Steelcase Inc. (SCS) Wednesday reported first quarter revenue of $754.0 million and net income of $17.0 million, or diluted earnings of $0.14 per share. In the prior year, Steelcase reported $735.1 million of revenue and $0.15 of diluted earnings per share, which reflected the net impact of annuitizing three defined benefit plans that reduced earnings by approximately $0.03 per share.
Revenue increased 3 percent, or was approximately flat on an organic basis, in the first quarter compared to the prior year. The Americas posted flat revenue growth, or an organic decline of 1 percent, compared to the prior year which included approximately $20 million of revenue related to a very large project, while EMEA posted revenue growth of 21 percent, or 8 percent on an organic basis, driven by strong project growth in Iberia, the UK and Germany. The Other category posted a revenue decline of 7 percent, or 9 percent on an organic basis.
Orders grew 5 percent in the first quarter compared to the prior year, with 6 percent growth in the Americas and 7 percent growth in EMEA driven by project business. Orders declined 6 percent in the Other category compared to a strong prior year.
"Our momentum continued to build as our new products, partnerships, and updated showrooms helped our order rates grow faster than the market during recent months," said Jim Keane, president and CEO. "We further strengthened our growth potential by launching a number of innovative products which received awards at NeoCon, expanding our offerings through additional partnerships and signing an agreement for the acquisition of Smith System. I'm also proud of the improvement in EMEA as our initiatives to grow the top line and improve profitability are showing results."
Current quarter operating income of $23.3 million compares to operating income of $35.1 million in the prior year. The decline of $11.8 million (or 170 basis points as a percentage of revenue) was driven by lower gross margin in the Americas and Asia Pacific, offset in part by a $6.9 million improvement in EMEA's operating results.
Gross margin of 31.6 percent in the current quarter represented a decline of 170 basis points compared to the prior year and reflected mixed results across the segments. In the Americas, gross margin decreased by 230 basis points compared to the prior year due to higher commodity costs, lower pricing and unfavorable shifts in business mix, while EMEA's gross margin improved 250 basis points, driven by higher absorption of fixed costs, benefits associated with cost reduction efforts and positive effects of changes in foreign currencies. The Other category's gross margin decreased by 300 basis points due to negative effects of changes in foreign currencies, higher inventory reserves and lower revenue.
"In response to quickly rising steel prices and other commodity costs, we implemented an additional list price adjustment earlier this month, which represented our second increase in four months," said Dave Sylvester, senior vice president and CFO. "We expect commodity cost increases to continue pressuring our gross margin for another quarter or two while these price adjustments take fuller effect. In addition, our revenue in the Americas over the same period is expected to include a growing mix of project business, including projects won at earlier price levels, which will impact our year-over-year gross margin comparisons."
Operating expenses of $214.6 million in the first quarter represented an increase of $4.6 million compared to the prior year, due to $4.9 million of currency translation effects and $2.2 million from an acquisition, net of divestitures, partially offset by lower expenses in a variety of areas.
Other income (expense), net reflected $3.3 million of income in the current quarter compared to $2.8 million of expense in the prior year, which included $7.3 million of charges related to annuitizing the three defined benefit plans.
Income tax expense of $6.2 million in the current quarter reflected an effective tax rate of 27 percent which was lower than the 36 percent recorded in prior year driven by tax reform in the U.S.
Total liquidity, comprised of cash, cash equivalents and the cash surrender value of company-owned life insurance, aggregated $301 million, and total debt was $294 million, at the end of the first quarter.
The Board of Directors has declared a quarterly cash dividend of $0.135 per share, to be paid on or before July 17, 2018, to shareholders of record as of July 2, 2018.
Outlook
Orders in the Americas grew 6 percent in the first quarter and backlog at the end of the quarter was approximately 14 percent higher than the prior year. EMEA orders grew 7 percent and backlog at the end of the quarter was approximately 15 percent higher than the prior year. Orders in the Other category declined 6 percent compared to a strong prior year. The company anticipates completing the acquisition of Smith System Manufacturing Company at the end of June and consolidating its results thereafter. Considering these and other factors, the company expects second quarter fiscal 2019 revenue to be in the range of $865 to $890 million, which includes revenue from the anticipated acquisition. Adjusted for an estimated $4 million of favorable currency translation effects, and the impact of acquisitions and divestitures, the projected revenue range translates to expected organic growth of 6 to 9 percent. In the second quarter of fiscal 2018, the company reported revenue of $775.6 million.
Steelcase expects to report diluted earnings per share between $0.28 to $0.33 for the second quarter of fiscal 2019. The estimates include a net gain from the sale of property in the Americas, which is expected to increase diluted earnings by approximately $0.03 per share after consideration of the related variable compensation expense. Earnings accretion from the anticipated acquisition of Smith System is expected to be modest, due to the initial effects of purchase accounting which will significantly impact operating income. In addition, many of the same factors which negatively impacted the year-over-year comparisons of gross margin in the Americas and Asia Pacific in the first quarter of fiscal 2019 are expected to also impact second quarter gross margin comparisons. Steelcase reported diluted earnings per share of $0.31 in the second quarter of fiscal 2018. Prior year results included a gain from the sale of real estate in EMEA and a discrete tax benefit, which had the effect of increasing diluted earnings by approximately $0.05 per share after consideration of the related variable compensation expense.
"We were honored our showroom was recognized as 'Best in Competition' at NeoCon, representing an endorsement of our design direction by the office interiors community," said Jim Keane. "With our expanding offerings, we are more fully meeting the needs of our customers and winning business from our competition and the pending acquisition of Smith System provides us the opportunity to grow market share in education and learning environments."
