Kimball International, Inc. (KBAL) today announced fourth quarter fiscal year 2016 net sales of $164.7 million and income from continuing operations of $6.3 million. Earnings per diluted share for the fourth quarter was $0.17, an increase of 42% over the prior year fourth quarter. Adjusted earnings per diluted share, which excludes charges related to a previously announced restructuring plan, was up 27%.

Bob Schneider, Chairman and CEO, stated, “I am very pleased with the progress we made in our fourth quarter and in fiscal year 2016 as we continue on our journey toward our guidance of achieving 8% to 9% operating income and quarterly earnings per diluted share of $0.23 to $0.27. At this level of performance, our return on capital will be among the best in the industry. Along with a strong push for new and innovative products, a big part of this journey was the shutdown and move of our Idaho operation to our Indiana facilities the last 18 months. The physical move is now done, and our Indiana employees are producing metal fabricated furniture for the first time. We had normal production training and start-up costs during the fourth quarter which offset most of the planned savings from this effort, and we expect to be substantially past the normal start-up costs by the end of the calendar year. Additionally, we had much higher than planned healthcare costs and in spite of the increase, our earnings improved over the prior year quarter. I look forward to continued earnings improvement

Net sales in the fourth quarter of fiscal year 2016 increased 4% from the prior year fourth quarter. The increase was primarily driven by the healthcare and government verticals (both up 17%), the education vertical (up 11%), and the hospitality vertical (up 6%). The prior year fourth quarter includes $9.5 million in sales in the hospitality vertical related to a record order for a single property. Excluding that order, the hospitality vertical would have had a 38% increase in sales during the fourth quarter.
The Company continued its strategy of quick launches of new and innovative products to fuel growth, increasing sales of new office furniture products 34% over the prior year fourth quarter. New product sales also approximated 29% of total office furniture sales in the current year fourth quarter compared to 22% in the prior year fourth quarter. New products are defined as those introduced within the last three years.
Orders received during the fourth quarter of fiscal year 2016 increased 2% over the prior year fourth quarter with increases in four of the Company's six verticals. Orders increased significantly in the healthcare vertical (up 34%) on continued strength in sales to healthcare group purchasing organizations and new customers. The healthcare increase was primarily offset by declines in orders within the finance vertical (down 18%) and the hospitality vertical (down 12%) due to timing of large orders.
Fourth quarter gross profit as a percent of net sales improved 0.5 of a percentage point over the prior year fourth quarter, driven by price increases, cost savings initiatives, and lower freight costs, partially offset by higher employee healthcare expenses during the current year quarter. Gross profit also was aided by the Company's restructuring plan involving the transfer of metal fabrication production from Idaho into facilities in Indiana, however, most of the benefit was offset by training and start-up costs.
Selling and administrative expenses in the fourth quarter of fiscal year 2016 increased as a percent of sales by 0.5 of a percentage point, and increased 4.9% in absolute dollars compared to the prior year. The higher selling and administrative expense was driven by increases in commissions driven by higher sales volumes and employee healthcare expenses, which were partially offset by a reduction in incentive compensation. Incentive compensation was lower in spite of higher earnings due to higher performance levels required to earn incentive compensation.
Pre-tax restructuring costs in the fourth quarter of fiscal year 2016 totaled $1.4 million, primarily consisting of continued training of Indiana employees prior to start of production, equipment relocation costs, and facility maintenance and shutdown costs related to the cessation of production at our Post Falls, Idaho facility. All production was transferred out of the Idaho facility as of March, 2016. Work continues in the Indiana facilities to train employees, ramp-up production and eliminate the inefficiencies associated with the start-up of production in a new facility.
The Company's 34.5% effective tax rate for the fourth quarter of fiscal year 2016 was lower than the prior year fourth quarter effective tax rate of 45.9%. The effective tax rate in the prior year fourth quarter was unfavorably impacted by nondeductible expenses related to the spin-off of Kimball Electronics.
Operating cash flow for the fourth quarter of fiscal year 2016 was positive at $9.2 million compared to a positive cash flow of $1.8 million in the fourth 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, and improved profitability.
The Company's cash and cash equivalents balance was $47.6 million at June 30, 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, partially offset by capital investments and the return of capital to share owners in the form of dividends and share repurchases.

Fiscal year 2016 net sales of $635.1 million increased 6% from fiscal year 2015 net sales of $600.9 million. Fiscal year 2016 operating income of $33.5 million increased 93% compared to fiscal year 2015 operating income of $17.3 million. Excluding charges related to the restructuring plan, adjusted operating income for fiscal year 2016 was $40.8 million, an increase of 58% over fiscal year 2015 adjusted operating income of $25.8 million which excludes charges related to the spin-off of the Company's Electronic Manufacturing Services segment and charges related to the restructuring plan. Income from continuing operations for fiscal year 2016 was $21.2 million, or $0.56 per diluted share, compared to income from continuing operations for fiscal year 2015 of $11.1 million, or $0.29 per diluted share. Excluding charges related to the restructuring plan, adjusted income from continuing operations for fiscal year 2016 was $25.7 million, or $0.68 per share. Excluding charges related to the spin-off of the Company's Electronic Manufacturing Services segment and charges related to the restructuring plan, adjusted income from continuing operations for fiscal year 2015 was $17.6 million, or $0.45 per share.

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

As indicated previously, the consolidation of metal production from the Idaho facility into Indiana facilities is expected to generate savings of approximately $5 million annually ($1.25 million per quarter). However, with ramp-up activities continuing, the Company estimates that first quarter savings will be lower than expected at approximately $600,000 and full savings is now expected to be realized by the end of the calendar year. Therefore, the Company expects to be near the low end of the previously announced earnings projection for the first quarter of fiscal year 2017, which was net sales to range from $170 million to $180 million; operating income to range from $13.6 million to $16.2 million which equates to 8% to 9% operating margin; 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 projected return on capital of Kimball International would exceed 20%, which 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. It also does not include any potential impact to earnings related to the government's review of our subcontract reporting process.