Steelcase Inc. (SCS) today reported fourth quarter revenue of $912.4 million and net income of $22.6 million, or diluted earnings of $0.19 per share, which included $16.9 million of charges related to the early retirement of debt. Excluding these charges, net of related income tax effects, adjusted earnings were $0.29 per share. In the prior year, Steelcase reported $772.7 million of revenue, breakeven net income and adjusted earnings per share of $0.24. Prior year results also included non-operating gains related to an investment in an unconsolidated affiliate which increased earnings by approximately $0.05 per share.
Revenue increased 18 percent in the fourth quarter compared to the prior year, or 15 percent on an organic basis, reflecting double-digit growth across all segments driven by strong project business from large customers. Orders (adjusted for constant currency, acquisitions and divestitures) grew 5 percent in the fourth quarter compared to the prior year, driven by growth across all segments. Orders in the prior year reflected the impact of a list price adjustment which accelerated orders into the fourth quarter.
"I am pleased with our fourth quarter and fiscal 2019 results, as we’ve delivered three consecutive quarters of strong organic revenue growth, which is above industry performance in the U.S. and many of our other markets," said Jim Keane, president and CEO. “Our success comes from the launch of new products, the acquisition of three great companies in AMQ, Smith System and Orangebox, and the strengthening of our portfolio through partnerships with companies such as West Elm. We also protected our profitability by implementing price increases in response to inflationary pressures."
Fourth quarter operating income of $47.0 million (or 5.2 percent of revenue) increased by $15.6 million compared to operating income of $31.4 million (or 4.1 percent of revenue) in the prior year. The Americas reported operating income of $51.0 million (or 7.9 percent of revenue) compared to $37.7 million (or 7.0 percent of revenue) in the prior year. EMEA reported operating income of $1.5 million, which included $0.9 million of amortization expense related to the purchase of Orangebox, compared to $1.5 million of operating income in the prior year.
"In EMEA, we reported year over year operating income improvement in the fourth quarter before consideration of the amortization expense related to the Orangebox acquisition, which marks five consecutive quarters in which we’ve delivered significant year over year operating improvements in the region," said Dave Sylvester, senior vice president and CFO. "Our EMEA strategies are working, as evidenced by our results this fiscal year, which included 10 percent organic revenue growth and $14 million of improvement in operating results excluding a $4 million gain on sale of property in the prior year and $2.5 million of amortization expense in the current year."
Gross margin of 31.0 percent in the fourth quarter represented a decrease of 160 basis points compared to the prior year, driven by higher cost of sales in the Americas. Gross margin decreased by 200 basis points in the Americas and 80 basis points in EMEA due to unfavorable business mix and higher overhead investments to support growth, partially offset by benefits from the higher volume and cost reduction initiatives. Benefits from pricing actions more than offset higher commodity, freight and labor costs in the quarter after three quarters of the opposite effect. Gross margin in the Other category decreased by 70 basis points.
Operating expenses of $236.1 million in the fourth quarter represented an increase of $15.5 million compared to the prior year but declined significantly as a percentage of revenue from 28.5 percent in the prior year to 25.8 percent in the current year. The increase in expense was primarily driven by $13.9 million from acquisitions, net of divestitures (including $2.3 million of amortization expense) and $2.2 million of higher variable compensation costs, partially offset by $2.4 million of favorable currency translation effects.
Interest expense of $23.5 million in the fourth quarter compared to $4.5 million in the prior year. The company issued $450 million of unsecured unsubordinated 5.125% senior notes in January 2019 and used a portion of the proceeds to fund the early retirement of $250 million of 6.375% senior notes in February 2019. The increase in interest expense in the current year was driven by $16.9 million of charges related to the early retirement of debt and $2.3 million of net interest costs related to the issuance of the new notes. The new notes have an effective interest rate of 5.6% and are due in January 2029.
Other income, net of $3.6 million in the fourth quarter compared to $17.4 million in the prior year, which included $13.9 million of gains related to a partial sale of an investment in an unconsolidated affiliate and the receipt of a premium related to a change in control of the affiliate.
Income tax expense of $5.7 million in the fourth quarter included $1.7 million of net discrete tax benefits and reflected an effective tax rate of approximately 20 percent. In the prior year, income tax expense was $44.7 million which included $27.9 million of charges related to U.S. tax reform and a $4.0 million charge related to a reduction in the French corporate income tax rate, both of which reduced the value of the company’s deferred tax assets.
Total liquidity, comprised of cash, cash equivalents and the cash surrender value of company-owned life insurance, aggregated to $417.4 million, and total debt was $487.0 million, at the end of the fourth quarter.
The Board of Directors has declared a quarterly cash dividend of $0.145 per share, to be paid on or before April 12, 2019, to shareholders of record as of March 29, 2019.
Fiscal 2019 Results
For fiscal 2019, the company recorded $3.4 billion of revenue and net income of $126.0 million, or diluted earnings per share of $1.05. Adjusted earnings were $1.20 per share. In fiscal 2018, the company recorded $3.1 billion of revenue, net income of $80.7 million, diluted earnings per share of $0.68 and adjusted earnings per share of $0.91.
Revenue increased 13 percent in fiscal 2019, with a 13 percent increase in the Americas, an 18 percent increase in EMEA and a 5 percent increase in the Other category. On an organic basis, fiscal 2019 revenue increased 9 percent, with a 9 percent increase in the Americas, a 10 percent increase in EMEA, and a 6 percent increase in the Other category.
Operating income of $183.6 million, or 5.3 percent of revenue, for fiscal 2019 increased by $28.4 million compared to operating income of $155.2 million, or 5.1 percent of revenue, for fiscal 2018. The improvement was driven by the revenue growth and improved operating expense leverage, partially offset by a decline in gross margin. The gross margin decline was largely driven by the Americas due to unfavorable business mix, higher commodity, freight and labor costs, net of pricing benefits and an $11.2 million pension charge recorded in the third quarter of fiscal 2019.
The company paid $64.3 million in dividends and repurchased 0.3 million shares under its share repurchase authorization program during fiscal 2019 at a cost of $4.2 million. There is $98.9 million remaining on the company's share repurchase authorization.
“Fiscal 2019 represented one of the best years Steelcase has reported in over a decade,” said Jim Keane. “Our revenue grew 13 percent this year as our solutions directly address the most critical needs of our customers around the world to drive innovation, to attract talent and to change the culture of the workplace.”
Outlook
The company expects first quarter fiscal 2020 revenue to be in the range of $830 to $855 million. Adjusted for the impact of acquisitions and unfavorable currency translation effects, the projected revenue range translates to expected organic growth of 7 to 10 percent. In the first quarter of fiscal 2019, the company reported revenue of $754.0 million.
Steelcase expects to report diluted earnings per share between $0.16 to $0.20 for the first quarter of fiscal 2020. Steelcase reported diluted earnings per share of $0.14 in the first quarter of fiscal 2019.
The company is targeting the following results for fiscal 2020:
Currency translation effects represent the estimated net effect of translating 2019 foreign currency revenues using the exchange rates at the end of Q4 2019.
This target reflects an estimated $27 million of interest expense on current indebtedness and an effective tax rate of 27%.
“As we begin fiscal 2020, we are excited to build off our recent momentum,” said Jim Keane. "Our strategies are working, we are driving towards realizing the full value of our acquisitions and partnerships, and more and more companies are recognizing the value of a high performing workplace."
