Steelcase Inc. (SCS) today reported second quarter revenue of $775.6 million and net income of $36.9 million, or diluted earnings of $0.31 per share. In the prior year, Steelcase reported $758.0 million of revenue, diluted earnings of $0.31 per share and adjusted earnings of $0.32 per share.

Revenue increased 2 percent in the second quarter compared to the prior year, while order growth was flat. The Americas revenue and orders declined less than 1 percent compared to the prior year, as continued growth in the company's new products and solutions was offset by declines in traditional furniture applications. Demand from large customers remained subdued, but the rate of decline was lower than the first quarter. EMEA revenue increased 5 percent, or 4 percent on an organic basis, and orders grew modestly, reflecting mixed results across the region. The Other category posted revenue growth of 20 percent, or 19 percent on an organic basis, driven by continued strength in Asia Pacific, and order growth was 3 percent.

“We are pleased with our overall performance in the second quarter, which included better than expected operating results in the Americas segment. We remain on track to launch more than 80 new products, enhancements and extensions in fiscal 2018, and we are significantly increasing the design-driven choices available to our customers through three new relationships announced over the past week," said Jim Keane, president and CEO. "In addition, we have seen recent improvement in our project win rates linked to our innovation, and our updated pipeline of project activity includes some notable increases from a few of our largest corporate customers."

Current quarter operating income of $54.2 million compares to operating income of $61.9 million in the prior year. Improvements in the operating results in EMEA and Asia Pacific were more than offset by a decline in the Americas which was driven by higher cost of sales as a percentage of revenue and higher operating expenses.

Cost of sales of 66.7 percent of revenue in the current quarter represented an increase of 140 basis points compared to a very strong prior year and reflected mixed results across the segments. In the Americas, cost of sales of 65.6 percent was 250 basis points higher than the prior year, which represented the lowest level of cost of sales as a percentage of revenue in more than a decade. The current quarter reflected increased discounting and incentives, higher commodity costs, investments in support of product development and manufacturing agility, and unfavorable shifts in business mix. In EMEA, cost of sales improved by 280 basis points, driven largely by benefits associated with cost reduction and other gross margin improvement initiatives. Cost of sales in the Other category improved by 30 basis points over the prior year, as the benefits associated with higher revenue were partially offset by inventory adjustments.

Operating expenses of $204.2 million in the second quarter represented an increase of $3.3 million compared to the prior year, or an $8.7 million sequential decline compared to the first quarter. The current quarter results included a $4.0 million gain on the sale of property in EMEA and $1.8 million of lower deferred compensation expense compared to the prior year. Beyond these items, 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 and marketing partnerships, addressing product gaps and pursuing other areas for growth.

Income tax expense of $13.8 million in the current quarter, which included a $3.9 million favorable tax adjustment, reflected an effective tax rate of 27.2 percent.

"The property gain and discrete tax benefit recorded in the second quarter had the effect of increasing earnings per share by approximately $0.05 after consideration of the related variable compensation expense," said Dave Sylvester, senior vice president and CFO. "Beyond these items, we were pleased with our operating results and the actions our employees took to pull back on discretionary spending, which allowed us to stay more fully invested in the significant number of new product introductions we are planning over the next several quarters."

Total liquidity, comprised of cash, short-term investments and the cash surrender value of company-owned life insurance, aggregated $373 million, and total debt was $296 million, at the end of the second quarter.

During the second quarter, the Company repurchased a total of 2.0 million shares of Class A Common Stock for a total cost of $27.3 million. A total of $99.2 million remained under the company's share repurchase authorization at the end of the second quarter.

The Board of Directors has declared a quarterly cash dividend of $0.1275 per share, to be paid on or before October 12, 2017, to shareholders of record as of September 28, 2017.

Outlook

The company expects third quarter fiscal 2018 revenue to be in the range of $785 to $810 million, which includes approximately $11 million of estimated favorable currency translation effects compared to the prior year and reflects a range of an organic decline of 1 percent to organic growth of 2 percent compared to the prior year. In the third quarter of fiscal 2017, the company reported revenue of $786.5 million.

Steelcase expects to report diluted earnings per share between $0.21 to $0.25 for the third quarter of fiscal 2018. The third quarter estimate includes an expected sequential increase in operating expenses of approximately $10 million compared to the second quarter (adjusted for the gain on property sale), as well as an expected sequential increase in cost of sales as a percentage of revenue due to seasonal shifts in business mix. Steelcase reported diluted earnings per share of $0.28 and adjusted earnings per share of $0.30 in the third quarter of fiscal 2017.

"We see multiple signs that point to improved growth in the coming quarters," said Jim Keane. "In addition to the significant number of new product introductions in fiscal 2018, we are expanding our market by recently launching smart and connected products that enhance workplace strategies and new relationships to expand our response to the increased demand for ancillary solutions. Increasing the breadth of our offerings is critical to support our customers as they navigate the growing importance of enabling creativity and innovation, increasing employee engagement and augmenting performance in the workplace."

Corporate Highlights:

Steelcase announced a relationship with FLOS, a worldwide leader in lighting whose portfolio includes decorative, architectural and custom lighting.
In EMEA, Steelcase announced a relationship with Bolia, a contemporary Danish furniture designer and maker. An exclusive, curated collection of Bolia designs will be available through Steelcase dealers.
Steelcase announced a relationship with Mitchell Gold + Bob Williams, a premier residential and commercial furniture manufacturer and retailer.
Senior Steelcase and Microsoft leaders, including Steelcase president and CEO Jim Keane and president of Microsoft Japan Takuya Hirano, co-hosted an August event in Tokyo on unleashing creative potential in organizations.
Steelcase Inc. pledged a gift of $50,000 to the United Way of Greater Houston to aide in Hurricane Harvey relief efforts. In addition, the Steelcase Foundation will gift $100,000 to the Center of Disaster Philanthropy Hurricane Harvey Fund and will match Steelcase employee donations to select philanthropies supporting those impacted.