Kimball International 2006 Annual Report s h a r p e n i n g o u r f o c u s w h o w e a r e Kimball International, Inc. is a preeminent manufacturer of furniture and electronic assemblies, serving customers around the world. Our customers, both large and small, receive our undivided attention, as we treat every one as the only one. Our touch is felt throughout daily life in both the workplace and in the home. Recognized with a reputation for excellence, Kimball International is committed to a high performance culture that values personal and organizational commitment to quality, reliability, value, speed, and ethical behavior. Kimball employees know they are part of a corporate culture that builds success for Customers while enabling employees to share in the company’s success through personal, professional and financial growth. w h a t w e d o Kimball International, Inc. provides a variety of products from its two business segments: the Furniture and Cabinets segment and the Electronic Contract Assemblies segment. The Furniture and Cabinets segment provides furniture for the office and hospitality industries sold under the Company’s family of brand names. The Furniture and Cabinets segment also provides engineering and manufacturing services which utilize common production and support capabilities on a contract basis to customers primarily in the residential furniture and cabinets industry. The Electronic Contract Assemblies segment provides engineering and manufacturing services which utilize common production and support capabilities to a variety of industries globally. t o o u r s h a r e o w n e r s Your Company experienced signifi cant change during the past year. Consolidated Net Sales for the fi scal year were $1,143,000,000. Overall sales are up from fi scal 2005 as the planned reduction in contract private label furniture sales has been more than offset by increased sales of our branded furniture. We also had additional sales late in fi scal 2006 related to acquisition activity in the Electronics segment. Annual earnings are down due to expenditures relating to the fi rst quarter restructuring decision to sharpen our focus and to simplify and standardize business processes within the Furniture and Cabinets segment. We have made signifi cant progress and are encouraged by trends in recent quarters. As planned in the fi rst quarter restructuring decision, we exited non-core markets and divested several unprofi table operations. The progress we have made in tightening our focus on our core markets is beginning to show in our operating results. We are confi dent this new business model will allow for greater customer service, with greater speed, at a much reduced operating cost structure and therefore higher earnings. We are most pleased with the quarterly progress in earnings since the announcement of the restructuring. Each successive quarter since the fi rst quarter showed higher earnings, exclusive of restructuring costs. This is an excellent trend resulting from the decision to restructure the furniture operations. As we go forward, addressing challenges SERVING A MARKET CELEBRATING OUR GROWTH A CENTER OF EXCELLENCE The strategic expansion of our worldwide Kimball Electronics welcomes our Irish Kimball Electronics Wales will provide capabilities and responsiveness in serving and Welsh team-mates, whose capabilities manufacturing services to a major customer our customers emphasizes our commitment will signifi cantly add to our package of for its medical diagnostics products, as well as to automotive electronics manufacturing. value offered to our global customers. seek new medical customers for this facility. e l e c t r o n i c s In our Electronic Contract Assemblies segment, sales and income continued to be challenged by the lower automotive volumes which have resulted from stresses within that industry. We are excited however, to see revenues from several new product introduction investments we made during the prior year. These new additions have been important to partially offset our reduced automotive sales. We are continuing our long-standing strategy to diversify our business among different automotive customers and also into other market sectors, such as industrial controls, medical devices, and public safety, where we can leverage our capabilities and unique package of value. Our recent acquisitions in Wales and Ireland are excellent examples of our efforts to broaden our package of value in these markets. We acquired a manufacturing operation in Wales and an assembly operation in Ireland as part of that growth and diversifi cation plan for this segment. These acquisitions of rising commodity costs, from fuel to steel to fl akeboard, as well as tighter margins in our build upon strong long-term relationships with two Electronics segment, particularly on new program awards, will continue to receive our attention as customers who view us as both a trusted business partner we work to sustain our improved profi tability. and a supplier. Your Company’s enviable record of positive cash fl ow from operations continued during fi scal The contract electronics industry overall is expected to continue to grow with additional 2006, and once again our balance sheet remains solid. With cash and short-term investments of outsourcing of manufacturing to companies such as Kimball. The market is also expected $172 million and virtually no long-term debt, your Company is well positioned with capital readily to continue to be very cost competitive, which means cost management will be key to good available to fund our growth. operating margins in this segment. 1 Douglas A. Habig, Chairman of the Board James C. Thyen, President and Chief Executive Officer MAKING A STATEMENT New showrooms in Chicago and Jasper both BUILDING AN IMAGE Kimball Hospitality continues to be selected as earned prestigious LEED certifi cations for BECOMING A LEADER the room furniture provider by many of the most environmentally responsible design. These investments demonstrate our Our National brand has evolved and recognized hotel chains, luxury properties and resort positioned itself as a market leader destinations around the world...installing over 25,000 commitment to our markets and to our offering extremely relevant, well styled rooms in the last year. environmental stewardship philosophy. offi ce furnishings with a high value focus. f u r n i t u r e f i n a n c i a l h i g h l i g h t s (Amounts in thousands, except for per share data) Net Sales Income from Continuing Operations Net Income Return on Capital Cash Flow from Operations Working Capital Capital Investments Share Owners' Equity Earnings Per Share from Continuing Operations (Diluted) Class A Class B Dividends Declared Class A Class B Market Price Per Share High Low Close 2006 2005 % Change 8.5% 5.1% -7.4% 8.1% 18.4% 13.6% -6.4% -1.3% 5.6% 5.5% 0.0% 0.0% $1,142,581 22,179 15,362 4.96% 76,612 231,381 31,517 422,582 $1,053,147 21,101 16,588 4.59% 64,707 203,668 33,665 428,226 0.57 0.58 0.62 0.64 19.72 10.25 19.71 0.54 0.55 0.62 0.64 15.40 11.22 13.20 * Income from Continuing Operations, Net Income, Return on Capital, Cash Flow from Operations and Earnings Per Share include restructuring charges. 2006 Sales By Business Segments 56.5% Furniture and Cabinets 43.5% Electronic Contract Assemblies Our Furniture and Cabinets segment was the focus of a business model change. We realigned Our focus is on the future, and from where we stand, that future is fi lled with opportunities manufacturing and marketing into one streamlined and integrated organization focused on for success! serving our offi ce furniture and hospitality furniture customers. Historically, our furniture segment has operated in a decentralized organizational model that has supported many diversifi ed businesses in a variety of markets. The restructuring announced in September 2005 was and is entirely focused on simplifi cation and standardization of our business processes, and improving the management alignment within this organization. Certainly, a major intent was to improve the cost structure, and we are already seeing some benefi t in our actual results and expect continuing improvements in fi scal 2007. This strategy is enabling growth of this segment, not mere cost containment. The offi ce furniture industry had strong growth this past year with double digit increases. Market growth over the next year is expected to continue although at a slower rate, refl ecting the slowing economy. Market growth in the hospitality industry is expected to remain strong over the coming year. Our vision remains constant: to build success for our customers which enables us to build success for ourselves. We thank all our employees for what they have done to make a positive difference in our operational excellence, our profi t improvement and our organizational effectiveness. With their continued commitment, we are confi dent in our ability to sharpen our focus, address our challenges, and build more success in 2007. We invite you to read the enclosed Form 10-K to better understand how Kimball International is sharpening its focus. James C. Thyen President and Chief Executive Officer Douglas A. Habig Chairman of the Board 2 3 b o a r d o f d i r e c t o r s Harry W. Bowman + ^ Retired; Former President and Chief Executive Officer of The Stiffel Company Director 6 years Gary P. Critser + Retired; Former Senior Executive Vice President, Secretary and Treasurer, Kimball International Director 2 years Douglas A. Habig * Chairman of the Board of Directors, Kimball International Director 33 years John B. Habig * Chairman of the Board of Directors of SVB&T Corporation, a Bank Holding Company Director 50 years Polly B. Kawalek + # Retired; Former Senior Vice President and President, Quaker Foods, PepsiCo Beverages and Foods Director 9 years Geoffrey L. Stringer + # Retired; Former Executive Vice President of Bank One and Chief Executive Officer of Bank One Capital Corporation Director 3 years James C. Thyen * President and Chief Executive Officer, Kimball International Director 24 years John T. Thyen Retired; Former Senior Executive Vice President, Strategic Marketing, Kimball International Director 16 years Ronald J. Thyen * Retired; Former Senior Executive Vice President, Operations Officer, Assistant Secretary, Kimball International Director 33 years Christine M. Vujovich ^ Vice President, Marketing and Environmental Policy, Cummins, Inc. Director 12 years Dr. Jack R. Wentworth # ^ Retired; Arthur M. Weimer Professor Emeritus of Business Administration, Indiana University; Former Dean of the Kelley School of Business, Indiana University Director 22 years * Member of the Executive Committee of the Board + Member of the Audit Committee of the Board # Member of the Compensation Committee of the Board ^ Member of the Governance and Nominating Committee of the Board o f f i c e r s Corporate Officers Randall L. Catt Executive Vice President, Human Resources Donald D. Charron Executive Vice President, President–Kimball Electronics Group John H. Kahle Executive Vice President, General Counsel, Secretary P. Daniel Miller Executive Vice President, President–Furniture Robert F. Schneider Executive Vice President, Chief Financial Officer Gary W. Schwartz Executive Vice President, Chief Information Officer R. Gregory Kincer Vice President, Business Development, Treasurer Michelle R. Schroeder Vice President, Corporate Controller Dean M. Vonderheide Vice President, Safety, Environment and Facilities Domestic Subsidiary Officers Roger Chang (Chang Shang Yu) Vice President, Asian Operations, Kimball Electronics Group Dwaine R. Saalman Vice President, Division Sales Manager, Kimball Office John S. Dick Vice President, Chief Financial Officer, Office Furniture Group Steven T. Korn Vice President, Business Development, Kimball Electronics Group Stanley C. Sapp Vice President, General Manager, Kimball Hospitality Michael K. Sergesketter Vice President, Chief Financial Officer, Kimball Electronics Group Kent F. Mahlke Vice President, Global Supply Chain Management, Office Furniture Group Kevin R. Smith Vice President, North American Operations, Kimball Electronics Group John C. Manchir Vice President, Manufacturing Office Furniture Group Dirk H. Manning Vice President, Sales, Kimball Office Kevin D. McCoy Vice President, Sales, National Office Furniture Donald W. VanWinkle Vice President, General Manager, National Office Furniture David E. White Vice President, General Manager, Kimball Office Zygmunt Witort Vice President, European Operations, Kimball Electronics Group Foreign Subsidiary Managers Janusz Kasprzyk General Manager, Kimball Electronics Poland, Sp. z o. o. John R. Spears General Manager, Kimball Electronics-Mexico, S.A. de C.V. J. Keith Beatty General Manager, flexcel-Juarez, S. A. de C. V. Tongchai Chuenchujit General Manager, Kimball Electronics (Thailand), Ltd. Shane Tiernan General Manager, Kimball Electronics Ireland, Ltd. John Harris General Manager, Kimball Electronics Wales, Ltd. Daniel Gu (LuYin Gu) General Manager, Kimball Electronics (Nanjing) Co., Ltd. y k c u t n e K , e l l i i v s u o L i , n g s e D e t i h W & k c a B l 4 i : n g s e D o t h e r c o r p o r a t e d a t a Kimball International, Inc. and Subsidiaries Annual Meeting: The annual meeting of Share Owners will be held at 9:30 a.m. Central Daylight Time on October 17, 2006, at the General Office Building, Kimball International, Inc., 1600 Royal Street, Jasper, Indiana. Share Owners are cordially invited to attend. 10-K Report: A copy of the Company’s annual report to the Securities and Exchange Commission on Form 10-K is available, without charge, upon written request directed to Robert F. Schneider, Executive Vice President, Chief Financial Officer at our corporate headquarters. Common Stock: Kimball International Class B Common Stock is traded on the NASDAQ Global Select Market of NASDAQ Stock Market LLC under the symbol: KBALB. KBALB Transfer Agent and Registrar of the Class A and B Common Stock: Share Owners with questions concerning address changes, dividend checks, registration changes, lost share certificates or transferring shares may contact: National City Bank Corporate Trust Operations PO Box 92301 Cleveland, OH 44193-0900 Phone: (800) 622-6757 TDD Line: (800) 622-5571 Internet Address: www.nationalcitystocktransfer.com E-Mail Address: shareholder.inquiries@nationalcity.com Analyst Contact: Financial analysts with questions concerning the Company may contact Robert F. Schneider, Executive Vice President, Chief Financial Officer at our corporate headquarters. Share Owner Contact: Share Owners with general questions concerning the Company may contact John H. Kahle, Executive Vice President, General Counsel, Secretary at our corporate headquarters. All members of management welcome suggestions about the Company and its performance. Corporate Headquarters: Kimball International, Inc. 1600 Royal Street Jasper, Indiana 47549-1001 (812) 482-1600 (800) 482-1616 (Toll Free) (812) 482-8500 (TDD for Hearing Impaired) Internet Address: Additional information on Kimball International is available at www.kimball.com on the Internet. Private Securities Litigation Reform Act of 1995: This document contains forward-looking statements that involve risks and uncertainties regarding Kimball International’s operations and future results. In accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Kimball provides cautionary statements, detailed in the Company’s Securities and Exchange Commission filings including, without limitation, the Company’s Form 10-K, which identifies specific factors that could cause actual results or events to differ materially from those described in the forward-looking statements. s a l e s, m a n u f a c t u r i n g a n d s e r v i c e o p e r a t i o n s Administrative, Shared, and Support Services Kimball Corporate Headquarters Jasper, Indiana Executive, administrative and sales offices, and corporate support services Education Center & Corporate Showroom Jasper, Indiana Training services and product display Kimball Travel and Guest Services Huntingburg and Jasper, Indiana Flight operations, services and guest relations Kimball Kids Jasper, Indiana Employee child development center Furniture and Cabinets Segment Showrooms & Service Centers New York, Chicago, Boston, Los Angeles, Atlanta, Dallas, Washington, D.C., and Jasper Product display and regional distribution Kimball Hospitality Jasper, Indiana Hospitality furniture Kimball Office Jasper, Indiana High end office furniture casegoods, systems, seating and filing sales National Jasper, Indiana Mid-market office furniture casegoods, seating and filing sales flexcel-Logistics Jasper, Indiana Transportation and fleet operations Product Design & Research Center Jasper, Indiana Product research, design, development and testing flexcel-Borden Facility Borden, Indiana Office furniture casegoods manufacturing flexcel-Danville Facility Danville, Kentucky Office and hospitality seating manufacturing flexcel-Fordsville Facility Fordsville, Kentucky Office furniture casegoods manufacturing flexcel-Jasper 11th Avenue Facility Jasper, Indiana Office and hospitality seating manufacturing flexcel-Jasper 15th Street Facility Jasper, Indiana Office furniture systems manufacturing flexcel-Jasper 16th Street Facility Jasper, Indiana Hospitality furniture and custom casegoods manufacturing flexcel-Jasper Cherry Street Facility Jasper, Indiana Flat, molded, postformed, and plastic-faced plywood, banded flakeboard and veneer face production flexcel-Juarez, S.A. de C.V. Facility Juarez, Mexico and El Paso, Texas, USA Projection TV cabinets, TV stands and hospitality casegoods manufacturing flexcel-Post Falls Facility Post Falls, Idaho Office furniture systems, casegoods and filing manufacturing flexcel-Salem Facility Salem, Indiana Office furniture casegoods manufacturing flexcel-Santa Claus Facility Santa Claus, Indiana Office furniture casegoods, TV cabinets and TV stands manufacturing Electronic Contract Assemblies Segment Kimball Electronics-Jasper, Plant 1 Jasper, Indiana Electronics assemblies production Kimball Electronics-Jasper, Plant 2 Jasper, Indiana Electronics assemblies production Kimball Electronics-Auburn Auburn, Indiana Electronics assemblies production Kimball Electronics Ireland, Ltd. Longford, Ireland Electronics assemblies production Kimball Electronics-Mexico, S.A. de C.V. Reynosa, Mexico and McAllen, Texas, USA Electronics assemblies production Kimball Electronics (Nanjing) Co., Ltd. Nanjing, China Electronics assemblies production Kimball Electronics Poland Sp. z o. o. Poznan, Poland Electronics assemblies production Kimball Electronics (Thailand), Ltd. Laem Chabang, Thailand Electronics assemblies production Kimball Electronics Wales, Ltd. Bridgend, Wales, U.K. Medical diagnostics products Kimball International, Inc. 1600 Royal Street Jasper, IN 47549 812-482-1600 812-482-8500 TDD www.kimball.com