Steelcase Inc. (SCS) today reported first quarter revenue of $735.1 million and net income of $18.1 million, or diluted earnings of $0.15 per share. In the prior year, Steelcase reported $718.8 million of revenue, diluted earnings of $0.16 per share and adjusted earnings of $0.18 per share.
The results reflect the net impact of annuitizing three of the company's smaller defined benefit plans which reduced diluted earnings per share by approximately $0.03.
Revenue increased 2 percent, or approximately 4 percent on an organic basis, in the first quarter compared to the prior year, while orders increased 1 percent. The Americas posted revenue growth of 3 percent, which included revenue from a very large project in the manufacturing sector. Orders in the Americas declined 3 percent compared to the prior year, driven by reduced demand from large customers. EMEA revenue declined 10 percent, or 4 percent on an organic basis, and orders grew 6 percent, reflecting mixed results across the region. The Other category posted revenue growth of 19 percent and order growth of 20 percent in the first quarter compared to the prior year, driven by continued strength in Asia Pacific.
“Our first quarter results were consistent with our expectations. All segments continued to deliver on our strategy, including record levels of revenue and operating income from our Asia Pacific business again this quarter," said Jim Keane, president and CEO. "Order growth from new products in the Americas has also been strong, as customers are continuing to shift from traditional furniture applications to our new solutions. We have continued to invest in product development across our portfolio and expect to launch more new products and enhancements over the balance of our fiscal year than in any of the past five years."
Current quarter operating income of $29.9 million compares to operating income of $33.3 million in the prior year. The defined benefit plan annuitizations negatively impacted current quarter operating income by $7.3 million, and prior year operating income included $4.6 million of restructuring costs.
Cost of sales was 67.0 percent of revenue in the current quarter, an improvement of 40 basis points compared to the prior year. The improvement was driven by strength in Asia Pacific, which contributed to a 400 basis point improvement in the Other category. Cost of sales in the Americas increased by 10 basis points compared to the prior year. The year-over-year comparison included unfavorable shifts in business mix and $3.4 million of charges related to the defined benefit plan annuitizations in the current quarter and approximately $6 million of warranty retrofit charges in the prior year. EMEA cost of sales increased by 30 basis points compared to the prior year due to the impacts of lower revenue and unfavorable shifts in business mix, offset in part by benefits from gross margin improvement initiatives.
“EMEA's results were consistent with our expectations given the low level of order backlog entering the quarter," said Dave Sylvester, senior vice president and CFO. "While the effects of lower volume prevented us from realizing the full benefits of our gross margin improvement initiatives, we are pleased with the 6% growth in orders for the quarter."
Operating expenses of $212.9 million in the first quarter represented an increase of $16.8 million compared to the prior year, or an $8.1 million sequential increase compared to the fourth quarter. The increased spending in the current quarter included investments in product development, sales, marketing and information technology that support the company's strategies, including developing new products, enhancements and applications such as smart + connected spaces and Creative Spaces, expanding ancillary offerings, addressing product gaps and pursuing other areas for growth. In addition, operating expenses in the current quarter included $3.9 million of charges associated with the defined benefit plan annuitizations ($3.0 million in the Other category and $0.9 million in Corporate).
Income tax expense of $10.3 million in the current quarter reflected an effective tax rate of 36.3 percent.
Total liquidity, comprised of cash, short-term investments and the cash surrender value of company-owned life insurance, aggregated $349 million, and total debt was $297 million, at the end of the first quarter.
The Board of Directors has declared a quarterly cash dividend of $0.1275 per share, to be paid on or before July 14, 2017, to shareholders of record as of July 3, 2017.
Order patterns for the first quarter continued to be mixed by segment. The 3 percent order decline in the Americas was driven by reduced demand from large customers. EMEA orders grew 6 percent driven by project business in Eastern Europe and the Middle East, as well as vended solutions at our owned dealers. The 20 percent order growth in the Other category was primarily driven by Asia Pacific. Considering these and other factors the company expects second quarter fiscal 2018 revenue to be in the range of $750 to $780 million, which reflects a range of an organic decline of 1 percent to organic growth of 3 percent compared to the prior year. In the second quarter of fiscal 2017, the company reported revenue of $758.0 million.
Steelcase expects to report diluted earnings per share between $0.21 to $0.25 for the second quarter of fiscal 2018. The company expects to report a year-over-year increase in operating expense in the second quarter similar to the first quarter. Steelcase reported diluted earnings per share of $0.31 and adjusted earnings per share of $0.32 in the second quarter of fiscal 2017.
"Our industry is changing as customers begin to adopt dramatically different spaces that support new ways of working," said Jim Keane. "We expect to increase our investments in new products and partnerships relevant to their emerging needs. These investments are intended to help us broaden our addressable market and create new growth opportunities for the future. The success of the products we launched in recent years, and the awards and other recognition we earned at the Neocon trade show give us confidence that customers and influencers agree we are on the right track.
- For the second year, Steelcase was honored by Civic 50, an initiative of Points of Light, as one of the "Most Community-Minded Companies in the U.S."
- At NeoCon 2017, Steelcase focused on Creativity, unveiling new products and applications featuring Creative Spaces, a range of technology-enabled workspaces jointly developed with Microsoft.
- The Steelcase NeoCon showroom was named "Best Large Showroom" by IIDA and Contract Magazine.
- At NeoCon, six products were recognized with industry awards and Allan Smith, vice president of global marketing, was named 2017 HiP Marketer.
- Steelcase and MIT's Self-Assembly Lab introduced Rapid Liquid Printing, a 3D printing method, in April. This partnership was featured in national and international media.
- The Steelcase Inc. Board of Directors was recognized for its diversity by 2020 Women on Boards.
- Steelcase earned the Clean Corporate Citizen (C3) designation from the State of Michigan for environmental performance and stewardship.