Steelcase (NYSE:SCS) said third-quarter adjusted earnings rose a penny to 30 cents, missing by 2 cents. Revenue fell 1.6% to $787.6 million dollars, missing. Steelcase's Q4 outlook was weak. The office furniture maker's shares plunged 20% to $15.05 per share in extended trading.
Steelcase reported third quarter revenue of $787.6 million and net income of $35.6 million, or diluted earnings per share of $0.28. Excluding restructuring costs, adjusted earnings were $0.30 per share. In the prior year, Steelcase reported $800.0 million of revenue, diluted earnings per share of $0.09 and adjusted earnings of $0.29 per share.
Organic revenue growth over the prior year was 1 percent after adjusting for approximately $29.9 million of unfavorable currency translation effects and the impact of a small acquisition, net of divestitures. The Americas and Other category posted organic revenue growth of 3 percent and 9 percent, respectively, while EMEA posted an organic decline of 8 percent. The organic decline in EMEA in the current quarter compares to 14 percent organic revenue growth in the prior year, which was primarily driven by a number of project orders received in the first half of fiscal 2015 for which revenue was recognized in the third and fourth quarters.
Current quarter operating income of $55.2 million compares to operating income of $18.7 million in the prior year. Excluding restructuring costs, third quarter adjusted operating income of $58.2 million increased by $2.1 million compared to the prior year and reflected improvements in the Americas and Asia Pacific largely offset by higher adjusted operating losses in EMEA.
"The Americas improved profitability in the third quarter despite slowing top line growth, and that helped to offset deeper losses than we expected in EMEA, as we continue to work through our major restructuring actions," said Jim Keane, president and CEO. "EMEA orders grew 20 percent organically in the quarter, driven by improved economies in Western Europe and strong demand for some of our new products. Asia Pacific posted record profitability for the quarter compared to a loss in the prior year."
Cost of sales was 67.5 percent of revenue in the current quarter, an improvement of 110 basis points compared to the prior year. In the Americas, cost of sales as a percentage of revenue improved 100 basis points over the prior year, largely driven by lower material costs and improvements in negotiated pricing. In EMEA, cost of sales as a percentage of revenue increased by 220 basis points, driven largely by costs associated with the manufacturing and distribution issues which arose during the second quarter and lower absorption of fixed costs associated with the organic revenue decline in the quarter. In addition to these items, disruption costs and inefficiencies associated with our manufacturing footprint changes in EMEA approximated $5 million in the third quarter and were lower than in the prior year in constant currency.
Operating expenses of $197.8 million represented an increase of $2.9 million compared to the prior year. Higher variable compensation expense and other operating expenses were partially offset by approximately $6 million of favorable currency translation effects.
“The adjusted operating loss in EMEA was significantly higher than anticipated and was driven by three factors,” said Dave Sylvester, senior vice president and CFO. “First, as we worked through the manufacturing and distribution issues in EMEA and reimbursed our dealers for any related impacts and provided incentives to sustain their loyalty, we incurred approximately $4 million of additional costs. Second, we estimate unfavorable shifts in business mix reduced gross margins by more than 200 basis points of revenue, or approximately $3 million, compared to our forecast. Third, operating expenses included approximately $3 million related to unforecasted severance costs and other items."
Other income, net increased by $1.3 million in the third quarter compared to the prior year, primarily due to lower foreign exchange losses in the current quarter.
The effective tax rate for the quarter was 34.9 percent reflecting the impact of implementing a new transfer pricing model in EMEA during the fourth quarter of fiscal 2015. The effective tax rate of 29.8 percent in the prior year reflected a net benefit primarily due to discrete tax credits associated with the manufacturing footprint changes in EMEA.
Cash, short-term investments and the cash surrender value of company-owned life insurance totaled $429 million and total debt was $300 million at the end of the third quarter.
The Board of Directors has declared a cash dividend of $0.1125 per share, to be paid on or before January 15, 2016 to shareholders of record as of January 7, 2016.
EMEA orders grew 20 percent on an organic basis in the third quarter of fiscal 2016 and included requests for extended delivery dates and orders for certain products with extended lead times. In the Americas, third quarter orders were down 1 percent on an organic basis compared to the prior year. As a result, the company expects fourth quarter fiscal 2016 revenue to be in the range of $720 to $745 million, which reflects an expected range of an organic revenue decline of 2 percent to organic revenue growth of 1 percent compared to the prior year. The company reported revenue of $749.9 million in the fourth quarter of fiscal 2015.
"EMEA’s strong order growth comes just as we are completing the transition to our go-forward operations model, the reorganization of our sales organization and the adoption of our global product platform, and as we look forward to opening our Munich Learning + Innovation Center next year,” said Jim Keane. "At the same time, order growth in the U.S. furniture industry has slowed, as has overall U.S. business capital spending. Our orders and pipeline at the end of the quarter show fewer large projects than last year. We are also seeing a shift in demand to certain product categories where we will be launching new products and taking other actions to improve our competitiveness starting in the fourth quarter and throughout the next fiscal year."
Steelcase expects to report diluted earnings of between $0.18 to $0.22 per share for the fourth 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 $0.20 to $0.24 per share. These estimates also include approximately $3 million of expected disruption costs and inefficiencies associated with the manufacturing footprint changes in EMEA and reflect anticipated improvements of manufacturing and distribution performance in EMEA. Steelcase reported diluted earnings per share of $0.18 and adjusted earnings per share of $0.21 in the fourth quarter of fiscal 2015.
“We remain optimistic about our new products and longer-term demand driven by the need for companies to modernize their workspaces," said Jim Keane. "In addition, our sales strategies are gaining traction in EMEA: our win rates with leading organizations are improving, newer products are growing faster than anticipated and excitement continues to build regarding the Munich Learning + Innovation Center."