Kimball International, Inc.(the "Company," "Kimball," "we," us," or "our") provides a variety of products from our two business segments: the Electronic Manufacturing Services (EMS) segment and the Furniture segment. The EMS segment provides engineering and manufacturing services which utilize common production and support capabilities globally to the automotive, medical, industrial, and public safety industries. The Furniture segment provides furniture for the office and hospitality industries, sold under Kimball's family of brand names. The pace of the economic recovery has been slow, and key economic indicators are showing mixed trends. The U.S. government's continuing inability to permanently resolve budget and other fiscal issues has the tendency to cause disruption in business strategy, execution, and timing in many of the markets in which we compete. EMS industry projections (by IDC and IHS in the February 2013MMI publication) forecasted growth for calendar year 2013 over 2012 in the 5% to 6% range. Growth projections for calendar year 2014 are in the 4% to 8% range. Additionally, in June 2013the Semiconductor Industry Association(SIA) endorsed a forecast for year-over-year semiconductor sales growth of 2% for 19
calendar year 2013 and 5% for calendar year 2014, and although the Company does not directly serve this market, it may be indicative of the end market demand for products utilizing electronic components. Kimball's focus is on the four key vertical markets of automotive, medical, industrial, and public safety within our EMS segment. Our overall expectation for the EMS market is that of moderate growth, but with mixed demand. The automotive end market is benefiting from relative strength in the U.S. market and improvement in the Chinese market, while demand in other geographies such as
Europecontinues to be less certain due to the lingering impact of the European debt crisis. The industrial market demand is improving but continues to reflect a lower demand for heating, cooling, and ventilation (HVAC) products than historical levels. Demand in the public safety market is being negatively impacted by lower spending and delays in ordering by government agencies coupled with a change in the mix of product within the public safety marketplace. Demand in the medical market remains stable. The Business and Institutional Furniture Manufacturer Association(BIFMA) forecast (by IHS as of August 2013) projects a year-over-year increase in the office furniture industry for calendar year 2013 of 5%. Improved year-over-year growth of 8% is projected for calendar year 2014. The hospitality furniture market forecast ( August 2013PwC and September 2013 PKF Hospitality Researchreports) projects an increase in occupancy rates of 1% to 2% and an increase in RevPAR ( Revenue Per Available Room) of 6% for calendar year 2013 over calendar year 2012. For calendar year 2014, occupancy is forecasted to increase 1% to 2%, and RevPAR is forecasted to increase in the range of 6% to 7%. The Company's focus on cost control continues. At the same time, we plan to continue to invest in capital expenditures prudently for projects in support of both organic growth and potential acquisitions that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability. We also continue to closely monitor market changes and our liquidity in order to proactively adjust our operating costs, discretionary capital spending, and dividend levels as needed. Managing working capital in conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of Kimball's profit sharing incentive bonus plan is that it is linked to our worldwide, group, or business unit performance which is designed to adjust compensation expense as profits change. We continue to maintain a strong balance sheet, which included minimal long-term debt of $0.3 millionand Share Owners' equity of $414.7 millionas of September 30, 2013. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facilities, was $191.6 millionat September 30, 2013. In addition to the above discussion related to the current market conditions, management currently considers the following events, trends, and uncertainties to be most important to understanding Kimball's financial condition and operating performance: • Inflation has moderated and does not appear to be a significant risk in the near-term, but we continue to focus on mitigating the impact of raw material commodity pricing pressures.