Steelcase Reports First Quarter Results
Significant Improvement in Gross Margin Driven by EMEA
Steelcase Inc. (NYSE:SCS) today reported first quarter revenue of $718.8 million and net income of $19.4 million, or diluted earnings per share of $0.16. Excluding restructuring costs, adjusted earnings were $0.18 per share. In the prior year, Steelcase reported $705.5 million of revenue, diluted earnings of $0.16 per share and adjusted earnings of $0.17 per share.
Organic revenue growth over the prior year was 1 percent after adjusting for unfavorable currency translation effects and the impact of a small acquisition. The Other category posted organic revenue growth of 12 percent over the prior year, driven by Asia Pacific and Designtex. EMEA achieved organic revenue growth of 3 percent, while the Americas experienced an organic revenue decline of 1 percent.
“Our financial results for the quarter were at the top end of our expectations, with strong revenue growth in Asia Pacific and a significant improvement in EMEA’s gross margins,” said Jim Keane, president and CEO. “We were also pleased with the improvement in gross margins in the Americas, where we have been making increased investments in sales and marketing initiatives, including many of the award-winning products and enhancements which were introduced at NeoCon last week.”
Current quarter operating income of $33.3 million compares to operating income of $33.5 million in the prior year. Excluding restructuring costs, first quarter adjusted operating income of $37.9 million represented an improvement of $2.5 million (or 30 basis points as a percent of revenue) compared to the prior year.
Cost of sales was 67.4 percent of revenue in the current quarter, an improvement of 130 basis points compared to the prior year. EMEA cost of sales improved by 480 basis points as a result of lower disruption costs and inefficiencies associated with manufacturing footprint changes in EMEA and favorable business mix. The Americas cost of sales improved 70 basis points over the prior year, driven by lower material costs, favorable business mix, on-going cost reduction efforts and improvements in negotiated customer pricing, partially offset by higher warranty costs.
“In EMEA, we were pleased to see our business mix include improved day-to-day business and our operations continue to stabilize in its new footprint,” said Dave Sylvester, senior vice-president and CFO. “We have been shifting our focus toward improving our efficiency, realizing the targeted savings, and driving lean manufacturing principles and continuous cost reduction programs.”
Operating expenses of $196.1 million in the current quarter represented an increase of $11.0 million compared to the prior year. The year-over-year increase was driven by investments in sales and marketing, the impact of an acquisition in the Americas, costs associated with the Learning + Innovation Center in Munich and higher corporate costs.
Income tax expense of $12.3 million in the quarter included $1.0 million of net unfavorable discrete tax items.
Total liquidity, comprised of cash, short-term investments and the cash surrender value of company-owned life insurance, aggregated $315 million, and total debt was $299 million, at the end of the first quarter.
During the first quarter, the company repurchased a total of 1.0 million shares of Class A Common Stock under its share repurchase authorizations for a total cost of $14.8 million. A total of $153.2 million remained under the company’s share repurchase authorizations at the end of the first quarter.
The Board of Directors has declared a cash dividend of $0.12 per share, to be paid on or before July 15, 2016 to shareholders of record as of July 5, 2016.
Order patterns were mixed during the first quarter, growing by approximately 5 percent in the Other category and declining by 5 percent in the Americas and 12 percent in EMEA compared to the prior year. The decline in orders for the Americas compares to an 8 percent increase in the prior year, which benefited from very strong growth in the Insurance Services and Federal Government vertical markets. The Americas was also negatively impacted by a significant decline in orders across the Energy vertical market, which grew modestly in the prior year. In EMEA, the decline in orders was driven by continued weakness in the Middle East and Africa and a significant decline in the U.K. As a result, the company expects second quarter fiscal 2017 revenue to be in the range of $770 to $795 million, which reflects an expected decline of between 3 to 6 percent compared to the prior year. In the second quarter of fiscal 2016, the company reported revenue of $819.0 million, which represented 4 percent growth over the prior year and 7 percent organic revenue growth.
“While we are forecasting an organic revenue decline in the second quarter, we remain positive about our longer-term prospects,” said Dave Sylvester. “In the Americas and EMEA, the vertical markets and geographies which posted the most significant order declines in the first quarter represented less than 15 percent of total product orders, and the rest of the businesses posted flat to modest order growth overall. In addition, our internal estimates of project orders expected to ship in the next four quarters (including for projects that have not yet been awarded) reflect growth compared to a year ago.”
Steelcase expects to report diluted earnings per share and adjusted earnings per share of between $0.29 to $0.33 for the second quarter of fiscal 2017. This estimate includes an anticipated significant year-over-year improvement in EMEA cost of sales as a percentage of revenue, primarily due to the expected elimination of disruption costs and inefficiencies associated with manufacturing footprint changes in EMEA. Steelcase reported diluted earnings per share of $0.30 and adjusted earnings per share of $0.35 in the second quarter of fiscal 2016.
“The five product awards won by Steelcase brands at NeoCon validate multiple aspects of our strategy,” said Jim Keane. “We were recognized for being ahead in the development of technology solutions that provide meaningful information about how space is being used, and we were recognized for insight-based products and surface materials that promote engagement through a more inspiring and effective workplace. We look forward to bringing these and other products in our development pipeline to market in the coming quarters.”
Other Recent Highlights
- Steelcase and its family of brands unveiled over ten new products and enhancements at NeoCon 2016. The showcased products demonstrated Steelcase’s commitment to making the office smarter and more connected, with some products utilizing technology to bring added value to users and facility managers helping them optimize their workplaces.
- At NeoCon 2016, Steelcase received five awards including gold awards for Steelcase® High Density Storage and Bespoke Surfaces by Designtex®, a silver award for Steelcase Workplace Advisor, and innovation awards for Turnstone’s Bassline™ tables and Steelcase’s new Black Collection of textiles.
- Steelcase’s Brody® WorkLounge received a silver award at the 2016 Edison Awards, which recognize innovation and excellence in the development, marketing and launch of new products and services.
- Launched in March 2016, Steelcase’s first Global Report: Engagement + The Global Workplace continued to generate positive customer conversations and media coverage around the world.
Steelcase will discuss first quarter results and business outlook on a conference call at 11:00 a.m. Eastern time tomorrow.
The full text of Steelcase’s 1Q17 earnings release, including all tables, is available at http://ir.steelcase.com/releasedetail.cfm?ReleaseID=976769
About Steelcase Inc.
For over 100 years, Steelcase Inc. has helped create great experiences for the world’s leading organizations, across industries. We demonstrate this through our family of brands – including Steelcase®, Coalesse®, Designtex®, PolyVision® and Turnstone®. Together, they offer a comprehensive portfolio of architecture, furniture and technology products and services designed to unlock human promise and support social, economic and environmental sustainability. We are globally accessible through a network of channels, including over 800 dealer locations. Steelcase is a global, industry-leading and publicly traded company with fiscal 2016 revenue of $3.1 billion.