Commitments and Contingent Liabilities

Leases:

Operating leases for certain offices, showrooms, a manufacturing facility, land, and equipment, which expire from fiscal year 2017 to 2026, contain provisions under which minimum annual lease payments are, in millions, $3.4, $3.0, $2.6, $2.5, and $2.4 for the five years ending June 30, 2021, respectively, and aggregate $6.5 million from fiscal year 2022 to the expiration of the leases in fiscal year 2026. We are obligated under certain real estate leases to maintain the properties and pay real estate taxes. Certain leases include renewal options and escalation clauses. Total rental expense from continuing operations amounted to, in millions, $6.7, $4.9, and $4.1 in fiscal years 2016, 2015, and 2014, respectively, including certain leases requiring contingent lease payments based on warehouse space utilized, which amounted to expense of, in millions, $2.4, $1.0, and $0.8 in fiscal years 2016, 2015, and 2014, respectively.

As of June 30, 2016 and 2015, capital leases were not material.

Guarantees:

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 Kimball’s failure to pay its obligations to the beneficiary. We had a maximum financial exposure from unused standby letters of credit totaling $1.4 million as of June 30, 2016 and $1.0 million as of June 30, 2015.

We are periodically required to provide performance bonds in order to conduct business with certain customers. The bonds are required to provide assurances to customers that the products and services they have purchased will be installed and/or provided properly and without damage to their facilities. We are ultimately liable for claims that may occur against the performance bonds. We had a maximum financial exposure from performance bonds totaling $1.5 million as of June 30, 2016 and an immaterial amount as of June 30, 2015.

We are not aware of circumstances that would require us to perform under any of these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our consolidated financial statements. Accordingly, no liability has been recorded as of June 30, 2016 and 2015 with respect to the standby letters of credit or performance bonds. Kimball also enters into commercial letters of credit to facilitate payments to vendors and from customers.

Product Warranties:

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

Changes in the product warranty accrual during fiscal years 2016, 2015, and 2014 were as follows:



(Amounts in Thousands)	2016			2015			2014
Product Warranty Liability at the beginning of the year	$	2,264		$	3,221		$	2,384
Additions to warranty accrual (including changes in estimates)	1,165			880			2,883
Settlements made (in cash or in kind)	(1,078		)	(927		)	(2,046		)
Distribution to Kimball Electronics, Inc.	—			(910		)	—
Product Warranty Liability at the end of the year	$	2,351		$	2,264		$	3,221

Other Contingency:

The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting.

In March 2016, in connection with a renewal of one of our contracts, we became aware of noncompliance and inaccuracies in our General Services Administration (“GSA”) subcontractor reporting. Accordingly, we retained outside legal counsel to assist in conducting an internal review of our reporting practices, and we self-reported the matter and the results of the internal review to the GSA. We have promptly responded to inquiries from the GSA since our initial reporting, and we intend to cooperate fully with any further inquiries or investigations. While we are not able to reasonably estimate the future financial impact, if any, of the possible sanctions at this time, any of them could, if imposed, have a material adverse impact on our business, future financial position, results of operations, or cash flows. The timing of the government’s review and determination of any outcome of these matters is uncertain and, therefore, it is unclear as to when and to what extent, if any, our previously issued earnings guidance might be impacted. We have incurred, and will continue to incur, legal and related costs in connection with our internal review and the government’s response to this matter. During fiscal year 2016, sales related to our GSA contracts were approximately 8.9% of total Kimball International, Inc. sales, with one contract accounting for approximately 5.0% of total Kimball International, Inc. sales and the other contract accounting for approximately 3.9% of Kimball International, Inc. sales.