Steelcase Inc. (SCS) today reported third quarter revenue of $786.5 million and net income of $41.2 million, or diluted earnings per share of $0.34. During the quarter, the company recognized a benefit related to the outcome of a tax audit in EMEA, which had a favorable impact on diluted earnings per share of $0.03. In the prior year, Steelcase reported $787.6 million of revenue, diluted earnings of $0.28 per share and adjusted earnings of $0.30 per share.

Revenue was relatively flat in the third quarter compared to the prior year, while orders increased by 3 percent. The Americas posted organic revenue growth of less than 1 percent and was negatively impacted by lower than expected growth in day-to-day business and a significant amount of customer deliveries that were expected to ship within the third quarter moving to the fourth quarter. EMEA posted organic revenue growth of 2 percent, driven by timing of customer deliveries, and the Other category posted an organic revenue decline of 2 percent in the third quarter compared to a relatively strong prior year.

“We were pleased to see our revenue growth in the Americas return to exceeding the industry for the first two months in the quarter, based on the most current information available from our industry association,” said Jim Keane, president and CEO. “We saw growth in our day-to-day business and continued year-over-year strength in our project pipeline, driven by new product introductions and other strategic actions we have taken over the past year. The growth in our day-to-day business fell somewhat short of our expectations, and we are targeting additional actions to buoy this business.”

Current quarter operating income of $54.6 million compares to operating income of $55.2 million in the prior year. Excluding restructuring items, third quarter adjusted operating income of $54.4 million declined by $3.8 million (or 50 basis points as a percent of revenue) compared to the prior year. The year-over-year comparison includes a significant improvement in EMEA offset by a decline in the Americas, and lower operating income in the Other category compared to a relatively strong prior year.

Cost of sales was 66.7 percent of revenue in the current quarter, an improvement of 80 basis points compared to the prior year. EMEA cost of sales improved by more than 1,000 basis points compared to the prior year driven by the elimination of costs and inefficiencies associated with our operational footprint changes and other manufacturing and distribution issues experienced in the prior year, as well as benefits from cost reduction efforts, gross margin improvement initiatives, and favorable shifts in business mix. The Americas cost of sales increased by 140 basis points over the prior year driven primarily by unfavorable shifts in business mix.

Operating expenses of $207.5 million in the current quarter represented an increase of $9.7 million compared to the prior year. The increase was driven by higher variable compensation expense (including expense associated with the tax benefit recorded in the quarter), investments in sales, product development and marketing in the Americas and higher corporate costs.

“In EMEA, the achievement of adjusted operating income in the quarter was better than expected and represented a $15 million improvement compared to the prior year, driven by a significant improvement in gross margin,” said Dave Sylvester, senior vice-president and CFO. “EMEA results also benefited from modest organic revenue growth (driven by timing of customer deliveries) and favorable adjustments to accrued liabilities of $2 million (which were non-recurring in nature)."

Income tax expense of $13.6 million in the quarter included a $5.7 million benefit related to the outcome of a tax audit in EMEA.

Total liquidity, comprised of cash, short-term investments and the cash surrender value of company-owned life insurance, aggregated $402 million, and total debt was $297 million, at the end of the third quarter.

During the third quarter, the company repurchased approximately 1.1 million shares of Class A Common Stock under its share repurchase authorization for a total cost of $15.2 million. A total of $126.5 million remained under the company's share repurchase authorization at the end of the third quarter.

Outlook

Order patterns were mixed during the third quarter, growing by approximately 3.5 percent in the Americas and 14 percent in the Other category and declining by 3 percent in EMEA compared to the prior year. The order growth in the Americas was driven by project business (including initial orders from a very large project won earlier in the year), and reflected an unusual amount of requested delivery dates which fall beyond the fourth quarter. In addition, orders in the Americas continued to reflect a significant decline in the Energy vertical market, impacting overall order growth in the segment by approximately 300 basis points year over year. The strong order growth in the Other category was driven by a record level of quarterly orders in Asia Pacific, and the modest decline in EMEA compares to strong order growth in the third quarter of the prior year. As a result, the company expects fourth quarter fiscal 2017 revenue to be in the range of $735 to $760 million, which reflects an expected range of an organic revenue decline of 1 percent to organic revenue growth of 2 percent. In the fourth quarter of fiscal 2016, the company reported revenue of $747.9 million.

Steelcase expects to report diluted earnings per share between $0.22 to $0.26 for the fourth quarter of fiscal 2017. Steelcase reported diluted earnings per share of $0.62 and adjusted earnings per share of $0.64 in the fourth quarter of fiscal 2016. During the fourth quarter of the prior year, the company reversed a valuation allowance recorded against net deferred tax assets and recorded a gain from the partial sale of an investment in an unconsolidated affiliate. These fourth quarter significant items, net of the associated variable compensation expense and income tax expense, had a combined favorable impact on diluted earnings per share of approximately $0.42.

“There are two potential items which are not reflected in our earnings estimate for the fourth quarter that we estimate could reduce our results by up to $0.08 per share,” said Dave Sylvester. “One item is related to a potential reduction in the French statutory tax rate, which the French government is currently considering and if enacted in the fourth quarter could require us to record a non-cash charge to reduce the value of our deferred tax assets. In addition, we are working toward annuitizing some of our smaller defined benefit plans, which if completed in the fourth quarter would result in a modest use of cash and an accounting charge related to accumulated other comprehensive losses recorded in connection with these plans. We have not included these items in our earnings estimate as there are a number of factors in each case which are outside of our control.”

“The operating profit posted by our EMEA segment this quarter was an important milestone: it reflects the individual contributions of all employees in the region and shows what is possible,” said Jim Keane. “At the same time, our employees in Asia Pacific are celebrating an important milestone with our highest amount of quarterly orders for that business. Both of these accomplishments, along with the positive momentum we are seeing in our project activity in the Americas, are indicators of the continued progress we are making as an integrated enterprise that meets the needs of global and local customers.”

Other Quarter Highlights:

Tim Brown, CEO and president of the global design consultancy IDEO, has joined the Steelcase Inc. Board of Directors.
Steelcase released its 2016 Corporate Sustainability Report celebrating the company’s sustainable performance around the world.
For the third year in a row, Steelcase received a perfect score from the Human Rights Campaign’s Corporate Equality Index, recognizing the company as one of the “Best Places to Work for LGBT Equality.”
Steelcase received a number of additional honors including recognition as one of Michigan’s Best and Brightest Sustainable Companies, Goodwill of Greater Grand Rapids Collaborative Partner Award and the 2016 Allstate Supplier Diversity Leadership Award.
Eddy Schmitt, senior vice president, Americas, was named to the American Society of Interior Designers (ASID) Board of Directors as an industry partner representative.