July 25, 1997
What courses of action can we pursue to keep our company growing and
prospering?
We continually ask ourselves this question. Given our passion to exceed
customer expectations, we're constantly striving for new and more
effective ways to design, build and sell our products and services.
We know that by satisfying customer needs, financial performance will
continue to grow and ultimately, so will the value of your investment.
This year's record sales and earnings, and outstanding Share Owner
return, provide ample evidence for the validity of that approach.
The improvements within our company have been many: Investments in
corporate-wide information technology. Employee training. Quality system
registrations. New, rigorous performance measures such as "economic
profit" which adds the cost of capital invested as a line item in
calculating profitability.
Some have been completed, and others are always continuing. These
"building blocks" have transformed Kimball International into a much
more market-responsive, flexible and competitive company.
This foundation of excellence forms the basis for a realigned senior
management to lead Kimball into a more intense phase of growth and to
benefit from opportunities in the furniture, electronics, processed wood
products and other potential new markets of tomorrow.
Fiscal 1997 set sales and earnings records
These "building blocks" of success have helped us achieve a record
performance in fiscal 1997.
Revenues and income reached the highest levels in the company's history.
Net sales grew seven percent to a record $992.0 million. Earnings jumped
28 percent to an all-time high of $57.7 million, or $2.79 per Class B
share. Fiscal 1996 earnings were $45.1 million ($2.16 per Class B
share), a figure which included a $1.9 million charge to exit the
domestic piano product line. Earnings growth was 23 percent without the
exit costs.
Overall, operations generated $122 million of cash flow, nearly double
the previous year's amount. After paying dividends and reinvesting
capital back into the company, net cash flow was a record $54 million.
Fiscal 1997's strong performance improved the company's already healthy
balance sheet, giving us enormous flexibility to fund future growth.
It was yet another year of strength. Sales set a record for a sixth
straight year. Earnings were higher for the fourth consecutive year.
Gross profit margins and net income as a percentage of sales were the
highest since 1992. Return on capital increased significantly. The Board
of Directors raised the quarterly dividend rate 12 percent.
This performance in fiscal 1997 was fueled by our two largest segments --
Furniture and Cabinets and Electronic Contract Assemblies. Manufacturing
process improvements, coupled with leveraging gains in sales volumes,
created significant growth in operating profits. In the smallest
segment, Processed Wood Products and Other, sales remained flat and
income declined.
Office and lodging furniture are strong
The Furniture and Cabinets segment, which represents 62 percent of
Kimball revenues, provided the largest share of Kimball's growth. Sales
increased six percent to $617.2 million and operating income rose 32
percent to $44.2 million.
All major office furniture product lines -- systems, casegoods, seating
and storage -- were in strong demand and generated significant increases
in revenues. Sales growth of systems and value-priced furniture outpaced
the industry. Well-received new products such as the Interworks system
and demand for existing products such as the mid-priced casegoods line
Arrowwood contributed to expanded orders.
In the Lodging Group, sales soared as the hospitality industry
refurbishing cycle continued. Prestigious hotel properties ordered
significant quantities of custom-built furniture. Lodging furniture
sales to major chains increased while sales to the healthcare industry
also continued to rise.
Within the Cabinet and Furniture Group, lower customer demand as the
result of shifting TV cabinet production schedules and changing
technologies resulted in lower revenues. Sales of other major contract
products, such as home furniture and audio speaker cabinets, also
declined. However, the excess manufacturing capacity was used to
supplement production of lodging products.
Electronics continues its brisk expansion
Representing 32 percent of Kimball's overall sales, the Electronic
Contract Assemblies segment is the company's second largest segment.
During fiscal 1997, sales increased 11 percent to $315.8 million.
Manufacturing efficiencies resulting from expanded sales helped boost
operating income from $21.4 million to $29.7 million.
The Electronics Group continues to diversify its customer and product
base. New computer assemblies expand the list of products made for
computer, network and telecommunications companies, and additional
automotive products are slated to join the manufacture of electronic
anti-lock braking system controls.
Two percent of the Electronics Group's sales growth came from Elmo
Semiconductor Corp., which was acquired in 1996. Elmo's design, research
and production skills, particularly in the advanced multichip module
area, expand Kimball's capabilities as the Electronics Group positions
itself as a full-service contract electronics provider.
Processed Wood Products sales remain flat
In the smallest segment, Processed Wood Products and Other, sales
remained flat at $59.0 million while operating income fell seven
percent to $7.1 million.
These business units remained key intercompany suppliers as sales to
Kimball's furniture operations increased. Higher internal demand and
changes in the product mix contributed to a decline in sales to outside
customers. Overall in the segment, sales increases for dimension, lumber
and metal parts products were offset by lower plastics, laminates and
veneer sales.
The Building Blocks of Success
Throughout this annual report, we discuss specific initiatives and
practices which form the "building blocks" for the company's success.
Changes in executive responsibilities that took effect July 1, 1997,
help ensure Kimball's continued success and positioning for healthy
growth. President Douglas A. Habig became Chairman and Chief Executive
Officer. Chief Financial Officer and Treasurer James C. Thyen was named
President. After 15 years as Chairman, Thomas L. Habig became Vice
Chairman and will continue to be active in company management. Director
of Accounting Robert F. Schneider was appointed Chief Financial Officer,
and Secretary Gary P. Critser assumed the additional responsibility of
Treasurer.
Six other senior executives also accepted expanded responsibilities.
From the first day, this team began aggressively pursuing the company's
strategic goals, taking actions to enhance competitiveness and to grow
sales and profits.
Together with the company's nearly 9,000 employees, Kimball leadership
will employ the many processes and tools necessary to grow. That
includes ensuring office furniture customers receive the Total Best
Solution. Formalizing quality systems. Redesigning and standardizing
furniture components. Bringing new operating information systems on
line. And much more.
Whatever the task, the work of improvement and growth is never ending.
We have set forth an aggressive, yet workable, expansion strategy which
already is producing visible results.
We have the vision, the people and the desire to reach our goals. We
appreciate your support as we strive to achieve an ever-increasing
return on your investment in Kimball International.

Douglas A. Habig
Chairman
Chief Executive Officer

Thomas L. Habig
Vice Chairman

James C. Thyen
President