Steelcase reports Q1 net income of US$21M, up 59% from a year ago, on revenues up 8.4% to US$723.1M; income boosted by US$12M gain from sale of idle facility in the Americas, and company plans now to sell or close a manufacturing facility in France

Aimee Bellah

GRAND RAPIDS, Michigan , June 26, 2014 (press release) – Initiates Additional Project to Strengthen Competitiveness in EMEA

Steelcase Inc. (NYSE:SCS) today reported first quarter revenue of $723.1 million and net income of $21.0 million, or diluted earnings per share of $0.17. Excluding net restructuring benefits, adjusted earnings were $0.12 per share. In the prior year, Steelcase reported $667.1 million of revenue, diluted earnings per share of $0.10 and adjusted earnings of $0.13 per share.

Organic revenue growth over the prior year was 8 percent after adjusting for approximately $4.4 million of favorable currency translation effects. In the Americas, organic revenue growth over the prior year was 6 percent. The EMEA segment posted organic revenue growth of 10 percent, driven primarily by additional shipping days in the current quarter and higher levels of project business. The Other category posted organic revenue growth of 14 percent, driven by strong project business at PolyVision.

Current quarter operating income of $36.4 million compares to operating income of $20.4 million in the prior year. First quarter adjusted operating income of $26.7 million improved modestly compared with adjusted operating income of $24.8 million in the prior year. Operating leverage from the revenue growth was largely offset by higher cost of sales.

"We believe our revenue growth in the U.S. continued to outpace the overall industry, and we were pleased to see improved project business in various markets across EMEA and Asia Pacific," said Jim Keane, president and CEO. "Earnings were lower than our expectations due to less than expected growth in the Americas and higher costs associated with product warranties, freight and distribution, some of which are expected to continue to impact our results through the second quarter."

Cost of sales of 69.8 percent of revenue in the current quarter increased 130 basis points compared to the prior year. In the Americas, cost of sales increased by 70 basis points over the prior year primarily due to higher warranty, freight and distribution costs. In EMEA, cost of sales increased by 140 basis points driven largely by disruption costs associated with the manufacturing footprint changes. The Other category cost of sales increased 330 basis points over the prior year, due to competitive pricing pressures and higher overhead costs in Asia Pacific.

Operating expenses were $191.9 million in the first quarter, an increase of $6.8 million over the prior year. This increase was largely due to higher variable compensation expense, driven in part by restructuring benefits, and unfavorable currency translation effects. As a percentage of revenue, operating expenses improved by 130 basis points.

Net restructuring benefits of $9.7 million in the current quarter included restructuring costs related to previously announced actions in EMEA and a $12.0 million gain related to the sale of an idle manufacturing facility in the Americas.

Other income, net in the first quarter of $3.5 million increased $2.3 million compared to the prior year, primarily due to higher equity in income of unconsolidated ventures.

Cash, short-term investments and the cash surrender value of company-owned life insurance totaled $398 million and total debt was $286 million at the end of the first quarter.

The Board of Directors has declared a cash dividend of $0.105 per share, to be paid on or before July 16, 2014 to shareholders of record as of July 7, 2014.

The company announced today that it has initiated procedures with the applicable works councils regarding a project to exit a manufacturing facility in France and transfer its activities to other existing facilities in the EMEA region to safeguard the company's global competitiveness. This project may involve the transfer of the operations of the facility to a third party or result in a closure, and the total costs of the project are currently estimated at $30 to $50 million, with anticipated annual savings of approximately $10 million when fully implemented.

"The action announced today represents another step of our multi-year strategy to restore profitability in this region and safeguard our global competitiveness," said Dave Sylvester, senior vice president and CFO. "Together with our plan to exit a manufacturing facility in Germany (announced in the third quarter of fiscal 2014), these actions are expected to reduce our adjusted operating losses by approximately $20 million on an annualized basis when fully implemented."

Outlook

In the Americas, first quarter orders were flat compared to the prior year, and customer order backlog at the end of the first quarter increased approximately 6 percent compared to the prior year. EMEA first quarter orders grew significantly due to favorable currency fluctuations, additional shipping days in the current quarter and strength in project business (including a large government project won in fiscal 2013 which is expected to begin shipping in the second half of fiscal 2015). As a result, EMEA customer order backlog at the end of the first quarter increased approximately 23 percent compared to the prior year. The company expects second quarter fiscal 2015 revenue to be in the range of $760 to $785 million, which reflects expected organic revenue growth in the range of 0 to 3 percent over the prior year. The company reported revenue of $757.6 million in the second quarter of fiscal 2014.

Steelcase expects to report diluted earnings between $0.18 to $0.22 per share for the second quarter of fiscal 2015. This estimate includes approximately $0.04 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 $0.22 to $0.26 per share. The estimates also include approximately $6 million of operating costs associated with disruption. The estimates do not include any restructuring costs associated with the project announced today due to the uncertainty of the timing and amount of such costs. Steelcase reported diluted earnings per share of $0.22 and adjusted earnings per share of $0.24 in the second quarter of fiscal 2014.

"Taking into consideration a strong project pipeline and our award-winning new product introductions, we expect to continue our growth in the Americas in the second quarter, which would mark the 18th consecutive quarter of organic revenue growth," Mr. Keane said. "And we remain optimistic about the longer-term potential across EMEA and Asia Pacific as we continue to improve our competitiveness. Projects like the one we announced today are always challenging, and I am thankful for an organization dedicated to our success and ready to address those challenges."

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