-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S7vpCIkqUQGzkmgvBzrulHWFyZ/FdbuiipfqBE241S2/7fQ+PB5S4XkYBHqWAvsc ZMFD7NOXaU9imoJJtR4xuA== 0000055772-10-000006.txt : 20100506 0000055772-10-000006.hdr.sgml : 20100506 20100506091330 ACCESSION NUMBER: 0000055772-10-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20100331 FILED AS OF DATE: 20100506 DATE AS OF CHANGE: 20100506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIMBALL INTERNATIONAL INC CENTRAL INDEX KEY: 0000055772 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE FURNITURE [2520] IRS NUMBER: 350514506 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-03279 FILM NUMBER: 10804216 BUSINESS ADDRESS: STREET 1: 1600 ROYAL ST CITY: JASPER STATE: IN ZIP: 47549 BUSINESS PHONE: 8124821600 MAIL ADDRESS: STREET 1: 1600 ROYAL STREET CITY: JASPER STATE: IN ZIP: 47549 FORMER COMPANY: FORMER CONFORMED NAME: JASPER CORP DATE OF NAME CHANGE: 19740826 10-Q 1 q103.htm KIMBALL INTERNATIONAL, INC. FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2010

OR

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

For the transition period from              to             

Commission File Number    0-3279

KIMBALL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-0514506
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1600 Royal Street, Jasper, Indiana 47549-1001
(Address of principal executive offices) (Zip Code)
(812) 482-1600
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes
   X     No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  __
    No       
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
  ___                                                                                        Accelerated filer   X 
Non-accelerated filer         (Do not check if a smaller reporting company)              Smaller reporting company 
      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes  __
    No   X  
The number of shares outstanding of the Registrant's common stock as of April 21, 2010 was:
  Class A Common Stock - 10,733,475 shares
  Class B Common Stock - 26,875,706 shares
1

KIMBALL INTERNATIONAL, INC.
FORM 10-Q
INDEX

Page No.
 
PART I    FINANCIAL INFORMATION
 
Item 1. Financial Statements
  Condensed Consolidated Balance Sheets
        - March 31, 2010 (Unaudited) and June 30, 2009
3
  Condensed Consolidated Statements of Income (Unaudited)
        - Three and Nine Months Ended March 31, 2010 and 2009
4
  Condensed Consolidated Statements of Cash Flows (Unaudited)
        - Nine Months Ended March 31, 2010 and 2009
5
  Notes to Condensed Consolidated Financial Statements (Unaudited) 6-28
Item 2. Management's Discussion and Analysis of Financial
    Condition and Results of Operations
29-45
Item 3. Quantitative and Qualitative Disclosures About Market Risk 45
Item 4. Controls and Procedures 45
 
PART II    OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
Item 6. Exhibits 46
 
SIGNATURES 47
 
EXHIBIT INDEX 48

2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements


KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data)

  (Unaudited)    
  March 31,   June 30,
  2010   2009
ASSETS        
Current Assets:        
    Cash and cash equivalents    $     41,261     $   75,932 
    Short-term investments    15,860     25,376 
    Receivables, net of allowances of $3,914 and $4,366, respectively    168,877     143,398 
    Inventories    150,436     127,004 
    Prepaid expenses and other current assets    45,073     35,720 
    Assets held for sale    1,160     1,358 
        Total current assets    422,667     408,788 
Property and Equipment, net of accumulated depreciation of $338,203 and        
    $338,001, respectively    195,680     200,474 
Goodwill    2,554     2,608 
Other Intangible Assets, net of accumulated amortization of $63,159 and        
    $62,481, respectively    8,472     10,181 
Other Assets    22,481     20,218 
        Total Assets    $   651,854     $ 642,269 
LIABILITIES AND SHARE OWNERS' EQUITY        
Current Liabilities:        
    Current maturities of long-term debt    $            61     $          60 
    Accounts payable    183,700     165,051 
    Borrowings under credit facilities    -0-     12,677 
    Dividends payable    1,827     2,393 
    Accrued expenses    50,918     52,426 
        Total current liabilities    236,506     232,607 
Other Liabilities:        
    Long-term debt, less current maturities    349     360 
    Other    29,268     26,948 
        Total other liabilities    29,617     27,308 
Share Owners' Equity:        
    Common stock-par value $0.05 per share:        
        Class A - 49,826,000 shares authorized        
                         14,368,000 shares issued    718     718 
        Class B - 100,000,000 shares authorized        
                         28,657,000 shares issued    1,433     1,433 
    Additional paid-in capital    93     343 
    Retained earnings    457,003     458,180 
    Accumulated other comprehensive loss    (2,291)    (501)
    Less: Treasury stock, at cost:        
        Class A - 3,635,000 and 3,646,000 shares, respectively    (48,260)    (50,421)
        Class B - 1,781,000 and 2,093,000 shares, respectively    (22,965)    (27,398)
            Total Share Owners' Equity    385,731     382,354 
                Total Liabilities and Share Owners' Equity    $   651,854     $ 642,269 
See Notes to Condensed Consolidated Financial Statements        

3


KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except for Per Share Data)

(Unaudited)   (Unaudited)
Three Months Ended   Nine Months Ended
March 31   March 31
2010   2009   2010   2009
Net Sales  $    282,347     $      268,852     $      832,167     $      935,953 
Cost of Sales  241,970     226,369     700,465     778,637 
Gross Profit  40,377     42,483     131,702     157,316 
Selling and Administrative Expenses  45,008     44,092     137,690     146,389 
Other General Income  (6,724)    (23,178)    (9,980)    (33,084)
Restructuring Expense  933     689     1,710     2,705 
Goodwill Impairment  -0-     14,559     -0-     14,559 
Operating Income  1,160     6,321     2,282     26,747 
Other Income (Expense):              
    Interest income  279     574     944     2,018 
    Interest expense  (27)    (163)    (133)    (1,553)
    Non-operating income (expense)  243     441     2,683     (4,246)
        Other income (expense), net  495     852     3,494     (3,781)
Income Before Taxes on Income  1,655     7,173     5,776     22,966 
Provision (Benefit) for Income Taxes  (4,675)    3,059     (4,234)    8,486 
Net Income   $       6,330     $          4,114     $        10,010     $        14,480 

Earnings Per Share of Common Stock:              
    Basic Earnings Per Share:              
        Class A   $         0.17       $           0.11       $           0.26       $           0.38  
        Class B   $         0.17       $           0.11       $           0.27       $           0.39  
    Diluted Earnings Per Share:              
        Class A   $         0.17       $           0.11       $           0.26       $           0.38  
        Class B   $         0.17       $           0.11       $           0.27       $           0.39  
             
Dividends Per Share of Common Stock:              
    Class A   $       0.045       $         0.045       $         0.135       $         0.355  
    Class B   $       0.050       $         0.050       $         0.150       $         0.370  
             
Average Number of Shares Outstanding              
    Class A and B Common Stock:              
        Basic 37,573    37,286    37,408    37,119 
        Diluted 37,633    37,374    37,499    37,211 
See Notes to Condensed Consolidated Financial Statements              

4


KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
  (Unaudited)
Nine Months Ended
March 31
2010   2009
Cash Flows From Operating Activities:      
    Net income   $  10,010     $ 14,480 
    Adjustments to reconcile net income to net cash provided by operating activities:      
        Depreciation and amortization  26,335     28,186 
        Gain on sales of assets  (6,802)    (32,070)
        Restructuring and exit costs  82     102 
        Deferred income tax and other deferred charges  (3,371)    (6,549)
        Goodwill impairment  -0-     14,559 
        Stock-based compensation  1,560     1,687 
        Excess tax benefits from stock-based compensation  (263)    (297)
        Other, net  (31)    -0- 
        Change in operating assets and liabilities:      
            Receivables  (28,420)    15,479 
            Inventories  (25,712)    17,553 
            Prepaid expenses and other current assets  (4,732)    7,144 
            Accounts payable  21,700     (7,966)
            Accrued expenses  (812)    (15,689)
                Net cash (used for) provided by operating activities  (10,456)    36,619 
Cash Flows From Investing Activities:      
    Capital expenditures  (26,288)    (37,078)
    Proceeds from sales of assets  12,321     48,263 
    Payments for acquisitions  -0-     (5,391)
    Purchase of capitalized software and other assets  (316)    (623)
    Purchases of available-for-sale securities  (6,555)    (5,449)
    Sales and maturities of available-for-sale securities  15,644     9,270 
    Other, net  310     (320)
        Net cash (used for) provided by investing activities  (4,884)    8,672 
Cash Flows From Financing Activities:      
    Proceeds from revolving credit facility  -0-     55,000 
    Payments on revolving credit facility  (12,248)    (33,348)
    Additional net change in credit facilities  -0-     (35,805)
    Payments on capital leases and long-term debt  (10)    (477)
    Dividends paid to Share Owners  (5,437)    (17,600)
    Excess tax benefits from stock-based compensation  263     297 
    Repurchase of employee shares for tax withholding  (1,201)    (1,209)
        Net cash used for financing activities  (18,633)    (33,142)
Effect of Exchange Rate Change on Cash and Cash Equivalents  (698)    (4,482)
Net (Decrease) Increase in Cash and Cash Equivalents  (34,671)    7,667 
Cash and Cash Equivalents at Beginning of Period  75,932     30,805 
Cash and Cash Equivalents at End of Period  $  41,261     $ 38,472 
Supplemental Disclosure of Cash Flow Information      
    Cash paid (refunded) during the period for:      
        Income taxes  $    8,070     $     (809)
        Interest expense  $       201     $   1,706 
See Notes to Condensed Consolidated Financial Statements      

5


KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation:

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

Change in Accounting Policy:

During the third quarter of fiscal year 2010, the Company changed its classification of interest and penalties related to unrecognized tax benefits, reflected in the Condensed Consolidated Statements of Income. Interest related to unrecognized tax benefits was previously classified on either the Interest income line or the Interest expense line. Penalties related to unrecognized tax benefits were previously classified as Non-operating expense. In accordance with the guidance for accounting for uncertainty in income taxes, based on an accounting policy election, interest related to unrecognized tax benefits may either be classified as income taxes or interest, and penalties related to unrecognized tax benefits may either be classified as income taxes or another expense classification. Beginning January 1, 2010, the Company revised its accounting policy and now classifies interest and penalties related to unrecognized tax benefits in the Provision (Benefit) for Income Taxes line of the Condensed Consolidated Statements of Income. The Company believes that the classification of interest and penalties in the Provision (Benefit) for Income Taxes line is preferable because it is management's belief that interest and penalties related to unrecognized tax benefits are costs of managing taxes payable (as opposed to, for example, interest as a cost of debt). Also, this presentation is more consistent with the practice followed by most of the Company's competitors. As a result of reclassifying interest related to unrecognized tax benefits, the Company's interest coverage ratio, which is a debt covenant in its revolving credit facility, will change. This change does not impact the Company's compliance with this debt covenant. Interest income and penalties related to unrecognized tax benefits during the third quarter of fiscal year 2010, in thousands, was ($21) and $3, respectively. Prior periods were not adjusted retrospectively due to immateriality. This change had no impact on Operating Income, Net Income, or Earnings Per Share. This change had an impact on Income Before Taxes on Income, however the impact was not material.

Change in Estimates:

The Company periodically performs assessments of the useful lives of assets. In evaluating useful lives, the Company considers how long assets will remain functionally efficient and effective, given levels of technology, competitive factors, and the economic environment. If the assessment indicates that the assets will continue to be used for a longer period than previously anticipated, the useful life of the assets are revised, resulting in a change in estimate. Changes in estimates are accounted for on a prospective basis by depreciating the assets' current carrying values over their revised remaining useful lives.

6


Effective July 1, 2009, the Company revised the useful lives of Surface Mount Technology (SMT) production equipment from 5 years to 7 years. Additionally, effective October 1, 2008, the Company revised the useful lives of Enterprise Resource Planning (ERP) software from 7 years to 10 years. The effect of these changes in estimates, compared to the original depreciation and amortization, for the three and nine months ended March 31, 2010 was a pre-tax reduction in depreciation and amortization expense of, in thousands, ($537) and ($1,611), respectively. The pre-tax reduction in amortization expense for both the three and nine months ended March 31, 2009 was, in thousands, ($460) and ($942), respectively. The pre-tax (decrease) increase to depreciation and amortization expense in future periods is expected to be, in thousands, ($537) for the remaining three months of fiscal year 2010, and ($1,010), $141, $1,052, and $1,272 in the four years ending June 30, 2014, and $1,756 thereafter.

Revisions to the Earnings Per Share Calculation:

In June 2008, the Financial Accounting Standards Board (FASB) issued guidance on determining whether instruments granted in share-based payment transactions are participating securities. Under the guidance, unvested share-based payment awards that contain nonforfeitable rights to dividends are considered to be a separate class of securities and are excluded from the common stock EPS calculations. The Company's restricted share unit awards meet the definition of a participating security when held by retirement-age participants. The guidance became effective as of the beginning of the Company's fiscal year 2010 and required that previously reported earnings per share data be recast in financial statements issued in periods after the effective date. The guidance impacted the Company's Class A Common Stock earnings per share results for certain interim periods and the annual period of fiscal year 2009. The impact on Class A basic and diluted earnings per share for the nine months ended March 31, 2009 was a reduction from $0.39 as originally reported to $0.38. The impact on fiscal year 2009 Class A basic earnings per share was a reduction from $0.47 as originally reported to $0.46. Class B Common Stock calculations were not impacted significantly enough to cause a change in the earnings per share result.

Goodwill and Other Intangible Assets:

The Electronic Manufacturing Services (EMS) segment had goodwill net of accumulated impairment losses of, in thousands, $2,554 and $2,608, as of March 31, 2010 and June 30, 2009, respectively. Goodwill decreased by, in thousands, $54 during the nine months ended March 31, 2010 due to the effect of changes in foreign currency exchange rates.

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, the Company compares the carrying value of the reporting unit to an estimate of the reporting unit's fair value to identify potential impairment. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed to determine the amount of potential goodwill impairment. If impaired, goodwill is written down to its estimated implied 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 units considers current market conditions existing at the assessment date.

No goodwill impairment was recorded in the three and nine months ended March 31, 2010. During the third quarter of fiscal year 2009, goodwill was reviewed on an interim basis due to the continued uncertainty associated with the economy and the significant decline in the Company's sales and order trends during the quarter as well as the increased disparity between the Company's market capitalization and the carrying value of its stockholders' equity. Interim testing resulted in the recognition of goodwill impairment in the prior year third quarter of, in thousands, $12,826 within the EMS segment and $1,733 within the Furniture segment. The impairment was recorded on the Goodwill Impairment line item of the Company's Condensed Consolidated Statements of Income. 

7


In addition to performing the required annual testing, the Company will continue to monitor circumstances and events in future periods to determine whether additional goodwill impairment testing is warranted on an interim basis. The Company can provide no assurance that an impairment charge for the goodwill balance, which approximates only 0.4% of the Company's total assets, will not occur in future periods as a result of these analyses.

Other intangible assets consist of capitalized software, product rights, and customer relationships and are reported as Other Intangible Assets on the Condensed Consolidated Balance Sheets.  Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. 

A summary of other intangible assets subject to amortization by segment was as follows:

  March 31, 2010   June 30, 2009
(Amounts in Thousands)   Cost   Accumulated
Amortization
  Net Value   Cost   Accumulated
Amortization
  Net Value
Electronic Manufacturing Services:                        
    Capitalized Software     $27,424       $       24,719       $    2,705       $27,455       $       24,217       $    3,238  
    Customer Relationships     1,167       585       582       1,167       448       719  
        Other Intangible Assets     $28,591       $       25,304       $    3,287       $28,622       $       24,665       $    3,957  
                       
Furniture:                        
    Capitalized Software     $36,040       $       32,179       $    3,861       $37,107       $       32,533       $    4,574  
    Product Rights     1,160       436       724       1,160       334       826  
        Other Intangible Assets     $37,200       $       32,615       $    4,585       $38,267       $       32,867       $    5,400  
                       
Unallocated Corporate:                        
    Capitalized Software     $  5,840       $         5,240       $       600       $  5,773       $         4,949       $       824  
        Other Intangible Assets     $  5,840       $         5,240       $       600       $  5,773       $         4,949       $       824  
                       
Consolidated     $71,631       $       63,159       $    8,472       $72,662       $       62,481       $  10,181  

Amortization expense related to other intangible assets was, in thousands, $631 and $1,898 during the quarter and year-to-date periods ended March 31, 2010, respectively. Amortization expense related to other intangible assets was, in thousands, $726 and $3,269 during the quarter and year-to-date periods ended March 31, 2009, respectively. Amortization expense in future periods is expected to be, in thousands, $347 for the remainder of fiscal year 2010, and $2,102, $1,862, $1,509, and $1,128 in the four years ending June 30, 2014, and $1,524 thereafter. The amortization period for product rights is 7 years. The amortization periods for customer relationship intangible assets range from 10 to 16 years.  The estimated useful life of internal-use software ranges from 3 to 10 years.

8


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

Product rights to produce and sell certain products are amortized on a straight-line basis over their estimated useful lives, and capitalized customer relationships are amortized based on the estimated attrition rate of customers. The Company has no intangible assets with indefinite useful lives which are not subject to amortization. 

Other General Income: 

Other General Income in fiscal year 2010 included a gain on the sale of the Company's Poland facility and land and settlement proceeds related to an antitrust class action lawsuit of which the Company was a class member. Other General Income in fiscal year 2009 included a gain related to the sale of undeveloped land and timberland holdings, as well as earnest money deposits retained by the Company resulting from the termination of a contract to sell and lease back the Company's Poland facility and land.

Components of Other General Income:    
  Three Months Ended   Nine Months Ended
(Amounts in Thousands) March 31   March 31
  2010   2009   2010   2009
Gain on Sale of Poland Facility and Land $ 6,724    $        -0-   $ 6,724    $        -0-
Settlement Proceeds Related to Antitrust Class Action Lawsuit -0-    -0-   3,256    -0-
Gain on Sale of Undeveloped Land and Timberland Holdings -0-   23,178    -0-   31,156 
Earnest Money Deposits Retained -0-    -0-   -0-   1,928 
Other General Income $ 6,724    $ 23,178    $ 9,980    $ 33,084 

Non-operating Income (Expense): 

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

Components of Non-operating income (expense), net:
  Three Months Ended   Nine Months Ended
(Amounts in Thousands) March 31   March 31
  2010   2009   2010   2009
Foreign Currency/Derivative Gain (Loss) $ (454)   $ 1,075    $    329    $        87 
Gain (Loss) on Supplemental Employee Retirement Plan Investments 540    (749)   2,560    (4,106)
Other 157    115    (206)   (227)
Non-operating income (expense), net $   243    $    441    $ 2,683    $ (4,246)

9


Effective Tax Rate:

For the third quarter fiscal year 2010 year-to-date period, the Company used the actual effective tax rate for the year-to-date tax provision calculation because a reliable estimate of the full-year effective tax rate could not be made. Relatively low pre-tax income coupled with the mix of operating results in multiple taxing jurisdictions and the difficulty of forecasting in certain markets caused significant uncertainty in the estimate of the annual effective tax rate.

The fiscal 2010 year-to-date actual effective tax rate was (73.3%) compared to the effective tax rate for the same period of fiscal year 2009 of 37.0%. Relatively low pre-tax income coupled with a tax benefit due to a tax planning strategy related to the sale of a facility and land in Poland and a favorable impact of the Company's earnings mix drove the significantly lower effective tax rate compared to the same period of fiscal year 2009. The mix of earnings between U.S. and foreign jurisdictions resulted in an overall tax benefit due to U.S. losses which have a higher statutory tax rate than the Company's foreign operations which were profitable in the first nine months of fiscal year 2010.

New Accounting Standards:

In January 2010, the FASB issued guidance to improve disclosures about fair value instruments. The guidance requires additional disclosure about significant transfers between levels 1, 2, and 3 of the fair value hierarchy and requires disclosure of changes in level 3 activity on a gross basis. In addition, the guidance clarifies existing requirements regarding the required level of disaggregation by class of assets and liabilities and also clarifies disclosures of inputs and valuation techniques. The guidance became effective beginning in the Company's third quarter of fiscal year 2010, except for the requirement to disclose level 3 activity on a gross basis, which will be effective as of the beginning of the Company's fiscal year 2012. The adoption did not have a material impact on the Company's consolidated financial statements.

In June 2009, the FASB established the FASB Accounting Standards Codification (Codification) as the single official source of authoritative U.S. GAAP recognized by the FASB (other than guidance issued by the Securities and Exchange Commission). The Codification does not change current U.S. GAAP but is intended to simplify user access to all authoritative U.S. GAAP by providing all literature related to a particular topic in one place. All existing FASB accounting standard documents have been superseded.  During the first quarter of fiscal year 2010, the Company began to utilize the Codification and revised its financial statements to no longer refer to former U.S. GAAP standards.

In June 2009, the FASB issued guidance related to variable interest entities (VIEs) which modifies how a company determines when VIEs should be consolidated. The guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. The guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and requires additional disclosures about a company's involvement in variable interest entities. The guidance will be effective as of the beginning of the Company's fiscal year 2011. The Company is currently evaluating the impact, if any, of adoption of the guidance on its consolidated financial statements.

10


In April 2009, the FASB issued guidance for interim disclosures about fair value of financial instruments. This guidance expands to interim periods the existing annual requirement to disclose the fair value of financial instruments that are not reflected on the balance sheet at fair value. The guidance became effective for interim periods beginning in the Company's first quarter of fiscal year 2010, and the required disclosure has been provided in Note 7 - Fair Value of Financial Assets and Liabilities of Notes to Condensed Consolidated Financial Statements.

In June 2008, the FASB issued guidance for determining whether instruments granted in share-based payment transactions are participating securities. This guidance provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The two-class method is an earnings allocation method for computing earnings per share when an entity's capital structure includes multiple classes of common stock and participating securities. This guidance became effective as of the beginning of the Company's fiscal year 2010 and required that previously reported earnings per share data be recast in financial statements issued in periods after the effective date. The effect of adopting the guidance is disclosed under the caption "Revisions to the Earnings Per Share Calculation" within this footnote.

In April 2008, the FASB issued guidance for the determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the goodwill and other intangible assets accounting principles. This new guidance allows an entity to use its own historical experience in renewing or extending similar arrangements, adjusted for entity-specific factors, in developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset. As a result, the determination of intangible asset useful lives is now consistent with the method used to determine the period of expected cash flows used to measure the fair value of the intangible assets. The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively to intangible assets acquired after the effective date. Disclosure requirements are to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The provisions of this guidance were adopted prospectively as of the beginning of the Company's fiscal year 2010 and did not have an effect on the Company's consolidated financial statements.

In December 2007, the FASB issued  guidance on business combinations which requires that the fair value of the purchase price of an acquisition including the issuance of equity securities be determined on the acquisition date; requires that all assets, liabilities, noncontrolling interests, contingent consideration, contingencies, and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. This guidance also broadens the definition of a business combination and expands disclosures related to business combinations. Additionally, in April 2009, the FASB issued further guidance which requires that acquired contingent assets and liabilities be recognized at fair value if fair value can be reasonably estimated. If the fair value cannot be reasonably estimated, the asset or liability will be recognized in accordance with existing accounting principles for accounting for contingencies and reasonable estimation of the amount of a loss. This new guidance became effective for business combinations occurring after the beginning of the Company's fiscal year 2010. The impact, if any, of this guidance on the Company's financial position, results of operations, and cash flows will depend on the extent of business combinations completed in the future.

11


In December 2007, the FASB issued guidance on noncontrolling interests in consolidated financial statements. This guidance requires that noncontrolling interests be reported as a separate component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statements of income, that changes in a parent's ownership interest be accounted for as equity transactions, and that, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. This guidance became effective as of the beginning of the Company's fiscal year 2010. The Company does not currently have noncontrolling interests, and therefore the adoption of this guidance did not have an impact on the Company's financial position, results of operations, or cash flows.

In September 2006, the FASB issued guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This guidance is only applicable to existing accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The guidance, as originally issued, was to be effective as of the beginning of the Company's fiscal year 2009. In February 2008, the FASB issued additional guidance on fair value measurements, approving a one-year deferral to the beginning of the Company's fiscal year 2010 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis at least annually. The Company adopted the provisions of fair value measurement guidance applicable to financial instruments as of July 1, 2008. The Company adopted the provisions of fair value measurement guidance applicable to non-financial assets and liabilities as of July 1, 2009 which did not have a material effect on the Company's consolidated financial statements. Required disclosures have been provided in Note 7 - Fair Value of Financial Assets and Liabilities of Notes to Condensed Consolidated Financial Statements.

Note 2. Inventories

Inventory components of the Company were as follows:

March 31, June 30,
(Amounts in Thousands) 2010 2009
Finished Products $  37,453   $  35,530   
Work-in-Process 13,236   11,752   
Raw Materials 112,174   93,999   
  Total FIFO Inventory $162,863   $141,281   
LIFO Reserve (12,427)  (14,277)  
  Total Inventory $150,436   $127,004   

For interim reporting, LIFO inventories are computed based on quantities as of the end of the quarter and interim changes in price levels. Changes in quantities and price levels are reflected in the interim financial statements in the period in which they occur, except in cases where LIFO inventory liquidations are expected to be reinstated by fiscal year end. During the three and nine-month periods ended March 31, 2010, LIFO inventory liquidations increased net income by, in thousands, $412 and $1,379, respectively. During the three and nine-month periods ended March 31, 2009, LIFO inventory liquidations increased net income by, in thousands, $764 and $1,764, respectively.

12


Note 3. Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those resulting from investments by and distributions to Share Owners. Comprehensive income (loss), shown net of tax if applicable, for the three and nine-month periods ended March 31, 2010 and 2009 was as follows:

  Three Months Ended
March 31, 2010
  Three Months Ended
March 31, 2009
(Amounts in Thousands) Pre-tax   Tax   Net of Tax   Pre-tax   Tax   Net of Tax
Net income          $     6,330             $        4,114 
Other comprehensive income (loss):                      
    Foreign currency translation adjustments  $    (5,610)    $     1,228     $    (4,382)    $   (3,035)    $       (406)    $      (3,441)
    Postemployment severance actuarial change  (1,823)    727     (1,096)    (1,690)    674     (1,016)
    Other fair value changes:                      
        Available-for-sale securities  (90)    36     (54)    594     (237)    357 
        Derivatives  1,990     (544)    1,446     (1,135)    57     (1,078)
    Reclassification to (earnings) loss:                      
        Available-for-sale securities  (272)    108     (164)    (148)    59     (89)
        Derivatives  (1,042)    317     (725)    2,571     (919)    1,652 
        Amortization of prior service costs  71     (27)    44     71     (28)    43 
        Amortization of actuarial change  310     (123)    187     169     (68)    101 
Other comprehensive income (loss)  $    (6,466)    $     1,722     $    (4,744)    $   (2,603)    $       (868)    $      (3,471)
Total comprehensive income          $     1,586             $           643 
                       
                       
                       
  Nine Months Ended
March 31, 2010
  Nine Months Ended
March 31, 2009
(Amounts in Thousands) Pre-tax   Tax   Net of Tax   Pre-tax   Tax   Net of Tax
Net income          $   10,010             $      14,480 
Other comprehensive income (loss):                      
    Foreign currency translation adjustments  $    (3,689)    $        796     $    (2,893)    $   (9,330)    $    (1,286)    $    (10,616)
    Postemployment severance actuarial change  (2,497)    996     (1,501)    (1,690)    674     (1,016)
    Other fair value changes:                      
        Available-for-sale securities  (134)    54     (80)    1,585     (632)    953 
        Derivatives  2,844     (684)    2,160     (15,732)    4,690     (11,042)
    Reclassification to (earnings) loss:                      
        Available-for-sale securities  (328)    130     (198)    (148)    59     (89)
        Derivatives  343     (117)    226     6,276     (2,559)    3,717 
        Amortization of prior service costs  214     (84)    130     214     (85)    129 
        Amortization of actuarial change  608     (242)    366     177     (71)    106 
Other comprehensive income (loss)  $    (2,639)    $        849     $    (1,790)    $ (18,648)    $        790     $    (17,858)
Total comprehensive income (loss)          $     8,220             $      (3,378)

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Accumulated other comprehensive loss, net of tax effects, was as follows:
  March 31,
2010
  June 30,
2009
(Amounts in Thousands)      
Foreign currency translation adjustments   $     4,928       $       7,821  
Unrealized gain (loss) from:      
    Available-for-sale securities   185       463  
    Derivatives   (3,345)      (5,731) 
Postemployment benefits:      
    Prior service costs   (850)      (980) 
    Net actuarial loss   (3,209)      (2,074) 
Accumulated other comprehensive loss   $    (2,291)      $        (501) 

Note 4. Segment Information

Management organizes the Company into segments based upon differences in products and services offered in each segment. The EMS segment provides engineering and manufacturing services which utilize common production and support capabilities to a variety of industries globally. The EMS segment focuses on electronic assemblies that have high durability requirements and are sold on a contract basis and produced to customers' specifications. The EMS segment currently sells primarily to customers in the medical, automotive, industrial controls, and public safety industries. The Furniture segment provides furniture for the office and hospitality industries, sold under the Company's family of brand names. Each segment's product line offerings consist of similar products and services sold within various industries. Intersegment sales are insignificant.

14


Unallocated corporate assets include cash and cash equivalents, short-term investments, and other assets not allocated to segments. Unallocated corporate net income consists of income not allocated to segments for purposes of evaluating segment performance and includes income from corporate investments and other non-operational items. The basis of segmentation and accounting policies of the segments are consistent with those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

  Three Months Ended   Nine Months Ended  
  March 31   March 31  
(Amounts in Thousands)  2010   2009   2010   2009  
Net Sales:                
 Electronic Manufacturing Services $190,137    $140,630    $522,606    $ 490,463   
 Furniture 92,181    128,222    309,487    445,490   
 Unallocated Corporate and Eliminations 29    -0-   74    -0-  
 Consolidated $282,347 

 

$268,852    $832,167 

 

$ 935,953   
                 
Net Income (Loss):                
 Electronic Manufacturing Services $  10,766 

 

$  (9,570)   $  13,212 

 

$ (11,047)  
 Furniture (4,543)

 

(1,615)   (3,759)

 

5,617   
 Unallocated Corporate and Eliminations 107 

 

15,299    557 

 

19,910   
 Consolidated $    6,330 

(1)

$    4,114 

(2)

$  10,010  

(1)

$   14,480 

(2)

(1) Net Income (Loss) included after-tax restructuring charges, in thousands, of $549 and $1,025 in the three and nine months ended March 31, 2010, respectively. The EMS segment recorded, in the three and nine months ended March 31, 2010, in thousands, $529 and $1,034, respectively, of after-tax restructuring charges. The Furniture segment recorded, in the three and nine months ended March 31, 2010, in thousands, $0 and $(51), respectively, of after-tax restructuring income. Unallocated Corporate and Eliminations recorded, in the three and nine months ended March 31, 2010, in thousands, $20 and $42, respectively, of after-tax restructuring charges. See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion. Additionally, the EMS segment recorded for both the three and nine months ended March 31, 2010, after-tax income of $7.7 million resulting from the gain on the sale of the Poland facility and land. The EMS segment also recorded for the nine months ended March 31, 2010, after-tax income of  $2.0 million resulting from settlement proceeds related to an antitrust class action lawsuit of which the Company was a class member.

(2) Net Income (Loss) included after-tax restructuring charges, in thousands, of $420 and $1,675 in the three and nine months ended March 31, 2009, respectively.  The EMS segment recorded, in the three and nine months ended March 31, 2009, in thousands, $178 and $1,077, respectively, of after-tax restructuring charges.  The Furniture segment recorded, in the three and nine months ended March 31, 2009, in thousands, $71 and $360, respectively, of after-tax restructuring charges.  Unallocated Corporate and Eliminations recorded, in the three and nine months ended March 31, 2009, in thousands, $171 and $238, respectively, of after-tax restructuring charges.  See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion.  Additionally, the EMS segment recorded for the nine months ended March 31, 2009, $1.6 million of after-tax income for earnest money deposits retained by the Company resulting from the termination of the contract to sell the Company's Poland building and real estate.  Unallocated Corporate and Eliminations also recorded, for both the three and nine months ended March 31, 2009, in millions, $13.9 and $18.7, respectively, of after-tax gains on the sale of undeveloped land holdings and timberlands. Also, for both the three and nine months ended March 31, 2009, the Company recorded $9.1 million of after-tax costs related to goodwill impairment, consisting of $8.0 million in the EMS segment and $1.1 million in the Furniture segment. See the Goodwill and Other Intangible Assets section of Note 1 - Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for further discussion.

  March 31,   June 30,  
(Amounts in Thousands) 2010 2009
Total Assets:
 Electronic Manufacturing Services $412,613  $351,506 
 Furniture 179,349  184,755 
 Unallocated Corporate and Eliminations 59,892  106,008 
 Consolidated $651,854 

 

$642,269 

 

15


Note 5. Commitments and Contingent Liabilities

Standby letters of credit are issued to third-party suppliers, lessors, and insurance and financial institutions and can only be drawn upon in the event of the Company's failure to pay its obligations to the beneficiary.  As of March 31, 2010, the Company had a maximum financial exposure from unused standby letters of credit totaling $4.8 million. The Company is not aware of circumstances that would require it to perform under any of these arrangements and believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the Company's financial statements. Accordingly, no liability has been recorded as of March 31, 2010 with respect to the standby letters of credit. The Company also enters into commercial letters of credit to facilitate payment to vendors and from customers.

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

Changes in the product warranty accrual for the nine months ended March 31, 2010 and 2009 were as follows:

Nine Months Ended
March 31
(Amounts in Thousands)

2010

  2009
Product Warranty Liability at the beginning of the period $ 2,176  $ 1,470 
Accrual for warranties issued 493  1,074 
Additions (Reductions) related to pre-existing warranties (including changes in estimates) (77)    157 
Settlements made (in cash or in kind) (712) (867)
Product Warranty Liability at the end of the period $ 1,880    $ 1,834 

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Note 6. Restructuring Expense

The Company recognized consolidated pre-tax restructuring expense of $0.9 million and $1.7 million in the three and nine months ended March 31, 2010, respectively, and $0.7 million and $2.7 million in the three and nine months ended March 31, 2009, respectively. The action discussed below represents the majority of the restructuring costs during the period presented in the summary table on the following page. Former restructuring plans that are substantially complete and did not have significant expense during the period presented are included in the summary table on the following page under the caption Other Restructuring Plans and include the Furniture segment Office Furniture Manufacturing Consolidation Plan and the Unallocated Corporate Gaylord restructuring plan.

The Company utilizes available market prices and management estimates to determine the fair value of impaired fixed assets. Restructuring charges are included in the Restructuring Expense line item on the Company's Condensed Consolidated Statements of Income.

European Consolidation Plan:

During the fourth quarter of fiscal year 2008, the Company approved a plan to expand its European automotive electronics capabilities and to establish a European Medical Center of Expertise in Poznan, Poland. The Company previously had one operation in Poznan. The Company successfully completed the move of production from Longford, Ireland, into that existing Poznan facility during the fiscal year 2009 second quarter. As part of the plan, the Company is also consolidating its EMS facilities located in Bridgend, Wales, and Poznan, Poland, into a new larger facility in Poznan, which is expected to improve the Company's margins in the very competitive EMS market. Construction of the new, larger facility in Poland is complete and limited production has begun. The plan is being executed in stages with a projected final completion of the consolidation by mid-fiscal year 2012. The Company sold the existing Poland facility and land during the fiscal year 2010 third quarter and recorded a $6.7 million pre-tax gain which is included in the Other General Income line on the Company's Condensed Consolidated Statements of Income. The Company is leasing back a portion of the facility until it completes the transfer of production to the new facility. The Company currently estimates that the total pre-tax charges related to the consolidation activities will be approximately, in millions, $21.2 consisting of  $19.6 of severance and other employee costs, $0.4 of property and equipment asset impairment, $0.7 of lease exit costs, and $0.5 of other exit costs.

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Summary of All Plans                                     
  Accrued
June 30,
2009 (2)
  Nine Months Ended March 31, 2010   Accrued
March 31,
2010 (2)
  Total Charges
Incurred Since Plan Announcement (3)
  Total Expected
Plan Costs (3) 
 
(Amounts in Thousands)   Amounts
Charged (Income) Cash
  Amounts
Charged 
Non-cash
  Amounts Utilized/
Cash Paid
  Adjustments        
EMS Segment                                
    FY 2008 European Consolidation Plan                          
        Transition and Other Employee Costs   $  12,288       $   1,489       $      -0-       $(2,041)      $      (992)  (4)   $10,744       $         19,090       $19,613    
        Asset Write-downs   -0-       -0-       82       (82)      -0-       -0-       428       428    
        Plant Closure and Other Exit Costs   -0-       154       -0-       (154)      -0-       -0-       611       1,132    
    Total EMS Segment   $  12,288       $   1,643       $       82       $(2,277)      $      (992)      $10,744       $         20,129       $21,173    
Furniture Segment                                
    Other Restructuring Plans (1)   -0-       (83)      -0-       83       -0-       -0-       152       152    
Unallocated Corporate                                
    Other Restructuring Plans (1)   -0-       68       -0-       (68)      -0-       -0-       644       750    
Consolidated Total of All Plans   $  12,288       $   1,628       $       82       $(2,262)      $      (992)      $10,744       $         20,925       $22,075    
                               
(1) Other Restructuring Plans with charges during the nine months ended March 31, 2010 include the Office Furniture Manufacturing Consolidation Plan initiated in fiscal year 2009 and the Unallocated Corporate Gaylord restructuring plan initiated in fiscal year 2007.  
(2) Accrued restructuring at March 31, 2010 and June 30, 2009 was $10.7 million and $12.3 million, respectively. The balances include $2.2 million and $3.8 million recorded in current liabilities at March 31, 2010 and June 30, 2009, respectively, and $8.5 million recorded in other long-term liabilities at both March 31, 2010 and June 30, 2009.
 
(3) These columns include restructuring plans that were active during the nine months ended March 31, 2010, including the EMS segment European Consolidation Plan initiated in fiscal year 2008, the Furniture segment Office Furniture Manufacturing Consolidation Plan initiated in fiscal year 2009, and the Unallocated Corporate Gaylord restructuring plan initiated in fiscal year 2007.  
(4) The effect of changes in foreign currency exchange rates within the EMS segment due to revaluation of the restructuring liability is included in this amount.  
 

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Note 7. Fair Value of Financial Assets and Liabilities

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

  • Level 1:  Unadjusted quoted prices in active markets for identical assets and liabilities.
  • Level 2:  Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
  • Level 3:  Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

The Company invested in convertible promissory notes and stock warrants of a privately-held company during the quarters ended March 31, 2010 and December 31, 2009. The Company has been chosen as the primary supplier for the privately-held company to produce products in the future and negotiations for a definitive supply agreement are in process.

The convertible promissory notes are classified as available-for-sale debt securities as a result of the conversion option and were valued using a recurring market-based method which approximates fair value by using the amortized cost basis of the promissory notes, with the discount amortized to interest income over the term. The stock warrants are classified as derivative instruments as a result of a net settlement feature and were valued on a recurring basis using a market-based method which utilizes the Black-Scholes valuation model with the following inputs: risk-free interest rate, volatility, expected life, and the estimated stock price.

See Note 9 - Short-Term Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the convertible debt securities. See Note 8 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information regarding the stock warrants.  

There were no other changes in the Company's inputs or valuation techniques used to measure fair values compared to those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

19



Recurring Fair Value Measurements:
As of March 31, 2010 and June 30, 2009, the fair values of financial assets and liabilities that are measured at fair value on a recurring basis using the market approach are categorized as follows:

  March 31, 2010
(Amounts in Thousands)   Level 1   Level 2   Level 3   Total
Assets                
    Cash equivalents     $       25,307       $            -0-       $            -0-       $       25,307  
    Available-for-sale securities: Municipal securities     -0-       14,084       -0-       14,084  
    Available-for-sale securities: Convertible debt securities     -0-       -0-       1,776       1,776  
    Derivatives: Foreign exchange contracts     -0-       1,848       -0-       1,848  
    Derivatives: Stock warrants     -0-       -0-       286       286  
    Nonqualified supplemental employee retirement plan assets     13,952       -0-       -0-       13,952  
        Total assets at fair value     $       39,259       $       15,932       $         2,062       $       57,253  
Liabilities                
    Derivatives: Foreign exchange contracts     $            -0-       $            318       $            -0-       $            318  
        Total liabilities at fair value     $            -0-       $            318       $            -0-       $            318  
               
               
  June 30, 2009
(Amounts in Thousands)   Level 1   Level 2   Level 3   Total
Assets                
    Cash equivalents     $       42,114       $            -0-       $            -0-       $       42,114  
    Available-for-sale securities: Municipal securities     -0-       25,376       -0-       25,376  
    Derivatives: Foreign exchange contracts     -0-       784       -0-       784  
    Nonqualified supplemental employee retirement plan assets     10,992       -0-       -0-       10,992  
        Total assets at fair value     $       53,106       $       26,160       $            -0-       $       79,266  
Liabilities                
    Derivatives: Foreign exchange contracts     $            -0-       $         3,407       $            -0-       $         3,407  
        Total liabilities at fair value     $            -0-       $         3,407       $            -0-       $         3,407  
               
During the three months ended March 31, 2010, the Company purchased convertible debt securities of $0.9 million and stock warrants of $0.1 million. During the nine months ended March 31, 2010, the Company purchased convertible debt securities of $1.7 million and stock warrants of $0.3 million. The changes in fair value of Level 3 investment assets for the three and nine months ended March 31, 2010 were immaterial.  There were no Level 3 investments as of the fiscal year ended June 30, 2009.


Non-Recurring Fair Value Measurements:

During the three and nine months ended March 31, 2010, the Company had no fair value adjustments applicable to items that are subject to non-recurring fair value measurement after the initial measurement date.

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Disclosure of Other Financial Instruments:

Other financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value have carrying amounts that approximate fair value as follows:

Assets

 

Liabilities

Certain cash and cash equivalents

 

Accounts payable

Receivables

 

Borrowings under credit facilities

Other assets not recorded at fair value

 

Dividends payable

 

 

Accrued expenses

The fair value estimate for long-term debt, excluding capital leases, was estimated using a discounted cash flow analysis based on quoted long-term debt market rates adjusted for the Company's non-performance risk. There was an immaterial difference between the carrying value and estimated fair value of long-term debt as of March 31, 2010 and June 30, 2009.

Note 8.  Derivative Instruments

Foreign Exchange Contracts:

The Company operates internationally and is therefore exposed to foreign currency exchange rate fluctuations in the normal course of its business. The Company's primary means of managing this exposure is to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques do not fully offset currency risk, the Company uses derivative instruments with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure is committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments are only utilized for risk management purposes and are not used for speculative or trading purposes.

The Company uses forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency. Foreign exchange contracts are also used to hedge against foreign currency exchange rate risks related to intercompany balances denominated in currencies other than the functional currencies. As of March 31, 2010, the Company had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $22.9 million and to hedge currencies against the Euro in the aggregate notional amount of 16.0 million EUR. The notional amounts are indicators of the volume of derivative activities but are not indicators of the potential gain or loss on the derivatives.

In limited cases due to unexpected changes in forecasted transactions, cash flow hedges may cease to meet the criteria to be designated as cash flow hedges. Depending on the type of exposure hedged, the Company may either purchase a derivative contract in the opposite position of the undesignated hedge or may retain the hedge until it matures if the hedge continues to provide an adequate offset in earnings against the currency revaluation impact of foreign currency denominated liabilities.

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The fair value of outstanding derivative instruments is recognized on the balance sheet as a derivative asset or liability. When derivatives are settled with the counterparty, the derivative asset or liability is relieved and cash flow is impacted for the net settlement. For derivative instruments that meet the criteria of hedging instruments under FASB guidance, the effective portions of the gain or loss on the derivative instrument are initially recorded net of related tax effect in Accumulated Other Comprehensive Income (Loss), a component of Share Owners' Equity, and are subsequently reclassified into earnings in the period or periods during which the hedged transaction is recognized in earnings. The ineffective portion of the derivative gain or loss is reported in the Non-operating income (expense) line item on the Condensed Consolidated Statements of Income immediately. The gain or loss associated with derivative instruments that are not designated as hedging instruments or that cease to meet the criteria for hedging under FASB guidance is also reported in the Non-operating income (expense) line item on the Condensed Consolidated Statements of Income immediately.

Based on fair values as of March 31, 2010, the Company estimates that $3.9 million of pre-tax derivative losses deferred in Accumulated Other Comprehensive Income (Loss) will be reclassified into earnings, along with the earnings effects of related forecasted transactions, within the next 12 months. Losses on foreign exchange contracts are generally offset by gains in operating costs in the income statement when the underlying hedged transaction is recognized in earnings. Because gains or losses on foreign exchange contracts fluctuate partially based on currency spot rates, the future effect on earnings of the cash flow hedges alone is not determinable, but in conjunction with the underlying hedged transactions, the result is expected to be a decline in currency risk. The maximum length of time the Company had hedged its exposure to the variability in future cash flows was 11 and 15 months as of March 31, 2010 and June 30, 2009, respectively.

Stock Warrants:

In conjunction with the Company's investment in convertible debt securities of a privately-held company during the quarters ended March 31, 2010 and December 31, 2009, the Company received common and preferred stock warrants which provide the right to purchase the privately-held company's equity securities at a specified exercise price. Specifically, the Company received stock warrants to purchase 2,000,000 shares of common stock at a $0.15 per share exercise price and received stock warrants to purchase a number of shares of preferred stock based on the latest preferred stock offering price (1,333,000 shares of preferred stock at a $1.50 per share exercise price, based on the last offering price of outstanding preferred stock). The value of the stock warrants will fluctuate primarily in relation to the value of the privately-held company's underlying securities, either providing an appreciation in value or potentially expiring with no value. Gains and losses on the revaluation of stock warrants are recognized in the Non-operating income (expense) line item on the Condensed Consolidated Statements of Income.

See Note 7 - Fair Value of Financial Assets and Liabilities of Notes to Condensed Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and Note 3 - Comprehensive Income (Loss) of Notes to Condensed Consolidated Financial Statements for the amount and changes in derivative gains and losses deferred in Accumulated Other Comprehensive Income (Loss).

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Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets and derivative gains and losses in the Condensed Consolidated Statements of Income are presented below.


Fair Values of Derivative Instruments on the Condensed Consolidated Balance Sheets
    Asset Derivatives   Liability Derivatives
      Fair Value As of       Fair Value As of
(Amounts in Thousands)   Balance Sheet Location   March 31,
2010
  June 30,
2009
  Balance Sheet Location   March 31,
2010
  June 30,
2009
Derivatives designated as
hedging instruments:
                   
   Foreign exchange contracts   Prepaid expenses and
other current assets
  $ 1,662       $      742     Accrued expenses     $    -0-       $ 2,581  
                       
Derivatives not designated as
hedging instruments:
                   
   Foreign exchange contracts   Prepaid expenses and
other current assets
  186       42     Accrued expenses     318       631  
   Foreign exchange contracts             Other liabilities (long-term)
    -0-       195  
   Stock warrants   Other assets (long-term)   286       -0-              
Total derivatives         $ 2,134       $      784           $    318       $ 3,407  


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The Effect of Derivative Instruments on Other Comprehensive Income (Loss)                
            Three Months Ended
March 31
  Nine Months Ended
March 31
(Amounts in Thousands)           2010   2009   2010   2009
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive
Income (Loss) (OCI) on Derivatives (Effective Portion):
               
        Foreign exchange contracts         $    1,990       $  (1,135)      $    2,844       $(15,732) 
                       
                       
                       
                       
The Effect of Derivative Instruments on Condensed Consolidated Statements of Income            
(Amounts in Thousands)                        
            Three Months Ended
March 31
  Nine Months Ended
March 31
Derivatives in Cash Flow Hedging Relationships   Location of Gain or (Loss)    2010   2009   2010   2009
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated
OCI into Income (Effective Portion):
       
        Foreign exchange contracts   Net Sales     $       -0-       $     (188)      $         12       $     (188) 
        Foreign exchange contracts   Cost of Sales     973       (2,483)      (429)      (4,202) 
        Foreign exchange contracts   Non-operating income (expense)     69       101       30       (2,030) 
        Total             $    1,042       $  (2,570)      $     (387)      $  (6,420) 
                       
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated
OCI into Income (Ineffective Portion):
       
        Foreign exchange contracts   Non-operating income (expense)     $       -0-       $         (1)      $         44       $       144  
                       
                       
Derivatives Not Designated as Hedging Instruments                        
Amount of Pre-Tax Gain or (Loss) Recognized in Income on Derivatives:                
        Foreign exchange contracts   Non-operating income (expense)     $       (54)      $       384       $     (491)      $       384  
        Stock warrants   Non-operating income (expense)     (5)      -0-       (5)      -0-  
        Total             $       (59)      $       384       $     (496)      $       384  
                       
                       
Total Derivative Pre-Tax Gain (Loss) Recognized in Income         $       983       $  (2,187)      $     (839)      $  (5,892) 

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Note 9.  Short-Term Investments

Municipal Securities:

The Company's short-term investment portfolio includes available-for-sale securities which are comprised of exempt securities issued by municipalities ("Municipal Securities") which can be in the form of General Obligation Bonds, Revenue Bonds, Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes, pre-refunded (by U.S. Govt. or State and Local Govt.) bonds, and short-term putable bonds. The Company's investment policy dictates that municipal securities must be investment grade quality.

Available-for-sale securities are recorded at fair value. See Note 7 - Fair Value of Financial Assets and Liabilities of Notes to Condensed Consolidated Financial Statements for more information on the fair value of available-for-sale securities. The amortized cost basis reflects the original purchase price, with discounts and premiums amortized over the life of the security. Unrealized losses on debt securities are recognized in earnings when a company has an intent to sell or is likely to be required to sell before recovery of the loss, or when the debt security has incurred a credit loss. Otherwise, unrealized gains and losses are recorded net of the tax related effect as a component of Share Owners' Equity. Municipal securities mature within a five-year period.

Municipal Securities        
(Amounts in Thousands)   March 31,
2010
  June 30,
2009
Amortized cost basis     $   13,776       $   24,606  
Unrealized holding gains     312       770  
Unrealized holding losses      (4)      -0-  
Other-than-temporary impairment     -0-       -0-  
    Fair Value     $   14,084       $   25,376  

At March 31, 2010, there were no individual securities with a material unrealized holding loss. Securities with unrealized losses have been in a continuous loss position for less than 12 months. There were no individual securities with an unrealized holding loss at June 30, 2009.


Activity for the municipal securities that were classified as available-for-sale was as follows:
               
Municipal Securities   Three Months Ended
March 31
  Nine Months Ended
March 31
(Amounts in Thousands)   2010   2009   2010   2009
Proceeds from sales     $       11,770       $         3,701       $       14,879       $         6,970  
Gross realized gains from sale of available-for-sale securities
      included in earnings
    272       135       328       188  
Gross realized losses from sale of available-for-sale securities
      included in earnings
    -0-       (5)      -0-       (40) 
Net unrealized holding gain (loss) included in Other
      Comprehensive Income (Loss)
    (90)      594       (134)      1,585  
Net (gains) losses reclassified out of Other
      Comprehensive Income (Loss)
    (272)      (148)      (328)      (148) 

Realized gains and losses are reported in Other Income (Expense) category of the Condensed Consolidated Statements of Income. The cost of each individual security was used in computing the realized gains and losses. No other-than-temporary impairment was recorded during the three and nine months ended March 31, 2010 and March 31, 2009.

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Convertible Debt Securities:

On February 1, 2010 and December 17, 2009, the Company purchased secured convertible promissory notes from a privately-held company with face amounts of $1.0 million for each note. The Company has been chosen as the primary supplier for the privately-held company to produce products in the future, and negotiations for a definitive supply agreement are in process. The convertible notes are accounted for as available-for-sale debt securities and are recorded at fair value.  Interest accrues on the debt securities at a rate of 8.00% per annum and is due with the principal at the February 1, 2011 and December 17, 2010 maturity dates.  The debt securities are convertible into the preferred stock of the privately-held company upon certain events, including a qualified financing, a nonqualified financing, initial public offering, or a change in control.

In connection with the purchase of the debt securities, the Company also received stock warrants to purchase the common and preferred stock of the privately-held company at a specified exercise price. See Note 8 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information regarding stock warrants.

In the aggregate, the investments, security interest, and supply agreement do not rise to the level of a material variable interest or a controlling interest in the privately-held company which would require consolidation.

See Note 7 - Fair Value of Financial Assets and Liabilities of Notes to Condensed Consolidated Financial Statements for more information on the fair value of available-for-sale securities.  Unrealized losses on the debt securities will be recognized in earnings when there is an intent to sell or is likely to be required to sell before recovery of the loss, or when the debt securities have incurred a credit loss. Otherwise, unrealized gains and losses are recorded net of the tax related effect as a component of Share Owners' Equity.

Supplemental Employee Retirement Plan Investments:

The Company maintains a self-directed supplemental employee retirement plan (SERP) for executive employees. The SERP is structured as a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. The Company recognizes SERP investment assets on the balance sheet at current fair value. A SERP liability of the same amount is recorded on the balance sheet representing the Company's obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income. Adjustments made to revalue the SERP liability are also recognized in income and exactly offset valuation adjustments on SERP investment assets. The change in net unrealized holding gains and (losses) for the nine-month periods ended March 31, 2010 and 2009 was, in thousands, $2,515 and ($3,996), respectively. SERP asset and liability balances were as follows:

(Amounts in Thousands)   March 31,
2010
  June 30,
2009
SERP investment - current asset     $         5,220       $         3,536  
SERP investment - other long-term asset     8,732       7,456  
    Total SERP investment     $       13,952       $       10,992  
       
SERP obligation - current liability     $         5,220       $         3,536  
SERP obligation - other long-term liability     8,732       7,456  
    Total SERP obligation     $       13,952       $       10,992  

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Note 10.  Assets Held for Sale

At March 31, 2010, a facility and land related to the Gaylord, Michigan, exited operation within the EMS segment were classified as held for sale and totaled, in thousands, $1,160. The assets were reported as Unallocated Corporate assets for segment reporting purposes.  The Company expects to sell these assets during the next 12 months. During the year-to-date period of fiscal year 2010, the Company sold equipment related to previously held timberlands, and the sale had an immaterial effect on the Company's consolidated financial statements. At June 30, 2009, the Company had, in thousands, assets totaling $1,358 classified as held for sale.

Note 11. Postemployment Benefits

The Company maintains severance plans for all domestic employees. These plans provide severance benefits to eligible employees meeting the plans' qualifications, primarily involuntary termination without cause. The components of net periodic postemployment benefit cost applicable to the Company's severance plans were as follows:

  Three Months Ended   Nine Months Ended  
  March 31   March 31  
(Amounts in Thousands) 2010   2009   2010   2009  
Service cost $  217     $  108     $   595     $ 270    
Interest cost 122     46     334     115    
Amortization of prior service costs 71     71     214     214    
Amortization of actuarial change 310     169     608     177    
Net periodic benefit cost $  720     $ 394     $1,751     $ 776    

The benefit cost in the above table includes only normal recurring levels of severance activity, as estimated using an actuarial method. Unusual or non-recurring severance actions, such as those disclosed in Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements, are not estimable using actuarial methods and are expensed in accordance with the applicable U.S. GAAP.

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Note 12.  Stock Compensation Plan

During fiscal year 2010, the following stock compensation was awarded to officers, key employees, and non-employee directors. All awards were granted under the 2003 Stock Option and Incentive Plan. For more information on similar unrestricted shares and performance share awards, refer to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Performance Shares  

Quarter Awarded

  Maximum Potential Shares Issuable   Grant Date Fair Value (4)
Annual Performance Shares - Class A (1)   1st Quarter   240,000    $ 6.24 
Long-Term Performance Shares - Class A (2)   1st Quarter   726,350    $ 6.24 
Long-Term Performance Shares - Class A (2)   2nd Quarter   1,280    $ 7.22 
Annual Performance Shares - Class A (1)   3rd Quarter   1,167    $ 7.32 
Long-Term Performance Shares - Class A (2)   3rd Quarter   4,766    $ 7.32 

 

Unrestricted Shares  

Quarter Awarded

   Shares   Grant Date Fair Value (4)
Unrestricted Shares (Director Compensation) - Class B (3)   2nd Quarter   19,662    $ 7.63 


(1) Annual performance shares were awarded to officers. Payouts will be based upon the fiscal year 2010 cash incentive payout percentages calculated under the Company's 2005 Profit Sharing Incentive Bonus Plan. The number of shares issued will be less than the maximum potential shares issuable if the maximum cash incentive payout percentages are not achieved. Annual performance shares vest after one year.
(2) Long-term performance shares were awarded to officers and other key employees. Payouts will be based upon the cash incentive payout percentages calculated under the Company's 2005 Profit Sharing Incentive Bonus Plan. Long-term performance shares are based on five successive annual performance measurement periods, with each annual tranche having a grant date when economic profit tiers are established at the beginning of the applicable fiscal year and a vesting date at the end of each annual period. The number of shares issued will be less than the maximum potential shares issuable if the maximum cash incentive payout percentages are not achieved.
(3) Unrestricted shares were awarded to non-employee members of the Board of Directors as compensation for director's fees, as a result of directors' elections to receive unrestricted shares in lieu of cash payment. Director's fees are expensed over the period that directors earn the compensation. Unrestricted shares do not have vesting periods, holding periods, restrictions on sale, or other restrictions.
(4) The grant date fair value of performance shares is based on the stock price at the date of the award, reduced by the present value of dividends normally paid over the vesting period which are not payable on outstanding performance share awards. The grant date fair value shown for long-term performance shares is applicable to the first tranche only. The grant date fair value of the unrestricted shares was based on the stock price at the date of the award.

28


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

Business Overview

Kimball International, Inc. provides a variety of products from its two business segments: the Electronic Manufacturing Services (EMS) segment and the Furniture segment. The EMS segment provides engineering and manufacturing services which utilize common production and support capabilities globally to the medical, automotive, industrial control, and public safety industries. The Furniture segment provides furniture for the office and hospitality industries, sold under the Company's family of brand names.

Within both segments, most of the markets in which the Company competes were adversely affected by the global recession and liquidity crisis. The Company experienced declining sales and order trends beginning in the second quarter of fiscal year 2009, but the EMS segment open order trend has subsequently rebounded with four consecutive quarterly increases. Open orders at March 31, 2010 were 29% higher in the EMS segment; however, open orders were 34% lower in the Furniture segment when compared to March 31, 2009. As compared to the most recent quarter ending December 31, 2009, the March 31, 2010 open orders for the EMS segment increased 16%, and the Furniture segment open orders declined 7%.  While open orders at a point in time are not necessarily indicative of future sales, the EMS segment improvements are encouraging.

After experiencing 15% sales declines in calendar year 2009, the EMS industry sales projections (by IDC, InForum, and Electronic Trend Publications) show average forecasted growth for calendar year 2010 of 7.2% compared to calendar year 2009. In addition, the Semiconductor Industry Association (SIA) reported that semiconductor sales are projected to grow approximately 10% in calendar year 2010, and although the Company does not directly serve this market, it may be indicative of end market demand for products utilizing electronic components.

 The Company continues its strategy of diversification within the EMS segment customer base as it currently focuses on the four key vertical markets of medical, automotive, industrial control, and public safety. Short-term demand in the automotive market improved during the first half of the Company's fiscal year 2010 in conjunction with the Cash for Clunkers program. Automotive activity in the third quarter of fiscal year 2010 remained strong with sustained activity projected for the fourth quarter of fiscal year 2010. Thereafter, automotive demand is expected to return to a more normal level due to the impact of current economic conditions on durable goods spending. Demand in the medical market has remained stable, and the Company sees signs of growth. The industrial control vertical market is also showing signs of stability, after benefiting from spending targeted at energy savings technologies, and the public safety vertical market is likewise stable. Sales to customers in the medical industry are the largest portion of the Company's EMS segment with sales to customers in the automotive industry being the second largest of the four vertical markets. The Company's sales to customers in the automotive industry are diversified among more than ten domestic and foreign customers and represented approximately 30% of the EMS segment's net sales for the third quarter of fiscal year 2010. The amount of sales of electronic components that relate to General Motors, Ford, and Chrysler automobiles sold in North America were only approximately 8% of the Company's EMS segment net sales during the third quarter of fiscal year 2010.

29


As of February 2010, the Business and Institutional Furniture Manufacturer Association (BIFMA International) is projecting an approximate 0.3% year-over-year decline in the office furniture industry for calendar year 2010 after a 29% decline in calendar year 2009 with a return to positive growth expected to begin mid-calendar year 2010. While the Company's mid-market brand has fared better than its contract office furniture brand due to the project nature of the contract market and the changing U.S. consumption patterns, it cannot predict future overall office furniture order trends at this time due to the short lead time of orders and the volatility in this market. In addition, the hotel industry forecasts (reported by Smith Travel Research and PricewaterhouseCoopers LLP) project occupancy rates to increase slightly in calendar year 2010 after a 9% decline in calendar year 2009 and project revenue per available room (RevPAR) to decline approximately another 1% for calendar year 2010 after a 17% decline in calendar year 2009. The Company expects order rates for hospitality furniture to remain depressed in the near term due to the lower hotel occupancy rates and RevPAR rates.

Competitive pricing pressures within the EMS segment and on many projects within the Furniture segment continue to put pressure on the Company's operating margins.

The Company is continually assessing its strategies in relation to the market conditions. A long-standing component of the Company's profit sharing incentive bonus plan is that it is linked to the performance of the Company which automatically lowers total compensation expense when profits are down. The Company has also implemented various initiatives in response to the market conditions including reducing operating costs, more closely scrutinizing customer and supply chain risk, and deferring or cancelling capital expenditures that are not immediately required to support customer requirements. The Company will continue to closely monitor market changes and its liquidity in order to proactively adjust its operating costs, discretionary capital spending, and dividend levels as needed.

The Company continues to maintain a strong balance sheet which includes a minimal amount of long-term debt of $0.4 million and Share Owners' equity of $386.0 million. The Company's short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of the Company's revolving credit facility, was $152.3 million at March 31, 2010.

In addition to the above risks related to the current market conditions, management currently considers the following events, trends, and uncertainties to be most important to understanding the Company's financial condition and operating performance:

  • The Company will continue its focus on preserving cash and minimizing debt. Managing working capital in conjunction with fluctuating demand levels is key. In addition, the Company plans to minimize capital expenditures where appropriate but will continue to invest in capital expenditures prudently, particularly for projects that would enhance the Company's capabilities and diversification while providing an opportunity for growth and improved profitability as the economy and the Company's markets recover.
  • While commodity prices have been trending favorably on a year-over-year comparison basis, the prices of steel and aluminum are expected to increase in the near-term.  Mitigating the impact of higher commodity and fuel prices continues to be an area of focus within the Company.
  • Management is currently evaluating the healthcare reform legislation that was signed into law in March 2010 to determine the full impact on the Company. This legislation is expected to increase the Company's healthcare and related administrative expenses.
  • Globalization continues to reshape not only the industries in which the Company operates but also its key customers and competitors.

30


 

  • As demand within the EMS industry increases, the availability of components used in products manufactured by the Company is a concern.  Many suppliers are being cautious regarding increasing their capacity and as a result, component shortages could occur. If shortages of components occur, the Company's production and shipment schedules could be impacted.
  • The nature of the electronic manufacturing services industry is such that the start-up of new programs to replace departing customers or expiring programs occurs frequently. The success of the Company's EMS segment is dependent on the successful replacement of such customers or programs. Such changes usually occur gradually over time as old programs phase out of production while newer programs ramp up. While the margins vary depending on the size of the program and the vertical market being served, replacement programs often carry lower margins.
  • Successful execution of the Company's restructuring plans is critical to the Company's future performance. The success of the restructuring initiatives is dependent on accomplishing the plans in a timely and effective manner. The Company's restructuring plans are discussed in the segment discussions below.
  • The increasingly competitive marketplace mandates that the Company continually re-evaluate its business models.
  • The Company's employees throughout its business operations are an integral part of the Company's ability to compete successfully, and the stability of its management team is critical to long-term Share Owner value. The Company's career development and succession planning process helps to maintain stability in management.
  • As end markets dictate, the Company is continually assessing under-utilized capacity and developing plans to grow the Company's customer base and better utilize manufacturing operations, including shifting manufacturing capacity to lower cost venues as necessary.

o    During the first quarter of fiscal year 2009, the Company approved a restructuring plan to consolidate production of select office furniture manufacturing departments. The consolidation is complete and has reduced manufacturing costs and excess capacity by eliminating redundant property and equipment, processes, and employee costs.

o    During the fourth quarter of fiscal year 2008, the Company approved a plan to expand its European automotive electronics capabilities and to establish a European Medical Center of Expertise in Poznan, Poland. The Company previously had one operation in Poznan. The Company successfully completed the move of production from Longford, Ireland, into that existing Poznan facility during the second quarter of fiscal year 2009. As part of the plan, the Company is also consolidating its EMS facilities located in Bridgend, Wales, and Poznan into a new, larger facility in Poznan, with a projected final completion of the consolidation by mid-fiscal year 2012. Construction of the new, larger facility in Poland is complete and limited production has begun.

31


 

  • To support growth and diversification efforts, the Company has focused on both organic growth and acquisition activities. Acquisitions allow rapid diversification of both customers and industries served.
  • The regulatory and business environment for U.S. public companies requires that the Company continually evaluate and enhance its practices in the areas of corporate governance and management practices. The Company has taken a number of steps to conform its corporate governance to evolving national and industry-wide best practices among U.S. public companies, not only to comply with new legal requirements, but also to enhance the decision-making process of the Board of Directors.

Certain preceding statements could be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties including, but not limited to, a significant change in economic conditions, loss of key customers or suppliers, or similar unforeseen events.

Financial Overview - Consolidated

Third quarter fiscal year 2010 consolidated net sales were $282.3 million compared to third quarter fiscal year 2009 net sales of $268.9 million, a 5% increase, due to a net sales increase in the EMS segment more than offsetting a net sales decrease in the Furniture segment. Net income for the third quarter of fiscal year 2010 was $6.3 million, or $0.17 per Class B diluted share, inclusive of a $7.7 million after-tax gain, or $0.20 per Class B diluted share, related to the sale of a facility and land in Poland, and after-tax restructuring charges of $0.6 million, or $0.01 per Class B diluted share. The third quarter fiscal year 2010 restructuring charges were primarily related to the European consolidation plan. The Company recorded net income for the third quarter of fiscal year 2009 of $4.1 million, or $0.11 per Class B diluted share, inclusive of after-tax restructuring charges of $0.4 million, or $0.01 per Class B diluted share. Third quarter fiscal year 2009 results also include a $13.9 million after-tax gain, or $0.37 per Class B diluted share, related to the sale of undeveloped land holdings and timberlands and a $9.1 million after-tax non-cash goodwill impairment charge, or $0.24 per Class B diluted share.

Net sales for the nine-month period ended March 31, 2010 of $832.2 million were down 11% from net sales of $936.0 million for the same period of the prior fiscal year due to a 31% net sales decrease in the Furniture segment more than offsetting a 7% net sales increase in the EMS segment. Net income for the nine-month period ended March 31, 2010 totaled $10.0 million, or $0.27 per Class B diluted share, inclusive of a $7.7 million after-tax gain, or $0.20 per Class B diluted share, related to the sale of a facility and land in Poland, $2.0 million after-tax income, or $0.05 per Class B diluted share, resulting from settlement proceeds related to an antitrust class action lawsuit of which the Company was a class member, and $1.0 million, or $0.03 per Class B diluted share, of after-tax restructuring costs primarily related to the European consolidation plan. Net income for the nine-month period ended March 31, 2009, totaled $14.5 million, or $0.39 per Class B diluted share, inclusive of $1.7 million, or $0.04 per Class B diluted share, of after-tax restructuring costs primarily related to the European consolidation plan. The fiscal 2009 year-to-date results also include several non-recurring items: an $18.7 million after-tax gain, or $0.50 per Class B diluted share, related to the sale of undeveloped land holdings and timberlands; a $9.1 million after-tax non-cash goodwill impairment charge, or $0.24 per Class B diluted share; and $1.6 million of after-tax income, or $0.04 per Class B diluted share, for earnest money deposits retained by the Company resulting from a termination of the contract to sell the Company's Poland facility and land.

32


Consolidated gross profit as a percent of net sales declined to 14.3% for the third quarter of fiscal year 2010 from 15.8% in the third quarter of fiscal year 2009. For the year-to-date period of fiscal year 2010, gross profit as a percent of net sales declined to 15.8% compared to 16.8% for the year-to-date period of fiscal year 2009.  A shift in sales mix (as depicted in the table below) toward the EMS segment which operates at a lower gross profit percentage than the Furniture segment contributed to the decline for the third quarter and fiscal-year-to-date periods. The EMS segment gross profit as a percent of net sales improved for both the third quarter and year-to-date period of fiscal year 2010.  The Furniture segment gross profit as a percent of net sales declined in the third quarter but improved in the year-to-date period of fiscal year 2010.  Gross profit is discussed in more detail in the segment discussions below.

Segment Net Sales as a % of Consolidated

Three Months Ended

Nine Months Ended

Net Sales

March 31

March 31

 


 

2010

2009

2010

2009

 




EMS segment

67%

52%

63%

52%

Furniture segment

33%

48%

37%

48%

Consolidated selling and administrative expense declined as a percent of net sales for the third quarter of fiscal year 2010 as compared to the third quarter of fiscal year 2009 due to the leverage gained with the higher sales volume.  Third quarter fiscal year 2010 consolidated selling and administrative expenses increased in absolute dollars by 2% compared to the third quarter of fiscal year 2009 primarily due to increased incentive compensation costs at select business units, increased severance costs due to scaling operations, and increased costs related to the reinstatement of the Company's retirement plan contribution for fiscal year 2010. Partially offsetting these cost increases were lower employee salary compensation realized from the salary reduction plan implemented by the Company late in the third quarter of fiscal year 2009 along with lower bad debt expense.

Consolidated selling and administrative expense increased as a percent of net sales for the nine months ended March 31, 2010 compared to the nine months ended March 31, 2009 due to sales volumes declining at a quicker rate than the selling and administrative expenses. Consolidated selling and administrative expenses for the first nine months of fiscal year 2010 declined in absolute dollars by 6% compared to the comparable period of fiscal year 2009 primarily due to decreased employee salary compensation, lower bad debt expense, lower depreciation and amortization expense, and other comprehensive cost reduction efforts throughout the Company.  The Company also experienced increased employee benefit costs primarily related to the reinstatement of the Company's retirement plan contribution and increased incentive compensation costs at select business units during the fiscal 2010 year-to-date period as compared to the fiscal 2009 year-to-date period.

In addition, in the third quarter and year-to-date period of fiscal year 2010, the Company recorded $0.5 million and $2.6 million, respectively, of expense compared to $0.7 million and $4.1 million, respectively, of income in the third quarter and year-to-date period of fiscal year 2009 related to the normal revaluation to fair value of its Supplemental Employee Retirement Plan (SERP) liability. The result for the third quarter and year-to-date period was an unfavorable variance in selling and administrative costs of $1.3 million and $6.7 million, respectively. As the general equity markets improved, the value of the SERP investments increased, causing additional selling and administrative expense related to the SERP liability. The SERP expense recorded in selling and administrative expenses was exactly offset by an increase in SERP investment income which was recorded in Other Income (Expense) as an investment gain; therefore, there was no effect on net earnings. The SERP investment is primarily comprised of employee contributions.

33


Other General Income in the third quarter of fiscal year 2010 included a $6.7 million pre-tax gain within the EMS segment related to the sale of the facility and land in Poland. The Company is leasing a portion of the facility until it completes the transfer of production to its newly constructed facility in Poland. In addition to the third quarter gain on the sale of the facility and land in Poland, the fiscal 2010 year-to-date Other General Income also included $3.3 million of pre-tax income recorded in the EMS segment resulting from settlement proceeds related to an antitrust class action lawsuit of which the Company was a class member. The class action alleged the defendant sellers illegally conspired to fix prices for electronic components purchased by a business unit within the EMS segment.

Other General Income in the third quarter of fiscal year 2009 included a $23.2 million pre-tax gain on the sale of undeveloped land holdings and timberlands. The gain on the sale of land was included in Unallocated Corporate in segment reporting. The total pre-tax gain on the sale of the undeveloped land holdings and timberlands for the fiscal 2009 year-to-date period was $31.2 million. In addition during the fiscal 2009 year-to-date period, the Company had a conditional agreement to sell and lease back the facility that housed its Poland operations. However, the buyer was unable to close the transaction. As a result, the Company was entitled to retain approximately $1.9 million of the deposit funds held by the Company which was recorded as pre-tax income in Other General Income. This income was recorded in the EMS segment. 

In the prior fiscal year third quarter, the Company recorded non-cash pre-tax goodwill impairment charges of $14.6 million as a result of interim goodwill impairment testing which was completed during the quarter due to the uncertainty associated with the economy and the significant decline in the Company's sales and order trends during the third quarter of fiscal year 2009 as well as the increased disparity between the Company's market capitalization and the carrying value of its Share Owners' equity.

The Other Income (Expense) line included other income of $0.5 million and $3.5 million during the three and nine months ended March 31, 2010, respectively, compared to other income of $0.9 million and other expense of $3.8 million recorded during the three and nine months ended March 31, 2009, respectively. Other Income (Expense) in the third quarter of fiscal year 2010 included the favorable impact of the SERP appreciation and an unfavorable impact of foreign currency movements which were partially offset by a favorable currency impact within operating income. The $6.7 million favorable variance in SERP investments was the primary driver of the increased other income for the nine months ended March 31, 2010. Interest expense for the first nine months of fiscal year 2010 was lower than the same period of fiscal year 2009 due to lower average outstanding debt balances coupled with lower interest rates. Interest income was likewise lower for the first nine months of fiscal year 2010 compared to the same period of fiscal year 2009 due to lower interest rates and lower average investment balances.

The fiscal 2010 year-to-date actual effective tax rate was (73.3%) compared to the effective tax rate for the same period of fiscal year 2009 of 37.0%.  Relatively low pre-tax income coupled with a tax benefit due to a tax planning strategy related to the sale of the Poland facility and land and a favorable impact of the Company's earnings mix drove the significantly lower effective tax rate compared to the same period of fiscal year 2009. The mix of earnings between U.S. and foreign jurisdictions resulted in an overall tax benefit due to U.S. losses which have a higher statutory tax rate than the Company's foreign operations which were profitable in the first nine months of fiscal year 2010.

Comparing the balance sheets as of March 31, 2010 to June 30, 2009, the Company's accounts receivable balance increased due to the higher sales volumes and due to a large customer holding payment until early April. The Company's inventory balance as of March 31, 2010 increased from the June 30, 2009 level primarily to support the increased EMS sales volumes and the transfer of production to the new EMS facility in Poland from the other EMS facilities in Europe. The Company's Accounts Payable balance increased in conjunction with the inventory increase. The Company's Borrowings under credit facilities is zero as of March 31, 2010 as the Company opted to pay off its short-term debt. 

34


Electronic Manufacturing Services Segment

During the fourth quarter of fiscal year 2008, the Company approved a plan to expand its European automotive electronics capabilities and to establish a European Medical Center of Expertise in Poznan, Poland. The Company previously had one operation in Poznan. The Company successfully completed the move of production from Longford, Ireland, into that existing Poznan facility during the fiscal year 2009 second quarter. As part of the plan, the Company is also consolidating its EMS facilities located in Bridgend, Wales, and Poznan, Poland, into a new, larger facility in Poznan, which is expected to improve the Company's margins in the very competitive EMS market. Construction of the new, larger facility in Poland is complete and limited production has begun. The plan is being executed in stages with a projected final completion by mid-fiscal year 2012. See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for more information on restructuring charges.

EMS segment results were as follows:

 

At or for the
Three Months Ended

 

For the
Nine Months Ended

 

 

March 31

 

March 31

 

 

 


 

 

2010

 

2009

% Change

2010

 

2009

% Change

(Amounts in Millions)


 



 


Net Sales

$  190.1

 

$  140.6 

35%

$  522.6

 

$ 490.5 

7%

Operating Income (Loss)

$    10.2

 

$  (16.1)

163%

$   12.5

 

$  (18.2)

169%

Net Income (Loss)

$    10.8

 

$    (9.6)

212%

$   13.2

 

$ (11.0)

220%

Poland Land/Facility Gain, net of tax

$      7.7

 

$      0.0 

 

$     7.7

 

$     0.0 

 

Goodwill Impairment, net of tax

 $      0.0

 

$      8.0 

 

$     0.0

 

$     8.0 

 

Restructuring Expense, net of tax

  $      0.5

 

$      0.2 

 

$     1.0

 

$     1.1 

 

Open Orders

$  198.9

 

$  154.1 

29%

     

 

Third quarter fiscal year 2010 EMS segment net sales to customers in the automotive, medical, industrial control, and public safety industries all increased compared to the third quarter of fiscal year 2009. For the first nine months of fiscal year 2010 increased sales to customers in the automotive, medical, and industrial control industries more than offset decreased sales to public safety customers. While open orders increased 29% compared to March 31, 2009, open orders at a point in time may not be indicative of future sales trends due to the contract nature of the Company's business.

The third quarter and year-to-date fiscal 2010 EMS segment gross profit as a percent of net sales improved 2.9 percentage points and 1.1 percentage points when compared to the third quarter and year-to-date periods of fiscal year 2009, respectively. The improvements were primarily driven by labor efficiency improvements and fixed cost leverage associated with the increased sales.

35


EMS segment selling and administrative expenses in absolute dollars increased 12% in the third quarter of fiscal year 2010 and decreased 4% year-to-date in fiscal 2010.  Selling and administrative expense as a percent of net sales declined in both the third quarter and year-to-date period of fiscal year 2010 compared to the same periods of fiscal year 2009 on the higher sales volumes. The third quarter increased selling and administrative expense was primarily related to an increase in incentive compensation costs and the reinstatement of the Company's retirement plan contribution for fiscal year 2010.  On a fiscal 2010 year-to-date basis the improvement was primarily related to decreased labor expense, benefits realized from restructuring actions, lower depreciation/amortization expense, and other overall cost reduction efforts which were partially offset by higher incentive compensation costs.

EMS segment Other General Income for the three and nine months ended March 31, 2010 included a $6.7 million pre-tax gain from the sale of the existing Poland facility and land; including the tax benefit related to the sale of this facility and land, the after-tax gain was $7.7 million. In addition, Other General Income in the year-to-date period of fiscal year 2010 included $3.3 million of pre-tax income, or $2.0 million after-tax, resulting from settlement proceeds related to the antitrust class action lawsuit. EMS segment Other General Income for the fiscal 2009 year-to-date period included the $1.9 million pre-tax, or $1.6 million after-tax, amount retained due to the buyer being unable to close on the sale of the existing Poland facility and land.

The EMS segment earnings for the three and nine months ended March 31, 2009 were also impacted by the recording of non-cash pre-tax goodwill impairment of $12.8 million, or $8.0 million after-tax.

As a percent of net sales, operating income was 5.3% and 2.4% for the third quarter and year-to-date period of fiscal year 2010, respectively, and (11.5%) and (3.7%) for the third quarter and year-to-date period of fiscal year 2009, respectively. 

EMS segment Other Income (Expense) in the third quarter of fiscal year 2010 as compared to the third quarter of fiscal year 2009 was unfavorably impacted by foreign currency movements which were partially offset by a favorable currency impact within operating income.

During the third quarter of fiscal year 2010, the EMS segment recorded $1.0 million of tax income related to the sale of the facility and land in Poland instead of tax expense normally associated with a gain, due to a tax planning strategy. The fiscal year 2010 year-to-date EMS segment income tax was also favorably impacted by $0.7 million in favorable net tax accrual adjustments and tax benefits associated with losses generated by U.S. EMS operations which have a higher statutory rate than the EMS operations in foreign tax jurisdictions which generated income.   The third quarter and year-to-date fiscal 2009 EMS income tax was impacted by a tax benefit related to its European operations which was primarily offset by the impact of losses in select foreign jurisdictions which have a lower tax rate.

Included in this segment are a significant amount of sales to Bayer AG affiliates which accounted for the following portions of consolidated net sales and EMS segment net sales:

 

Three Months Ended

Nine Months Ended

 

March 31

March 31

 


 

2010

2009

2010

2009

 




Bayer AG affiliated sales as a percent of consolidated net sales

16%

14%

15%

12%

Bayer AG affiliated sales as a percent of EMS segment net sales

23%

26%

24%

23%

36


The nature of the electronic manufacturing services industry is such that the start-up of new customers and new programs to replace expiring programs occurs frequently. New customer and program start-ups generally cause losses early in the life of a program, which are generally recovered as the program matures and becomes established. This segment continues to experience margin pressures related to an overall excess capacity position in the electronics subcontracting services market.

Risk factors within the EMS segment include, but are not limited to, general economic and market conditions, customer order delays, increased globalization, foreign currency exchange rate fluctuations, rapid technological changes, component availability, supplier stability, the contract nature of this industry, unexpected integration issues with acquisitions, the concentration of sales to large customers, and the potential for customers to choose to in-source a greater portion of their electronics manufacturing. The continuing success of this segment is dependent upon its ability to replace expiring customers/programs with new customers/programs. Additional risk factors that could have an effect on the Company's performance are contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Furniture Segment

During the first quarter of fiscal year 2009, the Company approved a restructuring plan to consolidate production of select office furniture manufacturing departments. The consolidation reduced manufacturing costs and excess capacity by eliminating redundant property and equipment, processes, and employee costs. The consolidation is complete. See Note 6 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for more information on restructuring charges.

Furniture segment results were as follows:

 

At or for the
Three Months Ended

 

For the
Nine Months Ended

 

 

March 31

 

March 31

 

 

 


 

 

2010

 

2009

% Change

2010

 

2009

% Change

(Amounts in Millions)


 



 


Net Sales

$    92.2 

 

$ 128.2  

(28%)

$ 309.5 

 

    $ 445.5 

(31%)

Operating Income (Loss)

$    (7.2)

 

$   (1.7) 

(323%)

$   (6.2)

 

$     9.9 

(163%)

Net Income (Loss)

$    (4.5)

 

$   (1.6) 

(181%)

$   (3.8)

 

$     5.6 

(167%)

Goodwill Impairment, net of tax

$      0.0 

 

$     1.1  

 

$     0.0 

 

$     1.1 

 

Restructuring (Income) Expense, net of tax

$      0.0 

 

$     0.1  

 

$   (0.1)

 

$     0.4 

 

Open Orders

$    57.1 

 

$   86.0  

(34%)

     

 

37


The net sales decline in the Furniture segment for the three and nine months ended March 31, 2010 compared to the same periods of the prior fiscal year resulted from decreased net sales of both office furniture and hospitality furniture. The decline in office furniture sales was due to both decreased sales volumes and higher discounting.  For the first nine months of fiscal year 2010, decreased sales volumes of office furniture more than offset price increases net of higher discounting when compared to the same period of fiscal year 2009. Third quarter and fiscal 2010 year-to-date sales of newly introduced office furniture products which have been sold for less than twelve months approximated $4.5 million and $17.1 million, respectively. Open orders of furniture products at March 31, 2010 declined when compared to the open orders at March 31, 2009 due to decreased open orders for both office furniture and hospitality furniture. Open orders at a point in time may not be indicative of future sales trends.

Third quarter fiscal year 2010 Furniture segment gross profit as a percent of net sales declined 1.1 percentage points as compared to the third quarter of fiscal year 2009.  The decline was driven by lower absorption of fixed costs associated with the lower net sales, higher costs related to the Company's retirement plan contribution, and increased discounting due to competitive pricing pressures.  In addition, the favorable impact of a decrease in LIFO inventory reserves resulting primarily from lower LIFO inventory levels was lower in the third quarter of fiscal year 2010 as compared to the third quarter of fiscal year 2009.  Favorable impacts to the current year third quarter including a sales mix shift to higher margin product and other overall cost reduction actions partially mitigated the gross profit decline.

Year-to-date fiscal 2010 Furniture segment gross profit as a percent of net sales improved 1.3 percentage points when compared to the same period of fiscal year 2009. Items contributing to the improved year-to-date gross profit as a percent of net sales included: price increases on select product, lower commodity costs, a sales mix shift to higher margin product, lower employee benefit costs, and other overall cost reduction actions. In addition, the favorable impact of a decrease in LIFO inventory reserves resulting primarily from lower LIFO inventory levels in the fiscal-year-to-date 2010 period was larger than the favorable impact in the fiscal-year-to-date 2009 period. These improvements more than offset the negative impact of the lower volumes on the gross profit percentage, increased costs related to the reinstatement of the Company's retirement plan contribution for fiscal year 2010, and increased discounting resulting from competitive pricing pressures. Due to the significant decline in sales volume, the gross profit dollars declined as compared to the year-to-date period of fiscal year 2009.

Third quarter and year-to-date fiscal year 2010 selling and administrative expenses decreased in absolute dollars by 9% and 13%, respectively, but increased as a percent of net sales on the lower sales volumes, when compared to the same periods of fiscal year 2009. The third quarter fiscal year 2010 selling and administrative expense decline resulted from lower employee salary compensation costs realized from past restructurings and the salary reduction plan implemented by the Company in fiscal year 2009 and lower bad debt expense.  Partially offsetting the lower costs were increased costs related to the reinstatement of the Company's retirement plan contribution and higher incentive costs at select business units and also higher severance costs due to scaling operations.   The year-to-date fiscal 2010 selling and administrative expense decline results from lower labor costs realized from past restructurings and the salary reduction plan, lower bad debt expense, and other improvements resulting from the focus on managing all costs. Partially offsetting the lower costs in the year-to-date period of fiscal year 2010 were increased costs related to the reinstatement of the retirement plan contribution and higher severance expenses due to the scaling of operations. 

38


The Furniture segment earnings for the three and nine months ended March 31, 2009 were impacted by the recording of non-cash pre-tax goodwill impairment of $1.8 million.

As a percent of net sales, operating income (loss) was (7.8%) and (2.0%) for the third quarter and year-to-date period of fiscal year 2010, respectively, and (1.3%) and 2.2% for the third quarter and year-to-date period of fiscal year 2009, respectively. 

Risk factors within this segment include, but are not limited to, general economic and market conditions, increased global competition, financial stability of customers, supply chain cost pressures, and relationships with strategic customers and product distributors. Additional risk factors that could have an effect on the Company's performance are contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Liquidity and Capital Resources

Working capital at March 31, 2010 was $186.2 million compared to working capital of $176.2 million at June 30, 2009. The current ratio was 1.8 at both March 31, 2010 and June 30, 2009.

The Company's internal measure of Accounts Receivable performance, also referred to as Days Sales Outstanding (DSO), for the first nine months of fiscal year 2010 of 48.0 days increased from the 47.2 days for the first nine months of fiscal year 2009. The Company defines DSO as the average of monthly accounts and notes receivable divided by an average day's net sales. The Company's Production Days Supply on Hand (PDSOH) of inventory measure for the first nine months of fiscal year 2010 decreased to 62.7 days from 66.5 days for the first nine months of fiscal year 2009. Inventory levels in the first nine months of fiscal year 2009 were unfavorably impacted by customers delaying near-term requirements during that time period, and the Company has since been working to align inventory levels with the lower sales levels. The Company defines PDSOH as the average of the monthly gross inventory divided by an average day's cost of sales.

The Company's short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of the Company's revolving credit facility, totaled $152.3 million at March 31, 2010 compared to $183.7 million at June 30, 2009. The credit facility provides an option to increase the amount available by an additional $50 million at the Company's request, subject to participating banks' consent.

39


The Company's net cash position from an aggregate of cash, cash equivalents, and short-term investments less short-term borrowings under credit facilities decreased from $88.6 million at June 30, 2009 to $57.1 million at March 31, 2010. The Company had no short-term borrowings as of March 31, 2010. Operating activities used $10.5 million of cash flow in the first nine months of fiscal year 2010 compared to the $36.6 million of cash generated by operating activities in the first nine months of fiscal year 2009. During the first nine months of fiscal year 2010 as compared to the first nine months of fiscal year 2009, the negative cash impact of increased accounts receivable and inventory balances to support increased EMS sales were partially offset by increased accounts payable. During the first nine months of fiscal year 2010, the Company reinvested $26.6 million into capital investments for the future, primarily for manufacturing equipment in both segments and the new Poland facility, which is part of the plan to consolidate the European manufacturing footprint. The Company also had proceeds from the sale of assets of $12.3 million  during the first nine months of fiscal year 2010 primarily related to the sale of the Poland facility which is being replaced by the newly constructed EMS facility also in Poland. The proceeds from the sale of assets during the first nine months of fiscal year 2009 of $48.3 million were primarily related to the sale of the Company's undeveloped land holdings and timberlands. Financing cash flow activities for the first nine months of fiscal year 2010 included $12.2 million payments on the revolving credit facility as the Company opted to pay down the facility to a zero balance.  The Company also had $5.4 million in dividend payments, which was a decrease from the $17.6 million of dividends paid during the first nine months of fiscal year 2009. The approximate 70% decline in dividends paid was a result of reduced dividend rates beginning in the fourth quarter of fiscal year 2009 to preserve cash. Consistent with the Company's historical dividend policy, the Company's Board of Directors will evaluate the appropriate dividend payment on a quarterly basis. During the remainder of fiscal year 2010 and fiscal year 2011, the Company expects to minimize capital expenditures where appropriate but will continue to invest in capital expenditures prudently, particularly for projects that would enhance the Company's capabilities and diversification while providing an opportunity for growth and improved profitability as the economy and the Company's markets recover.

At March 31, 2010, the Company had no short-term borrowings outstanding under its $100 million credit facility described in more detail below. The Company also has several smaller foreign credit facilities available and likewise had no borrowings under these facilities as of March 31, 2010. At June 30, 2009, the Company had $12.7 million of short-term borrowings outstanding.

At March 31, 2010, the Company had approximately $4.8 million in letters of credit against the $100 million credit facility. Total availability to borrow under the $100 million credit facility was $95.2 million at March 31, 2010.

The Company maintains the $100 million credit facility with an expiration date in April 2013 that allows for both issuances of letters of credit and cash borrowings. The $100 million credit facility provides an option to increase the amount available for borrowing to $150 million at the Company's request, subject to the group of participating banks' consent. The $100 million credit facility requires the Company to comply with certain debt covenants including interest coverage ratio, minimum net worth, and other terms and conditions. The Company was in compliance with these covenants at March 31, 2010.

The Company believes the most significant covenants under its $100 million credit facility are minimum net worth and interest coverage ratio. The table below compares the actual net worth and interest coverage ratio with the limits specified in the credit agreement.

40


 

Covenant

 

At or For the Period Ended March 31, 2010

 

Limit As Specified in Credit Agreement

 

Excess

Minimum Net Worth 

 

$385,731,000

 

$362,000,000

 

$23,731,000

Interest Coverage Ratio

 

32.4

 

3.0

 

29.4

The Interest Coverage Ratio is calculated on a rolling four-quarter basis as defined in the credit agreement.

The Company maintains a separate foreign credit facility for its EMS segment operation in Thailand which is backed by the $100 million revolving credit facility. In addition to the $100 million credit facility, the Company can opt to utilize foreign credit facilities which are available to satisfy short-term cash needs at that specific location rather than funding from intercompany sources. The Company has a credit facility for its EMS segment operation in Poznan, Poland, which allows for multi-currency borrowings up to 6 million Euro equivalent (approximately $8.1 million U.S. dollars at March 31, 2010 exchange rates). These foreign credit facilities can be cancelled at any time by either the bank or the Company.

The Company believes its principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under the Company's credit facilities will be sufficient for the remainder of fiscal year 2010 and the foreseeable future. One of the Company's sources of funds has been its ability to generate cash from operations to meet its liquidity obligations, which during fiscal year 2010 was hampered by lower sales volumes and could also be adversely affected in the future by factors such as general economic and market conditions, a decline in demand for the Company's products, loss of key contract customers, the ability of the Company to generate profits, and other unforeseen circumstances. In particular, should demand for the Company's products decrease significantly over the next 12 months due to the weakened economy, the available cash provided by operations could be adversely impacted. Another source of funds is the Company's credit facilities. The $100 million credit facility is contingent on complying with certain debt covenants.

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

Fair Value

During fiscal year 2010, no financial assets were affected by a lack of market liquidity. For level 1 financial assets, readily available market pricing was used to value the financial instruments. For available-for-sale securities classified as level 2 assets, the fair values are determined based on observable market inputs which use evaluated pricing models that vary by asset class and incorporate available trade, bid, and other market information. The Company evaluated the inputs used to value the instruments and validated the accuracy of the instrument fair values based on historical evidence. The Company's foreign currency derivatives, which were classified as level 2 assets/liabilities, were independently valued using a financial risk management software package using observable market inputs such as forward interest rate yield curves, current spot rates, and time value calculations. To verify the reasonableness of the independently determined fair values, these derivative fair values were compared to fair values calculated by the counterparty banks. The Company's own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency derivatives.

41


The Company invested in convertible promissory notes and stock warrants of a privately-held company during fiscal year 2010 and has been chosen as the primary supplier for the privately-held company to produce products in the future, and negotiations for a definitive supply agreement are in process. The convertible promissory notes, classified as available-for-sale debt securities, were valued using a recurring market-based method which approximates fair value by using the amortized cost basis of the promissory notes, with the discount amortized to interest income over the term. The stock warrants, classified as derivative instruments, were valued on a recurring basis using a market-based method which utilizes the Black-Scholes valuation model. The fair value measurements for the convertible promissory notes and stock warrants were calculated using unobservable inputs and were classified as level 3 financial assets.

See Note 7 - Fair Value of Financial Assets and Liabilities of Notes to Condensed Consolidated Financial Statements for more information.

Contractual Obligations

There have been no material changes outside the ordinary course of business to the Company's summary of contractual obligations under the caption, "Contractual Obligations" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements other than standby letters of credit and operating leases entered into in the normal course of business. These arrangements do not have a material current effect and are not reasonably likely to have a material future effect on the Company's financial condition, results of operations, liquidity, capital expenditures, or capital resources. See Note 5 - Commitments and Contingent Liabilities of Notes to Condensed Consolidated Financial Statements for more information on standby letters of credit. The Company does not have material exposures to trading activities of non-exchange traded contracts.

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

Critical Accounting Policies

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. The Company's management overlays a fundamental philosophy of valuing its assets and liabilities in an appropriately conservative manner. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in preparation of the Company's consolidated financial statements and are the policies that are most critical in the portrayal of the Company's financial position and results of operations. Management has discussed these critical accounting policies and estimates with the Audit Committee of the Company's Board of Directors and with the Company's independent registered public accounting firm.

42


Revenue recognition - The Company recognizes revenue when title and risk transfer to the customer, which under the terms and conditions of the sale may occur either at the time of shipment or when the product is delivered to the customer. Service revenue is recognized as services are rendered. Shipping and handling fees billed to customers are recorded as sales while the related shipping and handling costs are included in cost of goods sold. The Company recognizes sales net of applicable sales tax.

  • Sales returns and allowances - At the time revenue is recognized certain provisions may also be recorded, including returns and allowances, which involve estimates based on current discussions with applicable customers, historical experience with a particular customer and/or product, and other relevant factors. As such, these factors may change over time causing the provisions to be adjusted accordingly.  At March 31, 2010 and June 30, 2009, the reserve for returns and allowances was $3.1 million and $4.4 million, respectively. The returns and allowances reserve approximated 2% to 3% of gross trade receivables during the past two years.
  • Allowance for doubtful accounts - Allowance for doubtful accounts is generally based on a percentage of aged accounts receivable, where the percentage increases as the accounts receivable become older. However, management judgment is utilized in the final determination of the allowance based on several factors including specific analysis of a customer's credit worthiness, changes in a customer's payment history, historical bad debt experience, and general economic and market trends. The allowance for doubtful accounts at March 31, 2010 and June 30, 2009 was $1.9 million and $3.1 million, respectively. During the preceding two-year period, this reserve had approximated 1% of gross trade accounts receivable except for the period March 2009 through December 2009 during which time it approximated 2% of gross trade accounts receivable. The higher reserve was driven by increased risk created by deteriorating market conditions at that time.

Excess and obsolete inventory - Inventories were valued using the lower of last-in, first-out (LIFO) cost or market value for approximately 9% and 14% of consolidated inventories at March 31, 2010 and June 30, 2009, respectively, including approximately 80% and 83% of the Furniture segment inventories at March 31, 2010 and June 30, 2009, respectively. The remaining inventories were valued at lower of first-in, first-out (FIFO) cost or market value. Inventories recorded on the Company's balance sheet are adjusted for excess and obsolete inventory. In general, the Company purchases materials and finished goods for contract-based business from customer orders and projections, primarily in the case of long lead time items, and has a general philosophy to only purchase materials to the extent covered by a written commitment from its customers. However, there are times when inventory is purchased beyond customer commitments due to minimum lot sizes and inventory lead time requirements, or where component allocation or other procurement issues may exist. The Company may also purchase additional inventory to support transfers of production between manufacturing facilities. Evaluation of excess inventory includes such factors as anticipated usage, inventory turnover, inventory levels, and product demand levels. Factors considered when evaluating inventory obsolescence include the age of on-hand inventory and reduction in value due to damage, use as showroom samples, design changes, or cessation of product lines.

Self-insurance reserves - The Company is self-insured up to certain limits for auto and general liability, workers' compensation, and certain employee health benefits such as medical, short-term disability, and dental with the related liabilities included in the accompanying financial statements. The Company's policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims, and other analyses, which are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At March 31, 2010 and June 30, 2009, the Company's accrued liabilities for self-insurance exposure were $4.4 million and $6.5 million, respectively.

43


Taxes - Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. The Company evaluates the recoverability of its deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize its deferred tax assets. If recovery is not likely, the Company provides a valuation allowance based on its 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.

The Company operates within multiple taxing jurisdictions and is subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. However, the Company believes it has made adequate provision for income and other taxes for all years that are subject to audit. As tax periods are effectively settled, the provision will be adjusted accordingly. The liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions, was $3.5 million at both March 31, 2010 and June 30, 2009.

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, the Company compares the carrying value of the reporting unit to an estimate of the reporting unit's fair value to identify potential impairment. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed to determine the amount of potential goodwill impairment. If impaired, goodwill is written down to its estimated implied 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 units considers current market conditions existing at the assessment date. In addition to performing the required annual testing, the Company will continue to monitor circumstances and events in future periods to determine whether additional goodwill impairment testing is warranted on an interim basis. The Company can provide no assurance that an impairment charge for the Company's remaining goodwill balance will not occur in future periods as a result of these analyses. At both March 31, 2010 and June 30, 2009, the Company's goodwill, net of accumulated impairment losses, totaled $2.6 million.

New Accounting Standards

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

44


Forward-Looking Statements

Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of words such as "believes," "estimates," "projects," "expects," "anticipates," "forecasts," and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, continuing impacts of the global economic conditions, significant volume reductions from key contract customers, significant reduction in customer order patterns, loss of key customers or suppliers within specific industries, financial stability of key customers and suppliers, availability or cost of raw materials and components, increased competitive pricing pressures reflecting excess industry capacities, successful execution of restructuring plans, changes in the regulatory environment, or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of the Company are contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to market risks from the information disclosed in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed as of March 31, 2010, the Chief Executive Officer and Chief Financial Officer of the Company concluded that its disclosure controls and procedures were effective.

(b) Changes in internal control over financial reporting.

There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2010 that have materially affected, or that are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II.  OTHER INFORMATION

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

A share repurchase program authorized by the Board of Directors was announced on October 16, 2007. The program allows for the repurchase of up to two million shares of any combination of Class A and Class B shares and will remain in effect until all shares authorized have been repurchased. The Company did not repurchase any shares under the repurchase program during the third quarter of fiscal year 2010. At March 31, 2010, two million shares remained available under the repurchase program.

45


Item 6.  Exhibits

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

(3(a))  Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2007)

(3(b))  Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed October 23, 2009)

(10) Form of Employment Agreement dated March 8, 2010 between the Company and each of Donald W. Van Winkle and Stanley C. Sapp and dated May 1, 2006 between the Company and each of James C. Thyen, Douglas A. Habig, Robert F. Schneider, Donald D. Charron, John H. Kahle and Gary W. Schwartz (Incorporated by reference to Exhibit 10(c) to the Company's Form 10-Q for the period ended March 31, 2006)

(11)  Computation of Earnings Per Share

(18)  Preferability letter dated May 6, 2010 regarding change in classification of interest and penalties on uncertain tax positions

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

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

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

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

46


SIGNATURES

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

     
    KIMBALL INTERNATIONAL, INC.
     
     
  By: /s/ James C. Thyen
    JAMES C. THYEN
President,
Chief Executive Officer
    May 6, 2010
     
     
     
     
  By: /s/ Robert F. Schneider
    ROBERT F. SCHNEIDER
Executive Vice President,
Chief Financial Officer
    May 6, 2010

47


Kimball International, Inc.
Exhibit Index

Exhibit No.   Description
3(a)   Amended and restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended June 30, 2007)
3(b)   Restated By-laws of the Company (Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K filed October 23, 2009)
10   Form of Employment Agreement dated March 8, 2010 between the Company and each of Donald W. Van Winkle and Stanley C. Sapp and dated May 1, 2006 between the Company and each of James C. Thyen, Douglas A. Habig, Robert F. Schneider, Donald D. Charron, John H. Kahle and Gary W. Schwartz (Incorporated by reference to Exhibit 10(c) to the Company's Form 10-Q for the period ended March 31, 2006)
11   Computation of Earnings Per Share
18   Preferability letter dated May 6, 2010 regarding change in classification of interest and penalties on uncertain tax positions
31.1   Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

48

EX-11 2 q103ex11.htm KIMBALL INTERNATIONAL, INC. EXHIBIT 11 Exhibit 11

Exhibit 11

KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE

(Unaudited) Three Months Ended
March 31, 2010
  Three Months Ended
March 31, 2009
 
(Amounts in Thousands, Except for Per Share Data) Class A   Class B   Total   Class A   Class B   Total  
Basic Earnings Per Share:                  
    Dividends Declared  $     502     $  1,358     $  1,860     $        492     $  1,333     $  1,825   
    Less: Unvested Participating Dividends  -0-     -0-     -0-     (4)    -0-     (4)  
    Dividends to Common Share Owners  502     1,358     1,860     488     1,333     1,821   
    Undistributed Earnings          4,470             2,289   
    Less: Earnings Allocated to Participating Securities          -0-             (6)  
    Undistributed Earnings allocated to Common Share Owners
 1,278     3,192     4,470     663     1,620     2,283   
    Net Income Available to Common Share Owners  $  1,780     $  4,550     $  6,330     $     1,151     $  2,953     $  4,104   
 
    Average Basic Common Shares Outstanding
 10,745     26,828     37,573     10,822     26,464     37,286   
 
    Basic Earnings Per Share
 $   0.17     $   0.17         $       0.11     $   0.11       
Diluted Earnings Per Share:                  
    Dividends Declared and Assumed Dividends on Dilutive Shares  $     505     $  1,358     $  1,863     $        492     $  1,333     $  1,825   
    Less: Unvested Participating Dividends  -0-     -0-     -0-     (4)    -0-     (4)  
    Dividends and Assumed Dividends to Common Share Owners  505     1,358     1,863     488     1,333     1,821   
    Undistributed Earnings          4,467             2,289   
    Less: Earnings Allocated to Participating Securities          -0-             (6)  
    Undistributed Earnings allocated to Common Share Owners
 1,282     3,185     4,467     665     1,618     2,283   
    Net Income Available to Common Share Owners  $  1,787     $  4,543     $  6,330     $     1,153     $  2,951     $  4,104   
 
    Average Diluted Common Shares Outstanding
 10,802     26,831     37,633     10,884     26,490     37,374   
 
    Diluted Earnings Per Share
 $   0.17     $   0.17         $       0.11     $   0.11       
Reconciliation of Basic and Diluted EPS Calculations:                        
    Net Income Used for Basic EPS Calculation  $  1,780     $  4,550     $  6,330     $     1,151     $  2,953     $  4,104   
    Assumed Dividends Payable on Dilutive Shares:                      
        Performance shares  3     -0-     3     -0-     -0-     -0-   
    Increase (Reduction) of Undistributed Earnings - allocated based                        
      on Class A and Class B shares  4     (7)    (3)    2     (2)    -0-   
    Net Income Used for Diluted EPS Calculation  $  1,787     $  4,543     $  6,330     $     1,153     $  2,951     $  4,104   
 
    Average Shares Outstanding for Basic
      EPS Calculation
 10,745     26,828     37,573     10,822     26,464     37,286   
    Dilutive Effect of Average Outstanding:                        
        Performance shares  57     3     60     -0-     -0-     -0-   
        Restricted share units  -0-     -0-     -0-     62     26     88   
    Average Shares Outstanding for Diluted
      EPS Calculation
 10,802     26,831     37,633     10,884     26,490     37,374   
Included in dividends declared for the basic and diluted earnings per share computation for the three months ended March 31, 2009 are dividends computed and accrued on unvested Class A and Class B restricted share units, which were paid by a conversion to the equivalent value of common shares after a vesting period.  Restricted share units held by retirement-age participants at March 31, 2009 had a nonforfeitable right to dividends and are deducted from the above dividends and undistributed earnings figures allocable to common Share Owners. Previously reported earnings per share calculations for the three months ended March 31, 2009 have been recast as a result of FASB guidance on determining whether instruments granted in share-based payment transactions are participating securities. See Note 1 - Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for further discussion. There were no restricted share units outstanding as of March 31, 2010.  
All of the 680,000 and 748,000 average outstanding stock options were antidilutive and were excluded from the dilutive calculations for the quarters ended March 31, 2010 and 2009, respectively. In addition, 45,000 performance shares were antidilutive and were excluded from the dilutive calculation for the quarter ended March 31, 2009.  



(Unaudited) Nine Months Ended
March 31, 2010
  Nine Months Ended
March 31, 2009
(Amounts in Thousands, Except for Per Share Data) Class A   Class B   Total   Class A   Class B   Total
Basic Earnings Per Share:                
    Dividends Declared  $  1,481     $  4,022     $  5,503     $  4,119     $  9,613     $ 13,732 
    Less: Unvested Participating Dividends  (9)    -0-     (9)    (56)    -0-     (56)
    Dividends to Common Share Owners  1,472     4,022     5,494     4,063     9,613     13,676 
    Undistributed Earnings           4,507             748 
    Less: Earnings Allocated to Participating Securities          (8)            (3)
    Undistributed Earnings allocated to Common                      
      Share Owners  1,287     3,212     4,499     224     521     745 
    Net Income Available to Common Share Owners  $  2,759     $  7,234     $  9,993     $  4,287     $10,134     $ 14,421 
 
    Average Basic Common Shares Outstanding
 10,702     26,706     37,408     11,139     25,980     37,119 
 
    Basic Earnings Per Share
 $   0.26     $   0.27         $   0.38     $   0.39     
Diluted Earnings Per Share:                
    Dividends Declared and Assumed Dividends on Dilutive Shares  $  1,493     $  4,023     $  5,516     $  4,127     $  9,613     $ 13,740 
    Less: Unvested Participating Dividends  (9)    -0-     (9)    (56)    -0-     (56)
    Dividends and Assumed Dividends to Common Share Owners  1,484     4,023     5,507     4,071     9,613     13,684 
    Undistributed Earnings           4,494             740 
    Less: Earnings Allocated to Participating Securities          (8)            (3)
    Undistributed Earnings allocated to Common                      
      Share Owners  1,291     3,195     4,486     222     515     737 
    Net Income Available to Common Share Owners  $  2,775     $  7,218     $  9,993     $  4,293     $10,128     $ 14,421 
 
    Average Diluted Common Shares Outstanding
 10,789     26,710     37,499     11,206     26,005     37,211 
 
    Diluted Earnings Per Share
 $   0.26     $   0.27         $   0.38     $   0.39     
Reconciliation of Basic and Diluted EPS Calculations:                      
    Net Income Used for Basic EPS Calculation  $  2,759     $  7,234     $  9,993     $  4,287     $10,134     $ 14,421 
    Assumed Dividends Payable on Dilutive Shares:                    
        Performance shares  12     1     13     8     -0-     8 
    Increase (Reduction) of Undistributed Earnings  -                       
      allocated based on Class A and Class B shares  4     (17)    (13)    (2)    (6)    (8)
    Net Income Used for Diluted EPS Calculation  $  2,775     $  7,218     $  9,993     $  4,293     $10,128     $ 14,421 
 
    Average Shares Outstanding for Basic
      EPS Calculation
 10,702     26,706     37,408     11,139     25,980     37,119 
    Dilutive Effect of Average Outstanding:                      
        Performance shares  87     4     91     21     1     22 
        Restricted share units  -0-     -0-     -0-     46     24     70 
    Average Shares Outstanding for Diluted
      EPS Calculation
 10,789     26,710     37,499     11,206     26,005     37,211 
Included in dividends declared for the basic and diluted earnings per share computation are dividends computed and accrued on unvested Class A and Class B restricted share units, which will be paid by a conversion to the equivalent value of common shares after a vesting period.  Restricted share units held by retirement-age participants have a nonforfeitable right to dividends and are deducted from the above dividends and undistributed earnings figures allocable to common Share Owners. Previously reported earnings per share calculations for the nine months ended March 31, 2009 have been recast as a result of FASB guidance on determining whether instruments granted in share-based payment transactions are participating securities. See Note 1 - Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for further discussion.
All of the 704,000 and 756,000 average outstanding stock options were antidilutive and were excluded from the dilutive calculations for the nine months ended March 31, 2010 and 2009, respectively.  

EX-18 3 exhibit18.htm KIMBALL INTERNATIONAL, INC. EXHIBIT 18 Exhibit 18 Exhibit 18

 

May 6, 2010

Kimball International, Inc.
1600 Royal Street
Jasper, Indiana

Dear Sirs/Madams:

At your request, we have read the description included in your Quarterly Report on Form 10-Q to the Securities and Exchange Commission for the quarter ended March 31, 2010, of the facts relating to the change in classification of interest and penalties on uncertain tax positions from interest and non-operating expense, respectively, to income taxes. We believe, on the basis of the facts so set forth and other information furnished to us by appropriate officials of the Company, that the accounting change described in your Form 10-Q is to an alternative accounting principle that is preferable under the circumstances.

We have not audited any consolidated financial statements of Kimball International, Inc. and its consolidated subsidiaries as of any date or for any period subsequent to June 30, 2009. Therefore, we are unable to express, and we do not express, an opinion on the facts set forth in the above-mentioned Form 10-Q, on the related information furnished to us by officials of the Company, or on the financial position, results of operations, or cash flows of Kimball International, Inc. and its consolidated subsidiaries as of any date or for any period subsequent to June 30, 2009.

Yours truly,

/s/ Deloitte & Touche LLP
EX-31 4 exhibit311.htm KIMBALL INTERNATIONAL, INC. EXHIBIT 31.1 Exhibit 31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James C. Thyen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kimball International, Inc.;
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
   
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
   
  (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
   
  (c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
   
  (d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
   
  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
   
  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
   


Date: May 6, 2010
   
    /s/ James C. Thyen
    JAMES C. THYEN
President,
Chief Executive Officer
     
EX-31 5 exhibit312.htm KIMBALL INTERNATIONAL, INC. EXHIBIT 31.2 Exhibit 31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert F. Schneider, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kimball International, Inc.;
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
   
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
   
  (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
   
  (c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
   
  (d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
   
  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
   
  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
   


Date: May 6, 2010
   
    /s/ Robert F. Schneider
    ROBERT F. SCHNEIDER
Executive Vice President,
Chief Financial Officer
     
EX-32 6 exhibit321.htm KIMBALL INTERNATIONAL, INC. EXHIBIT 32.1 Exhibit 32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Kimball International, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James C. Thyen, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 



Date: May 6, 2010
   
    /s/ James C. Thyen
    JAMES C. THYEN
President,
Chief Executive Officer
EX-32 7 exhibit322.htm KIMBALL INTERNATIONAL, INC. EXHIBIT 32.2 Exhibit 32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Kimball International, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert F. Schneider, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 



Date: May 6, 2010
   
    /s/ Robert F. Schneider
    ROBERT F. SCHNEIDER
Executive Vice President,
Chief Financial Officer
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