit 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 our management, including our 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, 2019 , our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

(b) Changes in internal control over financial reporting.

We adopted new accounting guidance on the recognition of revenue from contracts with customers at the beginning of fiscal year 2019. As a result, we implemented changes required by the new standard, including accounting policies, internal controls over financial reporting, and disclosure controls, and we implemented new processes and procedures and Enterprise Resource Planning system changes to provide the information required by the new guidance.

PART II. OTHER INFORMATION

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

A share repurchase program authorized by the Board of Directors was announced on August 11, 2015 . 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. On February 7, 2019 an additional two million shares of common stock were authorized by the Board of Directors for repurchase. At March 31, 2019 , approximately 2.7 million shares remained available under the repurchase program.




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, 2019)	100	$	13.52	100	2,654,314
Month #2 (February 1-February 28, 2019)	—	$	—	—	2,654,314
Month #3 (March 1-March 31, 2019)	—	$	—	—	2,654,314
Total	100	$	13.52	100

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-Q filed November 2, 2017)


3(b)	Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company’s Form 8-K filed October 30, 2018)


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/ KRISTINE L. JUSTER
		Kristine L. Juster Chief Executive Officer
		May 8, 2019


	By:	/s/ MICHELLE R. SCHROEDER
		Michelle R. Schroeder Vice President, Chief Financial Officer
		May 8, 2019

TABLE OF CONTENTS

Part I. Financial Informationprint Item 1. Financial Statementsprint Note 1. Basis Of Presentationprint Note 2. Recent Accounting Pronouncements and Supplemental Informationprint Note 3. Acquisitionprint Note 4. Revenueprint Note 5. Income Taxesprint Note 6. Inventoriesprint Note 7. Accumulated Other Comprehensive Incomeprint Note 8. Commitments and Contingent Liabilitiesprint Note 9. Earnings Per Shareprint Note 10. Fair Valueprint Note 11. Investmentsprint Note 12. Derivative Instrumentsprint Note 13. Postemployment Benefitsprint Note 14. Stock Compensationprint Note 15. Variable Interest Entitiesprint Note 16. Credit Quality and Allowance For Credit Losses Of Notes Receivableprint 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 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 6. Exhibitsprint

Exhibits

3(a) Amended and Restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Companys Form 10-Q filed November 2, 2017) 3(b) Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Companys Form 8-K filed October 30, 2018) 31.1 Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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ArcelorMittal	MT
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Leggett & Platt, Incorporated	LEG
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KBAL 10-Q Quarter ended March 31, 2019

Exhibits