Kimball International, Inc.
Q3 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good morning, ladies and gentlemen. My name is Liz, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International Third Quarter Fiscal 2016 Financial Results Conference Call. All lines have been placed on listen-only mode to prevent any background noise. After the Kimball's speakers opening remarks, there will be a question-and-answer period where Kimball will respond to questions from analysts and investors. [Operator Instructions] As with prior conference calls; todays call May 4, 2016, will be recorded and may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from the forward-looking statements. Risk factors that may influence the outcome of forward-looking statements can be seen in the Kimball International Form 10-K and today's release. The panel for today's call is Bob Schneider, Chairman and CEO of Kimball International; and Michelle Schroeder, Vice President and Chief Financial Officer of Kimball International. I would now like to turn today's call over to Bob Schneider. Mr. Schneider, you may begin.

[Robert Schneider:]

Thank you, Liz, and welcome everyone to our third quarter conference call. The financial results for our third quarter ended March 31, 2015 were released yesterday afternoon and investor presentation slide deck has also been posted into the investor relations of our website to accompany this conference call. It does a nice job of trending important metrics and makes it a lot easier to see the progress we have made at Kimball International and I would advise you to open up that slide deck to see those. Allow a few brief comments before I turn the call over to Michelle who will provide us with the key financial highlights for the quarter. We will then open the call to questions from analysts. At the beginning of the fiscal year our turnaround goal was to grow sales above the industry average and continue the journey to improve our operating performance. We had a great start to the year and our momentum continued in the third quarter with strong sales growth in some of our key vertical markets and improved operating performance over the prior year. Here are a few of the key highlights for the third quarter. First, we continue to see improvements in our operating results over the prior year with operating income at 4.8% excluding restructuring. This is our best third quarter operating income percent in the last 10 years. If you are following along on the slide deck on our IR website, page 21 does a good job of showing our progress. Next our office function sales increased a healthy 13% and orders increased 6% for the quarter. According to the BIFMA, orders for the industry declined 2% for the 3 month ending March 31 so we took market share in orders. BIFMA has not yet released sales/assumption data for the quarter but I am pretty confident our sales at 13% growth grew faster than the industry again this quarter. For each of the last five quarters, our office furniture order rates have outpaced the industry as reported by BIFMA, as you can see on slide 16. I attribute this to new products and the broader array of furniture solutions we now offer that address collaborative working environment and appeal to the architect and design community. Sales for new products of the office furniture vertical increased 54% over the prior year third quarter. While these metrics are great, we caution a bit that the office furniture market has been slowing the last few quarters. And our recent orders while up are a bit slower. We are keeping a close eye on this market. We had another strong quarter with orders of our hospitality products increasing 49% during the third quarter which is great but frankly the comparison to the prior year was somewhat of an easy comparison. As we have discussed in the past we tend to see a lot of variability from quarter-to-quarter in this vertical given the project nature of this industry and as Michelle will discuss in a few minutes we saw that variability on the sales side as sales in this vertical declined during the quarter primarily due to several large projects that shipped last year. And last highlight, we generated $24.5 million in cash flow from operations during the third quarter in part driven by our conversion of working capital balances to cash during the quarter. Our cash balance increased to $43.8 million at the end of March which provided funding for strategic initiatives geared towards future growth as we look forward. Fourth quarter of our fiscal year which ends June 30 will be a busy one. We will be wrapping up the final activities of the consolidation of Post Falls, Idaho facility into our existing Indiana facilities. All the production activities is as of the end of March has been transferred and what remains is Post Falls facility clean up, continued training of our Indiana employees and eventual sale of the Post Falls facility. We are actively marketing the building and are working diligently to sell the facility as quickly as possible. We have ongoing maintenance costs related to the building which will continue to run through restructuring. This restructuring plan was announced through November 2014 and was one of the most complicated restructuring efforts we have ever completed. Our team worked very hard to limit the disruption during the transition and given the complexity and number of facilities this restructuring impacted, they managed the transition very well. As we have discussed in the past, we will begin realizing the full quarterly savings of $1,250,000 in the quarter ending September 30 which is our first quarter of next fiscal year, fiscal year 2017, this equates to an annual savings of $5 million a year. Also during the current fourth quarter we are participating in a couple of industry trade shows. This week we are participating in the hospitality trade show in Las Vegas which is a premier hospitality design event. This event provides us with the opportunity to connect with the most influential hospitality owners, operators and design professionals that dominate the market. We will be showcasing our extensive product and service capabilities highlighting our higher package value for the hospitality industry. We are also gearing up for the NeoCon office furniture trade show in Chicago in June. We are very excited about this event where Kimball office and national office furniture brands will be introducing several new products and unveiling new showroom designs in their street space. Enclosing I want to mention a couple of strategic partnerships that we recently announced that are indicative of our commitment to innovation. First Kimball office in partnership with the Philadelphia 76ers will establishing the 76ers innovation lab crafter by Kimball. The goal of the lab will be to cultivate an entrepreneurial spirit and foster innovation for startups and incubator companies. Selected companies will receive office space in the innovation lab which will be furnished by Kimball office as well as have access to industry experts, executives and financiers. The lab will be housed inside a state of the art 76ers training complex which is scheduled for completion within the next 12 months. Kimball office plans to use this space as a showcase for our vision of what the workspace of the future entails. Duck tailing into this strategy is a partnership with a startup called ShareDesk, a global leader in agile workplace workspace technology and on demand workspaces, interior designers and facility managers need a better way to manage the complexities created by the mobile workforce and our partnership with ShareDesk will be focused on using their technology to develop smart office interiors which will enable our customers to easily optimize their facilities while improving the effectiveness of those who occupy the space. Our collaboration with ShareDesk is a key element of our smart work place strategy and the 76ers innovation labs will quickly help us develop smart solutions for the work place of the future. We are very excited about the partnerships with the 76ers organization and also ShareDesk and the opportunities they bring in solving workplace challenges and boosting productivity. Now I will turn the call over to Michelle for a brief overview of the financial results before we open up the call to your questions. Michelle?

[Michelle Schroeder:]

Thanks, Bob. Consolidated sales to the third quarter increased 3% to a $150 million in the quarter and this is the eleventh consecutive quarter we have experienced sales growth over the prior year. Healthcare continues to be growing market and we are capitalizing on that opportunity. Our sales of the healthcare industry increased 60% over the third quarter last year. New products that we have developed the last couple of years specifically the design for the healthcare environment have enabled penetration of the healthcare focus into the community. Just allow with the increased sales insensitivity in the market are the biggest factors for the significant volume increase. Sales to the government increased 19% in the third quarter. The increase was driven by primarily to the sales by the government but shipments to State and local governments increased to a lesser extent. We did have a couple of large projects that shipped during the quarter contributing to the increase. Sales to the finance vertical increased 7% in the third quarter. We continue to work with existing customers to build product solutions for the bank of the future. We have invested in custom product development that complements our existing products to create applications that our customer may need. We believe these projects will create opportunities for future growth with these customers. I will talk about the variability in the hospitality vertical market. While orders in this vertical increased 49% sales were down 22% in the quarter. This is a very project based vertical market. In the third quarter of last fiscal year we shipped 6 projects that exceeded a million dollars each compared to only one project that exceeded the million dollars in the third quarter of this year. This market does remain strong as you can see from the 49% increase in orders last quarter. But we will continue to see choppiness from quarter to quarter. Our new product introductions continue on a strong space, sales from new office furniture products introduced in the last 3 years increased 54% compared to third quarter of last year. New product sales approximated about 25% of our total office furniture sales in the third quarter compared to only 18% in the third quarter of last year. Having flexible furniture solutions meet today's design trends and collaborative office environment have been very instrumental in our growth and we will continue to invest in that area. We are very encouraged with the pace of orders once again this quarter which increased 13% on a consolidated basis. Orders in the hospitality vertical led the way with a 49% increase over the third quarter of last year. And as I mentioned we do tend to feel other variability due to the project nature of the business. Economic indicators relative to the hospitality market indicate that hotels demand is expected to remain strong in 2016. Occupancy levels are expected to remain at the highest levels of 1981 which is a 35 year time. RevPAR our Revenue per available room is forecasted to grow 5.5% in 2016 which is also encouraging. Orders in the healthcare vertical increased significantly posting a 43% increase over the prior year. We are heavily investing in the sales and marketing efforts as well as project development within this vertical and we do believe there is a great opportunity on the healthcare market. While sales to the education market declined in the third quarter due to several large projects that shipped in the prior year, our orders in education increased 21% in the third quarter; this, as well as the growing opportunity as we continue to enhance our furniture solutions with effective academics, execution and training facility. Our order back log which was at $121 million at the end of March increased 16% over March of last year. As I move to operating income results my comments reflect operating income excluding restructuring costs in both years. Excluding the costs related to the spinoff of the electronic segment in the prior year and then also excluding for adjusting of our supplemental employee retirement plan liability fair value and that adjustment is completely offset in the other income line and results in new impacts of that income which is why we adjust for it in the operating income. So this non-GAAP disclosure is reconciled on the last page of our investors slide deck and this is the best apples to apples comparison of our ongoing operation. And I do look forward to the time when the spinoff and restructuring are out of our comparison but for the time being our normal GAAP financials are complicated and have the need to look at non-GAAP disclosures to simplify. For adjusted pro forma operating income ended at 4.8% in the third quarter and that compares to 4.2% in the last year. We were pleased to see the continued year-over-year improvement and have thus noticed the 4.8% was the best third quarter that we have seen in the decade. Benefit from the leverage of higher sales volume, recent price increases and sales makeshift to higher margin product, all contributed to the improved results, partially offsetting the improvements. We did have higher employee healthcare costs during the quarter and we experienced normal start-up costs related to the relocation to the production from Idaho operation to our Indiana location and that was in the ballpark of approximately $800,000. We anticipate the last learning curve of the move starting in July. In spite of these extra costs again our third quarter of 4.8% operating income was the best in the decade. The tax rate for the third quarter was 38% compared to the 10.5% in the prior year and last year we did have $1.5 million of benefits related to the release of income tax reserves and other tax accrual adjustments with we just did not repeat this year and so our effective tax rate for this year was more normal. We expect our combined effect of tax rate on average to be in the range of 35% to 38%. Our third quarter adjusted performance net income falls below prior year because of those favorable tax adjustments I just mentioned in the prior year. Our adjusted pro forma net income after restructuring was $4.4 million in the third quarter compared to prior year of $5.3 million which is a decline of approximately $800,000. However, if you exclude the tax benefits from last year our pro forma net income increased $700,000 in the third quarter of this year compared to last year. Our pretax restructuring cost related to the exit Post Falls facility were $2.8 million in the third quarter and again we expect this restructuring to be complete by June 30 with the full savings benefitting the quarter again of September 2016. So now moving to our forward looking guidance; just a reminder, our guidance co-relates completion of our restructuring activities and there is no change from what we had to close last quarter so for the quarter immediately following the completion of the restructuring which is the quarter of September 2016, we are estimating our sales will be in the range of $170 million to $180 million. Our operating income to be in the range of 8% to 9% and our EPS to be in the range of 23% to 27%. I want to remind everyone that in the third quarter we just finished we normally see lower sales in that quarter due to seasonality and loss of furniture and this usually results in lower margins in the third quarter compared to the rest of the year as we see reduced leverage of the fixed costs with the lower sales volume and this year was no exceptions. So when you look at our adjusted pro forma operating income of 4.8% this year compared to our guidance of 8% to 9%, I do want to remind you that when we set the guidance we fully anticipated this decline in the third quarter, its' not unusual. So to summarize the quarter ending September 2016 forward we feel we will be able to consistently perform at the 8% to 9% operating income level. Subject to the usual seasonality our industry sees. This guidance assumes that economic conditions do not deteriorate over the next two quarters. And we are a little cautious of facts that given the flow down in orders of the industry as reported by BIFMA but we do believe the U.S. economy will continue to grow at a slow pace. And we will continue to monitor our activity in our market space very closely. So moving to the balance sheet as of March 31, our cash and cash equivalent totaled $43.8 million, our operating cash flow in the third quarter was strong $24.5 million compared to $10.3 million of the last year and we paid $2.1 million in dividends in the third quarter. Our capital expenditures totaled $4.3 million in the quarter which was primarily for equipment purchases and facility renovations related to the restructuring activities and a change in technology towards our seeding lines. Past year we have purchased $20 million of stock however, we did not have any repurchase of shares during the third quarter. We continued to review and assess what our Board of Director's options around our capital restructure. We saw our day's sales outstanding which measures our accounts receivables performance improve to 27 days for the third quarter compared to 30 days of the last year. And our inventory metrics which is for supply of hand for the third quarter of this year increased to approximately 52 days compared to 47 days for the third quarter of last year. And that increase was driven primarily by increased inventory levels as we support growth and customer lead time requirements. We continued to have almost no long term which stood at about $143,000 as of March 31 and we also have a $30 million credit facility for Kimball International. So our balance sheet remains very strong. With that I would like to open up the call to questions. Do we have anyone on with questions?

[Operator:]

[Operator Instructions] The first question comes from the line of Catherine Thompson of Thompson Research. Your line is now open.

[Steven Ramsey:]

Good morning, this is Steven Ramsey on for Catherine. I have a few questions surrounding new product sales. First products introduced in the last three years, those sales being at 54% which clearly drove the higher contribution to total sales, can you share how new sales are contributing to orders and back log?

[Robert Schneider:]

Steven, it is very similar, last quarter our new product introduction sales were up equally huge number about 45%, we had it again this quarter and March and certainly as you look at our back log which Michelle mentioned was 16% at the end of March compared to year ago so a big portion of that is new product sales.

[Steven Ramsey:]

Excellent and on the commercial end market looks like year-over-year sales growth has been positive for quite a few quarters now and then orders are down 7%. Can you share your thoughts on what drove the decline?

[Robert Schneider:]

I think Steven, it's a little bit of touching on what Michelle touched on earlier in the general slowdown frankly in terms of the commercial office furniture industry and if you look on Slide 16 in our slide deck, you see a trend of the market and that commercial vertical is our biggest vertical and it is a good bell weather for the full market and you can see the trending of the market and so you see the challenge this industry is having and it showed up in terms of that vertical for us.

[Steven Ramsey:]

All right and then I am interested on the lagging impact of orders overall by vertical, just for instance in that commercial orders being down, do you expect that to impact sales in Q4 or later on and is the lag effect the same for other verticals. I know this is probably isn't total science, probably a lot of art involved?

[Robert Schneider:]

Good question because there is difference in the verticals and generally speaking all of the verticals except for the hospitality vertical turned very quickly and so the orders that we receive and have in back order by the end of March, a huge percentage of that is shipped by the time you get to the end of April. But when you are looking at the hospitality vertical the lead time on that product could be anywhere from 8 weeks to 16 weeks to 18 weeks and so when you look at hospitality typically they won't ship in the next quarter, some do. But a lot of that would branch over to the second quarter in to the future.

[Steven Ramsey:]

Very interesting. Upto 25% of office furniture sales that are new products can you talk maybe broadly or qualitatively about the types of products you have out there? The ones that are seeing the most success and for future the new products and demands, are you seeing any major shifts in what consumers want for continuation of what you are already providing them?

[Robert Schneider:]

We have seen tremendous shifts in the market over the last couple of years, two or three years to open collaboration type environments in businesses and so furniture that's important to that. So less desks, less cubicles what you call more open plan furniture more soft seating lounge furniture and that's where this market has been moving from a commercial office furniture standpoint and that's where we have been directing a lot of new product efforts and that's the big part of our success in the past quarter. But also as it relates to the healthcare vertical, many new products in the vertical that we brought on board starting about 2.5 years ago that are addressing needs in the acute care aspects of hospitals in doctors' offices, whereas before a lot of our healthcare sales were adapting office furniture that would go into the lounges of Doctor's offices and hospitals but we are designing a lot of furniture that is specific for the needs of doctors' and actual hospitals so it is a significant change in the type of product offering and so as we said it started 2.5 years ago and getting very nice tractions.

[Steven Ramsey:]

Excellent and you see that continuing nothing recently that would give you caution in continuing forward?

[Robert Schneider:]

Well orders were up very strongly in the quarter just ended, I don't remember the number off the top of my head but they were huge. But in terms of order increase of the healthcare verticals we are continuing to come out with additional products focused at that vertical and I fully expect to take market share in that vertical as we go forward.

[Michelle Schroeder:]

I will add to Bob's comments as well not maybe to the extent of healthcare but we have also introduced some products on the education vertical suffixed to that education and training facilities and so that likewise have had an impact from earnings of new products sales.

[Steven Ramsey:]

Excellent thank you guys.

[Michelle Schroeder:]

Welcome.

[Operator:]

The next question comes from James Jang of Sidoti. Please go ahead.

[James Jang:]

Hey guys, I know you mentioned the impact of the hospitality orders going to be coming through in Q1 not Q4 right?

[Robert Schneider:]

Let me say it this way James, if you remember the quarter ending in December, hospitality had a strong improvement in orders. The quarter ending in March the order were very strong and so essentially we have a lot of transparency in what we share in the various verticals over the last few conference calls and if you take the prior two quarters of orders for hospitality and just average them, it's a pretty good bet that that's going to be the next quarter. So if you take the second quarter orders for hospitality and what we had in our third quarter and average it, that'd be pretty close in terms of internally of what we think will ship in the quarter ending in June. It's a quick and dirty way to look at it and pretty close. It's a tough vertical to try to predict because it's got so much volatility because it has got so many projects and so that's the way we look at it.

[James Jang:]

And so this thing with hospitality, so was it new products or new partners that were added or just existing products and existing partners just ordering more?

[Robert Schneider:]

I am not sure exactly the percent but it is a huge percentage of our business. If custom or program business that has a lot of custom features to it so it's not so much a matter of coming out with new products because it's really a matter of what our customers want us to build and most of the time it is pretty darn custom. But the large increase that we saw in the orders in March quarter was not driven by bringing on new flags to a large degree, its flags and just a timing and placement of orders for them and new construction and again it's the nature of the beat in this industry to have significant amount of credibility and we have experienced that for many years.

[James Jang:]

Okay. And so with the Starwood and Marriott merger how is going to impact your hospitality sales?

[Robert Schneider:]

Well Marriott is a very good customer and Starwood is also, as they combine I am hopeful it will have a positive effect but standing back though we felt both of them today. If we didn't sell anything to Starwood and this came under the Marriott umbrella I would have a lot of hope that we can significantly pick up a lot of business. We are selling to Starwood Flags today so I am hopeful but keep that in mind, it's an important factor that it's not a new customer to us.

[James Jang:]

Okay. And so healthcare sales growing, can you comment on what types of products specifically help with the growth there?

[Robert Schneider:]

It's mostly seating, lot of lounge seating that is directly focused on open clean outs and other types of furniture that is necessary in a waiting room in the doctor's office for example but if you look on our website under our healthcare vertical you will see many examples of what this furniture looks like. Some of it is a recliner type furniture that is used for blood transfusion type activities. But again those are products that we had never made in the past that are new to us in the past couple of years. But you can get them looking throughout website.

[James Jang:]

So sales growth was, would you say, led more by the new clinical setting type furniture versus the waiting room furniture?

[Robert Schneider:]

It was more driven by furniture that is not office furniture that we are trying to sell into the vertical. Some of it is furniture that is going in the waiting room, some of it is going into the actual treatment rooms and I don't know the break down off the top of my head, I would assume and guess that most of that is directed at the waiting room but it's specific product versus trying to adapt its office furniture product into those waiting rooms.

[James Jang:]

And then can you tell me about the size of orders that you guys received with the more large projects, smaller projects?

[Robert Schneider:]

The large projects for us, we look at projects as over $750,000 as being large and this past quarter versus a year ago really not that much of a change. Didn't see much of a change in that.

[James Jang:]

Going to the education vertical, orders are up really strong for fiscal 2016 but sales are pretty flat this skew so do you see that impact coming through and execute?

[Robert Schneider:]

With our orders being up and the back orders being up very much implore through this next quarter ending in June and James recognize this in terms of the education market, it's a little bit like the concept of healthcare where in the past we would adapt commercial office furniture for that vertical and we have come out with more and more products in the past couple of years that are directed entirely to the education market. In class room type furniture that we have not had in the past and that's giving us some really nice traction.

[James Jang:]

And so the sales if you could give some color on education, do you do 8 through 12 or higher end?

[Robert Schneider:]

Mostly higher ed. presently we don't do a whole lot through 8 to 12.

[James Jang:]

Can you talk me through the GSA sales?

[Robert Schneider:]

James we are happy to see if they bury the choppy business projects focused and we have some very large projects that came through but I understand listening to our competitor's conference calls that general feeling is that that market has been pretty tough. But we brought the trend because of some large prospects.

[James Jang:]

And were those two new product introductions or did you see existing products being sold to?

[Robert Schneider:]

A big part of that is new products.

[James Jang:]

So in terms of our new product sales are up can you talk about margins versus older than three years, are they same or better for the new ones?

[Robert Schneider:]

Some of the new products have better margins, I would characterize it as very similar although some of them have a healthier margin.

[James Jang:]

So when you get to the extremes how much healthier will the margins be?

[Robert Schneider:]

James from a competitive standpoint we haven't disclosed that but rest assured we are pushing as hard as we can to take cost out of our products and doing everything to get the margins as rich as possible.

[James Jang:]

All right great thanks guys.

[Robert Schneider:]

Thanks James

[Operator:]

[Operator Instructions] The next question comes from Paul Sonkin of Gabelli. Please go ahead.

[Paul Sonkin:]

Good morning, a couple of questions, just kind of housekeeping. What is the estimated depreciation, amortization for 2016 and 2017 and CapEx?

[Robert Schneider:]

For 2016 it's about almost $15 million, for 2017 about the same.

[Michelle Schroeder:]

Our CapEx is going to be higher this year than normal, we are probably going to run around $19 million to $20 million CapEx this year versus normal $14 million to $15 million.

[Paul Sonkin:]

And that increase due to Post Falls?

[Robert Schneider:]

Yes, Post Falls. There was increases coming out of the spin and also a catchup on CapEx that had been pre-spin put off. As we got fiscal 2016 behind us and get into the fiscal 2017, we should see CapEx closer to depreciation.

[Paul Sonkin:]

Okay so probably $15 million or $16 million.

[Robert Schneider:]

Yes, in that neighborhood for fiscal 2017.

[Paul Sonkin:]

And then how much in proceeds do you expect from the building or what are you listing it at?

[Robert Schneider:]

We are hoping to get a lot of that building because it is a beautiful facility. It's listed right now Paul for $14.5 million. It's 460,000 square feet and seriously is an absolute beautiful facility.

[Paul Sonkin:]

And I guess since you don't have any long term debt there is no mortgage on it?

[Robert Schneider:]

That's correct.

[Paul Sonkin:]

Okay. Are you going to have capital gains on that?

[Robert Schneider:]

We've not noticed publicly what our book value is and we're keeping that private until we actually have a deal.

[Paul Sonkin:]

Well, what year did you buy it?

[Robert Schneider:]

We built it in 1994 and we fully hope to have a gain but we have noted what that might be.

[Paul Sonkin:]

Okay, but it's not like it's like the original building from 1924 or whatever it is…

[Robert Schneider:]

No, we built it. It's a beautiful building, and as Kimball does with all of its facilities, we maintain them. So it is not rundown facility.

[Paul Sonkin:]

Right. And then I guess you mentioned -- it was mentioned that the board is constantly exploring options around capital structure and I was just wondering if you could elaborate a little bit on kind of what that entails, like what kind of options theoretically are available.

[Robert Schneider:]

What it entails, let's start with dividends first. It's looking at our current earnings and what we anticipate earnings to be, and in our marketplace the average dividend payout ratio is around 30% to 50%, so we have a lot of discussion on that. And that, Michelle, last year in terms of total dollars of dividend roughly $8 million. So that's return to shareholders of $8 million. And then we look at cash flow generation and expectations on the cash balance, what we're doing in terms of, might be refurbishment or enhancement of some of our production facilities equipment that might utilize some CapEx. We also have a lot of discussions on acquisitions and when it might make sense. We are in a turnaround and we're getting to the last couple of innings of the turnaround in terms of getting this business to that 8% to 9% operating income and looking at the future and what markets might it makes sense to pursue perhaps through acquisition. And then also looking at stock buyback as it relates to routine buybacks to avoid dilution in our stock due to stock based compensation, and a year ago we had a lot of discussion on should we buy back shares to make a heavy adjustment to the capital structure because at that time we had a significant, very, very significant cash, and had the ability as Michelle said to buy back $20 million in stock.

[Paul Sonkin:]

Well, it seems as though like you have significant cash now, and from the building you get at least another $10 million. I forgot what the cash balance was last year, was it more around 60?

[Robert Schneider:]

50-ish as we were starting the discussion of a buyback. And, Paul, you're exactly right. We have no debt, we have a lot of cash today. We've got real estate to be sold that will generate cash, and we're evaluating that cash position as we look to the future and get pass the turnaround of where it makes best sense to deploy that.

[Paul Sonkin:]

Well, I guess the thing -- it seems as though dividend is less tax decision, method of returning capital to shareholders than a stock repurchase, and then a stock repurchase yields to get the compounding effect because your denominator is getting lower and lower. So we're usually, in terms of capital allocation, a bit more fun to share repurchases than we are of dividends.

[Robert Schneider:]

Yes and, Paul, we are too but I also like to balance what is normal in our industry in terms of the dividend returning cash to the shareowners and we think that's an important aspect to get in the industry we're in.

[Paul Sonkin:]

But you're so tiny, I don't know if that you can really compare you guys with steel case or something like that. I guess if you were looking at companies in the $300 million to $500 million category, I think your dividend would probably be high. But I guess it all depends on what you look at. So the other question that I had is, it was good that I was a little bit further down in the queue because I was able to go through the mass. For hospitality in Q4, because you have Q2 orders of 38.4, Q3 orders of 34.5, that averages 36.5, so that would be the estimate for Q4 sales, and Q4 sales last year were 40.5. So that means you're going to be down of around 10%, is that correct?

[Michelle Schroeder:]

Last year, Paul, if you remember we have that one big order. We have $9.5 million of sales from hospitality orders in Q4 of last year. So Q4 of last year was really high.

[Robert Schneider:]

And, Paul, in our earnings guidance and the analysis of what we had anticipated in terms of future sales and what hospitality would look like, we effectively pulled that out because those types of orders are few and far between. And in terms of repeating, they're just not that many out there, and so I think we have to look at that order separately.

[Paul Sonkin:]

Okay, so I guess your guidance going forward is sort of normalized and there would be some upside to that if you got some larger orders or does the guidance assume a certain number of larger orders?

[Robert Schneider:]

What we assumed is if you pull out, and Michelle, that order was about $13 million?

[Michelle Schroeder:]

The total was $14 million.

[Robert Schneider:]

$14 million -- if you pull that order out, Paul, we assumed in the guidance that hospitality would essentially be flat in sales.

[Paul Sonkin:]

Okay.

[Robert Schneider:]

Well I'm not sure I said that right.

[Paul Sonkin:]

Yes, you didn't give a specific guidance by segment.

[Robert Schneider:]

No, we didn't. But if that particular order that we would not have repeating in fiscal '16 we would replace it with a lot of smaller orders. And then when you're done looking at our business you'd say okay that the sales were flat. But it's important to note just how we got there because we had an absolutely huge order last year that just would not repeat.

[Michelle Schroeder:]

The total order was 14, nine and a half of that shipped in Q4. A little build in Q3 of last year but not much, and then the rest of it in Q1.

[Paul Sonkin:]

Okay. So then if you take the nine and a half out of the 40.5 you'll be up?

[Robert Schneider:]

Yes.

[Paul Sonkin:]

Got you. Okay, all right. So it seems like everything is going well.

[Robert Schneider:]

I think it's going very well. In terms of where we are in the turnaround, and as I said in the eighth or ninth inning of it, and I really would ask, Paul, take a look at our slide deck, at Slide 21, Slide 16, and you'll really get a sense of what we've done in a year and a half, two years. And our team is really excited. As Michelle mentioned, I touched on the operating income results in the quarter ending in March were the best in the decade, a lot of good things coming together. The one thing that I cautioned about that I touched on earlier is, and you see it on our Slide 16, I don't like the trend of that graph as it relates to the industry. The industry is showing a little bit of a headwind. I fully expect that we will take market share going forward in the industry but I wish the industry was higher.

[Paul Sonkin:]

I can sense in the tone of your voice like you're jumping out of chair on the conference call last quarter -- a little bit more, let's say reserved -- it looks like things are going great.

[Robert Schneider:]

Yes, I just wish the industry was doing a little bit better, but Kimball's doing a really, really good job in terms of the progress on our turnaround.

[Paul Sonkin:]

Yes, so when are you going to up the guidance to 10% operating margins? I'm just…

[Robert Schneider:]

I think, Paul, we might have talked about it in the past that we get to 8% to 9% up income. We're going to throw off the best return on capital in this industry. And yes, we're going to continue to use lean to takeout cost to try to improve the margin. But we're also investing to hit the gas pedal on growing this thing a lot faster and maintaining an excellent return on capital, and we think investors are going to like that model.

[Paul Sonkin:]

You guys are going to have a high class problem because you're going to be generating, assuming that the economy holds, you guys are going to be generating a lot of cash.

[Robert Schneider:]

That would be a nice challenge for our board to address.

[Paul Sonkin:]

Yes, high class problem.

[Robert Schneider:]

That's right.

[Paul Sonkin:]

All right, thanks and see you soon.

[Robert Schneider:]

Okay, thanks Paul.

[Michelle Schroeder:]

Thanks, bye.

[Operator:]

The next question is from James J. of Sidoti [ph]. Please go ahead.

[James Jang:]

Hey, guys. So I just have one more question.

[Robert Schneider:]

Okay.

[James Jang:]

Have you guys feel pressure on pricing from your suppliers, these upticks in crude, copper and iron ore of the previous quarter? Have you felt anything or heard anything from your suppliers on that?

[Robert Schneider:]

Yes, we are feeling pressure from so many suppliers and we're doing a lot in terms of redesigning product to take the material out, doing various things to try to offset the cost increases. Michelle touched on earlier, it's not only suppliers, healthcare this quarter was up a huge number. And so you have other cost, labor cost and things like that that come into play that put pressure on the margin. But as it relates to material cost nothing really significant stands out, although we have constant pushback from suppliers to adjust the pricing.

[James Jang:]

Okay, so have you had any discussions internally, I know you guys work with Tier 1 suppliers in I guess the Indiana area. Have you explored working with other suppliers, probably a little farther out geographically?

[Robert Schneider:]

We are dealing with suppliers all over the world, and you're looking a lot of the hardware for example that ends up on our furniture, hotel furniture and healthcare education, and supply components are coming literally from everywhere around the world. A lot of parts we manufacture, but a lot we assemble also that ends up in the end product that goes to our customers. I would not characterize it at all that we're maybe centrally focused on supply partners near us in Southern Indiana.

[James Jang:]

Okay, I got you. I guess I misheard when I said the fact.

[Robert Schneider:]

Okay, no problem.

[James Jang:]

All right, thanks guys.

[Michelle Schroeder:]

Thank you.

[Robert Schneider:]

Thanks, James.

[Operator:]

I'm showing no further questions in queue at this time. I'd like to turn the call back to Bob Schneider for closing remarks.

[Robert Schneider:]

Okay, thanks, Liz. Thank you everyone. In closing, I was very pleased with our results for the third quarter, which again was the best in the last decade. We're on track to hit our 8% to 9% up income goal by the first quarter of fiscal '17 which we discussed, two quarters from now although we are keeping an eye on the slowing office furniture market. Our entire team is fully dedicated to achieving that milestone of 8% to 9% of income. We appreciate your interest. Looking forward to speaking with you on our next call. Thank you and everyone have a great day.

[Operator:]

At this time listeners may simply hang up to disconnect from the call. Thank you and have a nice day.