Kimball International, Inc. (KBAL) today announced first quarter fiscal year 2017 net sales of $175.0 million and net income of $11.0 million. Earnings per diluted share for the first quarter was $0.29, an increase of 93% over the prior year first quarter. Adjusted earnings per diluted share, which excludes a $1.1 million after-tax gain related to a previously announced restructuring plan, was up 53%.

Bob Schneider, Chairman and CEO, stated, “The first quarter was a very nice one for Kimball, in fact exceeding all previous quarterly operating income results for the last 15 years. I am very pleased to report that we reached our sales and earnings guidance during this quarter and am especially encouraged that at this performance level, adjusted return on capital, excluding restructuring, of 25.5% is among the best in the industry. Achieving this level of earnings was in large part made possible by tremendous efforts to bring to market new products and marketing programs, along with the completion of the two restructuring plans since the spin-off of Electronics, and many other continuous improvement efforts. What Kimball accomplished the last two years is a real testament to the dedication of our 3,000 employees, all focused on serving the customer and continuous improvement."

Net sales in the first quarter of fiscal year 2017 increased 12% from the prior year first quarter. The increase was primarily driven by the healthcare vertical (up 40%), the education vertical (up 21%), and the hospitality vertical (up 15%). Healthcare and education vertical market sales benefited from strong sales growth through group purchasing organizations and a continued focus on these markets. The sales growth in the hospitality vertical market was driven by increased non-custom business with major hotel chains.
The Company continues to launch new and innovative products to fuel growth. Sales of new office furniture products increased 39% over the prior year first quarter. New product sales approximated 28% of total office furniture sales in the current year first quarter compared to 23% in the prior year first quarter. New products are defined as those introduced within the last three years.
Orders received during the first quarter of fiscal year 2017 increased 7% over the prior year first quarter. Orders increased significantly in the healthcare vertical (up 39%) on growth in orders received through healthcare group purchasing organizations and expansion in certain territories. Orders in the hospitality vertical also grew substantially (up 24%) on very strong orders for custom products.
First quarter gross profit as a percent of net sales improved 0.9 of a percentage point over the prior year first quarter, driven by pricing, leverage on higher sales volume, and benefits from the Company's restructuring plan involving the transfer of metal fabrication production from Idaho into facilities in Indiana.
Selling and administrative expenses in the first quarter of fiscal year 2017 decreased as a percent of sales by 1.0 percentage point, and increased 7.6% in absolute dollars compared to the prior year first quarter. The higher selling and administrative expense was driven by increases in incentive compensation as a result of higher earnings levels, and an increase in expense due to the normal revaluation to fair value of our Supplemental Employee Retirement Plan (“SERP"). A higher stock market tends to increase the value of investments in the SERP, and related expense was recognized in selling and administrative expenses and offset by SERP investment gains in Other Income (Expense); and thus there was no effect on net income.
Pre-tax restructuring recognized in the first quarter of fiscal year 2017 was a net gain of $1.8 million, which included a gain on the sale of the Post Falls, Idaho facility and land of $2.1 million and partially offsetting restructuring expense of $0.3 million. The sale generated $12.0 million of gross proceeds, or $11.2 million net of selling expenses. The manufacturing restructuring plan involving the exit of the Idaho facility and relocation to Indiana facilities is now complete. Pre-tax restructuring expenses in the prior year first quarter were $1.2 million.
The Company's 37.8% effective tax rate for the first quarter of fiscal year 2017 was comparable to the prior year first quarter effective tax rate of 38.2%, as neither period had any unusual tax impacts.
Operating cash flow for the first quarter of fiscal year 2017 was positive at $13.0 million compared to positive cash flow of $6.3 million in the first quarter of the prior year. The increase was primarily driven by improved profitability and the increased conversion of working capital balances to cash during the current quarter compared to the prior year quarter.
The Company's balance in cash, cash equivalents, and short-term investments was $62.7 million at September 30, 2016, compared to June 30, 2016 cash and cash equivalents of $47.6 million. The increase during the first quarter of fiscal year 2017 was primarily due to the sale of the Post Falls building and land mentioned above.

Outlook

Mr. Schneider stated, “We are providing a mid-term outlook of sales increasing mid-single digits over the prior year. With the manufacturing consolidation restructuring behind us, our mid-term outlook for operating income as a percent of sales, with the exception of our fiscal year third quarter, which tends to be seasonally lower than other quarters, is a range of 8% to 9%. After finishing fiscal year 2016 with operating income excluding restructuring of 6.4%, our mid-term outlook of 8% to 9% would be a significant improvement over recent results.”

At this earnings level, the Company expects its projected return on capital to exceed 20%, which is among the best in the office furniture industry. The Company's outlook assumes that economic conditions do not significantly worsen, negatively affecting the industries which it serves. It also does not include any potential impact to earnings related to the government's review of our subcontract reporting process.