Steelcase Reports Second Quarter Fiscal 2023 Results
- Revenue growth of 19% driven by strong backlog, including significant pricing benefits
- Gross margin improved 60 basis points compared to prior year despite continued significant inflationary pressure
- Third quarter outlook reflects continued revenue and earnings growth expectations driven by backlog and gross margin improvement
- Company announces additional reductions in planned spending and lower quarterly dividend due to uncertain demand environment
Steelcase Inc. (NYSE: SCS) today reported second quarter revenue of $863.3 million, net income of $19.6 million, or $0.17 per share, and adjusted earnings per share of $0.21. In the prior year, Steelcase reported revenue of $724.8 million and net income of $24.7 million, or $0.21 per share, and had adjusted earnings per share of $0.23.
The organic revenue growth in all segments was driven by a strong beginning backlog and included significant pricing benefits. Order growth in the Americas and EMEA was driven by pricing benefits, partially offset by a decline in volume in the Americas. The order decline in the Other category was driven by Asia Pacific with broad-based volume declines in all markets except India which continued its strong recovery from COVID-related restrictions in the prior year.
“Our sales and dealer teams have delivered significantly higher order growth than our industry in the Americas over the past year and done an outstanding job implementing our necessary pricing actions,” said Sara Armbruster, president and CEO. “I want to thank all of our employees for delivering better than expected earnings this quarter by remaining diligent in combating supply chain challenges and controlling operating expenses.”
Operating income of $28.9 million in the second quarter represented a decrease of $5.0 million compared to the prior year, which included a $15.4 million gain from the sale of land. Excluding the land gain in the prior year, the increase in operating income was primarily driven by higher volume and higher pricing benefits which improved gross margin, partially offset by higher operating expenses.
Gross margin of 29.1 percent in the second quarter represented an increase of 60 basis points compared to the prior year, with a 120 basis point improvement in the Americas, a 340 basis point decline in EMEA and a 90 basis point improvement in the Other category. Year-over-year pricing benefits of approximately $80 million exceeded year-over-year inflation by approximately $30 million. The improvement in the Americas was primarily due to higher volume (in part driven by the seasonal strength of Smith System), higher pricing benefits, net of inflation, and a favorable inventory adjustment, partially offset by higher fixed overhead costs and labor inefficiencies. The decline in EMEA was primarily due to higher inflation, net of pricing benefits, and labor inefficiencies. The improvement in the Other category was primarily due to higher volume and higher pricing benefits, net of inflation, partially offset by an unfavorable inventory adjustment.
“Inflation continues to be significant and has aggregated to approximately $270 million over the last six quarters, but for the first time since fiscal 2021, our year-over-year pricing benefits exceeded inflation this quarter,” said Dave Sylvester, senior vice president and CFO. “Over the coming quarters, although inflationary pressure is expected to remain, we anticipate the benefits from our pricing actions will continue to accumulate and more fully offset the cumulative inflationary costs we’ve incurred.”
Operating expenses of $221.4 million in the second quarter represented an increase of $48.5 million compared to the prior year, which included a $15.4 million gain on sale of land. The remaining increase was driven by $13.6 million of higher marketing, product development and sales expenses, $8.4 million of higher variable compensation, $7.9 million from acquisitions and $4.6 million of higher spending in other functional areas, partially offset by $4.9 million of favorable currency translation effects.
“In response to inflation and supply chain challenges throughout this year, we have been pulling back on our planned level of incremental spending while staying invested in our most critical strategic initiatives,” said Dave Sylvester. “Due to the recent volume decline in our incoming orders and lower than expected return-to-office trends in the Americas, we are planning to implement additional actions in the third quarter which target further reduction of our planned level of spending. These actions target approximately $20 million of annualized spending and are expected to include the elimination of up to 180 salaried positions across the Americas core business and Corporate functions.”
Interest expense of $7.2 million in the second quarter represented an increase of $0.8 million compared to the prior year, primarily due to borrowings under the company’s global credit facility during the quarter.
Total liquidity, comprised of cash and cash equivalents and the cash surrender value of company-owned life insurance, aggregated to $213.9 million at the end of the second quarter. Total debt was $563.5 million. Adjusted EBITDA for the trailing four quarters was $154.1 million.
As previously announced, the company’s acquisition of Halcon Furniture LLC was completed on June 10, 2022, and was funded using cash on hand and $68 million of borrowings under the company’s global credit facility.
The Board of Directors has declared a quarterly cash dividend of $0.10 per share, to be paid on or before October 17, 2022, to shareholders of record as of October 5, 2022.
“Based on the recent order and return-to-office trends, we adjusted our dividend this quarter to strengthen our liquidity profile and support a higher allocation of capital to reinvestment in the business and pursuit of our longer-term strategy,” said Dave Sylvester.
Outlook
At the end of the second quarter, the company’s backlog of customer orders was approximately $946 million, which was 38 percent higher than the prior year. Consistent with recent quarters, the backlog includes a higher than historical percentage of orders scheduled to ship beyond the end of the next quarter, and supply chain disruptions are expected to continue. Orders through the first three weeks of the third quarter declined approximately 20% compared to the prior year. As a result, the company expects third quarter fiscal 2023 revenue to be in the range of $825 to $850 million. The company reported revenue of $738.2 million in the third quarter of fiscal 2022. The projected revenue translates to growth of 12 to 15 percent compared to the third quarter of fiscal 2022, or organic growth of 13 to 16 percent.
The company expects to report earnings per share of between $0.08 to $0.12 for the third quarter of fiscal 2023 and adjusted earnings per share of between $0.17 to $0.21. The estimates includes:
- gross margin of between 29.0 to 29.5 percent, with projected pricing benefits, net of inflation, of approximately $55 million as compared to the prior year and sequentially unfavorable business mix and lower manufacturing efficiency due to decreased production volume,
- projected operating expenses of between $215 to $220 million, which includes $7 million of amortization of purchased intangible assets and an expected $7 million gain on sale of property,
- estimated restructuring charges of $8 million,
- projected interest expense, investment income and other income, net, of approximately $5 million and
- a projected effective tax rate of 27 percent.
The company reported earnings per share of $0.08 and had adjusted earnings per share of $0.10 in the prior year.
“Our strategy remains unchanged, but we are shifting additional effort to prioritize improvement in our profitability to fund future investments and to add more diversification to the markets and customers we serve,” said Sara Armbruster. “Looking forward, we continue to believe in the value of people coming together in person to imagine, create, and achieve, which we believe will drive investments to support new ways of working across all of the markets we serve.”
A replay of Steelcase’s Sep. 22 conference call webcast, including presentation slides, as well as the complete text of the company’s 2Q23 earnings release, including all tables, may be accessed at http://ir.steelcase.com.
About Steelcase Inc.
Organizations around the world trust Steelcase to help them create workplaces that help people work better, be inspired and accomplish more. The company designs, manufactures and partners with other leading organizations to provide architecture, furniture and technology solutions – accessible through a network of channels, including over 800 Steelcase dealer locations. Steelcase is a global, industry-leading and publicly traded company with fiscal 2022 revenue of $2.8 billion. For more information, visit www.steelcase.com.
