Steelcase Inc. (SCS) today reported third quarter revenue of $772.1 million and net income of $25.7 million, or diluted earnings of $0.22 per share. In the prior year, Steelcase reported $786.5 million of revenue and diluted earnings of $0.34 per share, which included a benefit related to the outcome of a tax audit in EMEA that had a favorable impact on diluted earnings per share of $0.03.
Revenue in the third quarter was down 2 percent compared to the prior year, and included $11 million of favorable currency translation effects offset in part by a $4 million unfavorable impact from divestitures. The Americas posted a 4 percent decline in revenue driven by reduced demand for day-to-day business from both large and smaller customers, including lower revenue from legacy products and applications. EMEA posted revenue growth of 4 percent but an organic revenue decline of 1 percent after taking into account the impact of currency translation effects and divestitures, while orders grew 4 percent, reflecting mixed results across the region. The Other category posted revenue growth of 5 percent, or 4 percent on an organic basis.
“Throughout this year we have increased spending primarily on product development. The products we plan to launch in Q4 include major additions to our offering which are expected to contribute significantly to our revenue in fiscal 2019.”
"Orders for day-to-day business in the Americas were flat in November following significant declines earlier in the quarter," said Jim Keane, president and CEO. "We're feeling increasingly confident about next year because of recent improvements in our project win rates, as well as a growing list of large project opportunities with decision dates in the coming quarters. In addition, customer and dealer reactions to our new product introductions, partnership offerings and the pending acquisition of AMQ Solutions have been very positive."
Current quarter operating income of $38.5 million compares to operating income of $54.6 million in the prior year. The decline of $16.1 million (or 190 basis points as a percentage of revenue) was driven by lower revenue in the Americas, lower gross margin in EMEA, and higher operating expenses globally. EMEA posted an operating loss in the current quarter compared to operating income in the prior year.
Gross margin of 32.6 percent in the current quarter represented a decline of 70 basis points compared to a strong prior year and reflected mixed results across the segments. In the Americas, gross margin decreased by 40 basis points compared to the prior year and included the impacts of unfavorable shifts in business mix, lower volume and higher commodity costs, offset in part by continued cost reduction efforts. EMEA gross margin decreased by 210 basis points compared to the prior year driven by unfavorable out-of-period accounting adjustments in the current quarter compared to favorable items in the prior year; benefits from gross margin improvement initiatives were offset by various operational inefficiencies, which are in the process of being resolved, and higher commodity costs.
Operating expenses of $213.3 million in the third quarter represented an increase of $5.8 million compared to the prior year, driven by increased spending which was offset in part by an $8 million reduction in variable compensation expense. The increased spending compared to the prior year reflected continued investments in product development, sales, marketing and information technology that support the company's strategies, including developing new products, enhancements and applications, expanding ancillary offerings through marketing partnerships, addressing product gaps and pursuing other areas for growth.
"We are seeing positive momentum in EMEA coming from new products and partnerships, another quarter of order growth, a strengthening opportunity pipeline, significant customer traffic through our Learning + Innovation Center in Munich and an engaging dealer conference," said Dave Sylvester, senior vice president and CFO. "Still, our third quarter results fell short of our expectations driven by customer postponements of installations and various operational issues which our teams are working diligently to resolve, as well as approximately $2.5 million of out-of-period accounting adjustments and unanticipated severance costs."
Outlook
Orders in the Americas declined approximately 6 percent in the third quarter compared to the prior year (which reflected the impact of initial orders from a very large project in the prior year as well as a divestiture in the current quarter), and backlog at the end of the quarter in the Americas was approximately 7 percent lower than the prior year. EMEA orders grew approximately 4 percent compared to the prior year, and backlog in EMEA at the end of the quarter was approximately 4 percent lower than the prior year. Orders in the Other category grew modestly compared to the prior year. Considering these and other factors, the company expects fourth quarter fiscal 2018 revenue to be in the range of $740 to $765 million. Adjusted for an estimated $17 million of favorable currency translation effects, expected revenue from the pending acquisition of AMQ Solutions and the impact of divestitures, the projected revenue range translates to an expected organic decline of 3 to 6 percent. In the fourth quarter of fiscal 2017, the company reported revenue of $769.1 million.
Steelcase expects to report diluted earnings per share between $0.14 to $0.18 for the fourth quarter of fiscal 2018. Steelcase reported diluted earnings per share of $0.21 and adjusted earnings per share of $0.22 in the fourth quarter of fiscal 2017. Prior year results reflected an $8 million reduction of the company's net deferred tax assets due to a change in the French corporate tax rate, which reduced diluted earnings per share by approximately $0.06, net of related variable compensation effects.
"There are three potential items which are not reflected in our earnings estimate for the fourth quarter that we estimate could significantly impact our results," said Dave Sylvester. "Two of these items are related to potential reductions in the U.S. and French statutory tax rates, which those governments are currently considering and if enacted in the fourth quarter could require us to record non-cash charges to reduce the value of our deferred tax assets. In addition, a potential transaction related to an unconsolidated affiliate could result in a pre-tax gain in the fourth quarter. We have not included these items in our earnings estimate as there are a number of factors relating to these items which are outside of our control."
"Throughout this year we have increased spending primarily on product development. The products we plan to launch in Q4 include major additions to our offering which are expected to contribute significantly to our revenue in fiscal 2019," said Jim Keane. "These products, along with our marketing partnerships and pending acquisition, are expected to boost our growth beyond offsetting declines in legacy products and applications. We expect to stay invested in developing new products while continuing to control spending in other areas of the business in order to balance growth with profitability."
