10-K 1 kbal10k06302019q4.htm KIMBALL INTERNATIONAL, INC. FORM 10-K Document
Kimball International, Inc.
10-K on 08/27/2019   Download
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number    0-3279
kimballlogonobrand.jpg
KIMBALL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Indiana
 
35-0514506
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
1600 Royal Street, Jasper, Indiana
 
47546-2256
(Address of principal executive offices)
 
(Zip Code)
(812) 482-1600
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically 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 Act).  Yes  o    No  x
Class A Common Stock is not publicly traded and, therefore, no market value is available, but it is convertible on a one-for-one basis into Class B Common Stock.  The aggregate market value of the Class B Common Stock held by non-affiliates, as of December 31, 2018 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $511.2 million, based on 97.7% of Class B Common Stock held by non-affiliates.

The number of shares outstanding of the Registrant’s common stock as of August 19, 2019 was:
          Class A Common Stock - 248,938 shares
          Class B Common Stock - 36,687,824 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on October 22, 2019 are incorporated by reference into Part III.





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


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

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but are not limited to, headboards, tables, seating, vanities, casegoods, lighting, and products enhanced with technology features utilizing a broad mix of wood, metal, stone, laminate, finish, glass, and fabric options.
Spin-Off of Kimball Electronics
On October 31, 2014 (the “Distribution Date”), we completed the spin-off of our Electronic Manufacturing Services (“EMS”) segment by distributing the related shares of Kimball Electronics, Inc. (“Kimball Electronics”), on a pro rata basis, to our shareholders of record as of October 22, 2014. After the Distribution Date, we no longer beneficially own any Kimball Electronics shares, and Kimball Electronics is an independent publicly traded company. Kimball International, Inc. trades on the Nasdaq Stock Market LLC (“Nasdaq”) under the ticker symbol “KBAL” and Kimball Electronics, Inc. trades on Nasdaq under the ticker symbol “KE”.
The disclosures within this Part I describe the continuing operations of Kimball International, Inc. after the spin-off.
Recent Business Changes
‘Kimball International Connect’ Strategy
In May 2019, Kimball International introduced a comprehensive strategy to connect our purpose, our people, and our brands to drive growth and unlock the Company’s full potential. Kimball International Connect seeks to enable the power of our people and positions our organization to engage at higher levels of collaboration and interdependence. We believe this strategy will successfully position us for the future and result in enhanced shareholder value over the long term.
Our Kimball International Connect Strategy is comprised of four pillars:
Inspire Our People: Leveraging our strong legacy of a bold and entrepreneurial spirit, we are cultivating a high-performance, caring culture. We unveiled our new purpose to our employees on May 9, 2019 and are investing in our training, technology and systems to remain an employer of choice and a great place to work.
Build Our Capabilities: We are creating center-led functions, including finance, human resources, information technology and legal, and are centralizing supply chain leadership to reduce duplication, deliver efficiencies, and drive consistency. We are also adopting ways of working to ensure the use of common best practices and approaches. To achieve our goals, we established a Program Management Office to oversee execution.
Fuel Our Future: We are driving lean throughout the organization, removing duplication at the business level, and infusing capital to accelerate efficiencies. Related to this, we are employing a more metrics-based approach and driving toward more formal standardized operating practices.
Accelerate Our Growth: We are continuing to advance new product development across our brands, selectively expanding our verticals and channels, including healthcare and e-commerce, and driving commercial excellence. We believe by being our customers’ first choice for shaping places that bring collaboration, discovery, wellness and relaxation to life, we will capture greater market share.
Transformation Restructuring Plan
In June 2019, we announced a transformation restructuring plan that is expected to optimize resources for future growth, improve efficiency, and build capabilities across our organization. We believe the transformation restructuring plan will establish a more cost-efficient structure to better align our operations with our long-term strategic goals. The transformation restructuring plan includes the following:
Our overall manufacturing facility footprint is being reviewed to reduce excess capacity and gain efficiencies. We plan to exit a leased seating manufacturing facility in Martinsville, Virginia in the second half of fiscal year 2020 and are evaluating our production capabilities and capacity across our organization to identify additional opportunities.
The creation of center-led functions for finance, human resources, information technology and legal functions is expected to result in the standardization of processes and the elimination of duplication. In addition, we are centralizing our supply chain efforts to maximize supplier value and plan to drive more efficient practices and operations within our logistics function.
Kimball brand selling resources are being reallocated to higher-growth markets. We also plan to exit four leased furniture showrooms across our brands during fiscal year 2020.

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These efforts are expected to generate annualized pre-tax savings of approximately $10.0 million when the transformation restructuring plan is fully implemented. We estimate that pre-tax restructuring charges incurred through the end of fiscal year 2020 will be approximately $8.0 million to $9.0 million.
Acquisition of David Edward Furniture, Inc. (“David Edward”)
During the second quarter of fiscal year 2019, we acquired substantially all of the assets and assumed certain specified limited liabilities of David Edward, which is 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 products are sold primarily in the North American market. 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 cash paid for the acquisition totaled $4.3 million. The purchase price has been adjusted for certain post-closing working capital adjustments. See Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information on the acquisition.
Acquisition of D’style, Inc.
During the second quarter of fiscal year 2018, we acquired certain assets of D’style, Inc. (“D’style”), headquartered in Chula Vista, California. The acquisition expanded our hospitality offerings beyond guest rooms to public spaces and provided new mixed material manufacturing capabilities. As part of this acquisition, we also acquired all of the capital stock of Diseños de Estilo S.A. de C.V. headquartered in Tijuana, Mexico, another member of the D’style group which manufactures exclusively for D’style, strengthening our North American manufacturing footprint and serving as a distribution channel to the Mexico and Latin America hospitality markets. The cash paid for the acquisition totaled $18.2 million. In fiscal year 2019, we paid $0.4 million in contingent earn-out consideration and expect to pay an additional $0.4 million in contingent earn-out consideration in fiscal year 2020 based upon D’style, Inc.’s fiscal year 2018 and fiscal year 2019 operating income compared to a predetermined target for each fiscal year. See Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information on the acquisition.
Capacity Utilization Restructuring Plan
In November 2014, we announced a capacity utilization restructuring plan which included the consolidation of our metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and the reduction of our Company plane fleet from two jets to one.
The transfer of work from our Idaho facility involved the start-up of metal fabrication capabilities in an existing Company-owned facility, along with the transfer of certain assembly operations into two additional existing Company-owned facilities, all located in southern Indiana. All production was transferred out of the Idaho facility as of March 2016, after which work continued in the Indiana facilities to train employees, ramp up production and eliminate the inefficiencies associated with the start-up of production in these facilities. The improvement of customer delivery, supply chain dynamics, and reduction of transportation costs began to generate pre-tax annual savings of approximately $5 million in fiscal year 2017. In addition, during the first quarter of fiscal year 2017, we sold our Post Falls, Idaho facility and land. See Note 8 - Property and Equipment of Notes to Consolidated Financial Statements for more information on the sale of the Idaho facility.
Outsourcing of Shipping Function
During fiscal year 2018, we outsourced the remainder of our outbound shipping that was previously transported by our Company-owned shipping fleet to a dedicated freight provider and sold our fleet of over-the-road tractors and trailers. The outsourcing to a dedicated freight provider partially mitigated increased transportation costs during fiscal year 2018 from non-dedicated freight carriers. The dedicated freight provider operates transportation equipment with our Company branding. We continue to operate Company-owned tractors and trailers to move products between our production facilities and distribution warehouses.
Seasonality
The impact of seasonality on our revenue includes lower sales to educational institutions during our second and third fiscal quarters, lower sales of hospitality furniture during times of high hotel occupancy such as the summer months, and lower sales in our third fiscal quarter due to the buying season of the government.

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Locations
As of June 30, 2019, our products were primarily produced at twelve Company-owned or leased manufacturing facilities: six located in Indiana, two in Kentucky, one in Virginia, one in Pennsylvania, one in Maryland, and one in Mexico. We also engage with third-party manufacturers within the U.S. as well as internationally to produce select finished goods and accessories for our brands. As part of our transformation restructuring plan, during fiscal year 2020 we plan to exit our leased manufacturing facility in Martinsville, Virginia and are continuing to evaluate our production capabilities and capacity across our organization to identify additional opportunities.
As described above, our facility in Idaho was sold in fiscal year 2017. A facility in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom was sold near the end of fiscal year 2017. We leased a portion of the facility back until December 2017 to facilitate the transition of those functions to other existing Indiana locations.
As of June 30, 2019, thirteen furniture showrooms were maintained in eight cities in the United States. As part of our transformation restructuring plan, we plan to exit four of those furniture showrooms during fiscal year 2020. Office space is leased in Dongguan, Guangdong, China and Ho Chi Minh City, Vietnam to facilitate sourcing of select finished goods and components from the Asia Pacific Region. As a result of the acquisition of D’style, we lease office and manufacturing space in Chula Vista, California and Tijuana, Mexico. We also lease office and manufacturing space in Red Lion, Pennsylvania and Baltimore, Maryland as a result of the David Edward acquisition.
Financial information by geographic area for each of the three years in the period ended June 30, 2019 is included in Note 17 - Geographic Information of Notes to Consolidated Financial Statements and is incorporated herein by reference.
Marketing Channels
Our furniture is marketed to end users by both independent and employee sales representatives, office furniture dealers, wholesalers, brokers, designers, purchasing companies, and catalog houses throughout North America and on an international basis. Customers can access our products globally through a variety of distribution channels.
We categorize our sales by the following vertical markets:
Commercial - The largest portion of our business is in the commercial market. We are a full-facility provider offering products for a variety of commercial applications including: office, collaborative and open plan, lobby-lounge, conferencing and meeting/huddle, training, dining/café, learning, lobby and reception, and other public spaces.
Education - Whether K-12, higher education, vocational training or any other learning institution, we understand that furniture for education needs to enhance learning and social environments. We offer flexible, collaborative, and technology-driven furnishings designed to make students and faculty more productive and comfortable.
Healthcare - We are focused on better outcomes for patients, their families, the staff that heals them, and the environments surrounding them by offering products to value-conscious healthcare customers, including hospitals, clinics, physician office buildings, long-term care facilities, and assisted living facilities throughout the country.
Hospitality - We offer a complete package of products for guest rooms and public spaces plus service support to the hospitality industry. We partner with the most recognized hotel brands to meet their specific requirements for properties throughout the world by working with a worldwide manufacturing base to offer the best solution to fulfill the project.
Finance - Banking and financial offices require affordable, functional, and stylish environments. Our versatile and customizable furnishings offer sophisticated styles for reception areas, employee work spaces, executive offices, and boardrooms.
Government - We supply office furniture, including desks, tables, seating, bookcases and filing and storage units for federal, state, and local government offices, as well as other government-related entities. We hold two Federal Supply Service contracts with the General Services Administration (“GSA”) that are subject to government subcontract reporting requirements. We also partner with multiple general purchasing organizations that assist public agencies such as state and local governments with furniture purchases. The U.S. government, as well as state and local governments, can terminate or modify their contracts with us at their discretion or if we default by failing to perform under the terms of the applicable contract, which would expose us to liability and impede our ability to compete in the future for contracts and orders.
A table showing our net sales by end market vertical is included in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.

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Major Competitive Factors
Our products are sold in the contract furniture and hospitality furniture industries. These industries have similar major competitive factors, which include price in relation to quality and appearance, product design, the utility of the product, supplier lead time, reliability of on-time delivery, sustainability, and the ability to respond to requests for special and non-standard products. We offer payment terms similar to industry standards and in unique circumstances may grant alternate payment terms.
Certain industries are more price sensitive than others, but all expect on-time, damage-free delivery. In addition to the many options available on our standard furniture products, custom furniture is produced to customer specifications and shipping timelines on a project basis.
Competitors
There are numerous furniture manufacturers competing within the marketplace, with a significant number of competitors offering similar products.
Our competition includes furniture manufacturers such as Steelcase Inc., Herman Miller, Inc., Knoll, Inc., HNI Corporation, and a large number of smaller privately-owned furniture manufacturers, both domestic and foreign-based.
Working Capital
We do not believe that we, or the contract furniture or hospitality furniture industries in general, have any special practices or special conditions affecting working capital items that are significant for understanding our furniture business. We do receive advance payments from customers on select furniture projects, primarily in the hospitality industry. 
Raw Material Availability
Certain components used in the production of furniture are manufactured internally and are generally readily available, as are other raw materials used in the production of wood and non-wood furniture. Certain fabricated seating components, wood frame assemblies as well as finished furniture products, electrical components, stone, fabrics, and fabricated metal components, which are generally readily available, are sourced on a global scale in an effort to provide quality products at the lowest total cost. In fiscal year 2018, the U.S. government imposed tariffs on steel and aluminum imported from several countries. The list of products subject to tariffs was expanded in fiscal year 2019 to include furniture products, parts, and components. The U.S. government continues to evaluate the ongoing need for, and the amount of, tariffs, and if further or increased tariffs are assessed, the cost and availability of both domestic and foreign sourced product and components could be further impacted.
Order Backlog
The aggregate sales price of products pursuant to open orders, which may be canceled by the customer, was as follows:
(Amounts in Millions)
June 30,
2019
 
June 30,
2018
Order Backlog
$
161.7

 
$
149.9

Our fiscal year 2018 order backlog has 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.
Of the order backlog increase, $2.5 million was due to orders from our David Edward operation in fiscal year 2019, while the remainder of the increase was driven by higher organic office furniture orders. The open orders as of June 30, 2019 are expected to be filled within the next fiscal year. Open orders may not be indicative of future sales trends.
Intellectual Property
In connection with our business operations, we hold both trademarks and patents in various countries and continuously have additional pending trademarks and patents. The intellectual property which we believe to be the most significant to the Company includes: Kimball, National, D’style, David Edward, Fringe, Waveworks, Xsite, Narrate, Pairings, Dock, and Respitality, which are all registered trademarks. Our patents expire at various times depending on the patent’s date of issuance.
Environment and Energy Matters
Our operations are subject to various federal, state, local, and foreign laws and regulations with respect to environmental matters. We believe that we are in substantial compliance with present laws and regulations and that there are no material liabilities related to such items.

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We are dedicated to excellence, leadership, and stewardship in matters of protecting the environment and communities in which we have operations. Reinforcing our commitment to the environment, six of our showrooms and one non-manufacturing location were designed under the guidelines of the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) for Commercial Interiors program. One manufacturing facility was designed using the LEED Operations and Maintenance program guidelines. Our National brand headquarters is Fitwel certified, which is a building certification that supports healthier workplace environments to improve occupant health and productivity.
We believe that continued compliance with foreign, federal, state, and local laws and regulations which have been enacted relating to the protection of the environment will not have a material effect on our capital expenditures, earnings, or competitive position. We believe capital expenditures for environmental control equipment during the next two fiscal years ending June 30, 2021 will not represent a material portion of total capital expenditures during those years.
Our manufacturing operations require the use of natural gas and electricity. Federal and state regulations may control the allocation of fuels available to us, but to date we have experienced no interruption of production due to such regulations. In our wood furniture manufacturing plants, a portion of energy requirements are satisfied internally by the use of our own scrap wood produced during the manufacturing of product.
Employees
 
June 30,
2019
 
June 30,
2018
United States
2,982

 
2,921

Foreign Countries
145

 
153

Total Employees
3,127

 
3,074

Our U.S. operations are not subject to collective bargaining arrangements. Outside of the U.S., approximately 43 employees are represented by worker’s unions that operate to promote the interests of workers. We believe that our employee relations are good.
Available Information
We make available free of charge through our website, www.kimballinternational.com/public-filings, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Our Internet website and the information contained on, or accessible through, such website is not incorporated into this Annual Report on Form 10-K.
Item 1A - Risk Factors
The following important risk factors could affect future results and events, causing results and events to differ materially from those expressed or implied in forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition, and results of operations and should be carefully considered before deciding to invest in, or retain, shares of our common stock. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also affect our business, financial condition, or results of operations. Because of these and other factors, past performance should not be considered an indication of future performance.
We may not be successful in implementing and managing our Kimball International Connect Strategy. In May 2019, we introduced our comprehensive Kimball International Connect strategy that is intended to connect our purpose, our people, and our brands to drive growth. The execution of this strategy involves risk, as management’s focus and Company resources could be diverted from our core operations, growth in our business could lead to operating inefficiencies, our corporate culture could be disrupted, which could lead to employee attrition, and our revenues could fall or could fail to grow as intended, any of which would have an adverse impact on our financial condition, results of operations, or cash flows.
Our restructuring efforts may not be successful. In June 2019, we announced a transformation restructuring plan that is intended to optimize resources for future growth, improve efficiency, and build capabilities across our organization. A critical component of our transformation restructuring plan is the transfer of production among facilities, which may result in management’s focus being diverted from our core operations, manufacturing inefficiencies, and excess working capital during the transition period. We are also creating center-led functions for finance, human resources, information technology and legal functions and are centralizing our supply chain efforts. The transition to center-led functions involves risk, as management’s focus could be diverted from our core operations. In addition, Kimball brand selling resources are being reallocated to higher-

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growth markets, and we plan to exit four furniture showrooms across our brands during fiscal year 2020, which could cause a temporary or permanent decline in revenues as the reallocation of resources is being implemented or if anticipated revenues are not realized in the higher-growth markets. The successful execution of our transformation restructuring plan is also dependent on the realization of cost savings, and, even if successful, the transformation restructuring plan may not be accomplished as quickly or effectively as anticipated.
Changes to government regulations may significantly increase our operating costs in the United States and abroad. Legislative and regulatory reforms by the U.S. federal and foreign governments could significantly impact our profitability by burdening us with forced cost choices that are difficult to recover with increased pricing. For example:
We depend on suppliers globally to provide materials, parts, finished goods, and components for use in our products. We utilize both steel and aluminum in our products, most of which is sourced domestically. The U.S. originally imposed tariffs of 25% on steel and 10% on aluminum imported from several countries, effective in June 2018, which has adversely impacted our input costs. The government expanded its list of products subject to tariffs to include furniture products, parts, and components at a 10% rate effective September 2018, increasing to an effective rate of 25% effective in June 2019, which increased the landed cost of our products. These various actions and the potential for further tariff increases have prompted other countries to consider, and in some instances implement, retaliatory tariffs. Additional tariffs or changes in global trade agreements or in U.S. governmental import/export regulations could cause the landed cost of our products to increase materially and could reduce our net income if we are unable to mitigate the additional cost, which would have an adverse impact on our financial condition, results of operations, or cash flows.
We conduct business with entities in Canada and Mexico; therefore, the replacement to the North American Free Trade Agreement (NAFTA) being negotiated by the U.S., Mexico, and Canada, which is called the United States–Mexico–Canada Agreement (USMCA), could result in increased regulation on, or otherwise impact, trade between the countries, which could have an adverse impact on our financial condition, results of operations, or cash flows.
We import a portion of our wooden furniture products and are thus subject to an anti-dumping tariff specifically on wooden bedroom furniture supplied from China. The tariffs are subject to review and could result in retroactive and prospective tariff rate increases, which could have an adverse impact on our financial condition, results of operations, or cash flows.
State and foreign regulations are increasing in many areas, such as hazardous waste disposal, labor relations, employment practices and data privacy, including the California Consumer Privacy Act, among others. Compliance with privacy regulations requires us to change our processes in order to track personal information collected from consumers and implement procedures to obtain consent from consumers regarding the usage of their information. These additional processes, or any violations of these state and foreign regulations, could have an adverse impact on our financial condition, results of operations, or cash flows.
We may be unable to purchase a sufficient amount of materials, parts, and components for use in our products at a competitive price, in a timely manner, or at all. We depend on suppliers globally to provide timely delivery of materials, parts, and components for use in our products. We monitor the financial stability of suppliers when feasible, as the loss of a significant supplier could have an adverse impact on our operations. Certain finished products and components we purchase are primarily manufactured in select regions of the world, and issues in those regions could cause manufacturing delays. In addition, delays can occur related to the transport of products and components via container ships, which load and unload through various U.S. ports that sometimes experience congestion. Price increases of commodity components could have an adverse impact on our profitability if we cannot offset such increases with other cost reductions or by price increases to customers. New tariffs or trade regulations which have been and could be imposed by the U.S. federal government may adversely impact our access, price, and delivery of finished products and components from foreign sources, and therefore adversely affect our profitability. Materials we utilize are generally available, but future availability is unknown and could impact our ability to meet customer order requirements. If suppliers fail to meet commitments to us in terms of price, delivery, or quality, it could interrupt our operations and negatively impact our ability to meet commitments to customers.
Uncertain macroeconomic and industry conditions, or a sustained slowdown or significant downturn in our markets, could adversely impact demand for our products and adversely affect operating results. Market demand for our products, which impacts revenues and gross profit, is influenced by a variety of economic and industry factors such as:
global consumer confidence;
volatility and the cyclical nature of worldwide economic conditions;
weakness in the global financial markets;
general corporate profitability of the end markets to which we sell;
credit availability to the end markets to which we sell;

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service-sector unemployment rates;
commercial property vacancy rates;
non-residential construction and refurbishment rates;
deficit status of many governmental entities which may result in declining purchases of office furniture;
uncertainty surrounding potential reform of the Affordable Care Act; and
new hotel and casino construction and refurbishment rates.
We must make decisions based on order volumes in order to achieve manufacturing efficiency. These decisions include determining what level of additional business to accept, production schedules, component procurement commitments, and personnel requirements, among various other considerations. We must constantly monitor the changing economic landscape and may modify our strategic direction accordingly. If we do not react quickly enough to the changes in market or economic conditions, it could result in lost customers, decreased market share, and increased operating costs.
We are subject to manufacturing inefficiencies due to the transfer of production among our facilities and other factors. At times we may experience labor or other manufacturing inefficiencies due to factors such as new product introductions, transfers of production among our manufacturing facilities, a sudden decline in sales, a new operating system, or turnover in personnel. Manufacturing inefficiencies could have an adverse impact on our financial position, results of operations, or cash flows.
A shortage of capacity in the trucking industry could drive increases in freight costs. We outsource inbound and outbound shipping to third-party contract carriers, including a dedicated freight provider that operates transportation equipment with our Company branding, and other commercial contract carriers. We may experience pressure on freight costs if our demand exceeds the capacity of available trucking fleets, particularly for commercial contract carriers. In periods of tight capacity, we may be unable to mitigate a freight cost increase through our supply chain planning or by increasing prices on our products, which could adversely affect our profitability.
Changes in U.S. fiscal and tax policies may adversely affect our business. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because Kimball International has a June 30 fiscal year-end, the lower corporate federal income tax rate was phased in, resulting in a U.S. federal statutory tax rate of 28.1% for our fiscal year ended June 30, 2018. The statutory federal tax rate is 21% for our fiscal year ended June 30, 2019 and subsequent fiscal years. The changes included in the Tax Act are broad and complex and could be further impacted by, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, or any changes in accounting standards for income taxes or related interpretations in response to the Tax Act. States or foreign jurisdictions may amend their tax laws and policies in response to the Tax Act, which could have a material impact on our future results and our effective tax rate.
Fluctuations in our effective tax rate could have a significant impact on our financial position, results of operations, or cash flows. We are subject to income taxes as well as non-income based taxes, mainly in the United States. Judgment is required in determining the worldwide provision for income taxes, other tax liabilities, interest, and penalties. Future events could change management’s assessment. We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We have also made assumptions about the realization of deferred tax assets. Changes in these assumptions could result in a valuation allowance for these assets. Final determination of tax audits or tax disputes may be different from what is currently reflected by our income tax provisions and accruals, which could adversely impact our financial position, results of operations, or cash flows.
Our failure to retain our existing management team, maintain our engineering, technical, and manufacturing process expertise, or continue to attract qualified personnel could adversely affect our business. We depend significantly on our executive officers and other key personnel. Our success is also dependent on keeping pace with technological advancements and adapting services to provide manufacturing capabilities that meet customers’ changing needs. To do that, we must retain our qualified engineering and technical personnel and successfully anticipate and respond to technological changes in a cost effective and timely manner. Our culture and guiding principles focus on continuous training, motivation, and development of employees, and we strive to attract, motivate, and retain qualified personnel. Failure to retain our executive officers and retain and attract other key personnel could adversely affect our business.
Turnover in personnel could cause manufacturing inefficiencies. The demand for manufacturing labor in certain geographic areas makes retaining experienced production employees difficult. Turnover could result in lost time due to inefficiencies and the need for additional training, which could impact our operating results.
Our sales to the U.S. government are subject to compliance with regulatory and contractual requirements, and noncompliance could expose us to liability or impede current or future business. The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing

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to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting.
We may pursue acquisitions that present risks and may not be successful. Our sales growth plans may occur through both organic growth and acquisitions. Acquisitions involve many risks that could have an adverse effect on our business, financial condition or results of operations, including:
difficulties in identifying suitable acquisition candidates and in negotiating and consummating acquisitions on terms attractive to us;
difficulties in the assimilation of the operations of the acquired company;
the diversion of resources, including diverting management’s attention from our current operations;
risks of entering new geographic or product markets in which we have limited or no direct prior experience;
the potential loss of key customers, suppliers and employees of the acquired company;
the potential incurrence of indebtedness to fund the acquisition;
the potential issuance of common stock for some or all of the purchase price, which could dilute ownership interests of our current shareholders;
the acquired business not achieving anticipated revenues, earnings, cash flow, or market share;
excess capacity;
failure to achieve the expected synergies resulting from the acquisition;
inaccurate assessment of undisclosed, contingent, or other liabilities or problems and unanticipated costs associated with the acquisition;
incorrect estimates made in accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill that could adversely affect our financial results; and
dilution of earnings.
We may not be successful in launching start-up operations or expanding our business in digital marketplaces. We are committed to growing our business, and therefore from time to time, we may determine that it would be in our best interests to start up a new operation or establish a digital presence to sell certain products. Start-up operations involve a number of risks and uncertainties, such as funding the capital expenditures related to the start-up operation, developing a management team for the new operation, diversion of management focus away from current operations, and creation of excess capacity. The risks and uncertainties that come with a digital presence include competition from more established competitors in the marketplace, responding quickly to consumer traffic patterns, supporting demand outside our current distribution channels, and additional cybersecurity risks. Any of these risks could have a material adverse effect on our financial position, results of operations, or cash flows. 
Our business depends on information technology systems and digital capabilities that are implemented in a manner intended to minimize the risk of a cybersecurity breach or other such threat, including the misappropriation of assets or other sensitive information or data corruption, which could cause operational disruption. An ongoing commitment of significant resources is required to maintain and enhance our existing information systems and implement the new and emerging technology necessary to meet customer expectations and compete in our markets. The techniques used to obtain unauthorized access change frequently and are not often recognized until after they have been launched. We recognize that any breach could disrupt our operations, damage our reputation, erode our share value, drive remediation expenses, or increase costs related to the mitigation of, response to, or litigation arising from any such issue. We cannot guarantee that our cybersecurity measures will completely prevent others from obtaining unauthorized access to our enterprise network, system and data.
Many states and the U.S. federal government are increasingly enacting laws and regulations to protect consumers against identity theft and to also protect their privacy. As our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions. If we are the target of a cybersecurity attack resulting in unauthorized disclosure of sensitive or confidential data, we may be required to execute costly notification procedures. Compliance with these laws will likely increase the costs of doing business. If we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential claims for damages and other remedies, which could harm our business.
We may be exposed to the credit risk of our customers who are adversely affected by weakness in market conditions. Weakness in market conditions may drive an elevated risk of potential bankruptcy of our customers resulting in a greater risk of uncollectible outstanding accounts receivable. The realization of these risks could have a negative impact on our profitability.

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Reduction of purchases by or the loss of a significant number of customers could reduce revenues and profitability. Significant declines in the level of purchases by customers or the loss of a significant number of customers could have a material adverse effect on our business. A reduction of, or uncertainty surrounding, government spending could also have an adverse impact on our sales levels. We can provide no assurance that we will be able to fully replace any lost sales, which could have an adverse effect on our financial position, results of operations, or cash flows.
We operate in a highly competitive environment and may not be able to compete successfully. The office and hospitality furniture industries are competitive due to numerous global manufacturers competing in the marketplace. In times of reduced demand for office furniture, large competitors may have greater efficiencies of scale or may apply more pressure to their aligned distribution to sell their products exclusively, which could lead to reduced opportunities for our products. While we work toward reducing costs to respond to pricing pressures, if we cannot achieve proportionate reductions in costs, profit margins may suffer.
Our operating results could be adversely affected by increases in the cost of fuel and other energy sources. The cost of energy is a critical component of freight expense and the cost of operating manufacturing facilities. Increases in the cost of energy could reduce our profitability.
A change in our sales mix among our diversified product offerings could have a negative impact on our gross profit margin. Changes in product sales mix could negatively impact our gross margin, as margins of different products vary. We strive to improve the margins of all products, but certain products have lower margins in order to price the product competitively. An increase in the proportion of sales of products with lower margins could have an adverse impact on our financial position, results of operations, or cash flows.
Our international operations involve financial and operational risks. We have a manufacturing operation outside the United States in Mexico, and administrative offices in China and Vietnam that coordinate with suppliers in those countries. These international operations are subject to a number of risks, including the following:
economic and political instability;
various and potentially conflicting cultural norms and business practices;
warfare, riots, terrorism, and other forms of violence or geopolitical disruption;
compliance with laws, such as the Foreign Corrupt Practices Act, applicable to U.S. companies doing business outside the United States;
changes in foreign regulatory requirements and laws;
health and security issues;
tariffs and other trade barriers;
potentially adverse tax consequences, including the manner in which multinational companies are taxed in the U.S.; and
foreign labor practices.
These risks could have an adverse effect on our financial position, results of operations, or cash flows. In addition, fluctuations in exchange rates could impact our operating results. Our risk management strategy may include the use of derivative financial instruments to hedge certain foreign currency exposures. Any hedging techniques we implement contain risks and may not be entirely effective. Exchange rate fluctuations could also make our products more expensive than a competitor's products not subject to these fluctuations, which could adversely affect our revenues and profitability in international markets.
If efforts to introduce new products or start-up new programs are not successful, this could limit sales growth or cause sales to decline. We regularly introduce new products to keep pace with workplace trends and evolving regulatory and industry requirements, including environmental, health, and safety standards such as sustainability and ergonomic considerations, and similar standards for the workplace and for product performance. Shifts in workforce demographics, working styles, and technology may impact the quantity and types of furniture products purchased by our customers, as commercial private office spaces occupy smaller footprints and collaborative, open-plan workstations gain popularity. The introduction of new products or the start-up of new programs require the coordination of the design, manufacturing, and marketing of such products. The design and engineering required for certain new products or programs can take an extended period of time, and further time may be required to achieve customer acceptance. Accordingly, the launch of any particular product or program may be delayed or may be less successful than we originally anticipated. Difficulties or delays in introducing new products or programs, or lack of customer acceptance of new products or programs could limit sales growth or cause sales to decline.
If customers do not perceive our products and services to be innovative and of high quality, our brand and name recognition and reputation could suffer. We believe that establishing and maintaining good brand and name recognition and a good reputation is critical to our business. Promotion and enhancement of our name and brands will depend on the effectiveness of marketing and advertising efforts and on successfully providing design-driven, innovative, and high-quality

12



products and superior services. If customers do not perceive our products and services to be design-driven, innovative, and of high quality, our reputation, brand and name recognition could suffer, which could have a material adverse effect on our business.
A loss of independent sales representatives, dealers, or other sales channels could lead to a decline in sales. Our commercial furniture is marketed to end users through both independent and employee sales representatives, commercial furniture dealers, wholesalers, brokers, designers, purchasing companies, and catalog houses. Our hospitality furniture is marketed to end users using independent sales representatives. A significant loss within any of these sales channels could result in a sales decline and thus have an adverse impact on our financial position, results of operations, or cash flows. Additionally, transitions within our sales organization to higher growth markets within our Kimball brand and our planned closure of four furniture showrooms across our brands could negatively affect our current commercial relationships, which could have an adverse impact on our financial position, results of operations or cash flows.
Failure to effectively manage working capital may adversely affect our cash flow from operations. We closely monitor inventory and receivable efficiencies and strive to improve these measures of working capital, but customer financial difficulties, cancellation or delay of customer orders, transfers of production among our manufacturing facilities, or manufacturing delays could adversely affect our cash flow from operations.
We could incur losses due to asset impairment. As business conditions change, we must continually evaluate and work toward the optimum asset base. It is possible that certain assets such as, but not limited to, facilities, equipment, lease assets, goodwill, or other intangible assets, could be impaired at some point in the future depending on changing business conditions. Goodwill and certain intangible assets are tested for impairment annually or when triggering events occur. Such resulting impairment could have an adverse impact on our financial position and results of operations.
A failure to comply with the financial covenants under our $30.0 million credit facility could adversely impact us. Our credit facility requires us to comply with certain financial covenants. We believe the most significant covenants under this credit facility are the adjusted leverage ratio and the fixed charge coverage ratio. More detail on these financial covenants is discussed in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K. As of June 30, 2019, we had no borrowings under this credit facility and we had $1.5 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. In the future, a default on the financial covenants under our credit facility could cause an increase in our borrowing rates or could make it more difficult for us to secure future financing, which could adversely affect our financial condition. We expect to negotiate a new credit facility to replace this credit facility prior to its October 2019 expiration. However, changing conditions in the credit markets or unforeseen circumstances could adversely impact the replacement of this credit facility, and if we are not able to replace this credit facility upon its expiration or on similar terms, it could adversely affect our financial condition.
Failure to protect our intellectual property could undermine our competitive position. We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of patent, trademark, copyright, and trade secret laws, as well as licensing agreements and third-party non-disclosure and assignment agreements. Because of the differences in foreign laws concerning proprietary rights, our intellectual property rights do not generally receive the same degree of protection in foreign countries as they do in the United States, and therefore in some parts of the world, we have limited protections, if any, for our intellectual property. Competing effectively depends, to a significant extent, on maintaining the proprietary nature of our intellectual property. The degree of protection offered by our various patents and trademarks may not be broad enough to provide significant proprietary protection or competitive advantages to the Company, and patents or trademarks may not be issued on pending or contemplated applications. In addition, not all of our products are covered by patents. It is also possible that our patents and trademarks may be challenged, invalidated, canceled, narrowed, or circumvented.
We may be sued by third parties for alleged infringement of their intellectual property rights and incur substantial litigation or other costs. Prior to launching major new products in our key markets, we normally evaluate existing intellectual property rights. However, our competitors may have filed for patent protection that is not, at the time of our evaluation, a matter of public knowledge. Our efforts to identify and avoid infringing upon third parties' intellectual property rights may not be successful. We could be notified of a claim regarding intellectual property rights, which could lead us to spend time and money to defend or address the claim. Even if the claim is without merit, it could result in substantial costs and diversion of resources.
Our insurance may not adequately protect us from liabilities related to product defects. We maintain product liability and other insurance coverage that we believe to be generally in accordance with industry practices, but our insurance coverage does not extend to field visits to repair, retrofit or replace defective products, or to product recalls. As a result, our insurance coverage may not be adequate to protect us fully against substantial claims and costs that may arise from liabilities related to product defects, particularly if we have a large number of defective products that we must repair, retrofit, replace, or recall.

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Increases in the cost of providing employee healthcare benefits could reduce our profitability. There may continue to be upward pressure on the cost of providing healthcare benefits to our employees. We are self-insured for healthcare benefits, so we incur the cost of claims, including catastrophic claims that may occasionally occur, with employees bearing only a limited portion of healthcare costs through employee healthcare premium withholdings. There can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce our profitability.
We are subject to extensive environmental regulation and significant potential environmental liabilities. Our past and present operation and ownership of manufacturing plants and real property are subject to extensive federal, state, local, and foreign environmental laws and regulations, including those relating to discharges in air, water, and land, the handling and disposal of solid and hazardous waste, and the remediation of contamination associated with releases of hazardous substances. In addition, the increased prevalence of global climate issues may result in new regulations that may negatively impact us. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist with respect to our facilities and real property. Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures, some of which could be material. In addition, any investigations or remedial efforts relating to environmental matters could involve material costs or otherwise result in material liabilities.
Natural disasters or other catastrophic events may impact our production schedules and, in turn, negatively impact profitability. Natural disasters or other catastrophic events, including severe weather, terrorist attacks, power interruptions, and fires, could disrupt operations and likewise our ability to produce or deliver products. Our manufacturing operations require significant amounts of energy, including natural gas and oil, and governmental regulations may control the allocation of such fuels. Employees are an integral part of our business, and events such as a pandemic could reduce the availability of employees reporting for work. In the event we experience a temporary or permanent interruption in our ability to produce or deliver product, revenues could be reduced, and our business could be materially adversely affected. In addition, catastrophic events, or the threat thereof, can adversely affect U.S. and world economies, and could result in delayed or lost sales of our products. In addition, any continuing disruption in our computer system could adversely affect our ability to receive and process customer orders, manufacture products, and ship products on a timely basis, and could adversely affect relations with our customers, potentially resulting in a reduction in orders from customers or a loss of customers. We maintain insurance to help protect us from costs relating to some of these matters, but such insurance may not be sufficient or paid in a timely manner to us in the event of such an interruption.
The value of our common stock may experience substantial fluctuations for reasons over which we may have little control. The value of our common stock could fluctuate substantially based on a variety of factors, including, among others:
actual or anticipated fluctuations in operating results;
announcements concerning our Company, competitors, or industry;
overall volatility of the stock market;
changes in the financial estimates of securities analysts or investors regarding our Company, the industry, or competitors;
general market or economic conditions; and
proxy contests or other shareholder activism.
We also provide financial objectives for our expected operating results for future periods. While the information is provided based on current and projected data about the markets we deliver to and our operational capacity and capabilities, the financial objectives are subject to risks and uncertainties. If our future results do not match our financial objectives for a particular period, or if the financial objectives are reduced in future periods, the value of our common stock could decline.
Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in results of operations and general economic, political, and market conditions, may adversely affect the value of our common stock.
Item 1B - Unresolved Staff Comments
None.

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Item 2 - Properties
The location, number, and use of our major facilities, including our executive and administrative offices, as of June 30, 2019, are as follows:
 
Number of Facilities
Use
North America
 
 
United States:
 
 
   Indiana
15
Manufacturing, Warehouse, Office
   Kentucky
2
Manufacturing, Office
   California
1
Warehouse, Office
   Virginia
1
Manufacturing, Warehouse, Office
   Maryland
1
Manufacturing, Warehouse, Office
   Pennsylvania
1
Manufacturing, Warehouse
Mexico
1
Manufacturing, Office
Asia
 
 
   China
1
Office
   Vietnam
1
Office
Total Facilities
24
 
The listed facilities occupy approximately 3,457,000 square feet in aggregate as of June 30, 2019, of which approximately 3,050,000 square feet are owned, and 407,000 square feet are leased.
During the second quarter of fiscal year 2019, we acquired substantially all of the assets of David Edward, which is headquartered in Baltimore, Maryland, and additional production facilities in Red Lion, Pennsylvania, which resulted in our acquisition of 103,000 square feet and 132,000 square feet of leased space, respectively.
Generally, properties are utilized at normal capacity levels on a multiple shift basis. At times, certain facilities utilize a reduced second or third shift. We continually assess our capacity needs and evaluate our operations to optimize our service levels by geographic region.
Significant loss of income resulting from a facility catastrophe would be partially offset by business interruption insurance coverage.
Operating leases for all facilities and related land, including thirteen leased office furniture showroom facilities that are not included in the table above, total 496,000 square feet and expire from fiscal year 2020 to 2027 with many of the leases subject to renewal options. The leased showroom facilities are in six states and the District of Columbia. As part of our transformation restructuring plan, during fiscal year 2020 we plan to exit our leased manufacturing facility in Martinsville, Virginia and four leased furniture showrooms. See Note 9 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for additional information concerning leases.
We own approximately 331 acres of land, which includes land where various facilities reside, including approximately 115 acres of land in the Kimball Industrial Park, Jasper, Indiana.
Item 3 - Legal Proceedings
We and our subsidiaries are not parties to any pending legal proceedings, other than ordinary routine litigation incidental to the business. The outcome of current routine pending litigation, individually and in the aggregate, is not expected to have a material adverse impact.
Item 4 - Mine Safety Disclosures
Not applicable.

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Information about our Executive Officers
Our executive officers as of August 27, 2019 are as follows: 
(Age as of August 27, 2019)
Name
 
Age
 
Office and
Area of Responsibility
 
Executive Officer
Since Calendar Year
Kristine L. Juster
 
56
 
Chief Executive Officer & Director, Kimball International
 
2018
Donald W. Van Winkle
 
58
 
President, Chief Operating Officer, Kimball International
 
2010
Michelle R. Schroeder
 
54
 
Vice President, Chief Financial Officer, Kimball International
 
2003
R. Gregory Kincer
 
61
 
Vice President, Corporate Development, Kimball International
 
2014
Julia E. Heitz Cassidy
 
54
 
Vice President, Chief Ethics & Compliance Officer, General Counsel and Secretary, Kimball International
 
2014
Lonnie P. Nicholson
 
55
 
Vice President, Chief Administrative Officer, Kimball International
 
2014
Kourtney L. Smith
 
49
 
Vice President, Kimball International;
President, National Office Furniture
 
2015
Katherine S. Sigler
 
56
 
Vice President, Kimball International;
President, Kimball Hospitality
 
2018
Koorosh Sharghi
 
33
 
Vice President, Strategy & Transformation, Kimball International
 
2019
Phyllis M. Goetz
 
59
 
Vice President, Kimball International; President, Kimball
 
2019
Executive officers are elected annually by the Board of Directors.
Ms. Juster was appointed Chief Executive Officer in November 2018 and has served as a member of our Board of Directors since April 2016. Prior to her appointment as Chief Executive Officer, Ms. Juster served for over 20 years as a Global Executive at Newell Brands, Inc. (“Newell”), a leading global consumer goods and commercial products company, until her retirement from Newell 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.
Mr. Van Winkle was appointed President, Chief Operating Officer in November 2014 and has also served as Interim President, Kimball from March 2019 until July 2019. As part of our transformation restructuring plan, the positions of President and Chief Operating Officer are being eliminated effective September 30, 2019. Mr. Van Winkle previously served as Executive Vice President, President — Furniture Group from March 2014 to November 2014. He also served as Vice President, President — Office Furniture Group from February 2010 until November 2013 when he was appointed Executive Vice President, President — Office Furniture Group. He had previously served as Vice President, General Manager of National from October 2003 until February 2010, and prior to that served as Vice President, Chief Finance and Administrative Officer for the Furniture Brands Group, as well as other key finance roles within our Furniture business since joining the Company in January 1991.
Ms. Schroeder was appointed Vice President, Chief Financial Officer in November 2014. She previously served as Vice President and Chief Accounting Officer, a position she assumed in May 2009. She was appointed to Vice President in December 2004, served as Corporate Controller from August 2002 until May 2009, and prior to that served as Assistant Corporate Controller and Director of Financial Analysis. As Chief Financial Officer, Ms. Schroeder has responsibility for the accounting, internal audit, investor relations, tax and treasury functions, as well as setting financial strategy and policies for the Company.
Mr. Kincer was appointed Vice President, Corporate Development in November 2014. Prior to that, he served as Vice President, Business Development, Treasurer since 2006 with responsibility for global treasury operations managing Company-wide liquidity, commercial banking relationships, corporate debt facilities, foreign exchange risk, and insurance programs, as well as the evaluation of acquisition opportunities. He also served in various finance and leadership roles of progressing responsibility since joining the Company in 1994.
Ms. Heitz Cassidy was appointed Vice President, General Counsel and Secretary in November 2014 and to the additional role of Chief Compliance Officer in July 2016, which was adjusted to Chief Ethics and Compliance Officer in October 2016, where she has the responsibility to provide and oversee the provision of legal advice and guidance as needed by the Company, oversee

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compliance with laws, assist in instilling and maintaining an ethical corporate culture, and implement and maintain our compliance policies and program. She provides strategic-thinking leadership, advice and counsel to our executive management, and as Secretary, assists the Board of Directors. She previously served as Deputy General Counsel since August 2009, with responsibility for handling all day-to-day legal activities of the Company and was appointed to Vice President in October 2013. She joined the Company in 1996 as an associate corporate counsel and has held positions of increasing responsibility within the legal department during her career.
Mr. Nicholson was appointed Vice President, Chief Administrative Officer in February 2015 with responsibility for the human resources and information technology functions. He also served as Vice President, Chief Information Officer from January 2014 until March 2015. Throughout 2013 he served as Director, Business Analytics and then Vice President, Business Analytics, with oversight of strategic application of data analysis, social media and mobile computing in support of the growth of our information management into more predictive analysis in order to build greater responsiveness to customer needs and improve operational decision making. He also served as Director of Organizational Development from November 2011 until January 2013, and Director of Employee Engagement from November 2008 until November 2011 following other roles of advancing responsibility in the areas of application development, systems analysis, process re-engineering, lean/continuous improvement and enterprise resource planning since joining the Company in 1986.
Ms. Smith was appointed President, National Office Furniture in January 2018 and has served as Vice President of Kimball International, Inc. since October 2015. Prior to January 2018, she held the position of President, Kimball Hospitality from August 2015 until January 2018, where she was responsible for strategic growth and direction. Previously, she served as Vice President, Marketing for National Office Furniture, a position she assumed in 2010, where she led product development, marketing, sustainability, vertical markets, and increasing brand awareness in the architect and design community. Prior to that, she held various other roles of increasing responsibility in marketing, product development, sales and service. She has over 25 years of experience in the office and hospitality industries.
Ms. Sigler was appointed President, Kimball Hospitality and also appointed a Vice President of Kimball International, Inc. in January 2018. She is responsible for the strategic growth and direction of Kimball Hospitality. Prior to that, she served as Vice President, Operations, for the Kimball brand from February 2015 until January 2018, where she was responsible for the strategic and day-to-day execution of all direct manufacturing and manufacturing support (engineering, global supply chain, quality and continuous improvement) functions. From December 2012 until February 2015, she served as Director of Operations of a Kimball brand manufacturing facility. From August 2004 to December 2012, she held operational leadership roles of increasing responsibility within the Kimball brand. Before her time with the Kimball brand, Ms. Sigler held numerous roles in Kimball Hospitality from 1992 to 2004, including customer service, master scheduling, sales operations management, demand management, and program management.
Mr. Sharghi was appointed Vice President, Strategy and Transformation in March 2019. He is responsible for leading our transformational growth strategy and integration efforts and partnering with our executive management to execute our business strategy in the Kimball, National, and Kimball Hospitality businesses, in alignment with our long-term growth strategy. Prior to joining the Company, Mr. Sharghi led the centralization of the global marketing function at Radio Systems Corporation, a pet products manufacturing company, as the Head of Global Marketing from April 2018 until March 2019. He also held a variety of senior strategy and operations leadership roles at Newell, where he served as Director of Marketing Operations and Strategy from March 2016 until April 2018, Senior Manager of Marketing Operations from June 2014 until March 2016, and Senior Finance Manager of Corporate Business Planning and Analysis from April 2013 until June 2014.
Ms. Goetz was appointed President, Kimball and also appointed a Vice President of Kimball International, Inc, in July 2019. She is responsible for the overall leadership of the Kimball brand strategic plan, its activation, and the full operations of the business unit. In this role, she is responsible for designing and executing growth initiatives and developing relationships with dealer networks, design firms, trade associations, national accounts, and the industry value chain. Prior to joining the Company, Ms. Goetz was Senior Vice President, Chief Development Strategist at HKS, Inc., an architectural firm, from October 2017 until July 2019. Her career also included multiple leadership roles at Herman Miller, Inc. from June 2011 until October 2017 that included National Director A&D Healthcare from October 2015 until October 2017 and Director of Strategic Sales Initiatives for Herman Miller Healthcare from June 2011 until October 2015. She was also one of the founders of Nurture, which is the Healthcare business for Steelcase, Inc., during her 16-year career with Steelcase.


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PART II

Item 5 - Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our Class B common stock trades on the Nasdaq Global Select Market under the symbol: KBAL. There is no established public trading market for our Class A common stock. However, Class A shares are convertible on a one-for-one basis into Class B shares.
Dividends declared on our Class A and Class B common stock totaled $11.9 million and $10.5 million for fiscal years 2019 and 2018, respectively. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis.
Shareholders
On August 19, 2019, our Class A common stock was owned by 103 shareholders of record, and our Class B common stock was owned by 1,224 shareholders of record, of which 46 also owned Class A common stock. The shares of our Class B common stock are equal to the shares of our Class A common stock with respect to all matters, including without limitation, dividend payments and voting rights, except that while Class A shares are convertible on a one-for-one basis into Class B shares, our Class B shares cannot be converted into Class A shares.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item concerning securities authorized for issuance under equity compensation plans is incorporated by reference to Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters of Part III of this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
A share repurchase program authorized by the Board of Directors was announced on 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. The Board of Directors can discontinue this repurchase program at any time. At June 30, 2019, 2.7 million shares remained available under the repurchase program.
During fiscal years 2019 and 2018, we repurchased 0.6 million and 0.5 million shares, respectively, of our common stock. We did not repurchase any shares under the repurchase program during the fourth quarter of fiscal year 2019.
 
 
 
 
 
 
 
 
 
Performance Graphs
The following performance graphs are not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate them by reference into such a filing.
The first graph below compares the cumulative total return to shareholders of our common stock from June 30, 2014 through June 30, 2019, the last business day in the respective fiscal years, to the cumulative total return of the Nasdaq Stock Market (U.S. and Foreign) and a peer group index for the same period of time.
The spin-off of Kimball Electronics is reflected as an increase in the total cumulative return to shareholders as a result of each shareholder receiving a distribution of three shares of Kimball Electronics for every four shares of the Company. The increase in the total cumulative return was calculated based on the value of Kimball Electronics stock, using a 30-day volume weighted average price calculation to eliminate the impact of stock price volatility immediately after the October 31, 2014 spin-off date.
Due to the diversity of our operations prior to the spin-off date, we are not aware of any public companies that are directly comparable. Therefore, the peer group index is comprised of publicly traded companies in both the furniture industry and in our former EMS segment, as follows:
Furniture peers:  HNI Corporation, Knoll, Inc., Steelcase Inc., Herman Miller, Inc.
EMS peers (applicable through the October 31, 2014 spin-off):  Benchmark Electronics, Inc., Jabil Inc., Plexus Corp.
In order to reflect the segment allocation of Kimball International prior to the October 31, 2014 spin-off date, a market capitalization-weighted index was first computed for each peer group, then a composite peer group index was calculated based on each segment’s proportion of net sales to total consolidated sales for fiscal year 2014 and for fiscal year 2015 through the October 31, 2014 spin-off date. After the spin-off date, only the Furniture peer companies were used in the capitalization-weighted peer group index. The public companies included in the peer groups have a larger revenue base than our furniture business and our former EMS business.

18



The graph assumes $100 is invested in our Class B common stock and each of the two indexes at the closing market quotations on June 30, 2014 and that dividends and the Kimball Electronics spin-off stock distribution are reinvested in Kimball International. The performances shown on the graph are not necessarily indicative of future price performance.
chart-617b6a18ec615d89bf3a10.jpg
 
2014
2015
2016
2017
2018
2019
Kimball International, Inc.
$
100.00

$
131.97

$
126.13

$
187.83

$
184.74

$
203.41

Nasdaq Composite Index
$
100.00

$
114.44

$
112.51

$
144.35

$
178.42

$
192.30

Peer Group Index
$
100.00

$
112.34

$
104.24

$
99.35

$
103.71

$
124.65


19



The spin-off of Kimball Electronics, which represented more than half of our Company in sales and the majority of earnings, makes comparable long-term stock price performance very difficult. Publicly available stock price analyses, such as five-year stock price trends, are not representative of our performance as stock prices in the pre-spin period are not comparable to stock prices in the post-spin period. To aid in trending our performance, below is a cumulative total return performance graph from the spin-off date forward.
fy19quarterlytotalreturn.jpg

20



Item 6 - Selected Financial Data
 
Year Ended June 30
 (Amounts in Thousands, Except for Per Share Data)
2019
 
2018
 
2017
 
2016
 
2015
Net Sales
$
768,070

 
$
704,554

 
$
692,967

 
$
635,102

 
$
600,868

Income from Continuing Operations
$
39,344

 
$
34,439

 
$
37,506

 
$
21,156

 
$
11,143

Earnings Per Share from Continuing Operations:
 
 

 
 

 
 

 
 

Basic:
$
1.07

 
$
0.92

 
$
1.00

 
$
0.56

 
 
Class A
 
 
 
 
 
 
 
 
$
0.25

Class B
 
 
 
 
 
 
 
 
$
0.29

Diluted:
$
1.06

 
$
0.92

 
$
0.99

 
$
0.56

 
 
Class A
 
 
 
 
 
 
 
 
$
0.25

Class B
 
 
 
 
 
 
 
 
$
0.29

Total Assets
$
364,666

 
$
331,460

 
$
314,975

 
$
273,570

 
$
265,279

Long-Term Debt, Less Current Maturities
$
136

 
$
161

 
$
184

 
$
212

 
$
241

Cash Dividends Per Share:
$
0.32

 
$
0.28

 
$
0.24

 
$
0.22

 
 

Class A
 
 
 
 
 
 
 
 
$
0.195

Class B
 
 
 
 
 
 
 
 
$
0.20

Our fiscal year 2018 and fiscal year 2017 results have been recast to reflect the impact of the adoption of guidance on the recognition of revenue from contracts with customers using the full retrospective transition method.
On October 31, 2014, we completed the spin-off of our EMS segment. The EMS segment was reclassified to discontinued operations in the Consolidated Statements of Income for all periods presented. Discontinued operations did not have an impact on the financial results of fiscal years 2019, 2018, 2017 and 2016. The preceding table excludes all income statement activity of the discontinued operations.
Fiscal year 2019 income from continuing operations included $0.7 million ($0.02 per diluted share) of after-tax restructuring expenses and $1.5 million ($0.04 per diluted share) of after-tax CEO transition costs.
Fiscal year 2017 income from continuing operations included $1.1 million ($0.03 per diluted share) of after-tax restructuring gains driven by the sale of the Idaho facility.
Fiscal year 2016 income from continuing operations included $4.5 million ($0.12 per diluted share) of after-tax restructuring expenses.
Fiscal year 2015 income from continuing operations included $3.2 million ($0.08 per diluted share) of after-tax restructuring expenses and $3.2 million ($0.08 per diluted share) of after-tax expense related to the spin-off.

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
For over 65 years, Kimball International, Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) has created design-driven, innovative furnishings that have helped our customers shape spaces into places that bring possibility to life by enabling collaboration, discovery, wellness, and relaxation. We go to market through our family of brands: Kimball, National, Kimball Hospitality, David Edward, and D’style by Kimball Hospitality. Our values and integrity are demonstrated daily by embracing our purpose and guiding principles while fostering a culture of caring that establishes us as an employer of choice. We build success through nurturing long-term relationships with customers, employees, suppliers, shareholders 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 Markit, a global information provider, as of January 2019 for the North American commercial furniture market, which they define as including office, education, and healthcare furniture

21



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 in the August 2019 PwC Hospitality Directions U.S. report includes a projected increase in RevPAR (Revenue Per Available Room) of 1.1% for calendar year 2019 and 1.0% for calendar year 2020, while occupancy levels for calendar 2019 and 2020 continue to hover at peak levels.
Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
‘Kimball International Connect’ Strategy - In May 2019, Kimball International introduced a comprehensive strategy to connect our purpose, our people, and our brands to drive growth and unlock the Company’s full potential. Kimball International Connect seeks to enable the power of our people and position our organization to engage at higher levels of collaboration and interdependence. We believe this strategy will successfully position us for the future and result in enhanced shareholder value over the long term. Our Kimball International Connect Strategy is comprised of four pillars:
Inspire Our People: Leveraging our legacy of a bold and entrepreneurial spirit, we are working to cultivate a high-performance, caring culture. We unveiled our new purpose to our employees on May 9, 2019 and are investing in our training, technology and systems to remain an employer of choice and a great place to work.
Build Our Capabilities: We are creating center-led functions, including finance, human resources, information technology and legal and are centralizing supply chain leadership to reduce duplication, deliver efficiencies, and drive consistency. We are also adopting ways of working to ensure the use of common best practices and approaches. To achieve our goals, we established a Program Management Office to oversee execution.
Fuel Our Future: We are driving lean throughout the organization, removing duplication at the business level, and infusing capital to accelerate efficiencies. Related to this, we are employing a more metrics-based approach and driving toward more formal standardized operating practices.
Accelerate Our Growth: We are continuing to advance new product development across our brands, selectively expanding our verticals and channels, including healthcare and e-commerce, and driving commercial excellence. We believe by being our customers’ first choice for shaping places that bring collaboration, discovery, wellness and relaxation to life, we will capture greater market share.
Transformation Restructuring Plan - In June 2019, we announced a transformation restructuring plan that is expected to optimize resources for future growth, improve efficiency, and build capabilities across our organization. We believe the transformation restructuring plan will establish a more cost-efficient structure to better align our operations with our long-term strategic goals. The efforts are expected to generate annualized pre-tax savings of approximately $10.0 million when the transformation restructuring plan is fully implemented. We estimate pre-tax restructuring charges incurred through the end of fiscal year 2020 will be approximately $8.0 million to $9.0 million. The transformation restructuring plan includes the following:
Our overall manufacturing facility footprint is being reviewed to reduce excess capacity and gain efficiencies. We plan to exit a leased seating manufacturing facility in Martinsville, Virginia in the second half of fiscal year 2020 and are evaluating our production capabilities and capacity across our organization to identify additional opportunities.
The creation of center-led functions for finance, human resources, information technology and legal functions is expected to result in the standardization of processes and the elimination of duplication. In addition, we are centralizing our supply chain efforts to maximize supplier value and plan to drive more efficient practices and operations within our logistics function.
Kimball brand selling resources are being reallocated to higher-growth markets. We also plan to exit four leased furniture showrooms across our brands during fiscal year 2020.
On October 23, 2018, our Board of Directors (“Board”) appointed Kristine L. Juster as Chief Executive Officer, effective November 1, 2018, to succeed Robert F. Schneider who retired as Chief Executive Officer and Chairman of the Board on October 31, 2018. Ms. Juster, an independent member of the Board and a member of the Audit Committee from April 2016 until her appointment as Chief Executive Officer, continues to serve as a member of the Board. 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 from Newell 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.
Productivity and lean initiatives resulted in approximately $10 million of cost savings in fiscal year 2019. These initiatives included investments in equipment and automation at our production facilities to improve production flow and increase

22



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 of the assets and assumed certain specified limited liabilities of David Edward Furniture, Inc. (“David Edward”), which is 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 products are sold primarily in the North American market. 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 2 - Acquisitions in the Notes to 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 included administrative and sales offices and warehousing in Chula Vista, California and a manufacturing location in Tijuana, Mexico. The acquisition expanded our hospitality offerings beyond guest rooms to public spaces and provided new mixed material manufacturing capabilities. See Note 2 - Acquisitions in the Notes to Consolidated Financial Statements for additional information.
On December 22, 2017, the Tax Cuts and Jobs Act (the “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 we have 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 was 21.0% for our fiscal year ended June 30, 2019 and will be the same in subsequent years.
We expect commodity prices to moderate, but we will continue to be exposed to fluctuations 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, increasing to a 25% rate effective June 2019. 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 determined that the government’s interest was sufficiently protected and, as a result, 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.
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 $134.8 million at June 30, 2019.
A comparison of the results of operations and liquidity and capital resources for the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 follows this overview.

23



Results of Operations - Fiscal Year 2019 Compared to Fiscal Year 2018
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 the full retrospective transition method.
 
At or for the
Year Ended
 
 
 
June 30
 
 
(Amounts in Millions)
2019
 
2018
 
% Change
Net Sales
$
768.1

 
$
704.6

 
9
%
Organic Net Sales*
754.2

 
704.6

 
7
%
Gross Profit
254.6

 
235.6

 
8
%
Selling and Administrative Expenses
204.1

 
184.6

 
11
%
Restructuring Expense
0.9

 

 
 
Operating Income
49.5

 
51.1

 
(3
%)
Operating Income %
6.4
%
 
7.2
%
 
 
Adjusted Operating Income *
$
53.1

 
$
52.0

 
2
%
Adjusted Operating Income % *
6.9
%
 
7.4
%
 
 
Net Income 
$
39.3

 
$
34.4

 
14
%
Net Income as a Percentage of Net Sales
5.1
%
 
4.9
%
 
 
Adjusted Net Income *
41.6

 
34.4

 
21
%
Diluted Earnings Per Share
$
1.06

 
$
0.92

 
15
%
Adjusted Diluted Earnings Per Share *
$
1.12

 
$
0.92

 
22
%
Return on Invested Capital **
38.5
%
 
38.1
%
 
 
Adjusted EBITDA *
$
69.5

 
$
67.0

 
4
%
Adjusted EBITDA as a Percentage of Net Sales*
9.0
%
 
9.5
%
 
 
Open Orders **
$
161.7

 
$
149.9

 
8
%
* Items indicated represent Non-GAAP (Generally Accepted Accounting Principles) measurements for fiscal year 2019 and fiscal year 2018.
** Items indicated represent Key Performance Indicators.
See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Net Sales by End Market Vertical
 
 
 
 
 
 
Year Ended
 
 
 
June 30
 
 
(Amounts in Millions)
2019
 
2018
 
% Change
Commercial
$
226.1

 
$
205.9

 
10
%
Education
92.1

 
86.3

 
7
%
Finance
69.8

 
67.6

 
3
%
Government
74.7

 
89.5

 
(17
%)
Healthcare
110.4

 
88.6

 
25
%
Hospitality
195.0

 
166.7

 
17
%
Total Net Sales
$
768.1

 
$
704.6

 
9
%
Fiscal year 2019 consolidated net sales were $768.1 million compared to fiscal year 2018 consolidated net sales of $704.6 million, a 9% increase. Organic net sales increased $49.6 million, or 7%, year-over-year due to both higher volume primarily in our hospitality, healthcare and commercial vertical markets and price increases coupled with lower discounting.

24



Key explanatory comments for our sales by vertical market for fiscal year 2019 compared to 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, as we had increased sales in both custom and non-custom projects driven by our marketing campaigns, the cyclical nature of the hospitality project business and, to a lesser extent, increased sales of our D’style products.
New products with particular appeal to the corporate workplace and continued development of our strategic relationships, as well as overall general growth in this market, drove the higher sales in the commercial vertical market.
Both an expanded focus beyond higher education customers and the strength of our new education-centric products drove the increased sales to the education vertical market. In addition, sales were positively impacted early in fiscal year 2019, as the timing of the normal education buying season in fiscal year 2018 was delayed and deferred sales into the first quarter of fiscal year 2019. We also implemented a new program designed to drive early engagement by our sales representatives in education opportunities during fiscal 2019, which we believe positively impacted our sales to this vertical market.
Our sales to the finance vertical market increased as large financial institutions continued to invest in their office environments.
Government vertical market sales declined primarily due to decreased federal government sales in part due to a decrease in average project size and a partial shift in our focus to other markets.
Each of our vertical market sales levels can fluctuate depending on the mix of projects in a given period.
Open orders at June 30, 2019 increased 8%, or 6% on an organic basis, when compared to the open order level as of June 30, 2018, primarily due to higher office furniture backlog driven by increased organic orders and, to a lesser extent, order backlog of David Edward products. Open orders at a point in time may not be indicative of future sales trends.
In fiscal year 2019, we recorded net income of $39.3 million, or $1.06 per diluted share, inclusive of after-tax Chief Executive Officer (“CEO”) transition costs of $1.5 million, or $0.04 per diluted share, and after-tax restructuring costs of $0.7 million, or $0.02 per diluted share. Excluding the CEO transition costs and restructuring costs, our adjusted net income for fiscal year 2019 was $41.6 million, or $1.12 per diluted share. In fiscal year 2018, we recorded net income of $34.4 million, or $0.92 per diluted share. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Gross profit as a percent of net sales decreased 30 basis points in fiscal year 2019 compared to fiscal year 2018, primarily due to increased transportation, commodity and tariff costs, increased employee costs, including healthcare and the negative impact of the David Edward acquisition on gross margin, which we expect will continue in the short-term until productivity improvements and synergies are realized. Our gross margin was favorably impacted by increased product pricing, the savings realized from our cost reduction initiatives, and the leverage gained on higher sales volumes.
As a percent of net sales, selling and administrative expenses in fiscal year 2019 compared to fiscal year 2018 increased 40 basis points. In absolute dollars, selling and administrative spending increased 11%, primarily due to increased retirement and incentive compensation as a result of achieving higher earning levels, the incremental selling and administrative expenses resulting from the D’style and David Edward acquisitions, higher salary expense, the CEO transition costs incurred in fiscal year 2019, and higher commission expense resulting from higher sales levels. In addition, fiscal year 2018 included a $1.0 million higher gain on the sale of assets than was recorded in fiscal year 2019.
In June 2019, we announced a transformation restructuring plan that is expected to optimize resources for future growth, improve efficiency, and build capabilities across our organization. We believe the transformation restructuring plan will establish a more cost-efficient structure to better align our operations with our long-term strategic goals. We recognized pre-tax restructuring expense of $0.9 million in fiscal year 2019 related to our transformation restructuring plan. See Note 3 - Restructuring Expense of Notes to Consolidated Financial Statements for further information on our transformation restructuring plan.

25



Other income (expense), net consisted of the following:
Other Income (Expense), net
Year Ended
 
June 30
(Amounts in Thousands)
2019
 
2018
Interest Income
$
1,931

 
$
1,057

Interest Expense
(174
)
 
(221
)
Gain on Supplemental Employee Retirement Plan Investments
673

 
980

Other
(235
)
 
(554
)
Other Income (Expense), net
$
2,195

 
$
1,262

Our fiscal year 2018 results of operations included the impact of the enactment of the Tax Act, which was signed into law on December 22, 2017. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because we have 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 21.0% for our fiscal year ended June 30, 2019 and subsequent fiscal years. Our fiscal year 2018 included approximately $3.3 million in reduced income tax expense to reflect federal taxes on taxable income at the lower blended effective tax rate, partially offset by a discrete tax impact of $1.8 million in additional expense as a result of applying the new lower federal income tax rates to our net deferred tax assets.
Our fiscal year 2019 effective tax rate of 23.9% was less than the combined federal and state statutory rate in part due to a $0.3 million research and development tax credit. Our fiscal year 2018 effective tax rate was 34.2%, as the benefits of the Tax Act were partially offset by the negative tax impact of applying the lower federal income tax rates to our net deferred tax assets. Our fiscal year 2018 effective tax rate also included a $0.6 million benefit resulting from a domestic manufacturing deduction.
Comparing our balance sheets as of June 30, 2019 to June 30, 2018, the $7.3 million increase in our inventory balance was primarily driven by the acquisition of David Edward, new products introduced in fiscal year 2019, and inventory intentionally purchased prior to the effective date of certain tariffs. Increases in our accrued incentive compensation and retirement were the largest contributors to the $6.9 million increase in our accrued expenses balance.

26



Results of Operations - Fiscal Year 2018 Compared to Fiscal Year 2017
Our fiscal year 2018 and fiscal year 2017 results have been recast to reflect the impact of the adoption of guidance on the recognition of revenue from contracts with customers using the full retrospective transition method.
 
At or for the
Year Ended
 
 
 
June 30
 
 
(Amounts in Millions)
2018
 
2017
 
% Change
Net Sales
$
704.6

 
$
693.0

 
2
%
Organic Net Sales*
691.5

 
693.0

 
%
Gross Profit
235.6

 
237.9

 
(1
%)
Selling and Administrative Expenses
184.6

 
183.0

 
1
%
Restructuring Gain

 
(1.8
)
 
 
Operating Income
51.1

 
56.7

 
(10
%)
Operating Income %
7.2
%
 
8.2
%
 
 
Adjusted Operating Income *
$
52.0

 
$
56.0

 
(7
%)
Adjusted Operating Income % *
7.4
%
 
8.1
%
 
 
Net Income 
$
34.4

 
$
37.5

 
(8
%)
Net Income as a Percentage of Net Sales
4.9
%
 
5.4
%
 
 
Adjusted Net Income *
34.4

 
36.4

 
(5
%)
Diluted Earnings Per Share
$
0.92

 
$
0.99

 
(7
%)
Adjusted Diluted Earnings Per Share *
$
0.92

 
$
0.96

 
(4
%)
Return on Invested Capital**
38.1
%
 
40.7
%
 
 
Adjusted EBITDA*
$
67.0

 
$
71.2

 
(6
%)
Adjusted EBITDA as a Percentage of Net Sales*
9.5
%
 
10.3
%
 
 
Open Orders **
$
149.9

 
$
134.3

 
12
%
* Items indicated represent Non-GAAP measurements for fiscal year 2018 and fiscal year 2017.
** Items indicated represent Key Performance Indicators.
See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Net Sales by End Market Vertical
 
 
 
 
 
 
Year Ended
 
 
 
June 30
 
 
(Amounts in Millions)
2018
 
2017
 
% Change
Commercial
$
205.9

 
$
203.2

 
1
%
Education
86.3

 
81.4

 
6
%
Finance
67.6

 
69.3

 
(2
%)
Government
89.5

 
87.1

 
3
%
Healthcare
88.6

 
98.2

 
(10
%)
Hospitality
166.7

 
153.8

 
8
%
Total Net Sales
$
704.6

 
$
693.0

 
2
%
Fiscal year 2018 consolidated net sales were $704.6 million compared to fiscal year 2017 net sales of $693.0 million, a 2% increase, as $13.0 million of net sales resulting from the D’style acquisition and price increases net of higher discounting more than offset decreased organic sales volume.

27



Key explanatory comments for our sales by vertical market follow:
For fiscal year 2018 compared to fiscal year 2017, increased hospitality vertical market sales were driven by the acquisition of the D’style business and increases in organic non-custom business, which more than offset a sales decline in our custom business.
Government vertical market sales for fiscal year 2018 increased as state and local government sales increased while sales to the federal government decreased.
Our sales to the education vertical market increased due to our greater focus on this market, despite educational funding being diverted to safety and security products which negatively impacted the timing and size of furniture orders received.
Although sales in the healthcare vertical market declined in fiscal year 2018 compared to fiscal year 2017, we experienced a rebound in quoting activity which led to increased shipments and orders in the fourth quarter of our fiscal year 2018.
Each of our vertical market sales levels can fluctuate depending on the mix of projects in a given period.
Open orders at June 30, 2018 increased 12% when compared to the open order level as of June 30, 2017 primarily due to higher hospitality furniture backlog driven by both the D’style acquisition and growth in organic hospitality orders. Excluding an approximate $2.0 million positive impact from a price increase for one of our brands which took effect on July 2, 2018 and accelerated orders into our fiscal year 2018, office furniture backlog as of June 30, 2018 was flat.
In fiscal year 2018 we recorded net income of $34.4 million, or $0.92 per diluted share. In fiscal year 2017 we recorded net income of $37.5 million, or $0.99 per diluted share, inclusive of $1.1 million, or $0.03 per diluted share, of after-tax restructuring gain from the sale of the Idaho facility. Excluding the non-recurring gain, our adjusted net income for fiscal year 2017 was $36.4 million, or $0.96 per diluted share. See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Gross profit as a percent of net sales decreased 90 basis points in fiscal year 2018 compared to fiscal year 2017, as increased product pricing and lower employee benefit expenses such as healthcare were more than offset by a shift in sales mix to lower margin products, freight cost increases, higher discounting, and an increase in our last-in first-out (“LIFO”) inventory reserve. See Note 7 - Inventories of Notes to Consolidated Financial Statements for more information on LIFO inventory.
As a percent of net sales, selling and administrative expenses in fiscal year 2018 compared to fiscal year 2017 decreased 20 basis points due to the increased sales volumes. In absolute dollars selling and administrative spending increased 1% as the additional selling and administrative expenses of the D’style acquisition, higher salary expense, and higher marketing expenditures to grow the business were partially offset by lower incentive compensation costs. During fiscal year 2018 we recognized a $1.7 million pre-tax gain on the sale of an administrative building, and in fiscal year 2017 we recognized $1.2 million of gains on the sale of land.
Fiscal year 2017 included a pre-tax restructuring gain of $1.8 million which included a gain on the sale of our Post Falls, Idaho facility and land of $2.1 million partially offset by restructuring expense of $0.3 million. See Note 3 - Restructuring Expense of Notes to Consolidated Financial Statements for further information on restructuring.
Other income (expense), net consisted of the following:
Other Income (Expense), net
Year Ended
 
June 30
(Amounts in Thousands)
2018
 
2017
Interest Income
$
1,057

 
$
536

Interest Expense
(221
)
 
(37
)
Gain on Supplemental Employee Retirement Plan Investments
980

 
1,215

Other
(554
)
 
(359
)
Other Income (Expense), net
$
1,262

 
$
1,355

Our fiscal year 2018 results of operations included the impact of the enactment of the Tax Act, which was signed into law on December 22, 2017. The Tax Act reduced federal corporate income tax rates effective January 1, 2018 and changed numerous other provisions. Because we have a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ending June 30, 2018. Our fiscal year 2018 included approximately

28



$3.3 million in reduced income tax expense to reflect federal taxes on current year taxable income at the lower blended effective tax rate, partially offset by a discrete tax impact of $1.8 million in additional expense as a result of applying the new lower federal income tax rates to our net deferred tax assets.
Our fiscal year 2018 effective tax rate was 34.2%, as the benefits of the Tax Act were partially offset by the negative tax impact of applying the lower federal income tax rates to our net deferred tax assets. Our fiscal year 2018 effective tax rate also included a $0.6 million benefit resulting from a domestic manufacturing deduction. Our fiscal year 2017 effective tax rate was 35.4% and included the benefit of $1.5 million resulting from a domestic manufacturing deduction. The Tax Act repealed the domestic manufacturing deduction.
Liquidity and Capital Resources
Our total cash, cash equivalents, and short-term investments increased to $106.3 million at June 30, 2019 from $87.3 million at June 30, 2018, primarily due to $65.0 million of cash flows from operations during fiscal year 2019, which were partially offset by capital expenditures, including capitalized software, of $21.0 million in fiscal year 2019, the return of capital to shareholders in the form of stock repurchases and dividends totaling $20.6 million in fiscal year 2019, and a $4.3 million cash outflow for the David Edward acquisition, which has been adjusted for certain post-closing working capital adjustments.
Working capital at June 30, 2019 was $96.5 million compared to working capital of $85.1 million at June 30, 2018. The current ratio was 1.7 at both June 30, 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 $134.8 million at June 30, 2019. At June 30, 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 June 30, 2019 or June 30, 2018.
Cash Flows
The following table reflects the major categories of cash flows for fiscal years 2019, 2018, and 2017.
 
 
Year Ended
 
 
June 30
(Amounts in thousands)
 
2019
 
2018
 
2017
Net cash provided by operating activities
 
$
64,967

 
$
46,866

 
$
64,844

Net cash used for investing activities
 
$
(22,186
)
 
$
(34,764
)
 
$
(36,215
)
Net cash used for financing activities
 
$
(22,265
)
 
$
(21,869
)
 
$
(13,362
)
Cash Flows from Operating Activities
For fiscal years 2019 and 2018, net cash provided by operating activities was $65.0 million and $46.9 million, respectively, fueled by net income of $39.3 million and $34.4 million, respectively. Changes in working capital balances provided $8.8 million of cash in fiscal year 2019. In fiscal year 2018, changes in working capital balances used $15.2 million and a reduction in deferred income tax and other deferred charges increased cash flow by $9.1 million. Cash generated from operating activities in fiscal year 2017 totaled $64.8 million, which was impacted by net income of $37.5 million, and changes in working capital balances provided $10.1 million of cash.
The $8.8 million of cash provided by changes in working capital balances in fiscal year 2019 was primarily driven by a combined $4.6 million increase in accrued annual cash incentive compensation and accrued retirement plan contributions and a $6.1 million reduction in prepaid income taxes.
The $15.2 million of cash used as a result of changes in working capital balances in fiscal year 2018 was partially driven by an increase of $6.7 million in prepaid expenses and other current assets primarily due to an overpayment of estimated income taxes for fiscal year 2018. Statutory federal tax rates declined in the latter half of fiscal year 2018 as the Tax Act was enacted, and we accelerated certain deductions into fiscal year 2018 to take advantage of higher tax rates in fiscal year 2018 versus fiscal year 2019. Also contributing was an increase of $5.7 million in our accounts receivable balance, primarily driven by increased sales toward the end of fiscal year 2018.
The $10.1 million of cash provided by changes in working capital balances in fiscal year 2017 was primarily driven by a combined $5.7 million increase in accrued annual cash incentive compensation and accrued retirement plan contributions.

29



Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for the fiscal years ended June 30, 2019 and June 30, 2018 were 28 days 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 fiscal years ended June 30, 2019 and June 30, 2018 were 44 and 42 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 fiscal year 2019, we invested $40.8 million in available-for-sale securities, and $42.4 million matured. During fiscal year 2018, we invested $42.5 million in available-for-sale securities, and $42.8 million matured. During fiscal year 2017, we invested $42.1 million in available-for-sale securities, and $5.9 million matured. Our short-term investments included municipal bonds, certificates of deposit purchased in the secondary market, and U.S. Treasury and federal agency securities. During fiscal year 2019, we had a cash outflow of $4.3 million for the David Edward acquisition, while during fiscal year 2018 we had a cash outflow of $18.2 million for the D’style acquisition. During fiscal years 2019, 2018, and 2017, we received proceeds from the sale of assets net of selling expenses of $1.3 million, $5.8 million, and $13.2 million respectively, the majority of which related to the sale of a series of Internet protocol addresses in fiscal year 2019, the sale of our fleet of over-the-road tractors and trailers in fiscal year 2018, and the sale of our Idaho facility in fiscal year 2017, respectively. During fiscal years 2019, 2018, and 2017, we reinvested $21.0 million, $22.3 million, and $12.7 million, respectively, into capital investments for the future. The capital investments in both fiscal year 2019 and 2018 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. The capital investments during fiscal year 2017 were primarily for facility improvements such as renovations to showrooms and our corporate headquarters, various manufacturing equipment, and replacements of tractors and trailers in our fleet.
Cash Flows from Financing Activities
We paid $11.4 million of dividends in fiscal year 2019 compared to paying $10.1 million of dividends in fiscal year 2018 and $8.8 million of dividends in fiscal year 2017. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. We repurchased shares pursuant to a previously announced stock repurchase program, which drove cash outflow of $9.1 million in fiscal year 2019, $8.9 million in fiscal year 2018, and $6.7 million in fiscal year 2017.
Credit Facility
We maintain a $30.0 million credit facility with a maturity date of October 2019 that allows for both issuances of letters of credit and cash borrowings. This facility provides an option to increase the amount available for borrowing to $55.0 million at our request, subject to the consent of the participating banks. At June 30, 2019, we had $1.5 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. At both June 30, 2019 and June 30, 2018, we had no borrowings outstanding. We expect to negotiate a new credit facility to replace this credit facility prior to its October 2019 expiration. However, changing conditions in the credit markets or unforeseen circumstances could adversely impact the replacement of this credit facility.
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 (as defined in the credit agreement), determined as of the end of each of our fiscal quarters for the then most recently ended four fiscal quarters, and may not be greater than 3.0 to 1.0. The fixed charge coverage ratio is defined as (a) the sum of (i) consolidated EBITDA, minus (ii) 50% of depreciation expense, minus (iii) taxes paid, minus (iv) dividends and distributions paid, to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii) interest expense, calculated on a consolidated basis in accordance with U.S. GAAP, determined as of the end of each of our fiscal quarters for the trailing four fiscal quarters then ending, and may not be less than 1.10 to 1.00. We were in compliance with all debt covenants of the credit facility during fiscal year 2019.

30



The table below compares the adjusted leverage ratio and fixed charge coverage ratio with the limits specified in the credit agreement.
 
 
At or For the Period Ended
 
Limit As Specified in
 
 
Covenant
 
June 30, 2019
 
Credit Agreement
 
Excess
Adjusted Leverage Ratio
 
(0.82
)
 
3.00

 
3.82

Fixed Charge Coverage Ratio
 
214.42

 
1.10

 
213.32

Future Liquidity
We believe our principal sources of liquidity from available funds on hand and short-term investments, cash generated from operations, and the availability of borrowing under our credit facility will be sufficient to fund future dividends and meet our working capital and other operating needs for at least the next 12 months. During fiscal year 2020, we also anticipate cash outflow of approximately $14.6 million for accrued cash incentive compensation related to our fiscal year 2019 performance and cash outflow of approximately $5 million for restructuring. During the fourth quarter of fiscal year 2019, our Board of Directors declared a quarterly dividend of $0.08 per share, which was paid in our first quarter of fiscal year 2020. We will continue to evaluate market conditions in determining future share repurchases. At June 30, 2019, 2.7 million shares remained available under the repurchase program. During fiscal year 2020, we expect to continue investments in capital expenditures, particularly for projects such as our headquarters renovation, showroom renovations, machinery and equipment upgrades and automation, as well as for 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, 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 Indicators
This Management’s Discussion and Analysis (“MD&A”) contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with U.S. GAAP in the statements of income, statements of comprehensive income, balance sheets, statements of cash flows, or statements of shareholders’ equity of the company. The non-GAAP financial measures used within this MD&A include (1) organic net sales, defined as net sales excluding the acquisition-related net sales during the periods for which there were no sales related to such acquisition in the comparable period; (2) adjusted operating income, defined as operating income excluding restructuring expenses, CEO transition costs, and market value adjustments related to our Supplemental Employee Retirement Plan (“SERP”) liability; (3) adjusted operating income percentage, defined as adjusted operating income as a percentage of net sales; (4) adjusted net income, defined as net income excluding restructuring expenses and CEO transition costs; (5) adjusted diluted earnings per share, defined as diluted earnings per share excluding restructuring expenses and CEO transition costs; (6) adjusted EBITDA, defined as earnings before interest, taxes, depreciation, and amortization and excluding restructuring expenses and CEO transition costs; and (7) adjusted EBITDA percentage, defined as adjusted EBITDA as a percentage of net sales. 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 and to be able to meaningfully trend, analyze and benchmark how our core operations performed without market value adjustments related to our SERP liability or expenses incurred in executing our transformation restructuring plan or our CEO transition. 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.

31



Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators
(Amounts in Thousands, Except for Per Share Data)
 
 
 
Organic Net Sales Compared to the Prior Year
Fiscal Year Ended
 
June 30,
 
2019
Net Sales, as reported
$
768,070

Less: David Edward acquisition net sales (1)
9,409

Less: D’style acquisition net sales (2)
4,476

Organic Net Sales
$
754,185

(1) Represents David Edward net sales for our fiscal year 2019 second, third and fourth quarters as the acquisition date was October 26, 2018 thus we did not own David Edward during our first quarter of fiscal year 2019 nor any quarters during fiscal year 2018.
(2) Represents D’style net sales for our fiscal year 2019 first quarter as the acquisition date was November 6, 2017 thus we did not own D’style during our first quarter of fiscal year 2018.
 
 
 
Fiscal Year Ended
 
June 30,
 
2018
Net Sales, as reported
$
704,554

Less: D’style acquisition net sales (3)
13,012

Organic Net Sales
$
691,542

(3) Represents D’style net sales for our fiscal year 2018 second, third and fourth quarters as the acquisition date was November 6, 2017 thus we did not own D’style during our first quarter of fiscal year 2018 nor any quarters during fiscal year 2017.

32



Adjusted Operating Income
Fiscal Year Ended
 
June 30,
 
2019
 
2018
 
2017
Operating Income, as reported
$
49,475

 
$
51,063

 
$
56,663

Add: Pre-tax Restructuring (Gain) Expense
937

 

 
(1,832
)
Add: Pre-tax Expense Adjustment to SERP Liability
673

 
980

 
1,215

Add: Pre-tax CEO Transition Costs
2,046

 

 

Adjusted Operating Income
$
53,131

 
$
52,043

 
$
56,046

Net Sales
$
768,070

 
$
704,554

 
$
692,967

Adjusted Operating Income %
6.9
%
 
7.4
%
 
8.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted Net Income
Fiscal Year Ended
 
June 30,
 
2019
 
2018
 
2017
Net Income, as reported
$
39,344

 
$
34,439

 
$
37,506

Pre-tax CEO Transition Costs
2,046

 

 

Tax on CEO Transition Costs
(527
)
 

 

Add: After-tax CEO Transition Costs
1,519

 

 

Pre-tax Restructuring (Gain) Expense
937

 

 
(1,832
)
Tax on Restructuring (Gain) Expense
(241
)
 

 
713

Add: After-tax Restructuring (Gain) Expense
696

 

 
(1,119
)
Adjusted Net Income
$
41,559

 
$
34,439

 
$
36,387

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted Diluted Earnings Per Share
Fiscal Year Ended
 
June 30,
 
2019
 
2018
 
2017
Diluted Earnings Per Share, as reported
$
1.06

 
$
0.92

 
$
0.99

Add: After-tax CEO Transition Costs
0.04

 

 

Add: After-tax Restructuring (Gain) Expense
0.02

 

 
(0.03
)
Adjusted Diluted Earnings Per Share
$
1.12

 
$
0.92

 
$
0.96

 
 
 
 
 
 


33



Earnings Before Interest, Taxes, Depreciation, and Amortization and excluding Restructuring Expense and CEO Transition Costs
(“Adjusted EBITDA”)
 
 
 
 
 
 
Fiscal Year Ended
 
June 30,
 
2019
 
2018
 
2017
Net Income
$
39,344

 
$
34,439

 
$
37,506

Provision for Income Taxes
12,326

 
17,886

 
20,512

Income Before Taxes on Income
51,670

 
52,325

 
58,018

Interest Expense
174

 
221

 
37

Interest Income
(1,931
)
 
(1,057
)
 
(536
)
Depreciation
14,803

 
13,701

 
14,482

Amortization
1,777

 
1,769

 
1,071

Pre-tax CEO Transition Costs
2,046

 

 

Pre-tax Restructuring (Gain) Expense
937

 

 
(1,832
)
Adjusted EBITDA
$
69,476

 
$
66,959

 
$
71,240

Net Sales
$
768,070

 
$
704,554

 
$
692,967

Net Income as a Percentage of Net Sales
5.1
%
 
4.9
%
 
5.4
%
Adjusted EBITDA as a Percentage of Net Sales
9.0
%
 
9.5
%
 
10.3
%
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.
Return on Invested Capital is a key performance indicator calculated as: [(Earnings Before Interest, Taxes and Amortization) multiplied by (1 minus Effective Tax Rate)] divided by (Total Shareholders’ Equity plus Net Debt). Net Debt is defined as current maturities of long-term debt plus long-term debt less cash, cash equivalents, and short-term investments.
Fair Value
During fiscal year 2019, no financial instruments were affected by a lack of market liquidity. Financial assets classified as level 1 assets were valued using readily available market pricing. For commercial paper and available-for-sale securities classified as level 2 assets, the fair values were determined based on market data using evaluated pricing models and incorporating 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, if any, of the investment, as well as positive and negative qualitative evidence, while the equity securities without readily determinable fair value are accounted for as a cost-method investment which carries the securities at cost, except in the event of impairment. The contingent earn-out liability incurred in the acquisition of D’style is classified as a level 3 financial liability and is valued based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the D’style acquisition and a discount rate that captures the risk associated with the liability.
See Note 13 - Fair Value of Notes to Consolidated Financial Statements for more information.

34



Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2019.
 
Payments Due During Fiscal Years Ending June 30
(Amounts in Millions)
Total
 
2020
 
2021-2022
 
2023-2024
 
Thereafter
Recorded Contractual Obligations: (a)
 

 
 

 
 
 

 
 
 

 
 
 

Long-Term Debt Obligations (b)
$
0.2

 
$

 
 
$
0.1

 
 
$
0.1

 
 
$

Other Long-Term Liabilities Reflected on the Balance
Sheet (c) (d) (e)
18.8

 
5.5

 
 
3.7

 
 
3.0

 
 
6.6

Unrecorded Contractual Obligations:
 
 
 

 
 
 

 
 
 

 
 
 

Operating Leases (e)
22.8

 
4.6

 
 
8.3

 
 
6.1

 
 
3.8

Purchase Obligations (f)
54.0

 
40.9

 
 
6.7

 
 
6.4

 
 

Total
$
95.8

 
$
51.0

 
 
$
18.8

 
 
$
15.6

 
 
$
10.4

(a)
As of June 30, 2019, we had no capital lease obligations.
(b)
Refer to Note 10 - Long-Term Debt and Credit Facilities of Notes to Consolidated Financial Statements for more information regarding long-term debt obligations. Accrued interest is also included on the Long-Term Debt Obligations line. The fiscal year 2020 amount includes less than $0.1 million of long-term debt obligations due in fiscal year 2020, which were recorded as a current liability.
(c)
The timing of payments of certain items included on the “Other Long-Term Liabilities Reflected on the Balance Sheet” line above is estimated based on the following assumptions:
The timing of long-term SERP payments is estimated based on an assumed retirement age of 62 with payout based on the prior distribution elections of participants. The fiscal year 2020 amount includes $3.1 million for SERP payments recorded as current liabilities.
The timing of severance plan payments is estimated based on the average remaining service life of employees. The fiscal year 2020 amount includes $0.6 million for employee transition payments related to the transformation restructuring plan and $0.5 million for severance payments, which were both recorded as current liabilities.
The timing of warranty payments is estimated based on historical data. The fiscal year 2020 amount includes $0.8 million for short-term warranty payments recorded as a current liability.
The timing of the earn-out liability is contingent upon D’style’s operating income for fiscal year 2019 compared to a predetermined target. The amount in the fiscal year 2020 column in the above table includes $0.4 million for earn-out payments recorded as a current liability.
(d)
Excludes $1.6 million of long-term unrecognized tax benefits and associated accrued interest and penalties along with deferred tax liabilities and miscellaneous other long-term tax liabilities which are not tied to a contractual obligation and for which we cannot make a reasonably reliable estimate of the period of future payments.
(e)
Refer to Note 9 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for more information regarding operating leases and certain other long-term liabilities. Executory costs such as property taxes and maintenance are excluded from the operating lease obligations.
(f)
Purchase Obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. The amounts listed above for purchase obligations include contractual commitments for items such as raw materials, supplies, capital expenditures, services, and software acquisitions/license commitments. Cancellable purchase obligations that we intend to fulfill are also included in the purchase obligations amount listed above through fiscal year 2024.
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 9 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for more information on the standby letters of credit and operating leases. We do not have material exposures to trading activities of non-exchange traded contracts.

35



Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in preparation of our consolidated financial statements and are the policies that are most critical in the portrayal of our financial position and results of operations. Management has discussed these critical accounting policies and estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.
Revenue recognition - 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 Consolidated Balance Sheets, and the expense is recorded as a reduction of net sales in the 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 Consolidated Balance Sheets, and the expense is recorded in selling and administrative expenses in the Consolidated Statements of Income.
Self-insurance reserves - We are self-insured up to certain limits for automobile and general liability, workers’ compensation, and certain employee health benefits such as medical, short-term disability, and dental, with the related liabilities included in the accompanying financial statements. Our policy is to estimate reserves based upon a number of factors, including known claims, estimated incurred but not reported claims, and other analyses, which are based on historical information, along with certain assumptions about future events. Changes in assumptions for such matters as a result of increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At June 30, 2019 and June 30, 2018, our accrued liabilities for self-insurance exposure were $3.8 million and $4.1 million, respectively.
Taxes - Deferred income taxes are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The deferred taxes are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. However, we believe we have made adequate provision for income and other taxes for all years that are subject to audit. As tax positions are effectively settled, the tax provision will be adjusted accordingly. The liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions, was $1.8 million at June 30, 2019 and $1.9 million at June 30, 2018.
Goodwill - Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill

36



impairment test. We compare the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. If the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date. During fiscal years 2019 and 2018, no goodwill impairment was recognized. At June 30, 2019 and June 30, 2018, goodwill totaled $11.2 million and $8.8 million, respectively.
New Accounting Standards
See Note 1 - Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for information regarding New Accounting Standards.  
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk: We hold an investment portfolio of available-for-sale securities, comprised of municipal bonds, certificates of deposit purchased in the secondary market, U.S. Treasury and federal agency securities. As of June 30, 2019, the fair value of the investment portfolio was $33.1 million. Our investment policy dictates that municipal bonds, U.S. Treasury and federal agency securities must be investment grade quality, and all certificates of deposit are Federal Deposit Insurance Corporation insured. These securities are fixed income instruments and will decline in value if market interest rates increase. A hypothetical 100 basis point increase in an annual period in market interest rates from levels at June 30, 2019 would cause the fair value of these investments to decline by an immaterial amount. Further information on investments is provided in Note 15 - Investments of Notes to Consolidated Financial Statements.
We also hold a total investment of $2.0 million in a privately-held company, consisting of $0.5 million in equity securities without readily determinable fair value and $1.5 million in stock warrants. The fair value of the investment may fluctuate due to events and changes in circumstances, but we have incurred no impairment during fiscal year 2019 or 2018.
Commodity Risk: We are exposed to market risk with respect to commodity price fluctuations for components used in the manufacture of our products, primarily related to wood and wood-related components, steel, aluminum, and plastics. These components are impacted by global pricing pressures and general economic conditions. The U.S. 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, increasing to a 25% rate effective June 2019. 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 fluctuations in transportation costs, which vary based upon freight carrier capacity and fuel prices. Transportation costs are managed by optimizing logistics and supply chain planning, and increasing prices on our products.
Foreign Exchange Rate Risk: We have minimal foreign currency risk and held no derivative securities as of June 30, 2019 and an immaterial amount of derivative instruments as of June 30, 2018. Further information on derivative financial instruments is provided in Note 14 - Derivative Instruments of Notes to Consolidated Financial Statements.

37



Item 8 - Financial Statements and Supplementary Data


38



MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Kimball International, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting and for the preparation and integrity of the accompanying financial statements and other related information in this report. The consolidated financial statements of the Company and its subsidiaries, including the footnotes, were prepared in accordance with accounting principles generally accepted in the United States of America and include judgments and estimates, which in the opinion of management are applied appropriately. We maintain a system of internal and disclosure controls intended to provide reasonable assurance that assets are safeguarded from loss or material misuse, transactions are authorized and recorded properly, and that the accounting records may be relied upon for the preparation of the financial statements. This system is tested and evaluated regularly for adherence and effectiveness by employees who work within the internal control processes, by our staff of internal auditors, as well as by the independent registered public accounting firm in connection with their annual audit.
Management’s assessment of the effectiveness of internal control over financial reporting excluded David Edward Furniture, Inc. (“David Edward”), an acquisition completed in October 2018. We acquired substantially all of the assets and assumed certain specified limited liabilities of David Edward. This acquisition represented 2% of consolidated total assets and 1% of consolidated net sales of the Company as of and for the year ended June 30, 2019. Under guidelines established by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their first assessment of internal control over financial reporting within one year of the date of the acquisition.
The Audit Committee of the Board of Directors, which is comprised of directors who are not employees of the Company, meets regularly with management, our internal auditors, and the independent registered public accounting firm to review our financial policies and procedures, our internal control structure, the objectivity of our financial reporting, and the independence of the independent registered public accounting firm. The internal auditors and the independent registered public accounting firm have free and direct access to the Audit Committee, and they meet periodically, without management present, to discuss appropriate matters.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.
These consolidated financial statements are subject to an evaluation of internal control over financial reporting conducted under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, conducted under the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, management concluded that our internal control over financial reporting was effective as of June 30, 2019.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued an audit report on our internal control over financial reporting which is included herein.

 
/s/ KRISTINE L. JUSTER
 
Kristine L. Juster
 
Chief Executive Officer
 
August 27, 2019
 
 
 
/s/ MICHELLE R. SCHROEDER
 
Michelle R. Schroeder
 
Vice President,
 
Chief Financial Officer
 
August 27, 2019


39



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

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Kimball International, Inc. and subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows, and shareholders’ equity, for each of the three years in the period ended June 30, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at David Edward Furniture, Inc. (“David Edward”), an acquisition completed in October 2018. The Company acquired substantially all of the assets and assumed certain specified limited liabilities of David Edward. This acquisition represented 2% of consolidated total assets and 1% of consolidated net sales of the Company as of and for the year ended June 30, 2019. Accordingly, our audit did not include the internal control over financial reporting at David Edward.

Basis for Opinions

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

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

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

Definition and Limitations of Internal Control over Financial Reporting

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

40



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

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


 
/s/ Deloitte & Touche LLP
 
DELOITTE & TOUCHE LLP
 
Indianapolis, Indiana
 
August 27, 2019
We have served as the Company's auditor since 2002.



41



KIMBALL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data)
 
June 30,
2019
 
June 30,
2018
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
73,196

 
$
52,663

Short-term investments
33,071

 
34,607

Receivables, net of allowances of $1,321 and $1,317, respectively
63,120

 
62,276

Inventories
46,812

 
39,509

Prepaid expenses and other current assets
13,105

 
18,523

Assets held for sale
281

 
281

Total current assets
229,585

 
207,859

Property and Equipment, net of accumulated depreciation of $185,865 and $180,059, respectively
90,671

 
84,487

Goodwill
11,160

 
8,824

Other Intangible Assets, net of accumulated amortization of $38,320 and $36,757, respectively
12,108

 
12,607

Deferred Tax Assets
8,722

 
4,916

Other Assets
12,420

 
12,767

Total Assets
$
364,666

 
$
331,460

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current Liabilities:
 

 
 

Current maturities of long-term debt
$
25

 
$
23

Accounts payable
47,916

 
48,214

Customer deposits
24,611

 
21,253

Dividends payable
3,038

 
2,662

Accrued expenses
57,494

 
50,586

Total current liabilities
133,084

 
122,738

Other Liabilities:
 

 
 

Long-term debt, less current maturities
136

 
161

Other
14,956

 
15,537

Total other liabilities
15,092

 
15,698

Shareholders’ Equity:
 

 
 

Common stock-par value $0.05 per share:
 

 
 

Class A - Shares authorized: 50,000,000
               Shares issued: 251,000 and 264,000, respectively
12

 
13

Class B - Shares authorized: 100,000,000
               Shares issued: 42,773,000 and 42,761,000, respectively
2,139

 
2,138

Additional paid-in capital
3,570

 
1,881

Retained earnings
277,391

 
249,945

Accumulated other comprehensive income
1,937

 
1,816

Less: Treasury stock, at cost, 6,212,000 shares and 5,901,000 shares, respectively
(68,559
)
 
(62,769
)
Total Shareholders’ Equity
216,490

 
193,024

Total Liabilities and Shareholders’ Equity
$
364,666

 
$
331,460


42



KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
 
Year Ended June 30
 
2019
 
2018
 
2017
Net Sales
$
768,070

 
$
704,554

 
$
692,967

Cost of Sales
513,518

 
468,923

 
455,106

Gross Profit
254,552

 
235,631

 
237,861

Selling and Administrative Expenses
204,140

 
184,568

 
183,030

Restructuring (Gain) Expense
937

 

 
(1,832
)
Operating Income
49,475

 
51,063

 
56,663

Other Income (Expense):
 

 
 

 
 

Interest income
1,931

 
1,057

 
536

Interest expense
(174
)
 
(221
)
 
(37
)
Non-operating income
978

 
953

 
1,276

Non-operating expense
(540
)
 
(527
)
 
(420
)
Other income (expense), net
2,195

 
1,262

 
1,355

Income Before Taxes on Income
51,670

 
52,325

 
58,018

Provision for Income Taxes
12,326

 
17,886

 
20,512

Net Income
$
39,344

 
$
34,439

 
$
37,506

 
 
 
 
 
 
Earnings Per Share of Common Stock:
 
 
 
 
 
Basic Earnings Per Share
$
1.07

 
$
0.92

 
$
1.00

Diluted Earnings Per Share
$
1.06

 
$
0.92

 
$
0.99

 
 
 
 
 
 
Class A and B Common Stock:
 
 
 
 
 
Average Number of Shares Outstanding - Basic
36,842

 
37,314

 
37,334

Average Number of Shares Outstanding - Diluted
37,064

 
37,494

 
37,833


43



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

 
Year Ended June 30, 2019
 
Year Ended June 30, 2018
 
Year Ended June 30, 2017
 
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
39,344

 
 
 
 
 
$
34,439

 
 
 
 
 
$
37,506

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
$
73

 
$
(19
)
 
$
54

 
$
(11
)
 
$
3

 
$
(8
)
 
$
(34
)
 
$
13

 
$
(21
)
Postemployment severance actuarial change
484

 
(124
)
 
360

 
895

 
(296
)
 
599

 
186

 
(72
)
 
114

Derivative gain (loss)
(11
)
 
2

 
(9
)
 
(10
)
 
3

 
(7
)
 

 

 

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

 

 

 
4

 
(1
)
 
3

 

 

 

Amortization of actuarial change
(404
)
 
104

 
(300
)
 
(260
)
 
84

 
(176
)
 
(473
)
 
184

 
(289
)
Derivatives
21

 
(5
)
 
16

 

 

 

 

 

 

Other comprehensive income (loss)
$
163

 
$
(42
)
 
$
121

 
$
618

 
$
(207
)
 
$
411

 
$
(321
)
 
$
125

 
$
(196
)
Total comprehensive income
 

 
 

 
$
39,465

 
 

 
 

 
$
34,850

 
 

 
 

 
$
37,310




44



KIMBALL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
 
Year Ended June 30
 
2019
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
 
 
Net income
$
39,344

 
$
34,439

 
$
37,506

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

 
 

 
 

Depreciation
14,803

 
13,701

 
14,482

Amortization
1,777

 
1,769

 
1,071

Gain on sales of assets
(1,117
)
 
(2,050
)
 
(3,148
)
Asset impairment charges

 

 
241

Deferred income tax and other deferred charges
(3,807
)
 
9,082

 
(1,580
)
Stock-based compensation
6,617

 
4,179

 
6,303

Other, net
(1,456
)
 
984

 
(125
)
Change in operating assets and liabilities:
 
 
 
 
 
Receivables
(338
)
 
(5,746
)
 
(4,778
)
Inventories
(4,505
)
 
8

 
2,876

Prepaid expenses and other current assets
4,894

 
(6,741
)
 
2,694

Accounts payable
(1,298
)

3,062


1,998

Customer deposits
2,480

 
(2,347
)
 
1,891

Accrued expenses
7,573

 
(3,474
)
 
5,413

Net cash provided by operating activities
64,967

 
46,866

 
64,844

Cash Flows From Investing Activities:
 

 
 

 
 

Capital expenditures
(19,693
)
 
(21,575
)
 
(11,751
)
Proceeds from sales of assets
1,291

 
5,817

 
13,200

Cash paid for acquisitions
(4,288
)
 
(18,201
)
 

Purchases of capitalized software
(1,278
)
 
(724
)
 
(982
)
Purchases of available-for-sale securities
(40,778
)
 
(42,497
)
 
(42,059
)
Maturities of available-for-sale securities
42,406

 
42,839

 
5,941

Other, net
154

 
(423
)
 
(564
)
Net cash used for investing activities
(22,186
)
 
(34,764
)
 
(36,215
)
Cash Flows From Financing Activities:
 

 
 

 
 

Change in capital leases and long-term debt
(23
)
 
(27
)
 
(30
)
Proceeds from sale-leaseback financing obligation

 

 
3,752

Dividends paid to shareholders
(11,435
)
 
(10,084
)
 
(8,783
)
Repurchases of Common Stock
(9,132
)
 
(8,936
)
 
(6,665
)
Repurchase of employee shares for tax withholding
(1,675
)
 
(2,822
)
 
(1,636
)
Net cash used for financing activities
(22,265
)
 
(21,869
)
 
(13,362
)
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash (1)
20,516

 
(9,767
)
 
15,267

Cash, Cash Equivalents, and Restricted Cash at Beginning of Year (1)
53,321

 
63,088

 
47,821

Cash, Cash Equivalents, and Restricted Cash at End of Year (1)
$
73,837

 
$
53,321

 
$
63,088

(1)The following table reconciles cash and cash equivalents in the balance sheets to cash, cash equivalents, and restricted cash per the statements of cash flows. 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)
June 30,
2019
 
June 30,
2018
 
June 30,
2017
 
June 30,
2016
Cash and Cash Equivalents
$
73,196

 
$
52,663

 
$
62,882

 
$
47,576

Restricted cash included in Other Assets
641

 
658

 
206

 
245