Kimball International, Inc. (KBAL) today announced third quarter fiscal year 2016 net sales of $150.0 million and income from continuing operations of $2.8 million, or $0.07 per diluted share. Adjusted income from continuing operations for the third quarter of fiscal year 2016 was $4.4 million, or $0.12 per diluted share, which excludes charges related to a previously announced restructuring plan.

Bob Schneider, Chairman and CEO, stated, “Our third quarter sales were up 3% compared to the prior year third quarter, with several of our verticals showing very strong performance. Specifically, healthcare sales grew 60% and sales into the government vertical increased 19%. However, the hospitality vertical had the usual volatility we often see in this project-based industry with sales being down 22%, while orders received during the quarter were up a strong 49%.”

Mr. Schneider continued, “Our fiscal third quarter is typically slower than other quarters, which tends to put pressure on our sales level and operating margin. However, I am pleased that our third quarter pro forma adjusted operating income as a percent of sales was 4.8%, which was our best fiscal third quarter in a decade. The continuous improvement and restructuring activities the last couple years are getting nice traction. The largest of those activities, the exit and transfer of operations from our Post Falls, Idaho facility to several facilities in Indiana, is nearing completion but negatively impacted results this quarter due to inefficiencies occurring during the final move of production between facilities. We continue to expect completion of this significant restructuring effort by June 30, 2016. All metal production activities as of the end of March have been transferred and what remains is Post Falls facility clean-up, continued training of Indiana employees and the eventual sale of the Post Falls facility. I sincerely appreciate the dedication of our employees as we near the end of this important project.”

Net sales in the third quarter of fiscal year 2016 increased 3% from the prior year third quarter. The increase was primarily driven by the healthcare vertical (up 60%) and the government vertical (up 19%). Our healthcare vertical benefited from strengthening relationships with purchasing organizations and product solutions specific to healthcare settings. The increase in sales to the government vertical market was primarily driven by several federal government projects. The hospitality vertical, which is very project-oriented, declined 22% due to shipping more large custom projects last year compared to the current year. Office furniture sales within verticals other than the hospitality vertical increased 13% compared to the prior year third quarter.
Sales from new office furniture products introduced in the last three years increased 54% compared to the third quarter of last year. New product sales approximated 25% of total office furniture sales in the current year third quarter compared to 18% in the prior year third quarter.
Orders received during the third quarter of fiscal year 2016 increased 13% over the prior year third quarter. Orders increased significantly in the hospitality vertical (up 49%) and the healthcare vertical (up 43%), as these markets remain strong. Office furniture orders received in the current year third quarter within verticals other than the hospitality vertical increased 6% over the prior year.
Third quarter gross profit as a percent of net sales increased 0.3 of a percentage point over the prior year third quarter, driven by price increases, an overall shift in sales mix to higher margin business, the benefit of leverage on higher sales, and lower freight costs, partially offset by increased labor and overhead expenses. The increased labor and overhead costs were partially driven by higher employee healthcare expenses during the current year quarter and inefficiencies related to the Company's restructuring plan, involving transferring the final stages of metal fabrication production from the operation located in Post Falls, Idaho, into existing production facilities in Indiana.
Pre-tax restructuring costs in the third quarter of fiscal year 2016 totaled $2.8 million, primarily consisting of employee transition costs and equipment relocation costs related to the cessation of production at our Post Falls, Idaho facility. Restructuring activities are expected to be completed by June 30, 2016, and thereafter only facility maintenance costs will be incurred until sold.
The Company's 38.0% effective tax rate for the third quarter of fiscal year 2016 was higher than the prior year third quarter effective tax rate of 10.5%. The prior year third quarter effective tax rate was favorably impacted by $1.5 million ($0.04 per share) of releases of income tax reserves upon the expiration of statutes of limitation and tax accrual adjustments.
Operating cash flow for the third quarter of fiscal year 2016 was a positive cash flow of $24.5 million compared to a positive cash flow of $10.3 million in the third quarter of the prior year. The increase was primarily driven by increased conversion of working capital balances to cash during the current quarter compared to the prior year quarter.
The Company's cash and cash equivalents balance was $43.8 million at March 31, 2016, compared to June 30, 2015 cash and cash equivalents of $34.7 million. The increase was driven by strong current year cash flows from operations.

Post-Restructuring Guidance for the Quarter Ending September 30, 2016

All substantial restructuring activities are expected to be complete by June 30, 2016, as indicated previously, and are expected to generate savings of approximately $5 million annually thereafter, with approximately $1.25 million benefit occurring quarterly. There is no change to the Company's earnings projection to reach 8% to 9% operating income as a percent of net sales in the quarter ending September 2016. Specifically, the Company projects the following for the quarter ending September 2016: net sales to range from $170 million to $180 million; operating income to range from $14 million to $16 million; effective tax rate to range from 35% to 38%; and earnings per diluted share to range from $0.23 to $0.27. At this level of earnings, the return on capital of Kimball International would be among the best in the office furniture industry. The Company's guidance assumes that economic conditions do not significantly worsen and negatively affect the industries which it serves.