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Americas Posts Record Operating Results; Significant Progress Achieved in EMEA Modernization
Steelcase Inc. (NYSE:SCS) today reported second quarter revenue of $819.0 million and net income of $37.2 million, or diluted earnings per share of $0.30. Excluding restructuring costs, adjusted earnings were $0.35 per share. In the prior year, Steelcase reported $786.7 million of revenue, diluted earnings per share of $0.24 and adjusted earnings of $0.27 per share.
Organic revenue growth over the prior year was 7 percent after adjusting for approximately $29.6 million of unfavorable currency translation effects and the impact of a small acquisition, net of divestitures. All segments reported organic revenue growth, with 17 percent growth in EMEA, 6 percent growth in the Americas and 5 percent growth in the Other category. The strong growth in EMEA in the current quarter compares to an organic revenue decline in the prior year, which included a number of project orders with extended shipment dates and extended lead times associated with manufacturing disruptions.
Current quarter operating income of $60.1 million compares to operating income of $52.8 million in the prior year. Excluding restructuring costs, second quarter adjusted operating income of $71.4 million improved by $12.2 million compared to the prior year and was driven by strength in the Americas.
“Our adjusted operating margin reached a new 15 year high and was led by the Americas, which posted a margin of 15 percent in the second quarter,” said Jim Keane, president and CEO. “This was a remarkable quarter for the Americas, as the full benefits of the long-term investments we made in the past to optimize our footprint combined with great performance by our people in sales, marketing and operations to deliver more value for our customers and capture more value for our shareholders.”
Cost of sales was 66.9 percent of revenue in the current quarter, an improvement of 120 basis points compared to the prior year. In the Americas, cost of sales as a percentage of revenue improved 190 basis points over the prior year, largely driven by improvements in negotiated pricing, lower material, freight and distribution costs and benefits of other cost reduction efforts. In EMEA, cost of sales as a percentage of revenue increased by 290 basis points, driven largely by manufacturing and distribution issues which arose during the quarter and lower absorption of fixed costs due to a large project that was manufactured in the first half of the prior year and shipped thereafter. In addition to these items, disruption costs and inefficiencies associated with our manufacturing footprint changes in EMEA approximated $6 million in the second quarter and were slightly lower than in the prior year in constant currency.
“The manufacturing and distribution issues which arose this quarter related to inconsistent equipment reliability, power outages and a failed sprinkler system at our new facility in the Czech Republic and resulted in significant incremental costs and labor inefficiencies,” said Dave Sylvester, senior vice president and CFO. “As of today, manufacturing is back on schedule and our distribution platforms have stabilized, but we expect additional costs in the third quarter as we assist our dealers in working through the backlog in their deliveries and installations caused by these issues.”
Operating expenses as a percentage of revenue equaled 24.4 percent in the second quarter which was flat compared to the prior year. Operating expenses of $199.7 million represented an increase of $8.3 million compared to the prior year. Higher variable compensation expense and other operating expenses were partially offset by approximately $7 million of favorable currency translation effects.
Restructuring costs of $11.3 million in the current quarter included severance provisions related to the relocation of activities to the Learning + Innovation Center in Munich, Germany, and charges related to the manufacturing footprint changes in EMEA.
“Our second quarter results in EMEA reflect the successful completion of some aspects of our manufacturing transformation and extended disruption from others,” said Dave Sylvester. “We expect disruption costs and inefficiencies to extend somewhat longer than previously projected and the savings to be delayed by a quarter or two. In addition, we expect to report an organic revenue decline in EMEA for the third quarter, compared to a strong prior year. As a result, we may incur adjusted operating losses in EMEA in the second half of fiscal 2016, compared to our previous target of achieving breakeven or better results for the same period.”
Other income, net decreased by $1.0 million in the second quarter compared to the prior year, primarily due to higher foreign exchange losses in the current quarter.
The effective tax rate for the quarter was 36.4 percent compared to 41.5 percent in the prior year, reflecting the impact of implementing a new transfer pricing model in EMEA during the fourth quarter of fiscal 2015.
Cash, short-term investments and the cash surrender value of company-owned life insurance totaled $368 million and total debt was $281 million at the end of the second quarter.
The Board of Directors has declared a cash dividend of $0.1125 per share, to be paid on or before October 15, 2015 to shareholders of record as of October 5, 2015.
Outlook
In the Americas, second quarter orders increased 4 percent organically compared to the prior year, and reflected fewer requests for extended delivery dates compared to the past three quarters. As a result, order backlog in the Americas at the end of the second quarter was approximately 11 percent lower compared to the end of the first quarter and 7 percent higher compared to the prior year. EMEA second quarter orders declined 7 percent on an organic basis compared to a strong prior year, which grew by 10 percent and reflected a strong ending backlog. As a result, the company expects third quarter fiscal 2016 revenue to be in the range of $800 to $820 million, which reflects expected organic revenue growth of 3 to 5 percent over the prior year. The company reported revenue of $800.0 million in the third quarter of fiscal 2015.
Steelcase expects to report diluted earnings of between $0.29 to $0.33 per share for the third quarter of fiscal 2016. This estimate includes approximately $0.02 per share of restructuring costs relating to previously announced restructuring projects. Adjusted for the estimated restructuring costs, the company expects to report adjusted earnings between $0.31 to $0.35 per share. These estimates also include approximately $5 million of expected disruption costs and inefficiencies associated with the manufacturing footprint changes in EMEA and reflect the anticipated stabilization of our manufacturing and distribution performance in EMEA. Steelcase reported diluted earnings per share of $0.09 and adjusted earnings per share of $0.29 in the third quarter of fiscal 2015.
“We are making important progress in the modernization of our EMEA business model, and as the footprint changes approach completion, we can turn our focus towards continuous improvement efforts to drive higher levels of performance,” said Jim Keane. “We are seeing strong demand for our newest products launched in EMEA, and our investments in the new Learning + Innovation Center in Munich will help us build on that momentum.”
