UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

OR

For the transition period from             to             

Large accelerated filer  o                                                                                       Accelerated filer  x 

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

Note 1. Basis of Presentation

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

Note 2. Spin-Off Transaction

On October 31, 2014 (“Distribution Date”), we completed the spin-off of our Electronic Manufacturing Services (“EMS”) segment by distributing the related shares of Kimball Electronics, Inc. (“Kimball Electronics”), on a pro rata basis, to the Company'sCompany’s Share Owners of record as of October 22, 2014. After the Distribution Date, the Company does not beneficially own any Kimball Electronics shares and Kimball Electronics is an independent publicly traded company. Kimball International, Inc. trades on the NASDAQ under the ticker symbol “KBAL” and Kimball Electronics, Inc. trades on the NASDAQ under the ticker symbol “KE”.

The EMS segment was reclassified to discontinued operations in the Condensed Consolidated Statements of Income. FinancialThe following table summarizes the results of the discontinued operations were as follows:for the nine months ended March 31, 2015. Discontinued operations did not have an impact on the financial results of fiscal year 2016 or the three months ended March 31, 2015.

Note 3. Recent Accounting Pronouncements and Supplemental Information

In JanuaryMarch 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on simplifying the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification on the statement of cash flows. The guidance is effective for our first quarter of fiscal year 2018 with early adoption permitted. We have not yet selected a transition method nor determined the effect of this guidance on our consolidated financial statements.

In January 2016, the FASB issued guidance which is intended to improve the recognition and measurement of financial instruments. The guidance revises an entity'sentity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective prospectively for our first quarter of fiscal year 2019 financial statements with early adoption allowed on certain provisions. We have not yet selected a transition method nor determined the effect of this guidance on our consolidated financial statements.

In November 2015, the FASB issued guidance on simplifying the balance sheet classification of deferred taxes. The guidance requires the classification of deferred tax assets and liabilities as noncurrent in a classified balance sheet. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected by this update. The guidance is effective for our first quarter of fiscal year 2018 financial statements with early adoption

In July 2015, the FASB issued guidance on simplifying the measurement of inventory which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Inventory within the scope of this update is required to be measured at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The guidance does not impact inventory measured on a last-in, first-out (“LIFO”) basis. The standards update is effective prospectively for our first quarter fiscal year 2018 financial statements with early adoption permitted. We do not expect the adoption to have a material effect on our consolidated financial statements.

In April 2015, the FASB issued guidance that requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability and further clarification guidance allows the cost of securing a revolving line of credit to be recorded as a deferred asset regardless of whether a balance is outstanding. This guidance is effective for our first quarter fiscal year 2017 financial statements. We currently comply with this method therefore the adoption will not have a material effect on our consolidated financial statements.

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

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

In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. To achieve this core principle, the guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance addresses several areas including transfer of control, contracts with multiple performance obligations, and costs to obtain and fulfill contracts. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB decided to defer the effective date for this new revenue standard by one year, which will make the guidance effective for our first quarter fiscal year 2019 financial statements using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients; or (ii) adoption with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures. In March 2016, the FASB issued

additional guidance which further clarifies assessing whether an entity is a principal or an agent in a revenue transaction, and impacts whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued additional guidance that addresses identifying performance obligations and implementing licensing guidance. The amendments have the same effective date and transition requirements as the new revenue standard. We have not yet selected a transition method nor determined the effect of this guidance on our consolidated financial statements.

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

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

Our policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable includes analysis of such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for credit losses on the trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Our limited amount of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses. Customary terms require payment within 30 days, with terms beyond 30 days being considered extended.

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

Our 36.6%38.0% effective tax rate for the secondthird quarter of fiscal year 2016 did not include any material unusual items. The secondthird quarter fiscal year 2015 effective tax rate of 101.5%10.5% was primarily drivenfavorably impacted by a lower combined state$1.1 million of releases of income tax rate post spin-off, requiring areserves upon the expiration of statutes of limitation and $0.4 million unfavorable adjustment to deferred taxes. This impact had a large effect on the effectiveof tax rate due to the relatively low level of pre-tax income in the second quarter of fiscal year 2015.accrual adjustments.

Our effective tax rate for the first halfnine months of fiscal year 2016 of 37.4%37.5% did not include any material unusual items. Our effective tax rate for the first halfnine months of fiscal year 2015 of 56.0%28.1% was unfavorablyfavorably impacted as our combined stateby $1.1 million of releases of income tax rate was lower post spin-off, requiringreserves upon the expiration of statutes of limitation and $0.4 million of tax accrual adjustments, which were partially offset by a $0.4 million adjustment to deferred taxes in the second quarter of fiscal year 2015 which increasedas our fiscal 2015 year-to-datecombined state tax expense and effective tax rate. In addition, a portion of our spin-off expenses which are nondeductible also unfavorably impacted the fiscal 2015 year-to-date tax rate.rate is lower post spin-off.

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

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

Note 4. Inventories

Inventory components were as follows:

For interim reporting, LIFO inventories are computed based on quantities as of the end of the quarter and interim changes in price levels. Changes in quantities and price levels are reflected in the interim financial statements in the period in which they occur, except in cases where LIFO inventory liquidations are expected to be reinstated by fiscal year end. The earnings impact of LIFO inventory liquidations during the three and six-monthnine-month periods ended DecemberMarch 31, 20152016 and 20142015 was immaterial.

Note 5. Accumulated Other Comprehensive Income (Loss)

During the sixnine months ended DecemberMarch 31, 20152016 and 2014,2015, the changes in the balances of each component of Accumulated Other Comprehensive Income, (Loss), net of tax, were as follows:

Note 6. Commitments and Contingent Liabilities

Standby letters of credit are issued to third-party suppliers, lessors, and insurance institutions and can only be drawn upon in the event of Kimball'sKimball’s failure to pay its obligations to a beneficiary. As of DecemberMarch 31, 2015,2016, we had a maximum financial exposure from unused standby letters of credit totaling $1.0 million. We are not aware of circumstances that would require us to perform under any of these arrangements and believe that the resolution of any claims that might arise in the future, either individually or

in the aggregate, would not materially affect our consolidated financial statements. Accordingly, no liability has been recorded as

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

Changes in the product warranty accrual for the sixnine months ended DecemberMarch 31, 20152016 and 20142015 were as follows:

Note 7. Restructuring Expense

We recognized pre-tax restructuring expense of $2.0$2.8 million and $3.2$6.0 million in the three and sixnine months ended DecemberMarch 31, 2015,2016, respectively, and recognized $3.3$0.4 million and $3.7 million of restructuring expense in both the three and sixnine months ended DecemberMarch 31, 2014.2015. We utilize available market prices and management estimates to determine the fair value of impaired fixed assets. Restructuring charges are included in the Restructuring Expense line item on the Company'sCompany’s Condensed Consolidated Statements of Income.

In November 2014, we announced a capacity utilization restructuring plan which includes the consolidation of our metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and the reduction of our Company plane fleet from two jets to one.

Key factorsAs of March 31, 2016, we are in the decision to consolidatefinal stages of consolidating the Idaho operation into the Indiana facilities include the improvement of customer delivery, supply chain dynamics, and transportation costs.facilities. The transfer of work involveshas involved the start-up of metal fabrication capabilities in a Company-owned facility, along with the transfer of certain assembly operations into two additional company-ownedCompany-owned facilities, all located in southern Indiana. The manufacturing capacity realignment is beinghas been carefully managed to mitigate customer disruptions. The consolidation activities began immediately after the announcement in November 2014, and we are actively marketing for sale the Post Falls, Idaho facility. We expect to incur approximately $1.6$0.8 million for future capital investments to supportas we finalize the transfer of production to Indiana. We anticipate pre-tax savings of approximately $5 million per year after the planrestructuring activities. The Post Falls, Idaho facility is fully implemented by June 2016, which is three months earlier than the original plan. A majority of the savings will not be realized until the plan is complete.being prepared for sale.

The reduction of our plane fleet from two jets to one reduced our cost structure while aligning the plane fleet size with our needs following the spin-off of Kimball Electronics on October 31, 2014. Previously, one of our jets was used primarily for the successful strategy of transporting customers to visit our showrooms, offices, research and development center, and manufacturing locations, while the remaining jet was used primarily for management travel. The plane used primarily for management travel was sold in the third quarter of fiscal year 2015. The sale of the plane resulted in a $0.2 million pre-tax gain in the third quarter of fiscal year 2015 which partially offset the impairment charge of $1.1 million recorded in the second quarter of fiscal year 2015. As a result of the aircraft fleet reduction, we began realizing the annual pre-tax savings of $0.8 million. In regards to the remaining jet, we believe that our location in rural Jasper, Indiana and the location of our manufacturing locations in small towns away from major metropolitan areas necessitates the need for the remaining jet to efficiently transport customers.

We will continue to incur ongoing building maintenance costs such as property taxes, insurance, and utilities until the facility is sold. Exclusive of these ongoing building maintenance costs, we currently estimate that the pre-tax restructuring charges will be approximately $10.3$11.7 million with $8.5$11.3 million recorded since the plan was announced with the remainder expected to be incurred over the remaining anticipated transition period. The restructuring charges are expected to consist of approximately $4.1$4.8 million of transition and other employee costs, $5.2$5.8 million of plant closure and other exit costs, and $1.0$1.1 million of non-cash asset impairment. Approximately 90%91% of the total cost estimate is expected to be cash expense.

Note 8. Fair Value

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

Our policy is to recognize transfers between these levels as of the end of each quarterly reporting period. There were no transfers between these levels during the sixnine months ended DecemberMarch 31, 2015.2016. There were also no changes in the inputs or valuation techniques used to measure fair values compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

Financial Instruments Recognized at Fair Value:

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

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

Note 9. Derivative Instruments

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

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

When derivatives were settled with the counterparty, the derivative asset or liability was relieved and cash flow was impacted for the net settlement. For derivative instruments that met the criteria of hedging instruments under FASB guidance, the effective portions of the gain or loss on the derivative instrument were initially recorded net of related tax effect in Accumulated Other Comprehensive Income, a component of Share Owners'Owners’ Equity, and were subsequently reclassified into earnings in the period or periods during which the hedged transaction was recognized in earnings. The gain or loss associated with derivative instruments that were not designated as hedging instruments or that ceased to meet the criteria for hedging under FASB guidance was recognized in earnings.

After the spin-off of the EMS segment on October 31, 2014, we held no derivative instruments. See the Condensed Consolidated Statements of Comprehensive Income for the changes in deferred derivative gains and losses. Information on the location and amounts of derivative gains and losses in the Condensed Consolidated Statements of Income are presented below.

The Effect of Derivative Instruments on Condensed Consolidated Statements of Income

Kimball maintains a self-directed supplemental employee retirement plan (“SERP”) in which executive employees are eligible to participate. The SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. Kimball recognizes SERP investment assets on the Condensed Consolidated Balance Sheets at current fair value. A SERP liability of the same amount is recorded on the Condensed Consolidated Balance Sheets representing an obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income in the Other Income (Expense) category. Adjustments made to revalue the SERP liability are also recognized in income as selling and administrative expenses and offset valuation adjustments on SERP investment assets. Net unrealized holding losses from continuing operations for the sixnine months ended DecemberMarch 31, 20152016 and 20142015 were, in thousands, $648$550 and $389,$121, respectively.

SERP asset and liability balances were as follows:

Note 11. Postemployment Benefits

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

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