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 September 30,December 31, 2017
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number    0-3279
kimballlogonobrand.jpg
KIMBALL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-0514506
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
1600 Royal Street, Jasper, Indiana 47549-1001
(Address of principal executive offices) (Zip Code)
(812) 482-1600
Registrant’s telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes  x    No o

Indicate by check mark whether the registrant has submitted electronically 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  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o                                                                                       Accelerated filer  x 
Non-accelerated filer  o (Do not check if a smaller reporting company)             Smaller reporting company  o
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes  o    No  x

The number of shares outstanding of the Registrant’s common stock as of October 20, 2017January 22, 2018 was:
Class A Common Stock - 279,533 shares
Class B Common Stock - 37,197,83137,205,209 shares


KIMBALL INTERNATIONAL, INC.
FORM 10-Q
INDEX
 Page No. 
   
PART I    FINANCIAL INFORMATION 
   
   
  
  
  
  
  
  
  
  
    
PART II    OTHER INFORMATION 
    
  
  
    
 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data)
(Unaudited)  
(Unaudited)  
September 30,
2017
 June 30,
2017
December 31,
2017
 June 30,
2017
ASSETS 
  
 
  
Current Assets: 
  
 
  
Cash and cash equivalents$64,250
 $62,882
$41,852
 $62,882
Short-term investments33,528
 35,683
37,720
 35,683
Receivables, net of allowances of $1,664 and $1,626, respectively54,262
 53,909
Receivables, net of allowances of $1,228 and $1,626, respectively53,140
 53,909
Inventories41,320
 38,062
38,861
 38,062
Prepaid expenses and other current assets9,044
 8,050
19,627
 8,050
Assets held for sale193
 4,223
67
 4,223
Total current assets202,597
 202,809
191,267
 202,809
Property and Equipment, net of accumulated depreciation of $184,245 and $182,803, respectively81,125
 80,069
Intangible Assets, net of accumulated amortization of $35,443 and $35,148, respectively2,824
 2,932
Property and Equipment, net of accumulated depreciation of $177,740 and $182,803, respectively80,904
 80,069
Goodwill8,559
 
Other Intangible Assets, net of accumulated amortization of $35,894 and $35,148, respectively13,328
 2,932
Deferred Tax Assets16,415
 14,487
9,350
 14,487
Other Assets13,033
 13,450
13,997
 13,450
Total Assets$315,994
 $313,747
$317,405
 $313,747
      
LIABILITIES AND SHARE OWNERS’ EQUITY      
Current Liabilities:      
Current maturities of long-term debt$26
 $27
$24
 $27
Accounts payable46,388
 44,730
42,271
 44,730
Customer deposits21,079
 20,516
28,236
 20,516
Sale-leaseback financing obligation3,777
 3,752

 3,752
Dividends payable2,703
 2,296
2,721
 2,296
Accrued expenses43,654
 49,018
38,312
 49,018
Total current liabilities117,627
 120,339
111,564
 120,339
Other Liabilities:      
Long-term debt, less current maturities161
 184
161
 184
Other16,191
 17,020
17,907
 17,020
Total other liabilities16,352
 17,204
18,068
 17,204
Share Owners’ Equity:      
Common stock-par value $0.05 per share:      
Class A - Shares authorized: 50,000,000
Shares issued: 280,000 for both periods
14
 14
14
 14
Class B - Shares authorized: 100,000,000
Shares issued: 42,745,000 and 42,744,000, respectively
2,137
 2,137
2,137
 2,137
Additional paid-in capital712
 2,971
1,566
 2,971
Retained earnings234,616
 230,763
239,354
 230,763
Accumulated other comprehensive income1,246
 1,115
1,327
 1,115
Less: Treasury stock, at cost, 5,557,000 shares and 5,726,000 shares, respectively(56,710) (60,796)
Less: Treasury stock, at cost, 5,549,000 shares and 5,726,000 shares, respectively(56,625) (60,796)
Total Share Owners’ Equity182,015
 176,204
187,773
 176,204
Total Liabilities and Share Owners’ Equity$315,994
 $313,747
$317,405
 $313,747
See Notes to Condensed Consolidated Financial Statements


KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
(Unaudited)(Unaudited) (Unaudited)
Three Months EndedThree Months Ended Six Months Ended
September 30December 31 December 31
2017 20162017 2016 2017 2016
Net Sales$169,517
 $174,996
$173,674
 $169,887
 $343,191
 $344,883
Cost of Sales109,928
 116,309
119,738
 114,129
 229,666
 230,438
Gross Profit59,589
 58,687
53,936
 55,758
 113,525
 114,445
Selling and Administrative Expenses43,632
 43,227
41,931
 42,728
 85,563
 85,955
Restructuring Gain
 (1,832)
 
 
 (1,832)
Operating Income15,957
 17,292
12,005
 13,030
 27,962
 30,322
Other Income (Expense):          
Interest income234
 110
234
 99
 468
 209
Interest expense(31) (5)(74) (5) (105) (10)
Non-operating income (expense), net286
 292
263
 (84) 549
 208
Other income (expense), net489
 397
423
 10
 912
 407
Income Before Taxes on Income16,446
 17,689
12,428
 13,040
 28,874
 30,729
Provision for Income Taxes5,489
 6,691
5,050
 4,323
 10,539
 11,014
Net Income$10,957
 $10,998
$7,378
 $8,717
 $18,335
 $19,715
          
Earnings Per Share of Common Stock: 
  
 
  
    
Basic Earnings Per Share$0.29
 $0.29
$0.20
 $0.23
 $0.49
 $0.53
Diluted Earnings Per Share$0.29
 $0.29
$0.20
 $0.23
 $0.49
 $0.52
          
Dividends Per Share of Common Stock$0.07
 $0.06
$0.07
 $0.06
 $0.14
 $0.12
          
Average Number of Shares Outstanding:   
Class A and B Common Stock:          
Basic37,428
 37,609
Diluted37,733
 38,024
Average Number of Shares Outstanding - Basic37,476
 37,234
 37,452
 37,421
Average Number of Shares Outstanding - Diluted37,736
 37,605
 37,775
 37,917
See Notes to Condensed Consolidated Financial Statements



KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
Three Months Ended Three Months EndedThree Months Ended Three Months Ended
September 30, 2017 September 30, 2016December 31, 2017 December 31, 2016
(Unaudited)Pre-tax Tax Net of Tax Pre-tax Tax Net of TaxPre-tax Tax Net of Tax Pre-tax Tax Net of Tax
Net income    $10,957
     $10,998
    $7,378
     $8,717
Other comprehensive income (loss):                      
Available-for-sale securities$14
 $(5) $9
 $(23) $9
 $(14)$(44) $17
 $(27) $(9) $4
 $(5)
Postemployment severance actuarial change267
 (104) 163
 243
 (94) 149
239
 (84) 155
 207
 (81) 126
Reclassification to (earnings) loss:                      
Available-for-sale securities3
 (1) 2
 
 
 
Amortization of actuarial change(67) 26
 (41) (145) 56
 (89)(66) 17
 (49) (143) 56
 (87)
Other comprehensive income (loss)$214
 $(83) $131
 $75
 $(29) $46
$132
 $(51) $81
 $55
 $(21) $34
Total comprehensive income    $11,088
     $11,044
    $7,459
     $8,751
            
 Six Months Ended Six Months Ended
 December 31, 2017 December 31, 2016
(Unaudited)Pre-tax Tax Net of Tax Pre-tax Tax Net of Tax
Net income    $18,335
     $19,715
Other comprehensive income (loss):           
Available-for-sale securities$(30) $12
 $(18) $(32) $13
 $(19)
Postemployment severance actuarial change506
 (188) 318
 450
 (175) 275
Reclassification to (earnings) loss:           
Available-for-sale securities3
 (1) 2
 
 
 
Amortization of actuarial change(133) 43
 (90) (288) 112
 (176)
Other comprehensive income (loss)$346
 $(134) $212
 $130
 $(50) $80
Total comprehensive income    $18,547
     $19,795
See Notes to Condensed Consolidated Financial Statements



KIMBALL INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)(Unaudited)
Three Months EndedSix Months Ended
September 30December 31
2017 20162017 2016
Cash Flows From Operating Activities:      
Net income$10,957
 $10,998
$18,335
 $19,715
Adjustments to reconcile net income to net cash provided by operating activities:Adjustments to reconcile net income to net cash provided by operating activities:  Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization3,668
 3,935
7,542
 7,905
Gain on sales of assets(436) (2,076)(2,153) (2,083)
Deferred income tax and other deferred charges(1,976) (1,504)5,369
 (1,827)
Stock-based compensation1,536
 1,779
2,511
 3,277
Other, net(100) (819)729
 (821)
Change in operating assets and liabilities:      
Receivables(385) (986)2,172
 4,025
Inventories(3,258) (827)656
 (125)
Prepaid expenses and other current assets480
 4,478
(8,892) 1,286
Accounts payable2,794
 594
(1,938) (439)
Customer deposits563
 1,427
4,529
 2,393
Accrued expenses(6,818) (3,987)(13,478) (1,201)
Net cash provided by operating activities7,025
 13,012
15,382
 32,105
Cash Flows From Investing Activities:      
Capital expenditures(6,408) (2,353)(11,722) (5,583)
Proceeds from sales of assets5,405
 11,306
5,630
 11,655
Cash paid upon acquisition(17,800) 
Purchases of capitalized software(187) (113)(423) (339)
Purchases of available-for-sale securities(6,991) (15,899)(18,902) (19,698)
Maturities of available-for-sale securities8,977
 
16,477
 746
Other, net(48) (702)(582) (965)
Net cash provided by (used for) investing activities748
 (7,761)
Net cash used for investing activities(27,322) (14,184)
Cash Flows From Financing Activities:      
Net change in capital leases and long-term debt1
 (22)(26) (25)
Dividends paid to Share Owners(2,234) (2,060)(4,857) (4,315)
Repurchases of Common Stock(1,746) (2,717)(1,781) (6,524)
Repurchase of employee shares for tax withholding(2,426) (1,167)(2,426) (1,167)
Net cash used for financing activities(6,405) (5,966)(9,090) (12,031)
Net Increase (Decrease) in Cash and Cash Equivalents1,368
 (715)
Net (Decrease) Increase in Cash and Cash Equivalents(21,030) 5,890
Cash and Cash Equivalents at Beginning of Period62,882
 47,576
62,882
 47,576
Cash and Cash Equivalents at End of Period$64,250
 $46,861
$41,852
 $53,466
Supplemental Disclosure of Cash Flow Information      
Cash paid during the period for:      
Income taxes$938
 $321
$13,139
 $13,096
Interest expense$31
 $5
$105
 $10
See Notes to Condensed Consolidated Financial Statements


KIMBALL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Kimball International, Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) have been prepared in accordance with the instructions to Form 10-Q. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. Intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.

Note 2. Recent Accounting Pronouncements and Supplemental Information
RecentRecently Adopted Accounting Pronouncements:
In MayJanuary 2017, the Financial Accounting Standards Board (“FASB”) issued guidance on simplifying the test for goodwill impairment by eliminating the requirement to estimate the implied fair value of a reporting unit from the goodwill impairment test. Under the guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective prospectively for our first quarter of fiscal year 2021 financial statements with early adoption permitted. In conjunction with our recent acquisition, we early adopted the guidance in our second quarter of fiscal year 2018 and the guidance did not have a material effect on our consolidated financial statements.
In January 2017, the FASB issued guidance which revises the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted and the amendments can be applied to transactions occurring before the guidance was issued as long as the applicable financial statements have not been issued. In conjunction with our recent acquisition, we early adopted the guidance in our second quarter of fiscal year 2018 and the guidance did not have a material effect on our consolidated financial statements.
In August 2016, the FASB issued guidance that clarifies and provides specific guidance on eight cash flow classification issues that are not addressed by current GAAP. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows, including how to classify contingent consideration payments made after a business combination, which will impact the presentation of future earn-out payments for our recent acquisition. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted. We early adopted the guidance in our second quarter of fiscal year 2018 and the guidance did not have a material effect on our consolidated financial statements.
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 guidance was adopted prospectively in our first quarter of fiscal year 2018 and did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted:
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted and will be applied prospectively to an award modified on or after the adoption date. We do not expect the adoption to have a material effect on our consolidated financial statements.


In March 2017, the FASB issued guidance that will shorten the amortization period for certain callable debt securities held at a premium to the earliest call date. This guidance does not require an accounting change for securities held at a discount. This guidance is to be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted. We have not yet determined the effect of this guidance on our consolidated financial statements.
In March 2017, the FASB issued guidance that requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic benefit cost in operating expenses, which will impact the presentation of our postemployment benefit plan. The guidance also allows only the service cost component to be eligible for capitalization. Employers are required to present all other components of net benefit cost separate from the service costs and disclose the line item in which the components of net benefit cost other than the service cost are included. Retrospective application of the change in the statement of income presentation is required, while the change in capitalization of the service cost is to be applied prospectively. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted. We have not yet determined the effect of this guidance on our consolidated financial statements.
In February 2017, the FASB issued guidance that clarifies the scope of guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. This new guidance is meant to clarify the scope of the original guidance that was issued in connection with the guidance relating to the recognition of revenue from contracts with customers, as defined below, which addresses recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted, and we are required to adopt concurrent with the adoption of the guidance on recognition of revenue from contracts with customers. We are reviewing the impact of this rule but have not yet determined the effect of this guidance on our consolidated financial statements.
In January 2017, the FASB issued guidance on simplifying the test for goodwill impairment by eliminating the requirement to estimate the implied fair value of a reporting unit from the goodwill impairment test. Under the guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective prospectively for our first quarter of fiscal year 2021 financial statements with early adoption permitted. We do not expect the adoption to have a material effect on our consolidated financial statements as we currently do not have any goodwill.


In January 2017, the FASB issued guidance which revises the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted and the amendments can be applied to transactions occurring before the guidance was issued as long as the applicable financial statements have not been issued. We do not expect the adoption to have a material effect on our consolidated financial statements.
In November 2016, the FASB issued guidance which requires an entity to include in their cash and cash equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The guidance is effective for our first quarter of fiscal year 2019 with early adoption permitted, and is required to be applied using a retrospective transition method to each prior reporting period. We do not expect the adoption to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued guidance on the measurement of credit losses on financial instruments. Under the guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The guidance is also intended to reduce the complexity by decreasing the number of credit impairment models that entities use to account for debt instruments. The guidance is effective for our first quarter of fiscal year 2021 with early adoption in our fiscal year 2020 permitted. We have not yet determined the effect of this guidance on our consolidated financial statements.
In February 2016, the FASB issued guidance that revises the accounting for leases. The guidance is intended to improve financial reporting of leasing transactions by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Leases will continue to be classified as either operating or finance leases, with the classification affecting the pattern of expense recognition in the statement of income. The guidance will also require additional disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for our first quarter of fiscal year 2020 with early adoption permitted, and is required to be applied using a modified retrospective approach to each prior reporting period. We are currently evaluating the impact of this guidance, but have not yet determined the effect 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’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 are currently evaluating the impact of this guidance, but have not yet determined the effect on our consolidated financial statements.
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 guidance was adopted prospectively in our first quarter of fiscal year 2018 and did not 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 of 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; and in May 2016, the FASB issued additional guidance that clarifies collectability, noncash consideration, and other transition issues. The amendments have the same effective date and transition requirements as the new revenue standard.
We have completed a preliminary review of the impact of the new revenue standard and expect the primary change to be the reclassification of certain items on the statement of income. For contracts involving products that are sold directly to end customers, currently any fees paid to dealer agents facilitating the sale are netted against revenue. Under the new standard, fees paid to dealer agents will be recognized as a selling expense. In addition, any commissions or fees paid to third-party purchasing organizations will be recognized as a selling expense rather than being netted against revenue. Although the result of these changes will be an increase in net sales and an increase in selling expenses, these changes will have no impact to operating income dollars, but will reduce operating income as a percent of net sales. The new standard will also require several less significant changes including classifying the reserve for returns and allowance as a liability rather than a contra-receivable, recognizing a recovery asset for potential product returns, and capitalizing costs to obtain and fulfill sales contracts. The new standard will also require significantly more disclosure than is required under current rules. We continue to evaluate the impact that will result from adoption of the new standard, and we are in the process of evaluatingimplementing changes to our business processes, systems, and internal controls to support recognition and disclosure under the new guidance againststandard. We expect to adopt the standard at the beginning of our existing accounting policiesfiscal year 2019 using the full retrospective approach which, upon adoption, will adjust fiscal years 2017 and are identifying areas that will be impacted2018 to provide comparable financial reporting for these periods.
Goodwill and Other Intangible Assets:
Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, we may assess qualitative factors to determine if it is more likely than not that the effectfair value is less than its carrying amount. We also have the guidance willoption to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test. We compare the carrying value of the reporting unit to the reporting unit’s fair value to identify impairment. If the fair value of the reporting unit is less than the carrying value, goodwill is written down to its fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting unit considers current market conditions existing at the assessment date. During the second quarter of fiscal year 2018 no goodwill impairment was recognized.
During the second quarter of fiscal year 2018, we acquired $8.6 million in goodwill from the acquisition of D’style, Inc. See Note 3 - Acquisitions of Notes to Condensed Consolidated Financial Statements for more information on this acquisition.


Other Intangible Assets reported on the Condensed Consolidated Balance Sheets consist of capitalized software, product rights, customer relationships, trade names, and non-compete agreements. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. A summary of other intangible assets subject to amortization is as follows:
 December 31, 2017 June 30, 2017
(Amounts in Thousands)Cost 
Accumulated
Amortization
 Net Value Cost 
Accumulated
Amortization
 Net Value
Capitalized Software$38,340
 $35,563
 $2,777
 $37,918
 $34,986
 $2,932
Product Rights162
 162
 
 162
 162
 
Customer Relationships7,050
 106
 6,944
 
 
 
Trade Names3,570
 60
 3,510
 
 
 
Non-Compete Agreements100
 3
 97
 
 
 
Other Intangible Assets$49,222
 $35,894
 $13,328
 $38,080
 $35,148
 $2,932
Amortization expense related to other intangible assets was, in thousands, $451 and $746 during the quarter and year-to-date period ended December 31, 2017, respectively, and was, in thousands, $282 and $518 during the quarter and year-to-date period ended December 31, 2016, respectively. Amortization expense in future periods is expected to be, in thousands, $1,011 for the remainder of fiscal year 2018, and $1,826, $1,872, $1,504, and $1,230 in the four years ending June 30, 2022, and $5,885 thereafter. The estimated useful life of internal-use software ranges from 2 to 10 years. The amortization period for customer relationship intangible assets is 20 years. The estimated useful life of trade names is 10 years. The estimated useful life of non-compete agreements is 5 years.
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 re-engineering costs are expensed in the period in which they are incurred. 
Product rights to produce and sell certain products, trade names, and non-compete agreements are amortized on a straight-line basis over their estimated useful lives. Capitalized customer relationships are amortized on estimated attrition rate of customers. We have on our consolidated financial statements, andno intangible assets with indefinite useful lives which transition method will be chosen for adoption.are not subject to amortization.
Notes Receivable and Trade Accounts Receivable:
Notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.
Our policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable includes analysis of such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for credit losses on the trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Our limited amount of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses. Customary terms require payment within 30 days, with terms beyond 30 days being considered extended.
Non-operating Income Taxes:(Expense), net:
The non-operating income (expense), net line item includes the impact of such items as fair value adjustments on Supplemental Employee Retirement Plan (“SERP”) investments, foreign currency rate movements, investment gain or loss, 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 offset by a change in the SERP liability that is recognized in selling and administrative expenses.
Components of the Non-operating income (expense), net line, were:
 Three Months Ended Six Months Ended
 December 31 December 31
(Amounts in Thousands)2017 2016 2017 2016
Foreign Currency Loss$(29) $(8) $(12) $(15)
Gain on Supplemental Employee Retirement Plan Investments413
 29
 764
 396
Other(121) (105) (203) (173)
Non-operating income (expense), net$263
 $(84) $549
 $208

Note 3. Acquisition
During the second quarter of fiscal year 2018, we acquired the assets of D’style, Inc., headquartered in Chula Vista, California. This acquisition expands our reach into hospitality public space areas and adds an attractive product portfolio of solutions for the residential market through the acquired Allan Copley Designs brand. These offerings enable us to take advantage of the trend where hospitality, residential and commercial designs are merging. In addition, the acquisition includes Diseños de Estilo in Tijuana, Mexico, another member of the D’style group which manufactures exclusively for D’style, strengthening our North American manufacturing footprint and serving as a distribution channel to the Mexico and Latin America hospitality markets. The acquisition purchase price totaled $20.0 million, inclusive of an expected $2.2 million earn-out, which is contingent based upon fiscal year 2018 and 2019 D’style, Inc. operating income compared to a predetermined target for each fiscal year. As of the acquisition date the fair value of the earn-out was $1.7 million. The purchase price is subject to certain post-closing working capital adjustments.
A summary of the preliminary purchase price allocation is as follows:
Purchase Price Allocation  
(Amounts in Thousands)  
Assets:  
Receivables $1,467
Inventories 1,455
Prepaid expenses and other current assets 1,120
Net property and equipment 184
Goodwill 8,559
Other intangible assets 10,720
Deferred tax assets 303
  $23,808
   
Liabilities:  
Accounts payable $804
Customer deposits 3,191
Accrued expenses 333
  $4,328
  $19,480


Consideration  
(Amounts in Thousands)  
Cash $17,800
Contingent earn-out — fair value at acquisition date 1,680
Fair value of total consideration $19,480
The operating results of this acquisition are included in our consolidated financial statements beginning on November 6, 2017. For both the quarter and year-to-date periods ended December 31, 2017, net sales and net income related to D’style were $2.8 million and less than $0.1 million, respectively. Direct costs of the acquisition during the quarter and year-to-date periods ended December 31, 2017, of approximately $0.4 million and $0.7 million, respectively, were expensed as incurred and were included on the Selling and Administrative Expenses line of our Condensed Consolidated Statements of Income. An immaterial amount of goodwill is not deductible for tax purposes, while the tax deductible portion is deductible over 15 years. Goodwill is primarily attributable to the anticipated revenue and supply chain synergies expected from the operations of the combined company. See Note 2 - Recent Accounting Pronouncements and Supplemental Information of Notes to Condensed Consolidated Financial Statements for more information on goodwill and other intangible assets. The purchase price allocation is provisional pending final valuations and purchase accounting adjustments, which were not final as of December 31, 2017. We utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process.

Note 4. Income Taxes
Our second quarter of fiscal year 2018 results of operations included the impact of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”), which was signed into law on December 22, 2017. The Tax Reform reduced federal corporate income tax rates and changed numerous other provisions. As we have a June 30 fiscal year-end, the lower corporate federal income tax rate will be phased in, resulting in a U.S. federal statutory tax rate of 28.1% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. The quarter and six months ended December 31, 2017 included approximately $1.6 million year-to-date in reduced income tax expense to reflect federal taxes at the lower blended effective tax rate. The benefits of the lower rate were more than offset by a one-time discrete $2.0 million unfavorable impact as a result of applying the new lower federal income tax rates to our net deferred tax assets.
The changes included in the Tax Reform are broad and complex. The final transition impacts of the Tax Reform may differ from the above estimate, due to, among other things, changes in interpretations of the Tax Reform, any legislative action to address questions that arise because of the Tax Reform, any changes in accounting standards for income taxes or related interpretations in response to the Tax Reform, or any updates or changes to estimates we have utilized to calculate the transition impacts. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30, 2018.
In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur. Our effective tax rate was 40.6% and 36.5%, respectively, for the first three and six months of fiscal year 2018 of 33.4% was favorablyended December 31, 2017, impacted by excessthe additional income tax benefits from stock award vesting.expense due to the Tax Reform. Our effective tax rate was 33.2% and 35.8%, respectively, for the first three and six months of fiscal year 2017 was 37.8% and did not include any material unusual items.
Non-operating Income (Expense), net:
The non-operating income (expense), net line item includesended December 31, 2016, primarily as the impact of such items as fair value adjustments on Supplemental Employee Retirement Plan (“SERP”) investments, foreign currency rate movements, investment gain or loss, 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 offset by a change indomestic manufacturing deduction impacted the SERP liability that is recognized in selling and administrative expenses.
Components of the Non-operating income (expense), net line, were:
 Three Months Ended
 September 30
(Amounts in Thousands)2017 2016
Foreign Currency Gain (Loss)$17
 $(7)
Gain on Supplemental Employee Retirement Plan Investments351
 367
Other(82) (68)
Non-operating income (expense), net$286
 $292
tax rates.



Note 3.5. Inventories
Inventory components were as follows:
(Amounts in Thousands)September 30, 2017 June 30,
2017
December 31, 2017 June 30,
2017
Finished products$26,446
 $24,537
$24,440
 $24,537
Work-in-process1,266
 1,346
1,274
 1,346
Raw materials26,953
 25,368
26,802
 25,368
Total FIFO inventory54,665
 51,251
52,516
 51,251
LIFO reserve(13,345) (13,189)(13,655) (13,189)
Total inventory$41,320
 $38,062
$38,861
 $38,062
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-monththree and six-month periods ended September 30,December 31, 2017 and 2016 was immaterial.

Note 4.6. Accumulated Other Comprehensive Income
During the three months ended September 30,December 31, 2017 and 2016, the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:
Accumulated Other Comprehensive Income            
(Amounts in Thousands) Unrealized Investment Gain (Loss) Postemployment Benefits Net Actuarial Gain (Loss) Accumulated Other Comprehensive Income Unrealized Investment Gain (Loss) Postemployment Benefits Net Actuarial Gain (Loss) Accumulated Other Comprehensive Income
Balance at June 30, 2017 $(21) $1,136
 $1,115
Balance at September 30, 2017 $(12) $1,258
 $1,246
Other comprehensive income (loss) before reclassifications 9
 163
 172
 (27) 155
 128
Reclassification to (earnings) loss 
 (41) (41) 2
 (49) (47)
Net current-period other comprehensive income (loss) 9
 122
 131
 (25) 106
 81
Balance at September 30, 2017 $(12) $1,258
 $1,246
Balance at December 31, 2017 $(37) $1,364
 $1,327
            
Balance at June 30, 2016 $
 $1,311
 $1,311
Balance at September 30, 2016 $(14) $1,371
 $1,357
Other comprehensive income (loss) before reclassifications (14) 149
 135
 (5) 126
 121
Reclassification to (earnings) loss 
 (89) (89) 
 (87) (87)
Net current-period other comprehensive income (loss) (14) 60
 46
 (5) 39
 34
Balance at September 30, 2016 $(14) $1,371
 $1,357
Balance at December 31, 2016 $(19) $1,410
 $1,391


During the six months ended December 31, 2017 and 2016, the changes in the balances of each component of Accumulated Other Comprehensive Income, net of tax, were as follows:


       
Accumulated Other Comprehensive Income      
(Amounts in Thousands) Unrealized Investment Gain (Loss) Postemployment Benefits Net Actuarial Gain (Loss) Accumulated Other Comprehensive Income
Balance at June 30, 2017 $(21) $1,136
 $1,115
Other comprehensive income (loss) before reclassifications (18) 318
 300
Reclassification to (earnings) loss 2
 (90) (88)
Net current-period other comprehensive income (loss) (16) 228
 212
Balance at December 31, 2017 $(37) $1,364
 $1,327
       
Balance at June 30, 2016 $
 $1,311
 $1,311
Other comprehensive income (loss) before reclassifications (19) 275
 256
Reclassification to (earnings) loss 
 (176) (176)
Net current-period other comprehensive income (loss) (19) 99
 80
Balance at December 31, 2016 $(19) $1,410
 $1,391
The following reclassifications were made from Accumulated Other Comprehensive Income to the Condensed Consolidated Statements of Income:
Reclassifications from Accumulated Other Comprehensive Income Three Months Ended Affected Line Item in the Condensed Consolidated Statements of Income Three Months Ended Six Months Ended Affected Line Item in the Condensed Consolidated Statements of Income
September 30,  December 31, December 31, 
(Amounts in Thousands) 2017 2016  2017 2016 2017 2016 
Postemployment Benefits Amortization of Actuarial Gain (1)
 $44
 $92
 Cost of Sales
         
Realized Investment Gain (Loss) on available-for-sale securities (1)
 $(3) $
 (3) $
 Non-operating income (expense), net
 1
 
 1
 
 Benefit (Provision) for Income Taxes
 (2) 
 (2) 
 Net Income
         
Postemployment Benefits amortization of actuarial gain (2)
 $43
 $91
 $87
 $183
 Cost of Sales
 23
 52
 46
 105
 Selling and Administrative Expenses
 (17) (56) (43) (112) Benefit (Provision) for Income Taxes
 23
 53
 Selling and Administrative Expenses 49
 87
 90
 176
 Net Income
 (26) (56) Provision for Income Taxes         
Total Reclassifications for the Period $41
 $89
 Net Income $47
 $87
 $88
 $176
 Net Income
Amounts in parentheses indicate reductions to income.
(1) See Note 11 - Investments of Notes to Condensed Consolidated Financial Statements for further information on available-for-sale securities.
(2) See Note 13 - Postemployment Benefits of Notes to Condensed Consolidated Financial Statements for further information on postemployment benefit plans.



Note 5.7. Commitments and Contingent Liabilities
Guarantees:
Standby letters of credit were issued to lessors and insurance institutions and can only be drawn upon in the event of our failure to pay our obligations to a beneficiary. As of September 30,December 31, 2017, we had a maximum financial exposure from unused standby letters of credit totaling $1.2 million.
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 one performance bond totaling $0.5 million as of December 31, 2017.
We are not aware of circumstances that would require us to perform under these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our consolidated financial statements. Accordingly, no liability has been recorded as of September 30,December 31, 2017 with respect to the standby letters of credit. We also enter into commercial letters of credit to facilitate payments to vendors and from customers.
Product Warranties:
We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability periodically based on changes in historical cost trends and in certain cases where specific warranty issues become known.
Changes in the product warranty accrual for the threesix months ended September 30,December 31, 2017 and 2016 were as follows:
Three Months EndedSix Months Ended
September 30December 31
(Amounts in Thousands)2017 20162017 2016
Product Warranty Liability at the beginning of the period$1,992
 $2,351
$1,992
 $2,351
Additions to warranty accrual (including changes in estimates)313
 213
839
 294
Settlements made (in cash or in kind)(146) (306)(478) (628)
Product Warranty Liability at the end of the period$2,159
 $2,258
$2,353
 $2,017
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, have met with government officials as requested on two occasions, and 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. 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 the first threesix months of fiscal year 2018, sales related to our GSA contracts were approximately 9.1%8.8% of our consolidated sales, with one contract accounting for approximately 6.4%6.0% of our consolidated sales and the other contract accounting for approximately 2.7%2.8% of our consolidated sales.



Note 6.8. Restructuring
During the quarterthree months ended September 30, 2016, we completed our capacity utilization restructuring plan which included the consolidation of our metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and the reduction of our Company plane fleet from two jets to one. During the three months ended September 30, 2017, we recognized no restructuring expense as the restructuring plan was complete, and weWe recognized a pre-tax restructuring gain of $1.8 million in the three months ended September 30, 2016 which included a gain on the sale of the Post Falls facility. During the three and six months ended December 31, 2017, and the three months ended December 31, 2016, we recognized no restructuring expense as the restructuring plan was complete. Restructuring activity is included in the Restructuring Gain line item on our Condensed Consolidated Statements of Income.

Note 7.9. Assets Held for Sale
At September 30,December 31, 2017, land located in Jasper, Indiana and over-the-road tractors totaling $0.2less than $0.1 million werewas classified as held for sale. At June 30, 2017, our fleet of over-the-road tractors and trailers which havehad been outsourced and a small parcel of land located in Jasper, Indiana totaling $4.2 million were classified as held for sale. During the first quarter of fiscal year 2018, we sold substantially all of our over-the-road tractors and trailers and the small parcel of land and recognized a pre-tax gain of $0.4 million as the $4.6 million selling price exceeded the book value net of selling costs. During the second quarter of fiscal year 2018, we sold the remainder of our over-the-road tractors and trailers for proceeds of $0.1 million which approximated net book value.

Note 8.10. Fair Value
We categorize assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Our policy is to recognize transfers between these levels as of the end of each quarterly reporting period. There were no transfers between these levels during the threesix months ended September 30,December 31, 2017. 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, 2017.
We hold a total investment of $2.0 million in a privately-held company, consisting of $0.5 million in non-marketable equity securities and $1.5 million in stock warrants. The investment in non-marketable equity securities is classified as a level 3 financial asset and is accounted for using the cost method, as explained in the Financial Instruments Not Carried At Fair Value section below. The investment in stock warrants is also classified as a level 3 financial asset and is accounted for as a derivative instrument valued on a recurring basis, as explained in the Financial Instruments Recognized at Fair Value section below. See Note 911 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the investment in non-marketable equity securities, and Note 1012 - Derivative Instruments of Notes to Condensed Consolidated Financial


Statements for further information regarding the investment in stock warrants. No purchases or sales
In connection with the acquisition of levelD’style, we valued long-lived and intangible assets at their estimated fair values at the acquisition date. The fair value estimates were based upon assumptions related to the future cash flows and discount rates utilizing currently available information, and in some cases, valuation results from independent valuation specialists (Level 3 determination of fair value). Subsequent to the acquisition, we determine the fair value of our long-lived and intangible assets occurred duringon a non-recurring basis in connection with our periodic evaluations of such assets for potential impairment and record impairment charges when such fair value estimates are lower than the three months ended September 30, 2017.carrying values of the assets.


Financial Instruments Recognized at Fair Value:
The following methods and assumptions were used to measure fair value:
Financial Instrument Level Valuation Technique/Inputs Used
Cash Equivalents: Money market funds 1 Market - Quoted market prices
Cash Equivalents: Commercial paper 2 Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information.
Available-for-sale securities: Secondary market certificates of deposit 2 Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information.
Available-for-sale securities: Municipal bonds 2 Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information.
Available-for-sale securities: Government agency securities 2 Market - Based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information.
Trading securities: Mutual funds held in nonqualified SERP 1 Market - Quoted market prices
Derivative Assets: Stock warrants 3 Market - The privately-held company is currently in an early stage of start-up. The pricing of recent purchases or sales of the investment are considered, as well as positive and negative qualitative evidence, in the assessment of fair value.
Contingent earn-out liability3Income - Based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the acquisition and a discount rate that captures the risk associated with the liability.



Recurring Fair Value Measurements:
As of September 30,December 31, 2017 and June 30, 2017, the fair values of financial assets that are measured at fair value on a recurring basis using the market approach are categorized as follows:
(Amounts in Thousands)September 30, 2017December 31, 2017
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
Assets              
Cash equivalents: Money market funds$33,343
 $
 $
 $33,343
$7,032
 $
 $
 $7,032
Cash equivalents: Commercial paper
 26,836
 
 26,836

 21,468
 
 21,468
Available-for-sale securities: Secondary market certificates of deposit
 11,162
 
 11,162

 11,752
 
 11,752
Available-for-sale securities: Municipal bonds
 19,172
 
 19,172

 22,775
 
 22,775
Available-for-sale securities: Government agencies
 3,194
 
 3,194

 3,193
 
 3,193
Trading Securities: Mutual funds in nonqualified SERP11,868
 
 
 11,868
12,428
 
 
 12,428
Derivatives: Stock warrants
 
 1,500
 1,500

 
 1,500
 1,500
Total assets at fair value$45,211
 $60,364
 $1,500
 $107,075
$19,460
 $59,188
 $1,500
 $80,148
Liabilities 
  
  
  
Contingent earn-out liability$
 $
 $1,680
 $1,680
Total liabilities at fair value$
 $
 $1,680
 $1,680
        
  
  
  
(Amounts in Thousands)June 30, 2017June 30, 2017
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
Assets              
Cash equivalents: Money market funds$30,383
 $
 $
 $30,383
$30,383
 $
 $
 $30,383
Cash equivalents: Commercial paper
 29,102
 
 29,102

 29,102
 
 29,102
Available-for-sale securities: Secondary market certificates of deposit
 10,336
 
 10,336

 10,336
 
 10,336
Available-for-sale securities: Municipal bonds
 22,154
 
 22,154

 22,154
 
 22,154
Available-for-sale securities: Government agencies
 3,193
 
 3,193

 3,193
 
 3,193
Trading Securities: Mutual funds in nonqualified SERP11,194
 
 
 11,194
11,194
 
 
 11,194
Derivatives: Stock warrants
 
 1,500
 1,500

 
 1,500
 1,500
Total assets at fair value$41,577
 $64,785
 $1,500
 $107,862
$41,577
 $64,785
 $1,500
 $107,862
The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, target date funds, a bond fund, and a money market fund. The SERP investment assets are offset by a SERP liability which represents our obligation to distribute SERP funds to participants. See Note 911 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.



Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include the following:
Financial Instrument Level Valuation Technique/Inputs Used
Notes receivable 2 Market - Price approximated based on the assumed collection of receivables in the normal course of business, taking into account the customer’s non-performance risk
Non-marketable equity securities (cost-method investments, which carry shares at cost except in the event of impairment) 3 Cost Method, with Impairment Recognized Using a Market-Based Valuation Technique - See the explanation below the table regarding the method used to periodically estimate the fair value of cost-method investments.
Long-term debt (carried at amortized cost) 3 Income - Price estimated using a discounted cash flow analysis based on quoted long-term debt market rates, taking into account Kimball International’s non-performance risk
The investment in non-marketable equity securities is accounted for using the cost method because we do not have the ability to exercise significant influence over the operating and financial policies of the investee. On a periodic basis, but no less frequently than quarterly, these investments are assessed for impairment when there are events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. If a significant adverse effect on the fair value of the investment were to occur and was deemed to be other-than-temporary, the fair value of the investment would be estimated, and the amount by which the carrying value of the cost-method investment exceeds its fair value would be recorded as an impairment loss.
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 9.11. Investments
Investment Portfolio:
Our investment portfolio as of September 30,December 31, 2017 and June 30, 2017 was comprised of municipal bonds, certificates of deposit purchased in the secondary market, and government agency securities. Municipal bonds include general obligation bonds and revenue bonds, some of which are pre-refunded. Government agency securities represent callable debt securities of a U.S. government sponsored agency. Our investment policy dictates that municipal bonds and government agency securities must be investment grade quality. Our secondary market certificates of deposit are classified as investment securities, being purchased in the secondary market through a broker and available to be sold in the secondary market. All certificates of deposit are FDIC insured.
Our investment portfolio is available for use in current operations, therefore investments are recorded within Current Assets in the Condensed Consolidated Balance Sheets. The contractual maturities of our investment portfolio were as follows (maturity dates for municipal bonds are based on pre-refunded dates and maturity dates for government agency securities are based on the first available call date): 
September 30, 2017December 31, 2017
(Amounts in Thousands)Certificates of Deposit Municipal Bonds Government Agency SecuritiesCertificates of Deposit Municipal Bonds Government Agency Securities
Within one year$9,258
 $13,573
 $3,194
$8,499
 $20,366
 $1,996
After one year through two years1,904
 5,599
 
3,253
 2,409
 1,197
Total Fair Value$11,162
 $19,172
 $3,194
$11,752
 $22,775
 $3,193
All investments are classified as available-for-sale securities which are recorded at fair value. See Note 810 - Fair Value 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 available-for-sale securities. Unrealized losses on available-for-sale securities are recognized in earnings when there is intent to sell or it is likely to be required to sell before recovery of the loss, or when the available-for-sale securities have incurred a credit loss. Otherwise, unrealized gains and losses are recorded net of the tax-related effect as a component of Share Owners’ Equity.
September 30, 2017December 31, 2017
(Amounts in Thousands)Certificates of Deposit Municipal Bonds Government Agency SecuritiesCertificates of Deposit Municipal Bonds Government Agency Securities
Amortized cost basis$11,161
 $19,187
 $3,200
$11,752
 $22,829
 $3,200
Unrealized holding gains1
 
 

 
 
Unrealized holding losses
 (15) (6)
 (54) (7)
Fair Value$11,162
 $19,172
 $3,194
$11,752
 $22,775
 $3,193
          
June 30, 2017June 30, 2017
(Amounts in Thousands)Certificates of Deposit Municipal Bonds Government Agency SecuritiesCertificates of Deposit Municipal Bonds Government Agency Securities
Amortized cost basis$10,334
 $22,183
 $3,200
$10,334
 $22,183
 $3,200
Unrealized holding gains2
 
 
2
 
 
Unrealized holding losses
 (29) (7)
 (29) (7)
Fair Value$10,336
 $22,154
 $3,193
$10,336
 $22,154
 $3,193
An immaterial amount of investments were in a continuous unrealized loss position as of September 30,December 31, 2017. There were no realizedRealized gains orand losses as a result of sales in the three and six months ended September 30,December 31, 2017 and September 30, 2016.December 31, 2016 were also immaterial.
Supplemental Employee Retirement Plan Investments:
We maintain a self-directed supplemental employee retirement plan (“SERP”) in which executive employees are eligible to participate. The SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. We recognize SERP investment assets on the Condensed Consolidated Balance Sheets at current fair value. A SERP liability of the same amount is recorded on the Condensed Consolidated Balance Sheets representing an obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income in the Other Income (Expense) 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 gains (losses) for the threesix months ended September 30,December 31, 2017 and 2016 were, in thousands, $299$486 and $(357),$99, respectively.
SERP asset and liability balances were as follows:
(Amounts in Thousands)September 30,
2017
 June 30,
2017
December 31,
2017
 June 30,
2017
SERP investments - current asset$2,733
 $1,259
$2,822
 $1,259
SERP investments - other long-term asset9,135
 9,935
9,606
 9,935
Total SERP investments$11,868
 $11,194
$12,428
 $11,194
      
SERP obligation - current liability$2,733
 $1,259
$2,822
 $1,259
SERP obligation - other long-term liability9,135
 9,935
9,606
 9,935
Total SERP obligation$11,868
 $11,194
$12,428
 $11,194
Non-marketable equity securities:
We hold a total investment of $2.0 million in a privately-held company, including $0.5 million in non-marketable equity securities. The investment in non-marketable equity securities is included in the Other Assets line of the Condensed Consolidated Balance Sheets. See Note 810 - Fair Value of Notes to Condensed Consolidated Financial Statements for more information on the


valuation of these securities. We do not hold a majority voting interest and are not the variable interest primary beneficiary of the privately-held company, thus consolidation is not required.

Note 10.12. Derivative Instruments
Stock Warrants:
We hold a total investment of $2.0 million in a privately-held company, including $1.5 million in stock warrants. The investment in stock warrants is accounted for as a derivative instrument, and is included in the Other Assets line of the Condensed Consolidated Balance Sheets. The stock warrants are convertible into equity shares of the privately-held company upon achieving certain milestones. The value of the stock warrants will fluctuate primarily in relation to the value of the privately-held company's underlying securities, either providing an appreciation in value or potentially expiring with no value. During the quarter ended September 30,December 31, 2017, the change in fair value of the stock warrants was not significant. See Note 810 - Fair Value of Notes to Condensed Consolidated Financial Statements for more information on the valuation of these securities.
       
Note 11.13. Postemployment Benefits
Our domestic employees participate in severance plans which provide severance benefits to eligible employees meeting the plans’ qualifications, primarily for involuntary termination without cause.
The components of net periodic postemployment benefit cost applicable to our severance plans were as follows:
Three Months EndedThree Months Ended Six Months Ended
September 30December 31 December 31
(Amounts in Thousands)2017 20162017 2016 2017 2016
Service cost$135
 $119
$131
 $113
 $266
 $232
Interest cost21
 15
21
 14
 42
 29
Amortization of actuarial income(67) (145)(66) (143) (133) (288)
Net periodic benefit cost (income)$89
 $(11)$86
 $(16) $175
 $(27)
The benefit cost (income) in the above table includes only normal recurring levels of severance activity, as estimated using an actuarial method. Unusual or non-recurring severance actions are not estimable using actuarial methods and are expensed in accordance with the applicable U.S. GAAP.

Note 12.14. Stock Compensation Plan
Stock-based compensation expense forduring the three monthsquarter and year-to-date period ended September 30,December 31, 2017, was $1.0 million and $2.5 million, respectively, and during the quarter and year-to-date period ended December 31, 2016, was $1.5 million and $1.8$3.3 million, respectively. The total income tax benefit for stock compensation arrangements during the quarter and year-to-date period ended December 31, 2017, was $0.3 million and $1.4 million, respectively, and during the quarter and year-to-date period ended December 31, 2016, was $0.6 million and $1.3 million, for the three months ended September 30, 2017, whichrespectively. The first quarter of fiscal year 2018 included $0.7$0.6 million of excess tax benefits from stock award vesting, and $0.7 million for the three months ended September 30, 2016.awards vesting.
During fiscal year 2018, the following stock compensation was awarded to officers and other key employees and to members of the Board of Directors who are not employees. All awardsAwards granted through October were granted under the Amended and Restated 2003 Stock Option and Incentive Plan.Plan, while awards granted during November were under the 2017 Stock Incentive Plan, which was approved by share owners at the October 31, 2017 annual share owners meeting. For more information on stock compensation awards, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.



Type of Award Quarter Awarded Shares or Units 
Grant Date Fair Value (5)
 Quarter Awarded Shares or Units 
Grant Date Fair Value (5)
Annual Performance Shares (1)
 1st Quarter 55,839
 
$16.52
 1st Quarter 55,839
 
$16.52
Annual Performance Shares (1)
 2nd Quarter 4,830
 $17.63 - $19.73
Relative Total Shareholder Return Awards (2)
 1st Quarter 26,167
 
$21.21
 1st Quarter 26,167
 
$21.21
Restricted Share Units (3)
 1st Quarter 51,211
 
$16.76
 1st Quarter 51,211
 
$16.76
Restricted Share Units (3)
 2nd Quarter 7,005
 $17.91 - $18.11
Unrestricted Shares (4)
 1st Quarter 10,055
 
$16.97
 1st Quarter 10,055
 
$16.97
Unrestricted Shares (4)
 2nd Quarter 9,237
 $19.29 - $20.72
(1) Annual performance shares were awarded to officers and other key employees. The number of annual performance shares to be issued will be dependent upon the Company’s return on equity during fiscal year 2018, with a percentage payout ranging from 0% to 200% of the target number set forth above. The maximum number of shares that can be issued under these awards is 111,678.121,338. Annual performance shares vest on June 30, 2018.
(2) Performance units were awarded to key officers under the Company’s Relative Total Shareholder Return program. Vesting occurs at June 30, 2020. Participants will earn from 0% to 200% of the target award depending upon how the compound annual growth rate of Kimball International common stock ranks within the peer group at the end of the performance period. The maximum number of units that can be issued under these awards is 52,334.
(3) Restricted share units were awarded to officers and key employees. Vesting occurs at June 30, 2018 and June 30, 2020. Upon vesting, the outstanding number of restricted share units and the value of dividends accumulated over the vesting period are converted to shares of common stock.
(4) Unrestricted shares were awarded to non-employee members of the Board of Directors as consideration for service to Kimball International and do not have vesting periods, holding periods, restrictions on sale, or other restrictions.
(5) The grant date fair value of annual performance shares is based on the stock price at the date of the award, reduced by the present value of dividends normally paid over the vesting period which are not payable on outstanding annual performance share awards. The grant date fair value of the Relative Total Shareholder Return awards was calculated using a Monte Carlo simulation. This valuation technique includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends. The grant date fair value of the restricted share units and unrestricted shares was based on the stock price at the date of the award.

Note 13.15. Variable Interest Entities
Our involvement with variable interest entities (“VIEs”) is limited to situations in which we are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the VIE’s economic performance. Thus, consolidation is not required. Our involvement with VIEs consists of an investment in a privately-held company consisting of non-marketable equity securities and stock warrants, and notes receivable related to independent dealership financing.
The non-marketable equity securities and stock warrants were valued at $0.5 million and $1.5 million, respectively, at both September 30,December 31, 2017 and June 30, 2017 and were included in the Other Assets line of the Condensed Consolidated Balance Sheets. For more information related to our investment in the privately-held company, see Note 810 - Fair Value of Notes to Condensed Consolidated Financial Statements.
The carrying value of the notes receivable for independent dealership financing were $0.8$0.7 million and $0.4 million as of September 30,December 31, 2017 and June 30, 2017, respectively, and were included on the Receivables and Other Assets line of our Condensed Consolidated Balance Sheets.
We have no obligation to provide additional funding to the VIEs, and thus our exposure and risk of loss related to the VIEs is limited to the carrying value of the investment and notes receivable. Financial support provided by Kimball International to the VIEs was limited to the items discussed above during the quarter ended September 30,December 31, 2017.



Note 14.16. Credit Quality and Allowance for Credit Losses of Notes Receivable
We monitor credit quality and associated risks of notes receivable on an individual basis based on criteria such as financial stability of the party and collection experience in conjunction with general economic and market conditions. As of September 30,December 31, 2017 and June 30, 2017, we had no material past due outstanding notes receivable.
As of September 30, 2017 As of June 30, 2017As of December 31, 2017 As of June 30, 2017
(Amounts in Thousands)Unpaid Balance Related Allowance Receivable Net of Allowance Unpaid Balance Related Allowance Receivable Net of AllowanceUnpaid Balance Related Allowance Receivable Net of Allowance Unpaid Balance Related Allowance Receivable Net of Allowance
Independent Dealership Financing$751
 $
 $751
 $433
 $
 $433
$671
 $
 $671
 $433
 $
 $433
Other Notes Receivable135
 126
 9
 138
 126
 12
132
 126
 6
 138
 126
 12
Total$886
 $126
 $760
 $571
 $126
 $445
$803
 $126
 $677
 $571
 $126
 $445

Note 15.17. Earnings Per Share
Basic earnings per share are based on the weighted average number of shares outstanding during the period. Diluted earnings per share are based on the weighted average number of shares outstanding plus the assumed issuance of common shares for all potentially dilutive securities.

Three Months EndedThree Months Ended Six Months Ended
September 30December 31 December 31
(Amounts in Thousands, Except for Per Share Data)2017 20162017 2016 2017 2016
   
Net Income$10,957
 $10,998
$7,378
 $8,717
 $18,335
 $19,715
          
Average Shares Outstanding for Basic EPS Calculation37,428
 37,609
37,476
 37,234
 37,452
 37,421
Dilutive Effect of Average Outstanding Compensation Awards305
 415
260
 371
 323
 496
Average Shares Outstanding for Diluted EPS Calculation37,733
 38,024
37,736
 37,605
 37,775
 37,917
          
Basic Earnings Per Share$0.29
 $0.29
$0.20
 $0.23
 $0.49
 $0.53
Diluted Earnings Per Share$0.29
 $0.29
$0.20
 $0.23
 $0.49
 $0.52


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Kimball International, Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) creates design driven, innovative furnishings sold through our family of brands: Kimball, National, and Kimball Hospitality. Our diverse portfolio offers solutions for the workplace, learning, healing, and hospitality environments.  Dedicated to our Guiding Principles, our values and integrity are evidenced by public recognition as a highly trusted company and an employer of choice. “We Build Success” by establishing long-term relationships with customers, employees, suppliers, share owners and the communities in which we operate.
We closely monitor key indicators for the markets in which we compete. As reported by the Business and Institutional Furniture Manufacturer Association (“BIFMA”), the forecast by IHS as of SeptemberNovember 2017 for the North American commercial furniture market, which they define as including office, education, and healthcare furniture products, projects a year-over-year increase of 5.4% for calendar year 2017 and 7.5%4.6% for calendar year 2018. The forecast for two of the leading indicators for the hospitality furniture market (August 2017(January 2018 PwC Hospitality Directions U.S. report) for calendar year 2018 includes a projected increase in RevPAR (Revenue Per Available Room) of 2.3% for calendar year 2017 and 2.0%2.7% for calendar year 2018, while the occupancy rate forecast for calendar year 2017 isand a slight increase and for calendar year 2018 shows a slight decline asin occupancy levels which continue to hover atnear peak levels.


Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
On November 6, 2017, we successfully completed the acquisition of privately-held D’style, Inc., which has administrative and sales offices in Chula Vista, California and has a manufacturing location in Tijuana, Mexico. The acquisition expands our hospitality offerings to public spaces beyond guest rooms and provides new mixed material manufacturing capabilities. D’style was purchased for $20.0 million, inclusive of a $2.2 million contingent earn-out. The purchase price is subject to certain post-closing working capital adjustments. See Note 3 - Acquisition of Notes to Condensed Consolidated Financial Statements for additional information regarding income taxes.
Our second quarter of fiscal year 2018 results of operations included the impact of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”), which was signed into law on December 22, 2017. The Tax Reform reduced federal corporate income tax rates and changed numerous other provisions. As we have a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. The quarter and six months ended December 31, 2017 included approximately $1.6 million year-to-date in reduced income tax expense to reflect federal taxes at the lower blended effective tax rate. The benefits of the lower rate were more than offset by a one-time discrete $2.0 million unfavorable impact as a result of applying the new lower federal income tax rates to our net deferred tax assets. The changes included in the Tax Reform are broad and complex. The final transition impacts of the Tax Reform may differ from the above estimate, due to, among other things, changes in interpretations of the Tax Reform, any legislative action to address questions that arise because of the Tax Reform, any changes in accounting standards for income taxes or related interpretations in response to the Tax Reform, or any updates or changes to estimates we have utilized to calculate the transition impacts. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30, 2018. We expect the lower statutory tax rate to generate significantly lower tax expense in future periods which will be partially offset by the loss of certain credits and loss of the deductibility of certain expenses.
During the latter portion of our fiscal year 2017 we sold a facility in Indiana which housed the education center for dealer and employee training, a research and development center, and a product showroom for proceeds of $3.8 million. We were leasing a portion of the facility back to facilitate the short-term transition of those functions to other existing Indiana locations. The sale of the facility did not qualify for sale-leaseback accounting during fiscal year 2017, and thus the $1.7 million pre-tax gain on the sale was not recognized in selling and administrative expenses until our second quarter of fiscal year 2018.
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 and impede our ability to compete in the future for contracts and orders.  The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting. In March 2016, in connection with a renewal of one of our two contracts with the General Services Administration (“GSA”), we became aware of noncompliance and inaccuracies in our 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, have met with government officials as requested on two occasions, and intend to cooperate fully with any further inquiries or investigations. We cannot reasonably predict the outcome of a government investigation at this time. During the first threesix months of fiscal year 2018, sales related to our GSA contracts were approximately 9.1%8.8% of our consolidated sales, with one contract accounting for approximately 6.4%6.0% of our consolidated sales and the other contract accounting for approximately 2.7%2.8% of our consolidated sales.
Due to the contract and project nature of furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business which in turn impact our operating results. Effective management of our manufacturing capacity is and will continue to be critical to our success. See below for further details regarding current sales and open order trends.
The impact of higher commodity prices is expected to intensify as pricing pressure from our vendors increases. We continue to focus on continuous improvement initiatives to help offset these cost increases.


Despite a moderate economic outlook, uncertainty in areas such asof the long-term impact of tax reform, trade agreements, tariffs, and the future of the Affordable Care Acthealthcare market could pose a threat to our future growth if companies reduce capital spending in response to the uncertainty.
We expect to continue to invest in capital expenditures prudently, including potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
We have a strong focus on cost control and closely monitor market changes and our liquidity in order to proactively adjust our operating costs, discretionary capital spending, and dividend levels as needed. Managing working capital in conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of our Annual Cash Incentive plan is that it is linked to our Company-wide and business unit performance which is designed to adjust compensation expense as profits change.
We continue to maintain a strong balance sheet. Our short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of our credit facility, was $126.6$108.4 million at September 30,December 31, 2017.


Financial Overview
At or for the
Three Months Ended
  
At or for the
Three Months Ended
   For the
Six Months Ended
  
September 30  December 31   December 31  
(Amounts in Millions)2017 2016 % Change2017 2016 % Change 2017 2016 % Change
Net Sales$169.5
 $175.0
 (3%)$173.7
 $169.9
 2% $343.2
 $344.9
 %
Gross Profit59.6
 58.7
 2%53.9
 55.8
 (3%) 113.5
 114.4
 (1%)
Selling and Administrative Expenses43.6
 43.2
 1%41.9
 42.7
 (2%) 85.6
 86.0
 %
Restructuring Gain
 (1.8) 


 
 

 
 (1.8)  
Operating Income16.0
 17.3
 (8%)12.0
 13.0
 (8%) 28.0
 30.3
 (8%)
Operating Income %9.4% 9.9% 

6.9% 7.7% 

 8.1% 8.8% 

Adjusted Operating Income *$16.0
 $15.5
 3%$12.0
 $13.0
 (8%) $28.0
 $28.5
 (2%)
Adjusted Operating Income % *9.4% 8.8%  6.9% 7.7%   8.1% 8.3%  
Net Income$11.0
 $11.0
 %$7.4
 $8.7
 (15%) $18.3
 $19.7
 (7%)
Adjusted Net Income *11.0
 9.9
 11%7.4
 8.7
 (15%) 18.3
 18.6
 (1%)
Diluted Earnings Per Share$0.29
 $0.29
  $0.20
 $0.23
   $0.49
 $0.52
  
Adjusted Diluted Earnings Per Share *$0.29
 $0.26
  $0.20
 $0.23
   $0.49
 $0.49
  
Open Orders$122.1
 $127.9
 (5%)$131.6
 $122.2
 8%      
* Items indicated represent Non-GAAP measurements. See the “Non-GAAP Financial Measures” section below.
Net Sales by End Market Vertical     
Net Sales by End Vertical Market           
Three Months Ended
 Three Months Ended
 
Six Months Ended
 
September 30
 December 31
 
December 31
 
(Amounts in Millions)2017 2016
% Change2017 2016
% Change
2017 2016
% Change
Commercial$51.7
 $50.5
 2%$48.6
 $51.7
 (6%) $99.4
 $100.7
 (1%)
Education30.5

26.6

15%16.6

14.6

14%
47.1

41.2

14%
Finance13.0

16.7

(22%)17.6

16.7

5%
30.7

33.5

(8%)
Government26.0

19.7

32%21.4

17.9

20%
46.2

36.2

28%
Healthcare18.0

22.6

(20%)23.1

27.1

(15%)
43.1

52.5

(18%)
Hospitality30.3

38.9

(22%)46.4

41.9

11%
76.7

80.8

(5%)
Total Net Sales$169.5

$175.0

(3%)$173.7

$169.9

2%
$343.2

$344.9

%
First

Second quarter fiscal year 2018 consolidated net sales were $169.5$173.7 million compared to firstsecond quarter fiscal year 2017 net sales of $175.0$169.9 million, or a 3% decrease. Decreased volume was partially offset2% increase driven by price increases net of higher discounting and $2.8 million of net sales resulting from the D’style acquisition. Inclusive of the D’style net sales of $2.8 million, net sales for the six-month period ended December 31, 2017 of $343.2 million were flat compared to net sales of $344.9 million for the six-month period ended December 31, 2016 as decreased volume exceeded price increases net of higher discounting.
During our second quarter of fiscal year 2018 we redefined our vertical market reporting to better reflect the end markets that we serve. The largest shifts among vertical markets were sales to certain government-affiliated medical facilities, which were previously classified in the government vertical market and are now classified in the healthcare vertical market. Prior period information was estimated to reflect the new vertical market definitions on a comparable basis.
For both the firstsecond quarter and year-to-date period of fiscal year 2018 compared to the same periods of fiscal year 2017, increased sales to the government vertical market are attributable to higher state and local government sales. In addition, the government and education vertical market sales increases were aided by heightened focus on these vertical markets. For the second quarter of fiscal year 2018 compared to the firstsecond quarter of fiscal year 2017, the decreaseacquisition of the D’style business and increases in organic non-custom business drove an increase in the hospitality vertical market was partially driven by an increase insales to a record quarterly level. Hospitality sales for the year-to-date period of fiscal year 2018 compared to the year-to-date period of fiscal year 2017 declined due to both custom and non-custom sales reductions, and continued customer requests to delay shipments. Uncertainty surrounding the potential replacement of the Affordable Care Act is causing a delaydelays and reductions in spending in the healthcare vertical market. These declines were partially offsetThe other commercial vertical market was negatively impacted by increases in the government and education vertical markets, which increased as a resulttiming of focus on these vertical markets.large projects.
Open orders at September 30,December 31, 2017 decreased 5%increased 8% when compared to the open order level as of September 30,December 31, 2016 in part due to caution and uncertainty in the healthcare market. Hospitalityas hospitality furniture order backlog increased primarily due to delays in order shipment dates requested by customers.the D’style acquisition. Open orders at a point in time may not be indicative of future sales trends.
In the firstsecond quarter of fiscal year 2018 we recorded net income of $11.0$7.4 million and diluted earnings per share of $0.29. In$0.20, and in the firstsecond quarter of fiscal year 2017 we also recorded net income of $11.0$8.7 million and diluted earnings per share of $0.29,$0.23. In the first six months of fiscal year 2018 we recorded net income of $18.3 million and diluted earnings per share of $0.49. In the first six months of fiscal year 2017 we recorded net income of $19.7 million and diluted earnings per share of $0.52, inclusive of


$1.1 $1.1 million or $0.03 per diluted share, of after-tax restructuring gain driven by the sale of the Idaho facility. Excluding the nonrecurring gain, adjusted net income for the first threesix months of fiscal year 2017 was $9.9$18.6 million, or $0.26$0.49 per diluted share.
Gross profit as a percent of net sales increaseddecreased 170 basis points in the firstsecond quarter of fiscal year 2018 compared to the firstsecond quarter of fiscal year 2017. The improvementdecline was driven by a favorable shift in sales mix to higherlower margin product, productivity improvements, the favorable impact of pricefreight cost increases, net of higher discounting, and an increase in the LIFO inventory reserve, which were partially offset by price increases and the additional margin contributed by D’style. Gross profit as a percent of net sales decreased 10 basis points in the first six months of fiscal year 2018 compared to the first six months of fiscal year 2017 as increased pricing and lower employee benefit expenses such as healthcare.healthcare more than offset a shift in sales mix to lower margin product, freight cost increases, higher discounting, and an increase in the LIFO inventory reserve.
As a percent of net sales, selling and administrative expenses in the firstsecond quarter of fiscal year 2018 compared to the firstsecond quarter of fiscal year 2017 increased 120decreased 90 basis points as total expenses decreased 1.9%, driven by a $1.7 million pre-tax gain on the sale of an administrative building and lower incentive compensation, partially offset by increases in salaries and additional costs related to the D’style acquisition including amortization of acquired intangibles and acquisition expenses. For the first six months of fiscal year 2018 compared to the first six months of fiscal year 2017, as a percent of net sales, selling and administrative expenses increased 0.9% primarily due to10 basis points as total expenses decreased 0.5%. The $1.7 million pre-tax gain on the sale of the education center and showroom, and lower incentive compensation costs were offset by higher marketing expenditures to grow the business, partially offset by lower incentive compensation. Also included in the first quarter of fiscal year 2018was a $0.4 million gain on the sale of land, offset by $0.4 million of acquisitionhigher salary expense, and additional costs related to the recently completed acquisition.D’style acquisition including amortization of acquired intangibles and acquisition expenses.
During the quarter ended September 30, 2016, we completed our capacity utilization restructuring plan which included the consolidation of our metal fabrication production from an operation located in Post Falls, Idaho, into existing production facilities in Indiana, and the reduction of our Company plane fleet from two jets to one. During the three months ended September 30, 2017, we recognized no restructuring expense as the restructuring plan was complete, and we recognized a pre-tax restructuring gain of $1.8 million in the three months ended September 30, 2016 which included a gain on the sale of the Post Falls facility. The improvement of customer delivery, supply chain dynamics, and reduction of transportation costs generated pre-tax savings of approximately $1.3 million and $0.9 million for our first quarters ended September 30, 2017 and September 30, 2016, respectively.

Other Income (Expense) consisted of the following:
Three Months EndedThree Months Ended Six Months Ended
September 30December 31 December 31
(Amounts in Thousands)2017 20162017 2016 2017 2016
Interest Income$234
 $110
$234
 $99
 $468
 $209
Interest Expense(31) (5)(74) (5) (105) (10)
Foreign Currency Gain (Loss)17
 (7)
Foreign Currency Loss(29) (8) (12) (15)
Gain on Supplemental Employee Retirement Plan Investments351
 367
413
 29
 764
 396
Other(82) (68)(121) (105) (203) (173)
Other Income (Expense), net$489
 $397
$423
 $10
 $912
 $407
Our second quarter of fiscal year 2018 results of operations included the impact of the enactment of the Tax Reform, which was signed into law on December 22, 2017. The Tax Reform reduced federal corporate income tax rates and changed numerous other provisions. As we have a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal tax rate of 28.1% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. The quarter and six months ended December 31, 2017 included approximately $1.6 million year-to-date in reduced income tax expense to reflect federal taxes at the lower blended effective tax rate. The benefits of the lower rate were more than offset by a one-time discrete $2.0 million unfavorable impact as a result of applying the new lower federal income tax rates to our net deferred tax assets.
The changes included in the Tax Reform are broad and complex. The final transition impacts of the Tax Reform may differ from the above estimate, due to, among other things, changes in interpretations of the Tax Reform, any legislative action to address questions that arise because of the Tax Reform, any changes in accounting standards for income taxes or related interpretations in response to the Tax Reform, or any updates or changes to estimates we have utilized to calculate the transition impacts. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30, 2018.
In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur. Our effective tax rate was 40.6% and 36.5%, respectively, for the first three and six months of fiscal year 2018 of 33.4% was favorablyended December 31, 2017, impacted by excessthe additional income tax benefits from stock award vesting.expense due to the Tax Reform. Our effective tax rate was 33.2% and 35.8%, respectively, for the first three and six months of fiscal year 2017 was 37.8% and did not include any material unusual items.ended December 31, 2016, primarily as the domestic manufacturing deduction impacted the tax rates.
Comparing the balance sheet as of September 30,December 31, 2017 to June 30, 2017, ourwe recorded goodwill of $8.6 million and intangible assets of $10.7 million resulting from the acquisition of D’style. Our prepaid expense and other current assets line increased due to a prepayment of estimated income taxes for the fiscal year. Our customer deposits line increased due to higher hospitality customer deposits partially driven by the acquisition. Our accrued expenses line decreased as approximately half of our accrued cash incentive compensation related to our fiscal year 2017 performance was paid out in the first quarterhalf of fiscal year 2018.

Liquidity and Capital Resources
Our cash position which is comprised of cash, cash equivalents, and short-term investments decreased to $97.8$79.6 million at September 30,December 31, 2017 from $98.6 million at June 30, 2017, primarily due to $7.0$17.8 million of cash flows from operations which were more than offset byoutflow for the D’style acquisition, capital expenditures of $6.6$12.1 million, and the return of capital to share owners in the form of stock repurchases and dividends totaling $4.0$6.6 million, which more than offset $15.4 million of cash flows from operations during the first threesix months of fiscal year 2018.
Working capital at September 30,December 31, 2017 was $85.0$79.7 million compared to working capital of $82.5 million at June 30, 2017. The current ratio was 1.7 at both September 30,December 31, 2017 and June 30, 2017.
Our short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of our credit facility, totaled $126.6$108.4 million at September 30,December 31, 2017. At September 30,December 31, 2017, we had $1.2 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. We had no credit facility borrowings outstanding as of September 30,December 31, 2017 or June 30, 2017.


During fiscal year 2017 we sold a facilityan administrative building in Indiana which housed an education center for dealer and employee training, a research and development center, and a product showroom for proceeds of $3.8 million. We arewere leasing a portion of the facility back to facilitate the short-term transition of those functions to other existing Indiana locations. The sale of the facility doesdid not qualify for sale-leaseback accounting thus the book value of the building remainsremained on the property and equipment line of our Condensed Consolidated Balance Sheets as of September 30, 2017 and June 30, 2017, and the related sale-leaseback financing obligation iswas a current liability on our Condensed Consolidated Balance Sheets as of September 30, 2017 and June 30, 2017. In addition, since the sale of the facility did not qualify for sale-leaseback accounting during fiscal year 2017, the $1.7 million pre-tax gain on the sale was not recognized in selling and administrative expenses until our second quarter of fiscal year 2018.
Cash Flows
The following table reflects the major categories of cash flows for the first threesix months of fiscal years 2018 and 2017.
 Three Months Ended Six Months Ended
 September 30 December 31
(Amounts in thousands) 2017 2016 2017 2016
Net cash provided by operating activities $7,025
 $13,012
 $15,382
 $32,105
Net cash provided by (used for) investing activities $748
 $(7,761)
Net cash used for investing activities $(27,322) $(14,184)
Net cash used for financing activities $(6,405) $(5,966) $(9,090) $(12,031)
Cash Flows from Operating Activities
For the first threesix months of fiscal year 2018 net cash provided by operating activities was $7.0$15.4 million fueled by $11.0$18.3 million of net income while the first threesix months of fiscal year 2017 net cash provided by operating activities was $13.0$32.1 million inclusive of $11.0$19.7 million of net income. Changes in working capital balances used $6.6$17.0 million of cash in the first threesix months of fiscal year 2018 and provided $0.7$5.9 million of cash in the first threesix months of fiscal year 2017.
The $6.6$17.0 million usage of cash from changes in working capital balances in the first threesix months of fiscal year 2018 was primarily due to a reduction in our accrued expenses balance as approximately half of our accrued cash incentive compensation and the retirement profit sharing contribution which are both related to our fiscal year 2017 performance were paid out during ourout. Also contributing was a prepayment of estimated income taxes for fiscal year 2018 which are included in the prepaid expenses and other current assets line. The $5.9 million of cash provided by changes in working capital balances in the first quartersix months of fiscal year 2018.2017 was primarily due to a reduction in our accounts receivable balance due to fluctuations in sales.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for the three-monthsix-month period ended September 30,December 31, 2017 improvedwas 28 days compared to 27 days from 28 days for the three-monthsix-month period ended September 30,December 31, 2016. We define DSO as the average of monthly trade accounts and notes receivable divided by an average day’s net sales. Our Production Days Supply on Hand (“PDSOH”) of inventory measure for the first quartersix-month period ended September 30,December 31, 2017 increaseddecreased to 49 days from 46 days from 47 days from the first quartersix-month period ended September 30,December 31, 2016. The PDSOH increase was driven by similar inventory levels year-over-year coupled with lower sales volumes. We define PDSOH as the average of the monthly gross inventory divided by an average day’s cost of sales.
Cash Flows from Investing Activities
During the first quartersix months of fiscal year 2018, we invested $7.0$18.9 million in available-for-sale securities, and $9.0$16.5 million matured. During the first quartersix months of fiscal year 2017, we invested $15.9$19.7 million in available-for-sale securities, with no maturities occurring during that quarter.and $0.7 million matured. Our short-term investments included municipal bonds, certificates of deposit purchased in the secondary market, and government agency securities. During the first threesix months of fiscal year 2018, we had a cash outflow of $17.8 million for the D’style acquisition. During the first six months of fiscal years 2018 and 2017, we received proceeds from the sale of assets net of selling expenses of $5.4$5.6 million and $11.3$11.7 million, respectively, the majority of which relates to the sale of our fleet of over-the-road tractors and trailers during the first quartersix months of fiscal year 2018 and the majority of which relates to the sale of our Idaho facility during the first quartersix months of fiscal year 2017. During the first threesix months of fiscal years 2018 and 2017, we reinvested $6.6$12.1 million and $2.5$5.9 million, respectively, into capital investments for the future. The capital investments during the first threesix months of the current year were primarily for facility improvements such as renovations to our corporate headquarters and showrooms, and various manufacturing equipment upgrades.upgrades to increase automation in production facilities which is expected to yield future benefits. The capital investments during the first threesix months of the prior year were primarily for showroom renovations and various manufacturing equipment.equipment, and replacements of tractors and trailers in our fleet.


Cash Flows from Financing Activities
We paid dividends of $2.2$4.9 million and $2.1$4.3 million in the three-monthsix-month periods ended September 30,December 31, 2017 and September 30,December 31, 2016, respectively. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. During the first threesix months of fiscal years 2018 and 2017, we repurchased shares pursuant to a previously announced share repurchase program which drove cash outflow of $1.7$1.8 million and $2.7$6.5 million, respectively.


Credit Facility
We maintain a $30 million credit facility with a maturity date of October 2019 that allows for both issuances of letters of credit and cash borrowings. This facility provides an option to increase the amount available for borrowing to $55 million at our request, subject to the consent of the participating banks. At September 30,December 31, 2017, we had $1.2 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. At both September 30,December 31, 2017 and June 30, 2017, we had no borrowings outstanding.
The credit facility requires us to comply with certain debt covenants, the most significant of which are the adjusted leverage ratio and the fixed charge coverage ratio. The adjusted leverage ratio is defined as (a) consolidated total indebtedness minus unencumbered U.S. cash on hand in the U.S. in excess of $15,000,000 to (b) consolidated EBITDA, determined as of the end of each of our fiscal quarters for the then most recently ended four fiscal quarters, and may not be greater than 3.0 to 1.0. The fixed charge coverage ratio is defined as (a) the sum of (i) consolidated EBITDA, minus (ii) 50% of depreciation expense, minus (iii) taxes paid, minus (iv) dividends and distributions paid, to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii) interest expense, calculated on a consolidated basis in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), determined as of the end of each of our fiscal quarters for the trailing four fiscal quarters then ending, and may not be less than 1.10 to 1.00. We were in compliance with all debt covenants of the credit facility during the three-monthsix-month period ended September 30,December 31, 2017.
The table below compares the adjusted leverage ratio and fixed charge coverage ratio with the limits specified in the credit agreement.
 At or For the Period Ended Limit As Specified in   At or For the Period Ended Limit As Specified in  
Covenant September 30, 2017 Credit Agreement Excess December 31, 2017 Credit Agreement Excess
Adjusted Leverage Ratio (0.62) 3.00
 3.62
 (0.37) 3.00
 3.37
Fixed Charge Coverage Ratio 551.38
 1.10
 550.28
 237.33
 1.10
 236.23
Future Liquidity
We believe our principal sources of liquidity from available funds on hand and short term investments, cash generated from operations, and the availability of borrowing under our credit facility will be sufficient to fund future dividends and meet our working capital and other operating needs for at least the next 12 months. During the firstsecond quarter of fiscal year 2018, our Board of Directors declared a quarterly dividend of $0.07 per share, which was an increase from our previous quarterly dividend of $0.06 per share. We anticipate cash outflows for a pending acquisition of $20.0 million subject to certain post-closing working capital adjustments, consisting of $17.8 million to be paid in fiscal year 2018 with an additional potential maximum earn-out of $2.2 million to be paid thereafter. During the remainderduring our third quarter of fiscal year 2018 we also expect cash outflow of approximately $7.8 million for accrued cash incentive compensation related to our fiscal year 2017 performance.2018. We will continue to evaluate market conditions in determining future share repurchases. During fiscal year 2018 we expect to ramp up investments in capital expenditures, particularly for projects such as our headquarters renovation, showroom renovations, machinery and equipment upgrades and automation, and potential acquisitions, that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by factors such as general economic and market conditions, lack of availability of raw material components in the supply chain, a decline in demand for our services,products, the impact of changes in tariffs, loss of key contract customers, including government subcontract customers, or potential fines and penalties that may result from the government’s review of our GSA subcontractor reporting, and other unforeseen circumstances. In particular, should demand for our products decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted.


Non-GAAP Financial Measures
This Management’s Discussion and Analysis (“MD&A”) contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the United States in the statements of income, statements of comprehensive income, balance sheets, or statements of cash flows of the company. The non-GAAP financial measures used within this MD&A include (1) adjusted operating income defined as operating income excluding restructuring; (2) adjusted net income defined as net income excluding restructuring; and (3) adjusted diluted earnings per share defined as diluted earnings per share excluding restructuring. Reconciliations of the reported GAAP numbers to these non-GAAP financial measures are included in the table below. No restructuring was incurred, and therefore the non-GAAP reconciliations are not shown for the second quarters of fiscal years 2018 and 2017. Management believes it is useful for investors to understand how its core operations performed without gains or expenses incurred in executing its restructuring plans. Excluding these amounts allows investors to meaningfully trend, analyze, and benchmark the performance of our core operations. Many of our internal performance measures that management uses to make certain operating decisions exclude these gains/expenses to enable meaningful trending of core operating metrics. These non-GAAP financial measures should not be viewed as an alternative to the GAAP measures and are presented as supplemental information.
Reconciliation of Non-GAAP Financial MeasuresReconciliation of Non-GAAP Financial Measures   
(Amounts in Thousands, Except for Per Share Data)    
Three Months EndedSix Months Ended
September 30December 31
2017 20162017 2016
Operating Income$15,957
 $17,292
$27,962
 $30,322
Pre-tax Restructuring Gain
 (1,832)
 (1,832)
Adjusted Operating Income$15,957
 $15,460
$27,962
 $28,490
Net Sales$169,517
 $174,996
$343,191
 $344,883
Adjusted Operating Income %9.4% 8.8%8.1% 8.3%
      
Net Income$10,957
 $10,998
$18,335
 $19,715
Pre-tax Restructuring Gain
 (1,832)
 (1,832)
Tax on Restructuring
 713

 713
After-tax Restructuring Gain
 (1,119)
 (1,119)
Adjusted Net Income$10,957
 $9,879
$18,335
 $18,596
      
Diluted Earnings Per Share$0.29
 $0.29
$0.49
 $0.52
Impact of Restructuring Gain
 (0.03)0.00
 (0.03)
Adjusted Diluted Earnings Per Share$0.29
 $0.26
$0.49
 $0.49
The open orders metric is a key performance indicator representing firm orders placed by our customers which have not yet been fulfilled and are expected to be recognized as revenue during future quarters. The timing of shipments can vary, but generally open orders are expected to ship within a twelve-month period.



Fair Value
Financial assets classified as level 1 assets were valued using readily available market pricing. For commercial paper and available-for-sale securities classified as level 2 assets, the fair values are determined based on market data which use evaluated pricing models and incorporate available trade, bid, and other market information. We evaluated the inputs used to value the instruments and validated the accuracy of the instrument fair values based on historical evidence. The investment in stock warrants and non-marketable equity securities of a privately-held company are classified as level 3 financial assets. The stock warrants are accounted for as a derivative instrument valued on a recurring basis considering the pricing of recent purchases or sales of the investment as well as positive and negative qualitative evidence, while the non-marketable equity securities are accounted for as a cost-method investment which carries the securities at cost, except in the event of impairment. The contingent earn-out liability is classified as a Level 3 financial liability, and is valued based on a valuation model that measures the present value of the probable cash payments based upon the forecasted operating performance of the acquisition and a discount rate that captures the risk associated with the liability.
See Note 810 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.
Contractual Obligations
There have been no material changes outside the ordinary course of business to our summary of contractual obligations under the caption, “Contractual Obligations” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to standby letters of credit, a performance bond, and operating leases entered into in the normal course of business. These arrangements do not have a material current effect and are not reasonably likely to have a material future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. See Note 57 - Commitments and Contingent Liabilities of Notes to Condensed Consolidated Financial Statements for more information on the standby letters of credit and the performance bond. We do not have material exposures to trading activities of non-exchange traded contracts.
The preceding statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Certain factors could cause actual results to differ materially from forward-looking statements.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the condensed consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. Management continually reviews the accounting policies and financial information disclosures. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017. During the first threesix months of fiscal 2018, there were no material changes in the accounting policies and assumptions previously disclosed.
New Accounting Standards
See Note 2 - Recent Accounting Pronouncements and Supplemental Information of Notes to Condensed Consolidated Financial Statements for information regarding New Accounting Standards.
Forward-Looking Statements
Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “seeks,” “likely,” “future,” “may,” “might,” “should,” “would,” “will,” and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, uncertainties related to the future impact of federal tax reform, the outcome of a governmental review of our subcontractor reporting practices, adverse changes in the global economic conditions, increased global competition, significant reduction in customer order patterns, loss of key customers or suppliers, financial stability of key customers and suppliers, relationships with strategic customers and product distributors, availability or cost of raw materials and components, increased competitive pricing pressures reflecting


excess industry capacities, changes in the regulatory environment, or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of Kimball International are contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.


Item 3. Quantitative and Qualitative Disclosures About Market Risk
We hold an investment portfolio of available-for-sale securities, comprised of municipal bonds, certificates of deposit purchased in the secondary market, and government agency securities. As of September 30,December 31, 2017, the fair value of the investment portfolio was $33.5$37.7 million. Our investment policy dictates that municipal bonds and government agency securities must be investment grade quality, and all certificates of deposit are FDIC insured. These securities are fixed income instruments and will decline in value if market interest rates increase. A hypothetical 100 basis point increase in an annual period in market interest rates from levels at September 30,December 31, 2017 would cause the fair value of these investments to decline by an immaterial amount. Further information on investments is provided in Note 911 - Investments of Notes to Condensed Consolidated Financial Statements.
We also hold a total investment of $2.0 million in a privately-held company, consisting of $0.5 million in non-marketable equity securities and $1.5 million in stock warrants. The fair value of the investment may fluctuate due to events and changes in circumstances, but we have incurred no impairment during the threesix months ended September 30,December 31, 2017.
There have been no material changes to other market risks, including commodity risk and foreign currency risk, from the information disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures.
We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed as of September 30,December 31, 2017, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
(b)Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30,December 31, 2017 that have materially affected, or that are reasonably likely to materially affect, our 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 August 11, 2015. The program allows for the repurchase of up to two million shares of common stock and will remain in effect until all shares authorized have been repurchased. At September 30,December 31, 2017, 1.7 million shares remained available under the repurchase program.
         
Period 
Total Number
of Shares
Purchased
 Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1 (July 1-July 31, 2017) 
 $
 
 1,757,260
Month #2 (August 1-August 31, 2017) 104,551
 $16.70
 104,551
 1,652,709
Month #3 (September 1-September 30, 2017) 
 $
 
 1,652,709
Total 104,551
 $16.70
 104,551
  
         
Period 
Total Number
of Shares
Purchased
 Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1 (October 1-October 31, 2017) 
 $
 
 1,652,709
Month #2 (November 1-November 30, 2017) 2,050
 $17.00
 2,050
 1,650,659
Month #3 (December 1-December 31, 2017) 
 $
 
 1,650,659
Total 2,050
 $17.00
 2,050
  


Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
3(a)
3(b)
10(a)
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document





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/ ROBERT F. SCHNEIDER
  
Robert F. Schneider
Chief Executive Officer
  November 2, 2017February 1, 2018
   
   
 By:/s/ MICHELLE R. SCHROEDER
  
Michelle R. Schroeder
Vice President,
Chief Financial Officer
  November 2, 2017February 1, 2018

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