Company Quick10K Filing
Kimball
Price19.25 EPS1
Shares37 P/E18
MCap717 P/FCF14
Net Debt-80 EBIT55
TEV637 TEV/EBIT12
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-06-30 Filed 2020-08-28
10-Q 2020-03-31 Filed 2020-05-11
10-Q 2019-12-31 Filed 2020-02-05
10-Q 2019-09-30 Filed 2019-11-05
10-K 2019-06-30 Filed 2019-08-27
10-Q 2019-03-31 Filed 2019-05-08
10-Q 2018-12-31 Filed 2019-02-05
10-Q 2018-09-30 Filed 2018-11-06
10-K 2018-06-30 Filed 2018-08-28
10-Q 2018-03-31 Filed 2018-05-02
10-Q 2017-12-31 Filed 2018-02-01
10-Q 2017-09-30 Filed 2017-11-02
10-K 2017-06-30 Filed 2017-08-29
10-Q 2017-03-31 Filed 2017-05-04
10-Q 2016-12-31 Filed 2017-02-02
10-Q 2016-09-30 Filed 2016-11-02
10-K 2016-06-30 Filed 2016-08-30
10-Q 2016-03-31 Filed 2016-05-04
10-Q 2015-12-31 Filed 2016-02-03
10-Q 2015-09-30 Filed 2015-11-04
10-K 2015-06-30 Filed 2015-08-26
10-Q 2015-03-31 Filed 2015-05-06
10-Q 2014-12-31 Filed 2015-02-04
10-Q 2014-09-30 Filed 2014-11-07
10-K 2014-06-30 Filed 2014-08-27
10-Q 2014-03-31 Filed 2014-05-05
10-Q 2013-12-31 Filed 2014-02-05
10-Q 2013-09-30 Filed 2013-11-05
10-K 2013-06-30 Filed 2013-08-26
10-Q 2013-03-31 Filed 2013-05-02
10-Q 2012-12-31 Filed 2013-02-04
10-Q 2012-09-30 Filed 2012-11-01
10-K 2012-06-30 Filed 2012-08-27
10-Q 2012-03-31 Filed 2012-05-03
10-Q 2011-12-31 Filed 2012-02-03
10-Q 2011-09-30 Filed 2011-11-01
10-K 2011-06-30 Filed 2011-08-29
10-Q 2011-03-31 Filed 2011-05-05
10-Q 2010-12-31 Filed 2011-02-04
10-Q 2010-09-30 Filed 2010-11-05
10-K 2010-06-30 Filed 2010-08-30
10-Q 2010-03-31 Filed 2010-05-06
10-Q 2009-12-31 Filed 2010-02-05
8-K 2020-08-01 Earnings, Exit Costs, Impairments, Regulation FD, Exhibits
8-K 2020-06-26 Officers, Regulation FD, Exhibits
8-K 2020-05-05
8-K 2020-04-27
8-K 2020-03-31
8-K 2020-03-23
8-K 2020-02-04
8-K 2019-11-04
8-K 2019-10-24
8-K 2019-10-22
8-K 2019-07-29
8-K 2019-07-09
8-K 2019-06-19
8-K 2019-06-19
8-K 2019-05-07
8-K 2019-02-28
8-K 2019-02-04
8-K 2018-11-02
8-K 2018-10-30
8-K 2018-10-25
8-K 2018-08-01
8-K 2018-07-06
8-K 2018-07-02
8-K 2018-05-07
8-K 2018-05-01
8-K 2018-01-31
8-K 2018-01-22

KBAL 10K Annual Report

Part I
Item 1 - Business
Item 1A - Risk Factors
Item 1B - Unresolved Staff Comments
Item 2 - Properties
Item 3 - Legal Proceedings
Item 4 - Mine Safety Disclosures
Part II
Item 5 - Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6 - Selected Financial Data
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Item 8 - Financial Statements and Supplementary Data
Note 1 Summary of Significant Accounting Policies
Note 2 Restructuring
Note 3 Acquisitions
Note 4 Revenue
Note 5. Leases
Note 6 Earnings per Share
Note 7 Income Taxes
Note 8 Inventories
Note 9 Property and Equipment
Note 10 Commitments and Contingent Liabilities
Note 11 Long - Term Debt and Credit Facilities
Note 12 Employee Benefit Plans
Note 13 Stock Compensation Plans
Note 14 Fair Value
Note 15 Derivative Instruments
Note 16 Investments
Note 17 Accrued Expenses
Note 18 Geographic Information
Note 19 Accumulated Other Comprehensive Income
Note 20 Variable Interest Entities
Note 21 Credit Quality and Allowance for Credit Losses of Notes Receivable
Note 22 Quarterly Financial Information (Unaudited)
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A - Controls and Procedures
Item 9B - Other Information
Part III
Item 10 - Directors, Executive Officers and Corporate Governance
Item 11 - Executive Compensation
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13 - Certain Relationships and Related Transactions, and Director Independence
Item 14 - Principal Accounting Fees and Services
Part IV
Item 15 - Exhibits, Financial Statement Schedules
Item 16 - Form 10 - K Summary
EX-3.B a10kexhibit3b06302020q4.htm
EX-4.A a10kexhibit4a06302020q4.htm
EX-10.W a10kexhibit10w06302020.htm
EX-21 a10kexhibit2106302020q4.htm
EX-23 a10kexhibit2306302020q4.htm
EX-24 a10kexhibit2406302020q4.htm
EX-31.1 exhibit31106302020q4.htm
EX-31.2 exhibit31206302020q4.htm
EX-32.1 exhibit32106302020q4.htm
EX-32.2 exhibit32206302020q4.htm

Kimball Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
72558043529014502012201420172020
Assets, Equity
3502802101407002012201420172020
Rev, G Profit, Net Income
3011-8-27-46-652012201420172020
Ops, Inv, Fin

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2020
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
kbal-20200630_g1.jpg
KIMBALL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Indiana35-0514506
(State or other jurisdiction of(I.R.S. Employer Identification No.)
incorporation or organization)
1600 Royal Street, Jasper, Indiana
47546-2256
(Address of principal executive offices)(Zip Code)
(812) 482-1600
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTrading Symbol(s)Name of each exchange on which registered
Class B Common Stock, par value $0.05 per shareKBALThe Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x        Accelerated filer  o Non-accelerated filer o   Smaller reporting company  o Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o    No  x
Class A Common Stock is not publicly traded and, therefore, no market value is available, but it is convertible on a one-for-one basis into Class B Common Stock.  The aggregate market value of the Class B Common Stock held by non-affiliates, as of December 31, 2019 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $742.2 million, based on 98.0% of Class B Common Stock held by non-affiliates.
The number of shares outstanding of the Registrant’s common stock as of August 24, 2020 was:
          Class A Common Stock - 193,162 shares
          Class B Common Stock - 36,780,147 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on October 27, 2020 are incorporated by reference into Part III.

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

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PART I
Forward-Looking Statements
This document contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These are statements made by management, using their best business judgment based upon facts known at the time of the statements or reasonable estimates, about future results, plans, or future performance and business of the Company. Such statements involve risk and uncertainty, and their ultimate validity is affected by a number of factors, both specific and general. They should not be construed as a guarantee that such results or events will, in fact, occur or be realized as actual results may differ materially from those expressed in these forward-looking statements. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “seeks,” “likely,” “future,” “may,” “might,” “should,” “would,” “will,” and similar expressions. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historical results. We make no commitment to update these factors or to revise any forward-looking statements for events or circumstances occurring after the statement is issued, except as required in current and quarterly periodic reports filed with the Securities and Exchange Commission (“SEC”) or otherwise by law. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the impact of COVID-19 on our business, disruptions in our supply chain including any impact of COVID-19 on cost and availability, adverse changes in global economic conditions, successful execution of Phase 2 of our restructuring plan, the impact of changes in tariffs, increased global competition, the impact of changes in the regulatory environment, the loss of or significant volume reductions from key contract customers, the financial stability of key customers and suppliers, or similar unforeseen events. Additional risks and uncertainties discussed in Item 1A - Risk Factors of this report could also cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our results to differ materially from those expressed in forward-looking statements.
At any time when we make forward-looking statements, we desire to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 where factors could cause actual results to differ materially from forward-looking statements.
Item 1 - Business
As used herein, the terms “Company,” “Kimball International,” “we,” “us,” or “our” refer to Kimball International, Inc., the Registrant, and its subsidiaries. Reference to a year relates to a fiscal year, ended June 30 of the year indicated, rather than a calendar year unless the context indicates otherwise. Additionally, references to the first, second, third, and fourth quarters refer to those respective quarters of the fiscal year indicated.
Overview
Kimball International was incorporated in Indiana in 1939. Our corporate headquarters is located at 1600 Royal Street, Jasper, Indiana. For over 70 years, Kimball International has created design driven furnishings that have helped our customers shape spaces into places, bringing possibility to life by enabling collaboration, discovery, wellness, and relaxation. We go to market through our family of brands: Kimball, Kimball Health, National, Etc. by National, Kimball Hospitality, and D’style by Kimball Hospitality. Our values and high integrity are demonstrated daily by living our purpose and guiding principles that establish us as an employer of choice. We build success by growing long-term relationships with customers, employees, suppliers, shareholders and the communities in which we operate.
We have been in the furniture business since 1950. Our end markets include the workplace, health and hospitality markets. Our workplace end market includes sales to the commercial, financial, government and education vertical markets. Through each of our brands, we offer a wide range of possibilities for creating functional environments that convey just the right image for each unique setting, as furniture solutions are tailored to the specific end user’s needs and demands. The workplace is evolving to optimize human interaction, and Kimball and National provide residentially inspired furniture solutions. While our rich heritage of wood craftsmanship remains, our new product portfolio incorporates the use of mixed materials, satisfying the marketplace’s need for multi-functional, open accommodations throughout all industries. Our furniture solutions are used in collaborative and open work spaces, conference and meeting/huddle rooms, training rooms, private offices, learning areas, classrooms, lobby/reception areas, and dining/café areas with a vast mix of wood, metal, laminate, paint, fabric, solid surface, and plastic options. To accommodate new ways of working we have added divider screens that are intended to reduce the spread of pathogens while enhancing existing products and blending new solutions into the workplace. As the need to work from home continues, we are offering new solutions to help redefine the future of work by building a work-from-home portfolio. In addition, we offer products designed specifically for the health market, such as casegoods and seating for patient exam rooms and lounge areas. In response to COVID-19, Kimball and National designed quick response programs that offer a broad furniture portfolio with quick-ship options. These pre-configured solutions offer easy-to-order and quick-to-receive vignettes for a variety of spaces. In
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the hospitality industry, Kimball Hospitality works with leading designers, purchasing agents, and hotel owners to create furniture that extends the unique ambiance of a property into guest rooms and public spaces by providing furniture solutions for hotel properties and mixed use commercial and residential developments. Hospitality products include, but are not limited to, headboards, tables, seating, vanities, casegoods, lighting, and products enhanced with technology features utilizing a broad mix of wood, metal, stone, laminate, finish, glass, and fabric options.
Recent Business Changes
‘Kimball International Connect’ Strategy
In May 2019, Kimball International introduced a comprehensive strategy to connect our purpose, our people, and our brands to drive growth and unlock the Company’s full potential. Kimball International Connect seeks to enable the power of our people and position our organization to engage at higher levels of collaboration and interdependence. We believe this strategy will result in enhanced shareholder value over the long term.
Our Kimball International Connect Strategy is comprised of four pillars:
Inspire Our People: Leveraging our legacy of a bold and entrepreneurial spirit, we are working to cultivate a high-performance, caring culture. We unveiled our new purpose to our employees on May 9, 2019 and are investing in our training, technology and systems to remain an employer of choice and a great place to work.
Build Our Capabilities: We created center-led functions, including finance, human resources, information technology and legal and centralized supply chain leadership to reduce duplication, deliver efficiencies, and drive consistency. We are also adopting new ways of working to ensure the use of common best practices and approaches. To achieve our goals, we established a Program Management Office to oversee execution.
Fuel Our Future: We are driving lean throughout the organization, removing duplication at the business level, and infusing capital to accelerate efficiencies. Related to this, we are employing a more metrics-based approach and driving toward more formal standardized operating practices.
Accelerate Our Growth: We are continuing to advance new product development across our brands, selectively expanding our verticals and channels, including health and e-commerce, and driving commercial excellence. We believe by being our customers’ first choice for shaping places that bring collaboration, discovery, wellness and relaxation to life, we will capture greater market share.
‘Kimball International Connect 2.0’ Strategy
In August 2020, Kimball International announced Connect 2.0, which centers around accelerating our growth. The four pillars of our previously announced strategy remain constant: inspire our people with a purpose driven and high performance culture, build our capabilities by expanding our work on innovation, fuel our future through the dedication to cost savings, and accelerate our growth. Connect 2.0 is designed to accelerate the growth of Kimball International and enable us to effectively manage through the current economic downturn, by driving market share gains as well as yielding additional cost savings. The Company will be reorganized into four market centric business units which are Workplace, Health, Hospitality, and eBusiness that will accelerate our ability to redesign and reimagine the new workplace, build a new work from home portfolio, continue assembling experts in health, and expand our hospitality business into other commercial direct sales environments. The dedicated eBusiness unit will take a leadership role in establishing all e-commerce across our brands and end markets. Each of these four business units will be supported by the agility and efficiency of Global Operations and the streamlined center-led structure that we implemented in year one of our strategy and the transformation restructuring plan described below.
Transformation Restructuring Plan
In June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. We believe the transformation restructuring plan has established a more cost-efficient structure to better align our operations with our long-term strategic goals. The transformation restructuring plan includes the following:
We reviewed our overall manufacturing facility footprint to reduce excess capacity and gain efficiencies by centralizing manufacturing operations. We ceased operations at a leased seating manufacturing facility in Martinsville, Virginia, consolidated a David Edward production facility in Red Lion, Pennsylvania into our Baltimore, Maryland facility.
The creation of center-led functions for finance, human resources, information technology and legal functions resulted in the standardization of processes and the elimination of duplication. In addition, we centralized our supply chain
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efforts to maximize supplier value and plan to drive more efficient practices and operations within our logistics function.
Kimball brand selling resources were reallocated to higher-growth markets. We also ceased use of four leased furniture showrooms across our brands during the first quarter of fiscal year 2020 and recognized impairment of the lease and associated leasehold improvements. Additional impairment was recognized in our fourth quarter of fiscal year 2020 due to degradation of sublease expectations resulting from the current economic environment.
These efforts, which are substantially complete except for subleasing of exited showrooms, generated pre-tax savings of approximately $10.5 million in fiscal year 2020. During fiscal years 2020 and 2019, we recognized $8.5 million and $0.9 million, respectively, of pre-tax restructuring expense.
Transformation Restructuring Plan Phase 2
In August 2020, we announced the second phase of our transformation restructuring plan that will align our business units to a new market-centric orientation and is expected to yield additional cost savings that will enable us to effectively manage through the downturn caused by the COVID-19 pandemic. Phase 2 of the transformation restructuring plan builds on the initial strategy and the transformation restructuring plan announced in June 2019. The following is a summary of the activities we will be undertaking pursuant to phase 2 of the transformation restructuring plan:
As part of the previously announced plan to consolidate manufacturing of all brands into one world-class global operations group, we are streamlining our manufacturing facilities by leveraging production capabilities across all facilities, establishing centers of excellence, and setting up processes to facilitate flexing of product between facilities in response to volume fluctuations. We are also reviewing our overall facility footprint to identify opportunities to reduce capacity and gain efficiencies.
As discussed above as part of our Connect 2.0 strategy, the Company will be reorganized into four market centric business units which are Workplace, Health, Hospitality and eBusiness.
We will streamline our workforce to align with the new organizational structure and respond to lower volumes created by the COVID-19 pandemic, creating a more efficient organization to deliver on our Connect 2.0 strategy.
Phase 2 of the transformation restructuring plan will begin immediately, and we expect a substantial majority of the underlying activities of these aforementioned actions to be completed within two years.
We currently estimate we will incur total pre-tax restructuring charges of approximately $17.0 million to $18.0 million related to the initiatives under phase 2 of the transformation restructuring plan.
Acquisition of David Edward Furniture, Inc. (“David Edward”)
During the second quarter of fiscal year 2019, we acquired substantially all of the assets and assumed certain specified limited liabilities of David Edward headquartered in Baltimore, Maryland. David Edward is a premier designer and manufacturer of contract furniture, sold in the health, corporate, education, and premium hospitality markets. David Edward products are generally specified by architects and sold primarily in the North American market. The David Edward collection by Kimball consists of classic and contemporary designs, focused primarily in the seating, tables, and ancillary furniture categories. In conjunction with the asset acquisition, we leased two existing David Edward production facilities in Baltimore, Maryland and Red Lion, Pennsylvania. The cash paid for the acquisition totaled $4.3 million. We consolidated the David Edward production facility in Red Lion, Pennsylvania into our Baltimore, Maryland facility near the end of our fiscal year 2020 as part of our transformation restructuring plan. Our focus is on investing in new equipment and a redesigned layout in Baltimore that will allow us to substantially increase capacity, improve efficiency, reduce lead times, and deliver on the high design, high quality products. See Note 3 - Acquisitions of Notes to Consolidated Financial Statements for more information on the acquisition.
Acquisition of D’style, Inc.
During the second quarter of fiscal year 2018, we acquired certain assets of D’style, Inc. (“D’style”), headquartered in Chula Vista, California. The acquisition expanded our hospitality offerings beyond guest rooms to public spaces and provided new mixed material manufacturing capabilities. As part of this acquisition, we also acquired all of the capital stock of Diseños de Estilo S.A. de C.V. headquartered in Tijuana, Mexico, another member of the D’style group which manufactures exclusively for D’style, strengthening our North American manufacturing footprint and serving as a distribution channel to the Mexico and Latin America hospitality markets. The cash paid for the acquisition totaled $18.2 million.
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Outsourcing of Shipping Function
During fiscal year 2018, we outsourced the remainder of our outbound shipping that was previously transported by our Company-owned shipping fleet to a dedicated freight provider and sold our fleet of over-the-road tractors and trailers. The outsourcing to a dedicated freight provider partially mitigated increased transportation costs during fiscal year 2018 from non-dedicated freight carriers. The dedicated freight provider operates transportation equipment with our Company branding. We continue to operate Company-owned tractors and trailers to move products between our production facilities and distribution warehouses.
Seasonality
The impact of seasonality on our revenue includes lower sales to educational institutions during our second and third fiscal quarters, lower sales of hospitality furniture during times of high hotel occupancy such as the summer months, and lower sales in our third fiscal quarter due to the buying season of the government.
Locations
As of June 30, 2020, our products were primarily produced at ten Company-owned or leased manufacturing facilities: six located in Indiana, two in Kentucky, one in Maryland, and one in Mexico. We also engage with third-party manufacturers within the U.S. as well as internationally to produce select finished goods and accessories for our brands. As part of our transformation restructuring plan, near the end of our fiscal year 2020, we exited our leased manufacturing facility in Martinsville, Virginia, and are evaluating our production capabilities and capacity across our organization to identify additional opportunities.
As of June 30, 2020, nine furniture showrooms were maintained in six cities in the United States. As part of our transformation restructuring plan, we ceased use of four of our furniture showrooms during our first quarter of fiscal year 2020. Office space is leased in Dongguan, Guangdong, China and Ho Chi Minh City, Vietnam to facilitate sourcing of select finished goods and components from the Asia Pacific Region. We lease office and manufacturing space in Baltimore, Maryland, Chula Vista, California and Tijuana, Mexico. We exited the Red Lion, Pennsylvania leased facility near the end of our fiscal year 2020 as that facility was consolidated into our Baltimore, Maryland facility.
Financial information by geographic area for each of the three years in the period ended June 30, 2020 is included in Note 18 - Geographic Information of Notes to Consolidated Financial Statements and is incorporated herein by reference.
Marketing Channels
Our furniture is marketed to end users by both independent and employee sales representatives, office furniture dealers, wholesalers, brokers, designers, purchasing companies, catalog houses, and eCommerce services. Customers can access our products globally through a variety of distribution channels.
We currently categorize our sales by the following end markets:
Workplace - Our workplace end market includes sales to the commercial, financial, government and education vertical markets. We are a full-facility provider offering products for a variety of commercial applications including: office, collaborative and open plan, lobby-lounge, conferencing and meeting/huddle, training, dining/café, learning, lobby and reception, and other public spaces. Banking and financial offices require affordable, functional, and stylish environments. Our versatile and customizable furnishings offer sophisticated styles for reception areas, employee work spaces, executive offices, and boardrooms. We also supply office furniture, including desks, tables, seating, bookcases and filing and storage units for federal, state, and local government offices, as well as other government-related entities. We hold two Federal Supply Service contracts with the General Services Administration (“GSA”) that are subject to government subcontract reporting requirements. We partner with multiple general purchasing organizations that assist public agencies such as state and local governments with furniture purchases. Our education products are sold to K-12, higher education, vocational training and other learning institutions, and the products are focused on both enhancing learning and creating social environments. We offer flexible, collaborative, and technology-driven furnishings designed to make students and faculty more productive and comfortable. We equip hallways, lounges, and other gathering spaces with versatile furniture that extends learning outside the classroom with areas designed for individual, one-on-one, and larger group use.
Health - Our health products are focused on meeting healthcare professional needs and preferences in flexible, adaptable, and collaborative spaces while putting the patient at the center of care. Our furnishings enable exam rooms to be a flexible space that can be used for consultation, telehealth and specific treatments or examinations. The products offered for areas surrounding the treatment areas are designed to be welcoming and relaxing to support the families of the patients. Our health products are offered to value-conscious healthcare customers, including hospitals, clinics, physician office buildings, long-term care facilities, and assisted living facilities throughout the country.
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Hospitality - We offer a complete package of products for guest rooms and public spaces plus service support to the hospitality industry. We partner with the most recognized hotel brands to meet their specific requirements for properties throughout the world by working with a worldwide manufacturing base to offer the best solution to fulfill the project.
A table showing our net sales by end market is included in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.
Major Competitive Factors
Our products are sold in the contract furniture and hospitality furniture industries. These industries have similar major competitive factors, which include price in relation to quality and appearance, product design, the utility of the product, including adaptability and cleanability, supplier lead time, reliability of on-time delivery, sustainability, and the ability to respond to requests for special and non-standard products. We offer payment terms similar to industry standards and in unique circumstances may grant alternate payment terms.
Certain industries are more price sensitive than others, but all expect on-time, damage-free delivery. In addition to the many options available on our standard furniture products, custom furniture is produced to customer specifications and shipping timelines on a project basis. Our Kimball brand Quickship for Care program offers shipping in 5 days or less for health and wellness solutions such as mobile storage, space division products, and seating and tables for exam areas with cleanable finish options. Our National brand has a quick response program that offers a broad furniture portfolio that ships in 48 hours or delivers in 10 days or less.
Competitors
There are numerous furniture manufacturers competing within the marketplace, with a significant number of competitors offering similar products.
Our competition includes furniture manufacturers such as Steelcase Inc., Herman Miller, Inc., Knoll, Inc., HNI Corporation, and a large number of smaller privately-owned furniture manufacturers, both domestic and foreign-based.
Working Capital
We do not believe that we, or the contract furniture or hospitality furniture industries in general, have any special practices or special conditions affecting working capital items that are significant for understanding our furniture business. We do receive advance payments from customers on select furniture projects, primarily in the hospitality industry. 
Raw Material Availability
Certain components used in the production of furniture are manufactured internally and are generally readily available, as are other raw materials used in the production of wood and non-wood furniture. Certain fabricated seating components, wood frame assemblies as well as finished furniture products, electrical components, stone, fabrics, and fabricated metal components, which are generally readily available, are sourced on a global scale in an effort to provide quality products at the lowest total cost. In fiscal year 2019, the U.S. government imposed tariffs on furniture products, parts, and components. The U.S. government continues to evaluate the ongoing need for, and the amount of, tariffs, and if further or increased tariffs are assessed, the cost and availability of both domestic and foreign sourced product and components could be further impacted. The COVID-19 global pandemic has also affected both domestic and global supply chains. Disruptions have eased but if COVID-19 impacts worsen, cost and availability of raw materials could be impacted.
Order Backlog
The aggregate sales price of products pursuant to open orders, which may be canceled by the customer, was as follows:
(Amounts in Millions)June 30,
2020
June 30,
2019
Order Backlog$151.1 $161.7 
The open orders as of June 30, 2020 are expected to be filled within fiscal year 2021, with $90 million expected to be filled during our first quarter of fiscal year 2021. The decline in the order backlog at June 30, 2020 was driven by the COVID-19 pandemic. Open orders may not be indicative of future sales trends.
Intellectual Property
In connection with our business operations, we hold both trademarks and patents in various countries and continuously have additional pending trademarks and patents. The intellectual property which we believe to be the most significant to the
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Company includes: Kimball, National, D’style, David Edward, Etc.(pending), Fringe, Waveworks, Xsite, Narrate, Pairings, Respitality, and Allan Copley Designs, which are all registered trademarks, and the unregistered trademarks Priority and Whittaker. Our patents expire at various times depending on the patent’s date of issuance.
Environment and Energy Matters
Our operations are subject to various federal, state, local, and foreign laws and regulations with respect to environmental matters. We believe that we are in substantial compliance with present laws and regulations and that there are no material liabilities related to such items.
We are dedicated to excellence, leadership, and stewardship in matters of protecting the environment and communities in which we have operations. Reinforcing our commitment to the environment, five of our showrooms and one non-manufacturing location were designed under the guidelines of the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) for Commercial Interiors program. One manufacturing facility was designed using the LEED Operations and Maintenance program guidelines. Our National brand headquarters is Fitwel certified, which is a building certification that supports healthier workplace environments to improve occupant health and productivity. Our Kimball brand headquarters received the WELL Health-Safety Rating that focuses on operational policies, maintenance protocols, emergency plans and shareholder engagement strategies to help organizations prepare their spaces for re-entry in a post COVID-19 environment.
We believe that continued compliance with foreign, federal, state, and local laws and regulations, which have been enacted relating to the protection of the environment, will not have a material effect on our capital expenditures, earnings, or competitive position. We believe capital expenditures for environmental control equipment during the next two fiscal years ending June 30, 2022 will not represent a material portion of total capital expenditures during those years.
Our manufacturing operations require the use of natural gas and electricity. Federal and state regulations may control the allocation of fuels available to us, but to date we have experienced no interruption of production due to such regulations. In our wood furniture manufacturing plants, a portion of energy requirements are satisfied internally by the use of our own scrap wood produced during the manufacturing of product.
Employees
 June 30,
2020
June 30,
2019
United States2,663 2,982 
Foreign Countries145 145 
Total Employees2,808 3,127 
Our U.S. operations are not subject to collective bargaining arrangements. Outside of the U.S., approximately 41 employees are represented by worker’s unions that operate to promote the interests of workers. We believe that our employee relations are good.
Available Information
We make available free of charge through our website, www.kimballinternational.com/public-filings, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Our Internet website and the information contained on, or accessible through, such website is not incorporated into this Annual Report on Form 10-K.
Item 1A - Risk Factors
The following important risk factors could affect future results and events, causing results and events to differ materially from those expressed or implied in forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition, and results of operations and should be carefully considered before deciding to invest in, or retain, shares of our common stock. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also affect our business, financial condition, or results of operations. Because of these and other factors, past performance should not be considered an indication of future performance.
The COVID-19 pandemic has had, and is expected to continue to have, an adverse effect on our business. The COVID-19 pandemic and the actions taken by various governments and third parties to combat the spread of COVID-19 (including, in
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some cases, mandatory quarantines and other suspensions of non-essential business operations) have led to significant disruptions in our manufacturing and distribution operations and could also disrupt our supply chains, including temporary reductions or pauses in operations at many of our and our suppliers’ manufacturing and distribution locations around the world. New order rates have also slowed in all three markets. We expect that our revenues will continue to be negatively impacted while the impact of COVID-19 continues. Our dealers and suppliers are also experiencing similar negative impacts from the COVID-19 pandemic. In order to preserve cash during this period of time, we have reduced spending on discretionary expenditures, which may have a material impact on our growth in the future.
The economic impacts of the COVID-19 pandemic have had, or are likely to have, a negative impact on many of our customers, particularly those in the hospitality market and, thus, may negatively affect our future revenues and increase credit risk. The severity of the impact on our business will depend in part on the delay of plans to return to the workplace balanced with working from home, prolonged reduction in travel, and the speed of the recovery of economic conditions globally, all of which are highly uncertain and out of our control. The duration and severity of the impact on our business, our industry and the global economy are not yet known and could have an adverse impact on our financial condition, results of operations, or cash flows.
We may not be successful in implementing and managing our Kimball International Connect Strategies. In May 2019, we introduced our comprehensive Kimball International Connect strategy that is intended to connect our purpose, our people, and our brands to drive growth. In August 2020, we announced the continuation of our strategy that we call Connect 2.0 which centers around accelerating our growth. Our plan is designed to enable us to effectively manage through the current economic downturn, by driving market share gains for the Company and yielding additional cost savings. The execution of these strategies involves risk, as management’s focus and Company resources could be diverted from our core operations, growth in our business could lead to operating inefficiencies, our corporate culture could be disrupted, which could lead to employee attrition, and our revenues could fall or could fail to grow as intended, any of which would have an adverse impact on our financial condition, results of operations, or cash flows.
Our restructuring efforts may not be successful. In June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. A critical component of our transformation restructuring plan is the transfer of production among facilities, which may result in management’s focus being diverted from our core operations, manufacturing inefficiencies, and excess working capital during the transition period. We also created center-led functions for finance, human resources, information technology and legal functions and centralized our supply chain efforts. The transition to center-led functions involves risk, as management’s focus could be diverted from our core operations. In addition, Kimball brand selling resources are being reallocated to higher-growth markets, and we exited four furniture showrooms during fiscal year 2020, which could cause a temporary or permanent decline if revenues are not realized in the higher-growth markets. If our closed leased facilities are not able to be subleased in the future according to our assumptions, we may incur additional impairment charges through restructuring expense.
The second phase of our transformation restructuring plan was announced in August 2020 that will align the Company’s business units to a new market-centric orientation. The Company will streamline manufacturing facilities by leveraging production capabilities across all facilities, establishing centers of excellence, and setting up processes to facilitate flexing of product between facilities in response to volume fluctuations. The Company will be reorganized into four market centric business units which are Workplace, Health, Hospitality, and eBusiness. The Company will streamline its workforce to align with the new organizational structure and respond to lower volumes created by the COVID-19 pandemic. The successful execution of both phases of our transformation restructuring plan is also dependent on the realization of cost savings, and, even if successful, the transformation restructuring plan may not be accomplished as quickly or effectively as anticipated.
Changes to government regulations may significantly increase our operating costs in the United States and abroad. Legislative and regulatory reforms by the U.S. federal and foreign governments could significantly impact our profitability by burdening us with forced cost choices that are difficult to recover with increased pricing. For example:
We depend on suppliers globally to provide materials, parts, finished goods, and components for use in our products. We utilize both steel and aluminum in our products, most of which is sourced domestically. Tariffs or changes in global trade agreements or in U.S. governmental import/export regulations could cause the landed cost of our products to increase materially and could reduce our net income if we are unable to mitigate the additional cost, which would have an adverse impact on our financial condition, results of operations, or cash flows.
We conduct business with entities in Canada and Mexico; therefore, the United States–Mexico–Canada Agreement (USMCA), could result in increased regulation on, or otherwise impact, trade between the countries, which could have an adverse impact on our financial condition, results of operations, or cash flows.
We import a portion of our wooden furniture products and are thus subject to an anti-dumping tariff specifically on wooden bedroom furniture supplied from China. The tariffs are subject to review and could result in retroactive and
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prospective tariff rate increases, which could have an adverse impact on our financial condition, results of operations, or cash flows.
State and foreign regulations are increasing in many areas, such as hazardous waste disposal, labor relations, employment practices and data privacy, including the California Consumer Privacy Act, among others. Compliance with privacy regulations requires us to change our processes in order to track personal information collected from consumers and implement procedures to obtain consent from consumers regarding the usage of their information. These additional processes, or any violations of these state and foreign regulations, could have an adverse impact on our financial condition, results of operations, or cash flows.
We may be unable to purchase a sufficient amount of materials, parts, and components for use in our products at a competitive price, in a timely manner, or at all. We depend on suppliers globally to provide timely delivery of materials, parts, and components for use in our products. We monitor the financial stability of suppliers when feasible, as the loss of a significant supplier could have an adverse impact on our operations. Certain finished products and components we purchase are primarily manufactured in select regions of the world, and issues in those regions could cause manufacturing delays. In addition, delays can occur related to the transport of products and components via container ships, which load and unload through various U.S. ports that sometimes experience congestion. Price increases of commodity components could have an adverse impact on our profitability if we cannot offset such increases with other cost reductions or by price increases to customers. New tariffs or trade regulations which have been and could be imposed by the U.S. federal government may adversely impact our access, price, and delivery of finished products and components from foreign sources, and therefore adversely affect our profitability. Materials we utilize are generally available, but future availability is unknown and could impact our ability to meet customer order requirements. If suppliers fail to meet commitments to us in terms of price, delivery, or quality, it could interrupt our operations and negatively impact our ability to meet commitments to customers.
Uncertain macroeconomic and industry conditions, or a sustained slowdown or significant downturn in our markets, could adversely impact demand for our products and adversely affect operating results. Market demand for our products, which impacts revenues and gross profit, is influenced by a variety of economic and industry factors such as:
global consumer confidence;
volatility and the cyclical nature of worldwide economic conditions;
increased working from home;
weakness in the global financial markets;
general corporate profitability of the end markets to which we sell;
credit availability to the end markets to which we sell;
service-sector unemployment rates;
commercial property vacancy rates;
non-residential construction and refurbishment rates;
deficit status of many governmental entities which may result in declining purchases of office furniture;
uncertainty surrounding potential reform of the Affordable Care Act;
COVID-19 impacts; and
new hotel and casino construction and refurbishment rates.
We must make decisions based on order volumes in order to achieve manufacturing efficiency. These decisions include determining what level of additional business to accept, production schedules, component procurement commitments, and personnel requirements, among various other considerations. We must constantly monitor the changing economic landscape and may modify our strategic direction accordingly. If we do not react quickly enough to the changes in market or economic conditions, it could result in lost customers, decreased market share, and increased operating costs.
We are subject to manufacturing inefficiencies due to the transfer of production among our facilities and other factors. At times we may experience labor or other manufacturing inefficiencies due to factors such as new product introductions, transfers of production among our manufacturing facilities, a sudden decline in sales such as due to COVID-19, a new operating system, or turnover in personnel. Manufacturing inefficiencies could have an adverse impact on our financial position, results of operations, or cash flows.
A shortage of freight carrier capacity could drive increases in freight costs. We outsource inbound and outbound shipping to third-party contract carriers, including a dedicated freight provider that operates transportation equipment with our Company branding, and other domestic and international contract carriers. We may experience pressure on freight costs if our demand exceeds the capacity of available trucking and ocean fleets, particularly for commercial contract carriers. In periods of tight capacity, we may be unable to mitigate a freight cost increase through our supply chain planning or by increasing prices on our products, which could adversely affect our profitability.
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Fluctuations in our effective tax rate could have a significant impact on our financial position, results of operations, or cash flows. We are subject to income taxes as well as non-income based taxes, mainly in the United States. Judgment is required in determining the worldwide provision for income taxes, other tax liabilities, interest, and penalties. Future events could change management’s assessment. We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We have also made assumptions about the realization of deferred tax assets. Changes in these assumptions could result in a valuation allowance for these assets. Final determination of tax audits or tax disputes may be different from what is currently reflected by our income tax provisions and accruals, which could adversely impact our financial position, results of operations, or cash flows.
Our failure to retain our existing management team, maintain our engineering, technical, and manufacturing process expertise, or continue to attract qualified personnel could adversely affect our business. We depend significantly on our executive officers and other key personnel. Our success is also dependent on keeping pace with technological advancements and adapting services to provide manufacturing capabilities that meet customers’ changing needs. To do that, we must retain our qualified engineering and technical personnel and successfully anticipate and respond to technological changes in a cost effective and timely manner. Our culture and guiding principles focus on continuous training, motivation, and development of employees, and we strive to attract, motivate, and retain qualified personnel. Failure to retain our executive officers and retain and attract other key personnel could adversely affect our business.
Turnover in personnel could cause manufacturing inefficiencies. The demand for manufacturing labor in certain geographic areas makes retaining experienced production employees difficult. Turnover could result in lost time due to inefficiencies and the need for additional training, which could impact our operating results.
Our sales to the U.S. government are subject to compliance with regulatory and contractual requirements, and noncompliance could expose us to liability or impede current or future business. The U.S. government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future for contracts and orders. The failure to comply with regulatory and contractual requirements could subject us to investigations, fines, or other penalties, and violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting.
We may pursue acquisitions that present risks and may not be successful. Our sales growth plans may occur through both organic growth and acquisitions. Acquisitions involve many risks that could have an adverse effect on our business, financial condition or results of operations, including:
difficulties in identifying suitable acquisition candidates and in negotiating and consummating acquisitions on terms attractive to us;
difficulties in the assimilation of the operations of the acquired company;
the diversion of resources, including diverting management’s attention from our current operations;
risks of entering new geographic or product markets in which we have limited or no direct prior experience;
the potential loss of key customers, suppliers and employees of the acquired company;
the potential incurrence of indebtedness to fund the acquisition;
the potential issuance of common stock for some or all of the purchase price, which could dilute ownership interests of our current shareholders;
the acquired business not achieving anticipated revenues, earnings, cash flow, or market share;
excess capacity;
failure to achieve the expected synergies resulting from the acquisition;
inaccurate assessment of undisclosed, contingent, or other liabilities or problems and unanticipated costs associated with the acquisition;
incorrect estimates made in accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill that could adversely affect our financial results; and
dilution of earnings.
We may not be successful in launching start-up operations or expanding our business in digital marketplaces. We are committed to growing our business, and therefore from time to time, we may determine that it would be in our best interests to start up a new operation or establish a digital presence to sell certain products, including via our planned eBusiness unit. Start-up operations involve a number of risks and uncertainties, such as funding the capital expenditures related to the start-up operation, developing a management team for the new operation, diversion of management focus away from current operations, and creation of excess capacity. The risks and uncertainties that come with a digital presence include competition from more established competitors in the marketplace, responding quickly to consumer traffic patterns, supporting demand outside our
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current distribution channels, and additional cybersecurity risks. Any of these risks could have a material adverse effect on our financial position, results of operations, or cash flows. 
Our business depends on information technology systems and digital capabilities that are implemented in a manner intended to minimize the risk of a cybersecurity breach or other such threat, including the misappropriation of assets or other sensitive information or data corruption, which could cause operational disruption. An ongoing commitment of significant resources is required to maintain and enhance our existing information systems and implement the new and emerging technology necessary to meet customer expectations and compete in our markets. The techniques used to obtain unauthorized access change frequently and are not often recognized until after they have been launched. We recognize that any breach could disrupt our operations, damage our reputation, erode our share value, drive remediation expenses, or increase costs related to the mitigation of, response to, or litigation arising from any such issue. We cannot guarantee that our cybersecurity measures will completely prevent others from obtaining unauthorized access to our enterprise network, system and data.
Many states and the U.S. federal government are increasingly enacting laws and regulations to protect consumers against identity theft and to also protect their privacy. As our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions. If we are the target of a cybersecurity attack resulting in unauthorized disclosure of sensitive or confidential data, we may be required to execute costly notification procedures. Compliance with these laws will likely increase the costs of doing business. If we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential claims for damages and other remedies, which could harm our business.
We may be exposed to the credit risk of our customers who are adversely affected by weakness in market conditions. Weakness in market conditions, including that caused by the COVID-19 pandemic, may drive an elevated risk of potential bankruptcy of our customers resulting in a greater risk of uncollectible outstanding accounts receivable. The realization of these risks could have a negative impact on our profitability.
Reduction of purchases by or the loss of a significant number of customers could reduce revenues and profitability. Significant declines in the level of purchases by customers or the loss of a significant number of customers could have a material adverse effect on our business. A reduction of, or uncertainty surrounding, government spending could also have an adverse impact on our sales levels. We can provide no assurance that we will be able to fully replace any lost sales, which could have an adverse effect on our financial position, results of operations, or cash flows.
We operate in a highly competitive environment and may not be able to compete successfully. The office and hospitality furniture industries are competitive due to numerous global manufacturers competing in the marketplace. In times of reduced demand for office furniture, large competitors may have greater efficiencies of scale or may apply more pressure to their aligned distribution to sell their products exclusively, which could lead to reduced opportunities for our products. While we work toward reducing costs to respond to pricing pressures, if we cannot achieve proportionate reductions in costs, profit margins may suffer.
Our operating results could be adversely affected by increases in the cost of fuel and other energy sources. The cost of energy is a critical component of freight expense and the cost of operating manufacturing facilities. Increases in the cost of energy could reduce our profitability.
A change in our sales mix among our diversified product offerings could have a negative impact on our gross profit margin. Changes in product sales mix could negatively impact our gross margin, as margins of different products vary. We strive to improve the margins of all products, but certain products have lower margins in order to price the product competitively. An increase in the proportion of sales of products with lower margins could have an adverse impact on our financial position, results of operations, or cash flows.
Our international operations involve financial and operational risks. We have a manufacturing operation outside the United States in Mexico, and administrative offices in China and Vietnam that coordinate with suppliers in those countries. These international operations are subject to a number of risks, including the following:
economic and political instability;
various and potentially conflicting cultural norms and business practices;
warfare, riots, terrorism, and other forms of violence or geopolitical disruption;
compliance with laws, such as the Foreign Corrupt Practices Act, applicable to U.S. companies doing business outside the United States;
changes in foreign regulatory requirements and laws;
health and security issues;
tariffs and other trade barriers;
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potentially adverse tax consequences, including the manner in which multinational companies are taxed in the U.S.;
COVID-19 impacts; and
foreign labor practices.
These risks could have an adverse effect on our financial position, results of operations, or cash flows. In addition, fluctuations in exchange rates could impact our operating results. Our risk management strategy may include the use of derivative financial instruments to hedge certain foreign currency exposures. Any hedging techniques we implement contain risks and may not be entirely effective. Exchange rate fluctuations could also make our products more expensive than a competitor's products not subject to these fluctuations, which could adversely affect our revenues and profitability in international markets.
If efforts to introduce new products or start-up new programs are not successful, this could limit sales growth or cause sales to decline. We regularly introduce new products to keep pace with workplace trends and evolving regulatory and industry requirements, including environmental, health, and safety standards such as sustainability and ergonomic considerations, and similar standards for the workplace and for product performance. Shifts in workforce demographics, the popularity of working from home, working styles, and technology may impact the quantity and types of furniture products purchased by our customers. The introduction of new products or the start-up of new programs require the coordination of the design, manufacturing, and marketing of such products. The design and engineering required for certain new products or programs can take an extended period of time, and further time may be required to achieve customer acceptance. Accordingly, the launch of any particular product or program may be delayed or may be less successful than we originally anticipated. Difficulties or delays in introducing new products or programs, or lack of customer acceptance of new products or programs could limit sales growth or cause sales to decline.
If customers do not perceive our products and services to be innovative and of high quality, our brand and name recognition and reputation could suffer. We believe that establishing and maintaining good brand and name recognition and a good reputation is critical to our business. Promotion and enhancement of our name and brands will depend on the effectiveness of marketing and advertising efforts and on successfully providing design-driven, innovative, and high-quality products and superior services. If customers do not perceive our products and services to be design-driven, innovative, and of high quality, our reputation, brand and name recognition could suffer, which could have a material adverse effect on our business.
The Company’s business involves the potential for product recalls, product liability and other claims against it which could affect its earnings and financial condition. New and existing products may be subject to the United States Consumer Products Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act of 2008, which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous, and similar laws under foreign jurisdictions. Under certain circumstances, the Consumer Products Safety Commission or comparable foreign agency could require the Company to repurchase or recall one or more of its products. Any purchase or recall of the Company’s products could be costly and damaging to the Company’s reputation. If the Company were required to remove, or voluntarily removed, its products from the market, the Company’s reputation could be impacted and the Company may have large quantities of finished product that it could not sell. The Company also faces exposure to product liability claims in the event that one of its products is alleged to have resulted in property damage, bodily injury or other adverse effects. In addition to the risk of substantial monetary judgments or fines or penalties that may result from any governmental investigations, product liability claims or regulatory actions could result in negative publicity that could harm the Company’s reputation in the marketplace, adversely impact the value of its end-user brands, or result in an increase in the cost of producing the Company’s products.
A loss of independent sales representatives, dealers, or other sales channels could lead to a decline in sales. Our workplace and health furniture is marketed to end users through both independent and employee sales representatives, furniture dealers, wholesalers, brokers, designers, purchasing companies, catalog houses, and eCommerce services. Our hospitality furniture is marketed to end users using independent sales representatives. A significant loss within any of these sales channels could result in a sales decline and thus have an adverse impact on our financial position, results of operations, or cash flows. Additionally, closures of furniture showrooms across our brands could negatively affect our current commercial relationships, which could have an adverse impact on our financial position, results of operations or cash flows.
Failure to effectively manage working capital may adversely affect our cash flow from operations. We closely monitor inventory and receivable efficiencies and strive to improve these measures of working capital, but customer financial difficulties, cancellation or delay of customer orders, transfers of production among our manufacturing facilities, manufacturing delays, or the impacts of the COVID-19 pandemic could adversely affect our cash flow from operations.
We could incur losses due to asset impairment. As business conditions change, we must continually evaluate and work toward the optimum asset base. It is possible that certain assets such as, but not limited to, facilities, equipment, lease assets, goodwill, or other intangible assets, could be impaired at some point in the future depending on changing business conditions or
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internal reorganization plans. If our closed leased facilities are not able to be subleased in the future according to our assumptions, we may incur additional impairment charges. Goodwill and certain intangible assets are tested for impairment annually or when triggering events occur. Such resulting impairment could have an adverse impact on our financial position and results of operations.
A failure to comply with the financial covenants under our $75.0 million credit facility could adversely impact us. Our credit facility requires us to comply with certain financial covenants. We believe the most significant covenants under this credit facility are the adjusted leverage ratio and the fixed charge coverage ratio. More detail on these financial covenants is discussed in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K. As of June 30, 2020, we had no borrowings under this credit facility and we had $1.6 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. In the future, a default on the financial covenants under our credit facility could cause an increase in our borrowing rates or could make it more difficult for us to secure future financing, which could adversely affect our financial condition.
Failure to protect our intellectual property could undermine our competitive position. We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of patent, trademark, copyright, and trade secret laws, as well as licensing agreements and third-party non-disclosure and assignment agreements. Because of the differences in foreign laws concerning proprietary rights, our intellectual property rights do not generally receive the same degree of protection in foreign countries as they do in the United States, and therefore in some parts of the world, we have limited protections, if any, for our intellectual property. Competing effectively depends, to a significant extent, on maintaining the proprietary nature of our intellectual property. The degree of protection offered by our various patents and trademarks may not be broad enough to provide significant proprietary protection or competitive advantages to the Company, and patents or trademarks may not be issued on pending or contemplated applications. In addition, not all of our products are covered by patents. It is also possible that our patents and trademarks may be challenged, invalidated, canceled, narrowed, or circumvented.
We may be sued by third parties for alleged infringement of their intellectual property rights and incur substantial litigation or other costs. Prior to launching major new products in our key markets, we normally evaluate existing intellectual property rights. However, our competitors may have filed for patent protection that is not, at the time of our evaluation, a matter of public knowledge. Our efforts to identify and avoid infringing upon third parties' intellectual property rights may not be successful. We could be notified of a claim regarding intellectual property rights, which could lead us to spend time and money to defend or address the claim. Even if the claim is without merit, it could result in substantial costs and diversion of resources.
Our insurance may not adequately protect us from liabilities related to product defects. We maintain product liability and other insurance coverage that we believe to be generally in accordance with industry practices, but our insurance coverage does not extend to field visits to repair, retrofit or replace defective products, or to product recalls. As a result, our insurance coverage may not be adequate to protect us fully against substantial claims and costs that may arise from liabilities related to product defects, particularly if we have a large number of defective products that we must repair, retrofit, replace, or recall. Additionally, the cost of insurance for a given level of coverage may increase which may impact profitability or lead us to reduce insurance coverage levels.
Increases in the cost of providing employee healthcare benefits could reduce our profitability. There may continue to be upward pressure on the cost of providing healthcare benefits to our employees. We are self-insured for healthcare benefits, so we incur the cost of claims, including catastrophic claims that may occasionally occur, with employees bearing only a limited portion of healthcare costs through employee healthcare premium withholdings. Healthcare claims declined when COVID-19 hit as elective procedures were delayed. We expect there to be an increase in claims when employees choose to have elective procedures completed. There can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce our profitability.
We are subject to extensive environmental regulation and significant potential environmental liabilities. Our past and present operation and ownership of manufacturing plants and real property are subject to extensive federal, state, local, and foreign environmental laws and regulations, including those relating to discharges in air, water, and land, the handling and disposal of solid and hazardous waste, and the remediation of contamination associated with releases of hazardous substances. In addition, the increased prevalence of global climate issues may result in new regulations that may negatively impact us. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist with respect to our facilities and real property. Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures, some of which could be material. In addition, any investigations or remedial efforts relating to environmental matters could involve material costs or otherwise result in material liabilities.
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Natural disasters or other catastrophic events may impact our production schedules and, in turn, negatively impact profitability. Natural disasters or other catastrophic events, including severe weather, terrorist attacks, power interruptions, pandemics, and fires, could disrupt operations and likewise our ability to produce or deliver products. Our manufacturing operations require significant amounts of energy, including natural gas and oil, and governmental regulations may control the allocation of such fuels. Employees are an integral part of our business, and events such as a pandemic could reduce the availability of employees reporting for work. In the event we experience a temporary or permanent interruption in our ability to produce or deliver product, revenues could be reduced, and our business could be materially adversely affected. In addition, catastrophic events, or the threat thereof, can adversely affect U.S. and world economies, and could result in delayed or lost sales of our products. In addition, any continuing disruption in our computer system could adversely affect our ability to receive and process customer orders, manufacture products, and ship products on a timely basis, and could adversely affect relations with our customers, potentially resulting in a reduction in orders from customers or a loss of customers. We maintain insurance to help protect us from costs relating to some of these matters, but such insurance may not be sufficient or paid in a timely manner to us in the event of such an interruption.
The value of our common stock may experience substantial fluctuations for reasons over which we may have little control. The value of our common stock could fluctuate substantially based on a variety of factors, including, among others:
actual or anticipated fluctuations in operating results;
announcements concerning our Company, competitors, or industry;
overall volatility of the stock market;
changes in the financial estimates of securities analysts or investors regarding our Company, the industry, or competitors;
general market or economic conditions including the economic impacts of the COVID-19 pandemic; and
proxy contests or other shareholder activism.
We also provide financial objectives for our expected operating results for future periods. While the information is provided based on current and projected data about the markets we deliver to and our operational capacity and capabilities, the financial objectives are subject to risks and uncertainties. If our future results do not match our financial objectives for a particular period, or if the financial objectives are reduced in future periods, the value of our common stock could decline.
Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in results of operations and general economic, political, and market conditions, may adversely affect the value of our common stock.
Item 1B - Unresolved Staff Comments
None.
Item 2 - Properties
The location, number, and use of our major facilities, including our executive and administrative offices, as of June 30, 2020, are as follows:
Number of FacilitiesUse
North America
United States:
   Indiana15Manufacturing, Warehouse, Office
   Kentucky2Manufacturing, Office
   California1Warehouse, Office
   Maryland2Manufacturing, Warehouse, Office
Mexico1Manufacturing, Office
Asia
   China1Office
   Vietnam1Office
Total Facilities23
The listed facilities occupy approximately 3,303,000 square feet in aggregate as of June 30, 2020, of which approximately 3,050,000 square feet are owned, and 253,000 square feet are leased.
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Generally, properties are utilized at normal capacity levels on a multiple shift basis. At times, certain facilities utilize a reduced second or third shift. We continually assess our capacity needs and evaluate our operations to optimize our service levels by geographic region.
Significant loss of income resulting from a facility catastrophe would be partially offset by business interruption insurance coverage.
Operating leases for all facilities and related land, including nine leased office furniture showroom facilities that are not included in the table above, total 321,000 square feet and expire from fiscal year 2021 to 2027 with many of the leases subject to renewal options. The leased showroom facilities are in five states and the District of Columbia. As part of our transformation restructuring plan, we have ceased operations at a leased manufacturing facility in Martinsville, Virginia, consolidated a David Edward production facility in Red Lion, Pennsylvania into our Baltimore, Maryland production facility, and ceased use of four leased furniture showrooms during fiscal year 2020. See Note 5 - Leases of Notes to Consolidated Financial Statements for additional information concerning leases.
We own approximately 331 acres of land, which includes land where various facilities reside, including approximately 115 acres of land in the Kimball Industrial Park, Jasper, Indiana.
Item 3 - Legal Proceedings
We and our subsidiaries are not parties to any pending legal proceedings, other than ordinary routine litigation incidental to the business. The outcome of current routine pending litigation, individually and in the aggregate, is not expected to have a material adverse impact.
Item 4 - Mine Safety Disclosures
Not applicable.
Information about our Executive Officers
Our executive officers as of August 28, 2020 are as follows: 
(Age as of August 28, 2020)
NameAge
Office and
Area of Responsibility
Executive Officer
Since Calendar Year
Kristine L. Juster57Chief Executive Officer & Director, Kimball International2018
Michelle R. Schroeder55Executive Vice President, Chief Financial Officer, Kimball International2003
R. Gregory Kincer62Executive Vice President, Corporate Development & Treasurer, Kimball International2014
Lonnie P. Nicholson56Executive Vice President, Chief Human Resources Officer, Kimball International2014
Kourtney L. Smith50Executive Vice President, Kimball International;
President, Workplace
2015
Katherine S. Sigler57Executive Vice President, Kimball International;
President, Hospitality
2018
Koorosh Sharghi34Executive Vice President, Chief Strategy & Innovation Officer, Kimball International; President, eBusiness2019
Phyllis M. Goetz60Executive Vice President, Kimball International; President, Health2019
Mark W. Johnson43Executive Vice President, Chief Legal, Governance Officer & Corporate Secretary, Kimball International2020
Greg A. Meunier50Executive Vice President, Global Operations, Kimball International2020
Executive officers are elected annually by the Board of Directors.
Ms. Juster was appointed Chief Executive Officer in November 2018 and has served as a member of our Board of Directors since April 2016. Prior to her appointment as Chief Executive Officer, Ms. Juster served for over 20 years as a Global Executive at Newell Brands, Inc. (“Newell”), a leading global consumer goods and commercial products company, until her retirement from Newell in April 2018. During her tenure at Newell, Ms. Juster served as President of the Global Writing
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Segment from May 2014 until her retirement in April 2018 and in other roles of increasing responsibility since joining Newell in 1995, including serving as President of Newell’s Baby and Parent Segment, President of Newell’s Home Décor Segment, and President of Newell’s Culinary Lifestyles Segment.
Ms. Schroeder was appointed Executive Vice President, Chief Financial Officer in January 2020 and previously served as Vice President, Chief Financial Officer, since November 2014.
Mr. Kincer was appointed Executive Vice President, Corporate Development & Treasurer in January 2020 and previously served as Vice President, Corporate Development, since November 2014.
Mr. Nicholson was appointed Executive Vice President, Chief Human Resources Officer in January 2020 and previously served as Vice President, Chief Administrative Officer, since February 2015.
Ms. Smith was appointed President, Workplace in August 2020, and Executive Vice President of Kimball International, Inc. in January 2020 and is responsible for the strategic growth and direction of our Workplace business unit. She previously served as President, National Office Furniture since January 2018, and Vice President of Kimball International, Inc. since October 2015. She held the position of President, Kimball Hospitality from August 2015 until January 2018, where she was responsible for strategic growth and direction. Previously, she served as Vice President, Marketing for National Office Furniture, a position she assumed in 2010, where she led product development, marketing, sustainability, vertical markets, and increasing brand awareness in the architect and design community.
Ms. Sigler was appointed President, Hospitality in August 2020, and Executive Vice President of Kimball International, Inc. in January 2020 and is responsible for the strategic growth and direction of our Hospitality business unit. She previously served as President, Kimball Hospitality and as Vice President of Kimball International, Inc. since January 2018. Prior to that, she served as Vice President, Operations, for the Kimball brand from February 2015 until January 2018, where she was responsible for the strategic and day-to-day execution of all direct manufacturing and manufacturing support (engineering, global supply chain, quality and continuous improvement) functions.
Mr. Sharghi was appointed Chief Strategy and Innovation Officer and President, eBusiness in August 2020, Executive Vice President, Strategy and Transformation in January 2020 and previously served as Vice President, Strategy and Transformation since March 2019. He is responsible for our eCommerce merchandising and product portfolio, digital marketing and digital customer experience while still leading our transformational growth strategy and integration efforts and partnering with our executive management to execute our business strategy in alignment with our long-term growth strategy. Prior to joining the Company, Mr. Sharghi led the centralization of the global marketing function at Radio Systems Corporation, a pet products manufacturing company, as the Head of Global Marketing from April 2018 until March 2019. He also held a variety of senior strategy and operations leadership roles at Newell, where he served as Director of Marketing Operations and Strategy from March 2016 until April 2018 and Senior Manager of Marketing Operations from June 2014 until March 2016.
Ms. Goetz was appointed President, Health in August 2020, Executive Vice President of Kimball International, Inc. in January 2020 and is responsible for the strategic growth and direction of our Health business unit including brand and product marketing, health specialty design and innovation, health specialty applied research, sales operations and health-focused selling. She previously served as President, Kimball and Vice President of Kimball International, Inc. since July 2019, in which she was responsible for the overall leadership of the Kimball brand strategic plan, its activation, and the full operations of the business unit. Prior to joining the Company, Ms. Goetz was Senior Vice President, Chief Development Strategist at HKS, Inc., an architectural firm, from October 2017 until July 2019. Her career also included multiple leadership roles at Herman Miller, Inc. from June 2011 until October 2017 that included National Director A&D Healthcare from October 2015 until October 2017 and Director of Strategic Sales Initiatives for Herman Miller Healthcare from June 2011 until October 2015. She was also one of the founders of Nurture, which is the Healthcare business for Steelcase, Inc., during her 16-year career with Steelcase.
Mr. Johnson was appointed Executive Vice President, Chief Legal, Governance Officer and Corporate Secretary in February 2020 and leads the Company’s corporate business practices, including legal, compliance, investor relations and environmental, social, and corporate governance. Prior to joining the Company, Mr. Johnson served as Deputy General Counsel at Newell from November 2009 until February 2020 where he was the legal department’s chief operating counsel and led the organization’s government affairs activities.
Mr. Meunier was appointed Executive Vice President, Global Operations in January 2020 where he leads our manufacturing operations and is responsible for the enhancement of manufacturing capabilities. Prior to that, he served as Vice President, Global Operations, National Office Furniture from May 2016 until January 2020 and Director of Operations, Casegoods Manufacturing, National Office Furniture from September 2010 until May 2016.
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PART II

Item 5 - Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our Class B common stock trades on the Nasdaq Global Select Market under the symbol: KBAL. There is no established public trading market for our Class A common stock. However, Class A shares are convertible on a one-for-one basis into Class B shares.
Dividends declared on our Class A and Class B common stock totaled $13.4 million and $11.9 million for fiscal years 2020 and 2019, respectively. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis.
Shareholders
On August 24, 2020, our Class A common stock was owned by 96 shareholders of record, and our Class B common stock was owned by 1,273 shareholders of record, of which 46 also owned Class A common stock. The shares of our Class B common stock are equal to the shares of our Class A common stock with respect to all matters, including without limitation, dividend payments and voting rights, except that while Class A shares are convertible on a one-for-one basis into Class B shares, our Class B shares cannot be converted into Class A shares.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item concerning securities authorized for issuance under equity compensation plans is incorporated by reference to Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters of Part III of this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
A share repurchase program authorized by the Board of Directors was announced on August 11, 2015. The program allows for the repurchase of up to two million shares of common stock and will remain in effect until all shares authorized have been repurchased. On February 7, 2019 an additional two million shares of common stock were authorized by the Board of Directors for repurchase. The Board of Directors can discontinue this repurchase program at any time. At June 30, 2020, 2.5 million shares remained available under the repurchase program.
During fiscal years 2020 and 2019, we repurchased 0.1 million and 0.6 million shares, respectively, of our common stock. We did not repurchase any shares under the repurchase program during the fourth quarter of fiscal year 2020 due to temporarily suspending share repurchases as a result of the COVID-19 pandemic.

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Performance Graphs
The following performance graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.
The graph below compares the cumulative total return to shareholders of our common stock from June 30, 2015 through June 30, 2020, the last business day in the respective fiscal years, to the cumulative total return of the Nasdaq Stock Market (U.S. and Foreign) and a peer group index for the same period of time.
Due to the diversity of our operations, we are not aware of any public companies that are directly comparable. Therefore, the peer group index is comprised of publicly traded companies as follows:
Furniture peers:  HNI Corporation, Knoll, Inc., Steelcase Inc., Herman Miller, Inc.
The graph assumes $100 is invested in our Class B common stock and each of the two indexes at the closing market quotations on June 30, 2015 and that dividends are reinvested. The performances shown on the graph are not necessarily indicative of future price performance.
kbal-20200630_g2.jpg
 201520162017201820192020
Kimball International, Inc.$100.00 $95.50 $142.24 $139.96 $154.03 $104.92 
Nasdaq Composite Index$100.00 $98.32 $126.14 $155.91 $168.04 $213.32 
Peer Group Index$100.00 $91.30 $87.68 $91.29 $110.36 $73.42 

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Item 6 - Selected Financial Data
This information should be read in conjunction with Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Financial Statements and Supplementary Data.
Year Ended June 30
(Amounts in Thousands, Except for Per Share Data)
20202019201820172016
Net Sales$727,859 $768,070 $704,554 $692,967 $635,102 
Net Income$41,054 $39,344 $34,439 $37,506 $21,156 
Earnings Per Share of Common Stock:    
Basic Earnings Per Share$1.11 $1.07 $0.92 $1.00 $0.56 
Diluted Earnings Per Share$1.11 $1.06 $0.92 $0.99 $0.56 
Total Assets$386,267 $364,666 $331,460 $314,975 $273,570 
Long-Term Debt, Less Current Maturities$109 $136 $161 $184 $212 
Cash Dividends Per Share$0.36 $0.32 $0.28 $0.24 $0.22 
Our fiscal year 2018 and fiscal year 2017 results have been recast to reflect the impact of the adoption of guidance on the recognition of revenue from contracts with customers using the full retrospective transition method.
Fiscal year 2020 net income included $6.3 million ($0.17 per diluted share) of after-tax restructuring expenses and $0.5 million ($0.01 per diluted share) of after-tax CEO transition costs.
Fiscal year 2019 net income included $0.7 million ($0.02 per diluted share) of after-tax restructuring expenses and $1.5 million ($0.04 per diluted share) of after-tax CEO transition costs.
Fiscal year 2017 net income included $1.1 million ($0.03 per diluted share) of after-tax restructuring gains driven by a sale of a manufacturing facility in Idaho.
Fiscal year 2016 net income included $4.5 million ($0.12 per diluted share) of after-tax restructuring expenses.
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
For over 70 years, Kimball International, Inc. (the “Company,” “Kimball International,” “we,” “us,” or “our”) has created design-driven furnishings that have helped our customers shape spaces into places, bringing possibility to life by enabling collaboration, discovery, wellness, and relaxation. We go to market through our family of brands: Kimball, Kimball Health, National, Etc. by National, Kimball Hospitality, and D’style by Kimball Hospitality. Our values and integrity are demonstrated daily by living our purpose and guiding principles that establish us as an employer of choice. We build success by growing long-term relationships with customers, employees, suppliers, shareholders and the communities in which we operate.
We closely monitor key indicators for the markets in which we compete. As reported by the Business and Institutional Furniture Manufacturer Association (“BIFMA”), the forecast by IHS Markit, a global information provider, as of May 2020 for the U.S. office furniture market, projects a year-over-year decline of 4.9% for calendar year 2020. The forecast for two of the leading indicators for the hospitality furniture market in the May 2020 PwC Hospitality Directions U.S. report includes a projected 53.1% decline in RevPAR (Revenue Per Available Room) for calendar year 2020, while occupancy levels for calendar 2020 are anticipated to decline 41.4%.
Management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
COVID-19 - The COVID-19 pandemic adversely impacted our financial performance during the latter half of our fiscal year 2020, and is expected to have a continuing adverse impact as we navigate through this crisis. The expected duration and severity of the COVID-19 impact on our business is affected by plans to return to the workplace balanced with working from home and the potential prolonged reduction in travel. Our dealers and suppliers are also experiencing similar negative impacts from the COVID-19 pandemic. Additional impacts to our business resulting from the COVID-19 outbreak include, but are not limited to, the following:
We initially responded in late March to shelter-in-place and similar government orders as mandated by temporarily closing non-essential manufacturing, distribution, and showroom locations and implementing a remote working program for professional staff, including video conferencing capabilities. As we serve the healthcare industry and the federal government, four of our ten facilities continued to operate to provide these essential products. We prioritized
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health products by launching a family of quickship products for facilities serving the COVID-19 crisis. As government mandates lifted in late April and early May, we increased the number of facilities in operation to eight out of the ten and by the end of June all ten that comprise our US manufacturing footprint, which reduced our lead-times on incoming orders and provides us with the ability to accommodate additional volumes.
Order rates in the fourth quarter decreased in our workplace, health and hospitality markets and customers postponed deliveries which reduced our fourth quarter revenues.
The safety and health of our employees is most important, thus we have implemented new safety measures, such as domestic and international travel restrictions, work-from-home practices for professional staff, extensive cleaning protocols, social distancing on the manufacturing floor, and utilization of personal protective equipment for employees who are unable to work remotely.
In response to the decline in revenue, we are focusing on cost control and are closely monitoring market changes and our liquidity in order to proactively adjust our operating costs. In order to preserve cash during this time, we have also reduced spending on discretionary expenditures. Managing working capital in conjunction with fluctuating demand levels is likewise key. While the impact of COVID-19 is anticipated to impact our future sales levels, 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 meet our working capital and other operating needs for at least the next twelve months.
Transformation Restructuring Plan - In June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. We believe the transformation restructuring plan has established a more cost-efficient structure to better align our operations with our long-term strategic goals. The efforts generated pre-tax savings of approximately $10.5 million in fiscal year 2020. Through June 30, 2020, we recorded restructuring charges of $9.4 million and estimate that the total pre-tax restructuring charges upon completion of the plan will be approximately $11.4 million and are expected to consist of approximately $3.6 million for severance and other employee-related costs, $3.7 million for facility exit and other costs, and $4.1 million for asset impairment. The transformation restructuring plan included the following:
We reviewed our overall manufacturing facility footprint to reduce excess capacity and gain efficiencies by centralizing manufacturing operations. We have ceased operations at a leased seating manufacturing facility in Martinsville, Virginia, and consolidated a David Edward production facility in Red Lion, Pennsylvania into our Baltimore, Maryland facility.
The creation of center-led functions for finance, human resources, information technology and legal functions resulted in the standardization of processes and the elimination of duplication. In addition, we centralized our supply chain efforts to maximize supplier value and plan to drive more efficient practices and operations within our logistics function.
Kimball brand selling resources were realigned to higher-growth markets. We also ceased use of four leased furniture showrooms across our brands during the first quarter of fiscal year 2020 and recognized impairment of the lease and associated leasehold improvements. Additional impairment was recognized in our fourth quarter due to degradation of sublease expectations resulting from the current economic environment.
Transformation Restructuring Plan Phase 2 - In August 2020, we announced the second phase of our transformation restructuring plan that will align our business units to a new market-centric orientation and is expected to yield additional cost savings that will enable us to effectively manage through the downturn caused by the COVID-19 pandemic. Phase 2 of the transformation restructuring plan builds on the initial strategy and the transformation restructuring plan announced in June 2019. Phase 2 of the transformation restructuring plan will begin immediately, and we expect a substantial majority of the restructuring activities to be completed within two years. We currently estimate we will incur total pre-tax restructuring charges of approximately $17.0 million to $18.0 million related to the initiatives under phase 2 of the transformation restructuring plan, with $14.0 million to $15.0 million expected to be recorded in fiscal year 2021, and the remainder in fiscal year 2022. The restructuring charges are expected to consist of approximately $9.0 million to $9.4 million for severance and other employee-related costs, $4.0 million to $4.3 million for facility costs, and $4.0 million to $4.3 million for lease and other asset impairment. The following is a summary of the activities we will be undertaking pursuant to phase 2 of the transformation restructuring plan:
As part of the previously announced plan to consolidate manufacturing of all brands into one world-class global operations group, we are streamlining our manufacturing facilities by leveraging production capabilities across all facilities, establishing centers of excellence, and setting up processes to facilitate flexing of product between facilities in response to volume fluctuations. We are also reviewing our overall facility footprint to identify opportunities to reduce capacity and gain efficiencies.
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The Company will be reorganized into four market centric business units which are Workplace, Health, Hospitality and eBusiness.
We will streamline our workforce to align with the new organizational structure and respond to lower volumes created by the COVID-19 pandemic, creating a more efficient organization to deliver on our Connect 2.0 strategy.
On October 26, 2018, we acquired substantially all of the assets and assumed certain specified limited liabilities of David Edward Furniture, Inc. (“David Edward”), which is headquartered in Baltimore, Maryland. David Edward is a premier designer and manufacturer of contract furniture, sold in the health, corporate, education, and premium hospitality markets. David Edward products are generally specified by architects and sold primarily in the North American market. The David Edward product portfolio consists of classic and contemporary designs, focused primarily in the seating, tables, and ancillary furniture categories. In conjunction with the asset acquisition, we leased the two existing David Edward production facilities in Baltimore, Maryland and Red Lion, Pennsylvania. As part of our transformation restructuring plan we are consolidating the David Edward production facility in Red Lion, Pennsylvania into the Baltimore, Maryland facility. Our focus is on investing in new equipment and a redesigned layout in Baltimore that will allow us to substantially increase capacity, improve efficiency, reduce lead times, deliver on the high design, high quality products, and expand our Kimball Health Portfolio. See Note 3 - Acquisitions of Notes to Consolidated Financial Statements for additional information.
With the current decline in the economy, we expect commodity prices to remain moderate, and we will continue to be exposed to fluctuations in transportation costs, which vary based upon freight carrier capacity and fuel prices. We utilize both steel and aluminum in our products, most of which is sourced domestically. The U.S. imposed tariffs on steel and aluminum and we have worked to offset increases in the cost of these materials through supplier negotiations, global sourcing initiatives, product re-engineering and parts standardization, and price increases on our products.
Due to the contract and project nature of furniture markets, fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business, which in turn impacts our operating results. Effective management of our manufacturing capacity is and will continue to be critical to our success. See below for further details regarding current sales and open order trends.
We expect to continue to invest in capital expenditures prudently, particularly for projects that will enhance our capabilities and diversification while providing an opportunity for growth and improved profitability.
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 $170.5 million at June 30, 2020.
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Results of Operations - Fiscal Year 2020 Compared to Fiscal Year 2019
 At or for the
Year Ended
 
 June 30 
(Amounts in Millions)20202019% Change
Net Sales$727.9 $768.1 (5%)
Organic Net Sales*723.9 768.1 (6%)
Gross Profit250.8 254.6 (1%)
Selling and Administrative Expenses187.9 204.1 (8%)
Restructuring Expense8.5 0.9 
Operating Income54.4 49.5 10%
Operating Income %7.5 %6.4 %
Adjusted Operating Income *$64.2 $53.1 21%
Adjusted Operating Income % *8.8 %6.9 %
Net Income
$41.1 $39.3 4%
Net Income as a Percentage of Net Sales5.6 %5.1 %
Adjusted Net Income *47.9 41.6 15%
Diluted Earnings Per Share$1.11 $1.06 5%
Adjusted Diluted Earnings Per Share *$1.29 $1.12 15%
Return on Invested Capital **37.5 %38.5 %
Adjusted EBITDA *$81.3 $69.5 17%
Adjusted EBITDA %*11.2 %9.0 %
Order Backlog **$151.1 $161.7 (7%)
* Items indicated represent Non-GAAP (Generally Accepted Accounting Principles) measurements.
** Items indicated represent Key Performance Indicators.
See the “Non-GAAP Financial Measures and Other Key Performance Indicators” section below.
Net Sales by End Market
 Year Ended 
 June 30 
(Amounts in Millions)20202019% Change
Workplace$435.4 $462.7 (6%)
Health108.9 110.4 (1%)
Hospitality183.6 195.0 (6%)
Total Net Sales$727.9 $768.1 (5%)
The Workplace, Health and Hospitality end markets align with the reorganization which occurred at the beginning of fiscal year 2021. Our Workplace end market includes sales to the commercial, financial, government and education vertical markets.
Fiscal year 2020 consolidated net sales were $727.9 million compared to fiscal year 2019 consolidated net sales of $768.1 million, a 5% decrease. Organic net sales decreased $44.2 million, or 6%, year-over-year due to lower volume primarily in our workplace and hospitality end markets, which more than offset increased pricing. The declines in sales volumes in all three of our end markets were driven by the COVID-19 pandemic. Each of our end market sales levels can fluctuate depending on the mix of projects in a given period.
Order backlog at June 30, 2020 decreased 7%, when compared to the open order level as of June 30, 2019, driven by the COVID-19 pandemic. Open orders at a point in time may not be indicative of future sales trends.
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Gross profit as a percent of net sales increased 140 basis points in fiscal year 2020 compared to fiscal year 2019, primarily due to increased product pricing and the savings realized from our transformation plan which were partially offset by the loss of leverage on the lower sales volumes and a shift in sales mix to lower margin products.
Selling and administrative expenses in fiscal year 2020 compared to fiscal year 2019 decreased 8%, and as a percent of net sales decreased 80 basis points. The reduction in selling and administrative expenses was driven by the savings benefit related to the transformation plan, lower commissions, lower incentive compensation resulting from lower earnings, and lower CEO transition expense which were partially offset by a prior year gain on the sale of assets which did not repeat in the current year.
In June 2019, we announced a transformation restructuring plan to optimize resources for future growth, improve efficiency, and build capabilities across our organization. The transformation restructuring plan has established a more cost-efficient structure to better align our operations with our long-term strategic goals. We recognized pre-tax restructuring expense of $8.5 million in fiscal year 2020 and $0.9 million in fiscal year 2019 related to our transformation restructuring plan. See Note 2 - Restructuring of Notes to Consolidated Financial Statements for further information on our transformation restructuring plan.
Other income (expense), net consisted of the following:
Other Income (Expense), netYear Ended
 June 30
(Amounts in Thousands)20202019
Interest Income$1,641 $1,931 
Interest Expense(79)(174)
Gain on Supplemental Employee Retirement Plan Investments600 673 
Other(419)(235)
Other Income (Expense), net$1,743 $2,195 
Our fiscal year 2020 effective tax rate of 26.9% was higher than the combined federal and state statutory rate primarily from the impact of nondeductible officer compensation which more than offset a $0.4 million research and development tax credit. Our fiscal year 2019 effective tax rate of 23.9% was less than the combined federal and state statutory rate in part due to a $0.3 million research and development tax credit.
Comparing our balance sheets as of June 30, 2020 to June 30, 2019, our accounts payable balance declined as our expenditures declined due to the COVID-19 pandemic. The $16.4 million decline in our accrued expenses line was due to our accrued incentive compensation and retirement profit sharing contribution accruals for fiscal year 2020 being lower than for fiscal year 2019, and our accrual for customer incentives was also lower for fiscal year 2020 as programs were altered due to COVID-19. The right-of-use operating lease assets and current and long-term operating lease liabilities lines are the result of implementing Accounting Standards Codification (ASC) 842 as of the beginning of our fiscal year 2020. See Note 5 - Leases of Notes to Consolidated Financial Statements for further information.
Results of Operations - Fiscal Year 2019 Compared to Fiscal Year 2018
For the comparison of fiscal years ended June 30, 2019 and June 30, 2018, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K filed August 27, 2019.
Liquidity and Capital Resources
Our total cash, cash equivalents, and short-term investments was $97.1 million at June 30, 2020 and $106.3 million at June 30, 2019. Cash flows from operations of $29.8 million were more than offset by capital expenditures, including capitalized software, of $21.1 million and the return of capital to shareholders in the form of dividends totaling $12.9 million and stock repurchases totaling $3.0 million during fiscal year 2020.
Working capital at June 30, 2020 was $123.1 million compared to working capital of $96.5 million at June 30, 2019. The current ratio was 2.1 and 1.7 at June 30, 2020 and June 30, 2019, respectively.
Our short-term liquidity available, represented as cash, cash equivalents, and short-term investments plus the unused amount of our credit facility, totaled $170.5 million at June 30, 2020. At June 30, 2020, we had $1.6 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. We had no credit facility borrowings outstanding as of June 30, 2020 or June 30, 2019.
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Cash Flows
The following table reflects the major categories of cash flows for fiscal years 2020 and 2019.
Year Ended
June 30
(Amounts in thousands)20202019
Net cash provided by operating activities$29,798 $64,967 
Net cash provided by (used for) investing activities$6,141 $(22,186)
Net cash used for financing activities$(17,332)$(22,265)
Cash Flows from Operating Activities
For fiscal years 2020 and 2019, net cash provided by operating activities was $29.8 million and $65.0 million, respectively, fueled by net income of $41.1 million and $39.3 million, respectively. Changes in working capital balances used $42.6 million of cash in fiscal year 2020 and provided $8.8 million of cash in fiscal year 2019.
The $42.6 million usage of cash from changes in working capital balances in fiscal year 2020 was partially due to the $17.9 million cash impact of a reduction in our accrued expenses balance as the cash incentive compensation and retirement profit sharing contribution accruals for fiscal year 2020 were lower than for fiscal year 2019 and our accrual for customer incentives were also lower for fiscal year 2020 as programs were altered due to COVID-19. In addition, the impact of COVID-19 drove an $8.3 million cash decrease in our accounts payable as our expenditures declined, a $5.2 million cash increase in our accounts receivable balance, and a $5.0 million cash reduction in customer deposits.
The $8.8 million of cash provided by changes in working capital balances in fiscal year 2019 was primarily driven by a combined $4.6 million increase in accrued annual cash incentive compensation and accrued retirement plan contributions and a $6.1 million reduction in prepaid income taxes.
Our measure of accounts receivable performance, also referred to as Days Sales Outstanding (“DSO”), for the fiscal years ended June 30, 2020 and June 30, 2019 were 32 days and 28 days, respectively. The DSO increase was largely driven by the impacts of COVID-19 and customer payment patterns. We define DSO as the average of monthly accounts and notes receivable divided by an average day’s net sales. Our Production Days Supply on Hand (“PDSOH”) of inventory measure for the fiscal years ended June 30, 2020 and June 30, 2019 were 50 and 44 days, respectively. Production slowdowns and reductions in shipments related to COVID-19 both contributed to the increase in PDSOH. We define PDSOH as the average of the monthly net inventory divided by an average day’s cost of sales.
Cash Flows from Investing Activities
During fiscal year 2020, we invested $25.0 million in available-for-sale securities, and $52.9 million matured. During fiscal year 2019, we invested $40.8 million in available-for-sale securities, and $42.4 million matured. Throughout fiscal year 2020 and 2019, our short-term investments included municipal bonds, certificates of deposit purchased in the secondary market, and U.S. Treasury and federal agency securities. During fiscal years 2020 and 2019, we reinvested $21.1 million and $21.0 million, respectively, into capital investments for the future. The capital investments both fiscal years 2020 and 2019 were primarily for facility improvements, such as renovations to our corporate headquarters, and various manufacturing equipment upgrades to increase automation in production facilities which is expected to yield future benefits. During fiscal year 2019 we received proceeds from the sale of assets net of selling expenses of $1.3 million, the majority of which related to the sale of a series of Internet protocol addresses and had cash outflow of $4.3 million for the David Edward acquisition.
Cash Flows from Financing Activities
We paid $12.9 million of dividends in fiscal year 2020 compared to paying $11.4 million of dividends in fiscal year 2019. Consistent with our historical dividend policy, our Board of Directors evaluates the appropriate dividend payment on a quarterly basis. We repurchased shares pursuant to a previously announced stock repurchase program, which drove cash outflow of $3.0 million in fiscal year 2020 and $9.1 million in fiscal year 2019.
Credit Facility
We maintain a $75.0 million credit facility with a maturity date of October 2024 that allows for both issuances of letters of credit and cash borrowings. We also have an option to request an increase of the amount available for borrowing to $150 million, subject to participating banks’ consent. The revolving loans under the Credit Agreement may consist of, at our election, advances in U.S. dollars or advances in any other currency that is agreed to by the lenders. The proceeds of the revolving loans
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are to be used for general corporate purposes including acquisitions. A portion of the credit facility, not to exceed $10 million of the principal amount, will be available for the issuance of letters of credit. At June 30, 2020, we had $1.6 million in letters of credit outstanding, which reduced our borrowing capacity on the credit facility. At both June 30, 2020 and June 30, 2019, 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 equivalents on hand in excess of $15,000,000 provided that the maximum subtraction shall not exceed $35,000,000 to (b) adjusted 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, minus (v) if the Adjusted Leverage Ratio is greater than 1.00 to 1.00 for the then most recently ended four fiscal quarter period, repurchase of Equity Interests to (b) the sum of (i) scheduled principal payments on indebtedness due and/or paid, plus (ii) interest expense, calculated on a consolidated basis in accordance with U.S. GAAP, determined as of the end of each of our fiscal quarters for the trailing four fiscal quarters then ending, and may not be less than 1.10 to 1.00.We were in compliance with all debt covenants of the credit facility during fiscal year 2020.
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 EndedLimit As Specified in
CovenantJune 30, 2020Credit AgreementExcess
Adjusted Leverage Ratio(0.38)3.00 3.38 
Fixed Charge Coverage Ratio637.92 1.10 636.82 
Future Liquidity
While we expect the impact of COVID-19 will continue to impact our sales levels, 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 meet our working capital and other operating needs for at least the next twelve months. During fiscal year 2021, we also anticipate cash outflow of approximately $11 million related to the second phase of our transformation restructuring plan. During the fourth quarter of fiscal year 2020, our Board of Directors declared a quarterly dividend of $0.09 per share, which was paid in our first quarter of fiscal year 2021. Future cash dividends are subject to approval by our Board of Directors and may be adjusted as business needs or market conditions change. We will continue to evaluate market conditions in determining future share repurchases. At June 30, 2020, 2.5 million shares remained available under the repurchase program. During fiscal year 2021, we expect to continue investments in capital expenditures, particularly for projects such as 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, including reduced revenues from the COVID-19 pandemic, the impact of changes in tariffs, lack of availability of raw material components in the supply chain, loss of key contract customers, and other unforeseen circumstances. In particular, should demand for our products decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted.
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Non-GAAP Financial Measures and Other Key Performance Indicators
This Management’s Discussion and Analysis (“MD&A”) contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with U.S. GAAP in the statements of income, statements of comprehensive income, balance sheets, statements of cash flows, or statements of shareholders’ equity of the company. The non-GAAP financial measures used within this MD&A include (1) organic net sales, defined as net sales excluding the acquisition-related net sales during the periods for which there were no sales related to such acquisition in the comparable period; (2) adjusted operating income, defined as operating income excluding restructuring expenses, CEO transition costs, and market value adjustments related to our SERP liability; (3) adjusted operating income percentage, defined as adjusted operating income as a percentage of net sales; (4) adjusted net income, defined as net income excluding restructuring expenses and CEO transition costs; (5) adjusted diluted earnings per share, defined as diluted earnings per share excluding restructuring expenses and CEO transition costs; (6) adjusted EBITDA, defined as earnings before interest, taxes, depreciation, and amortization and excluding restructuring expenses and CEO transition costs; and (7) adjusted EBITDA percentage, defined as adjusted EBITDA as a percentage of net sales. Reconciliations of the reported GAAP numbers to these non-GAAP financial measures are included in the tables below. Management believes it is useful for investors to understand and to be able to meaningfully trend, analyze and benchmark how our core operations performed without market value adjustments related to our SERP liability or expenses incurred in executing our transformation restructuring plan or our CEO transition. Many of our internal performance measures that management uses to make certain operating decisions exclude these expenses to enable meaningful trending of core operating metrics. These non-GAAP financial measures should not be viewed as an alternative to the GAAP measures and are presented as supplemental information.

Reconciliation of Non-GAAP Financial Measures and Other Key Performance Indicators
(Amounts in Thousands, Except for Per Share Data)
Organic Net Sales Compared to the Prior YearFiscal Year Ended
June 30,
2020
Net Sales, as reported$727,859 
Less: David Edward acquisition net sales (1)
3,980 
Organic Net Sales$723,879 
(1) Represents David Edward net sales for our fiscal year 2020 first quarter. This adjusts fiscal year 2020 sales to include the same number of quarters as we operated David Edward during fiscal year 2019.

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Adjusted Operating IncomeFiscal Year Ended
June 30,
20202019
Operating Income, as reported$54,387 $49,475 
Add: Pre-tax Restructuring Expense8,489 937 
Add: Pre-tax Expense Adjustment to SERP Liability600 673 
Add: Pre-tax CEO Transition Costs698 2,046 
Adjusted Operating Income$64,174 $53,131 
Net Sales$727,859 $768,070 
Adjusted Operating Income %8.8 %6.9 %
Adjusted Net IncomeFiscal Year Ended
June 30,
20202019
Net Income, as reported$41,054 $39,344 
Pre-tax CEO Transition Costs698 2,046 
Tax on CEO Transition Costs(180)(527)
Add: After-tax CEO Transition Costs518 1,519 
Pre-tax Restructuring Expense8,489 937 
Tax on Restructuring Expense(2,185)(241)
Add: After-tax Restructuring Expense6,304 696 
Adjusted Net Income$47,876 $41,559 
Adjusted Diluted Earnings Per ShareFiscal Year Ended
June 30,
20202019
Diluted Earnings Per Share, as reported$1.11 $1.06 
Add: After-tax CEO Transition Costs0.01 0.04 
Add: After-tax Restructuring Expense0.17 0.02 
Adjusted Diluted Earnings Per Share$1.29 $1.12 

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Earnings Before Interest, Taxes, Depreciation, and Amortization and excluding Restructuring Expense and CEO Transition Costs
(“Adjusted EBITDA”)
Fiscal Year Ended
June 30,
20202019
Net Income$41,054 $39,344 
Provision for Income Taxes15,076 12,326 
Income Before Taxes on Income56,130 51,670 
Interest Expense79 174 
Interest Income(1,641)(1,931)
Depreciation15,107 14,803 
Amortization2,402 1,777 
Pre-tax CEO Transition Costs698 2,046 
Pre-tax Restructuring Expense8,489 937 
Adjusted EBITDA$81,264 $69,476 
Net Sales$727,859 $768,070 
Net Income %5.6 %5.1 %
Adjusted EBITDA %11.2 %9.0 %
The order backlog 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 the backlog of orders is expected to ship within a twelve-month period.
Return on Invested Capital is a key performance indicator calculated as: [(Earnings Before Interest, Taxes, Amortization, Restructuring Expense, and CEO Transition Costs) multiplied by (1 minus Effective Tax Rate)] divided by (Total Shareholders’ Equity plus Net Debt). Net Debt is defined as current maturities of long-term debt plus long-term debt less cash, cash equivalents, and short-term investments.
Fair Value
During fiscal year 2020, no financial instruments were affected by a lack of market liquidity. Financial assets classified as level 1 assets were valued using readily available market pricing. For commercial paper and available-for-sale securities classified as level 2 assets, the fair values were determined based on market data using evaluated pricing models and incorporating available trade, bid, and other market information. We evaluated the inputs used to value the instruments and validated the accuracy of the instrument fair values based on historical evidence. The investment in stock warrants and equity securities without readily determinable fair value of a privately-held company are classified as level 3 financial assets. The stock warrants are accounted for as a derivative instrument valued on a recurring basis considering the pricing of recent purchases or sales, if any, of the investment, as well as positive and negative qualitative evidence, while the equity securities without readily determinable fair value are accounted for as a cost-method investment which carries the securities at cost, except in the event of impairment.
See Note 14 - Fair Value of Notes to Consolidated Financial Statements for more information.
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Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2020.
 Payments Due During Fiscal Years Ending June 30
(Amounts in Millions)Total20212022-20232024-2025Thereafter
Recorded Contractual Obligations:      
Long-Term Debt Obligations (a)
$0.1 $ $0.1 $ $ 
Other Long-Term Liabilities Reflected on the Balance Sheet (b) (c)
18.9 5.3 3.7 3.0 6.9 
Operating Leases (d)
24.5 5.0 9.0 6.6 3.9 
Unrecorded Contractual Obligations:    
Purchase Obligations (e)
60.3 36.7 13.1 7.8 2.7 
Total$103.8 $47.0 $25.9 $17.4 $13.5 
(a)Refer to Note 11 - Long-Term Debt and Credit Facilities of Notes to Consolidated Financial Statements for more information regarding long-term debt obligations. Accrued interest is also included on the Long-Term Debt Obligations line. The fiscal year 2021 amount includes less than $0.1 million of long-term debt obligations due in fiscal year 2021, which were recorded as a current liability.
(b)The timing of payments of certain items included on the “Other Long-Term Liabilities Reflected on the Balance Sheet” line above is estimated based on the following assumptions:
The timing of long-term SERP payments is estimated based on an assumed retirement age of 62 with payout based on the prior distribution elections of participants. The fiscal year 2021 amount includes $3.6 million for SERP payments recorded as current liabilities.
The timing of severance plan payments is estimated based on the average remaining service life of employees. The fiscal year 2021 amount includes $0.2 million for employee transition payments related to the transformation restructuring plan and $0.5 million for severance payments, which were both recorded as current liabilities.
The timing of warranty payments is estimated based on historical data. The fiscal year 2021 amount includes $1.0 million for short-term warranty payments recorded as a current liability.
(c)Excludes $1.8 million of long-term unrecognized tax benefits and associated accrued interest and penalties along with deferred tax liabilities and miscellaneous other long-term tax liabilities which are not tied to a contractual obligation and for which we cannot make a reasonably reliable estimate of the period of future payments.
(d)Refer to Note 5 - Leases of Notes to Consolidated Financial Statements for more information regarding operating leases. Variable lease expense is excluded from the operating lease obligations. Variable lease expense associated with our leases is dependent upon the occurrence of events, activities, or circumstances in lease agreements such as warehouse square footage utilized, property taxes assessed, and other non-lease component charges.
(e)Purchase Obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. The amounts listed above for purchase obligations include contractual commitments for items such as raw materials, supplies, capital expenditures, services, and software acquisitions/license commitments. Cancellable purchase obligations that we intend to fulfill are also included in the purchase obligations amount listed above through fiscal year 2025.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to standby letters of credit and performance bonds. 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 10 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements for more information on the standby letters of credit and performance bonds. We do not have material exposures to trading activities of non-exchange traded contracts.
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Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in preparation of our consolidated financial statements and are the policies that are most critical in the portrayal of our financial position and results of operations. Management has discussed these critical accounting policies and estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.
Revenue recognition - Effective at the beginning of fiscal year 2019, we adopted guidance on the recognition of revenue from contracts with customers, using a full retrospective method. Under the new guidance, revenue is measured as the amount of consideration we expect to receive in exchange for transferring distinct goods or providing services to customers. Our revenue consists substantially of product sales, and is reported net of sales discounts, rebates, incentives, returns, and other allowances offered to customers. We recognize revenue when performance obligations under the terms of contracts with our customers are satisfied, which occurs when control passes to a customer to enable them to direct the use of and obtain benefit from the product. This typically occurs when a customer obtains legal title, obtains the risks and rewards of ownership, has received the goods according to the contractual shipping terms either at the shipping point or destination, and is obligated to pay for the product. Shipping and handling activities are recognized as fulfillment activities and are expensed at the time revenue is recognized. We recognize sales net of applicable sales taxes and similar revenue-based taxes.
We use judgment in estimating the reduction in net sales driven by customer rebate and incentive programs. Judgments primarily include expected sales levels to be achieved and the corresponding rebate and incentive amounts expected to be earned by dealers and salespersons.
We also use judgment in estimating a reserve for returns and allowances which is recorded at the time of the sale, based on estimated product returns and price concessions. The reserve for returns and allowances is recorded in accrued expenses on the Consolidated Balance Sheets, and the expense is recorded as a reduction of net sales in the Consolidated Statements of Income.
We perform ongoing credit evaluations of our customers and impair receivable balances by recording specific allowances for bad debts based on judgment using factors such as current trends, the length of time the receivables are past due, and historical collection experience. The allowance for accounts receivable balances that are determined likely to be uncollectible are a reduction in the receivables line of the Consolidated Balance Sheets, and the expense is recorded in selling and administrative expenses in the Consolidated Statements of Income.
Inventory - Inventories are stated at the lower of cost or market value. Cost includes material, labor, and applicable manufacturing overhead. Costs associated with underutilization of capacity are expensed as incurred. Inventories were valued using the last-in, first-out (“LIFO”) method for approximately 93% of consolidated inventories at both June 30, 2020 and June 30, 2019, and the remaining inventories were valued using the first-in, first-out (“FIFO”) method and average cost method. Inventory valued using the LIFO method requires judgement in the determination of appropriate indices used for evaluating price level changes and the application of indices to the various types of inventory within LIFO inventory pools. See Note 1 -Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for further information regarding the LIFO calculation. As of June 30, 2020 and 2019, the LIFO reserve was $16.2 million and $16.3 million, respectively. Inventories recorded on our balance sheets are adjusted for excess and obsolete inventory. For inventory using the LIFO method, excess and obsolete inventory is determined based upon FIFO inventory values, but the LIFO reserve is adjusted to prevent recognizing excessive inventory reserves in total.
Self-insurance reserves - We are self-insured up to certain limits for automobile and general liability, workers’ compensation, and certain employee health benefits such as medical, short-term disability, and dental, with the related liabilities included in the accompanying financial statements. Our policy is to estimate reserves based upon a number of factors, including known claims, estimated incurred but not reported claims, and other analyses, which are based on historical information, along with certain assumptions about future events. Changes in assumptions for such matters as a result of increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At June&