Steelcase Inc. (SCS) today reported second quarter revenue of $758.0 million and net income of $38.2 million, or diluted earnings per share of $0.31. Excluding restructuring costs, adjusted earnings were $0.32 per share. In the prior year, Steelcase reported $819.0 million of revenue, diluted earnings of $0.30 per share and adjusted earnings of $0.35 per share.

Revenue declined 7 percent in the second quarter compared to the prior year, while orders declined 2 percent. The Americas posted an organic revenue decline of 7 percent, and EMEA declined organically by 10 percent, while the Other category was relatively flat. The revenue declines were primarily driven by lower levels of order backlog in the Americas and EMEA at the beginning of the quarter compared to a strong prior year. In addition, weak July orders in the Americas contributed to the decline. The organic revenue decline in the Americas was broad based and compares to 6 percent organic revenue growth in the prior year. The organic revenue decline in EMEA resulted from lower revenue in the U.K., Germany and the Middle East and compares to 17 percent organic revenue growth in EMEA in the prior year which was driven by those markets.

"July orders in the Americas were down 8 percent, which approximated the industry decline for that month, and that led to lower second quarter revenue than we expected," said Jim Keane, president and CEO. "While the domestic economic and political environments remain uncertain, Americas orders improved in August and early September on the strength of new products, our project opportunity pipeline for the next twelve months has expanded, and we are expecting growth in the third quarter compared to the prior year. Our EMEA business also continues to improve, although Brexit and other political factors are contributing to persistent headwinds, impacting our expectations for the second half of the year."

Current quarter operating income of $61.9 million compares to operating income of $60.1 million in the prior year. Excluding restructuring costs, second quarter adjusted operating income of $62.2 milliondeclined by $9.2 million (or 50 basis points as a percent of revenue) compared to the prior year primarily driven by lower revenue in the Americas.

Cost of sales was 65.3 percent of revenue in the current quarter, an improvement of 160 basis points compared to the prior year. EMEA cost of sales improved by 700 basis points as a result of lower disruption costs and inefficiencies associated with manufacturing and distribution footprint changes and cost reduction efforts, offset in part by the impact of lower revenue. The Americas cost of sales improved 60 basis points over the prior year, driven by lower warranty costs and ongoing cost reduction efforts, offset in part by the impact of lower revenue.

Operating expenses of $200.9 million in the current quarter represented an increase of $1.2 million compared to the prior year. Increased investments in product development and the establishment of the new Learning + Innovation Center in Munich, Germany, were partially offset by lower variable compensation expense.

“Further stabilization of our EMEA operations in the new footprint drove the significant improvement in EMEA gross margins compared to the prior year,” said Dave Sylvester, senior vice-president and CFO. “As we look to the second half of fiscal 2017, we expect continued stabilization to contribute to a significant improvement in our EMEA operating results compared to the prior year.”

Income tax expense of $21.4 million in the quarter represented an effective tax rate of approximately 36 percent.

Total liquidity, comprised of cash, short-term investments and the cash surrender value of company-owned life insurance, aggregated $363 million, and total debt was $299 million, at the end of the second quarter.

During the second quarter, the company repurchased approximately 867 thousand shares of Class A Common Stock under its share repurchase authorizations for a total cost of $11.5 million. A total of $141.6 million remained under the company's share repurchase authorization at the end of the second quarter.

The Board of Directors has declared a cash dividend of $0.12 per share, to be paid on or before October 14, 2016, to shareholders of record as of October 4, 2016.

Outlook

Order patterns were mixed during the second quarter, growing by approximately 4 percent in the Other category and declining by 2 percent in the Americas and 4 percent in EMEA compared to the prior year. Orders patterns in the Americas improved during August and early September following weakness in July and continued to reflect a significant decline in the Energy vertical market. Orders in EMEA continued to reflect weakness in the Middle East and Africa. As a result, the company expects third quarter fiscal 2017 revenue to be in the range of $795 to $820 million, which reflects expected organic revenue growth of 1 to 4 percent. In the third quarter of fiscal 2016, the company reported revenue of $787.6 million, which represented a 2 percent decline compared to the prior year, or 1 percent organic growth.

Steelcase expects to report diluted earnings per share between $0.32 to $0.36 for the third quarter of fiscal 2017, including approximately $0.01 per share of restructuring costs. This estimate includes an anticipated significant year-over-year improvement in EMEA cost of sales as a percentage of revenue, primarily due to the continued stabilization and improvement of the industrial model. Steelcase reported diluted earnings per share of $0.28 and adjusted earnings per share of $0.30 in the third quarter of fiscal 2016.

“In the Americas, we launched an additional eight new products, enhancements and line extensions during the last three months, bringing the calendar year-to-date total to 25, and we have plans for an additional 15 introductions over the balance of the calendar year,” said Jim Keane. “These accelerated product development efforts, strong demand for our newer products and other actions all contribute to our expectation that the Americas business will return to year-over-year growth in the third quarter of fiscal 2017.”

Other Quarter Highlights

Steelcase opened two new showrooms in Hangzhou, China and Delhi, India.
Steelcase has been honored by Civic 50, an initiative of Points of Light, as one of the “Most Community-Minded Companies in the U.S.”
Steelcase has also been recognized as a “Supply Chain to Admire” by Supply Chain Insights and as the recipient of the National Joint Powers Alliance's “Legacy Award.”