Steelcase Inc. (SCS) today reported first quarter revenue of $824.3 million and net income of $17.8 million, or diluted earnings of $0.15 per share. In the prior year, Steelcase reported $754.0 million of revenue and net income of $17.0 million, or diluted earnings of $0.14 per share.

Revenue increased 9 percent in the first quarter compared to the prior year, or 6 percent on an organic basis, reflecting growth across all segments. Orders (adjusted for currency translation effects, acquisitions and divestitures) grew 15 percent in the first quarter compared to the prior year, driven primarily by strong growth in day-to-day business. The order growth was favorably impacted by a February 2018 list price adjustment which accelerated orders from the first quarter of fiscal 2019 into the fourth quarter of fiscal 2018.

"We are pleased to have delivered another quarter of strong growth in sales and operating income," said Jim Keane, president and CEO. "Our 15 percent order growth was particularly strong and in line with our expectations. We fell just short of our revenue estimates because order growth was weighted toward the second half of the quarter and customers requested delivery dates later than we typically see, in part because of construction labor shortages that caused their projects to be delayed. We ended the quarter with a high backlog and a strong pipeline of customer opportunities which support our outlook for the second quarter."

First quarter operating income of $27.6 million (or 3.3 percent of revenue) increased by $4.3 million or 18 percent compared to operating income of $23.3 million (or 3.1 percent of revenue) in the prior year. The Americas reported operating income of $32.4 million (or 5.6 percent of revenue) compared to $29.7 million (or 5.5 percent of revenue) in the prior year, reflecting an improvement in operating expenses as a percentage of revenue, largely offset by lower gross margin. EMEA reported operating income of $0.8 million compared to an operating loss of $1.7 million in the prior year.

"We delivered strong year-over-year improvement in EMEA this quarter, with 9 percent organic revenue growth, improvements in gross margin and lower operating expenses as a percentage of revenue," said Dave Sylvester, senior vice president and CFO. "Our teams remain solidly focused on achieving profitability in EMEA for fiscal 2020 and reaching a low- to mid-single-digit operating margin for that segment within the next three years."

Gross margin of 31.3 percent in the first quarter represented a decrease of 30 basis points compared to the prior year, driven by higher cost of sales in the Americas. The Americas experienced continued unfavorable business mix partially offset by benefits from pricing actions taken over the last several quarters, net of higher commodity and freight costs. Gross margin in EMEA improved by 60 basis points, and gross margin in the Other category improved by 30 basis points.

Operating expenses of $230.8 million in the first quarter represented an increase of $16.2 million compared to $214.6 million in the prior year but declined as a percentage of revenue to 28.0 percent in the current quarter compared to 28.5 percent in the prior year. The increase in expense was primarily driven by $12.4 million from acquisitions, net of a divestiture (including $3.1 million of amortization expense), and higher investment in product development, partially offset by $3.3 million of favorable currency translation effects.

"Steelcase has long had a focus on fitness to drive operating efficiencies, fund growth initiatives and improve profitability," said Dave Sylvester. "This quarter, we supported increased investments in product development and acquisition-related amortization expense while delivering a 50 basis point improvement in our operating expense leverage."

Interest expense of $6.7 million in the first quarter represented an increase of $2.3 million compared to $4.4 million in the prior year due to the higher level of outstanding debt following the issuance of new term notes in the fourth quarter of fiscal 2019.

Other income, net decreased by $1.1 million compared to the prior year, due to lower income from unconsolidated affiliates.

Income tax expense of $6.3 million in the first quarter reflected an effective tax rate of approximately 26 percent. In the prior year, income tax expense was $6.2 million and the effective tax rate approximated 27 percent.

Total liquidity, comprised of cash, cash equivalents and the cash surrender value of company-owned life insurance, aggregated to $309.4 million, and total debt was $486.6 million, at the end of the first quarter.

The Board of Directors has declared a quarterly cash dividend of $0.145 per share, to be paid on or before July 16, 2019, to shareholders of record as of July 1, 2019.

Outlook

The company expects second quarter fiscal 2020 revenue to be in the range of $970 to $995 million, which would represent 11 to 14 percent growth compared to $875.8 million of revenue in the prior year. Adjusted for the impact of acquisitions, a divestiture and unfavorable currency translation effects, the projected revenue range translates to expected organic growth of 6 to 9 percent.

Steelcase expects to report diluted earnings per share between $0.41 to $0.45 for the second quarter of fiscal 2020. Steelcase reported diluted earnings per share of $0.41 in the second quarter of fiscal 2019. The prior year included a $7.5 million gain from the sale of property.

The company is reaffirming its fiscal 2020 targets of 5.5 to 9.5 percent revenue growth (which translates to 2 to 6 percent organic revenue growth) and $1.20 to $1.35 of diluted earnings per share.

"We remain on track to achieve our fiscal 2020 targets, despite some signs of slowing economic growth, because customers are continuing to invest in modernized, fluid work environments to support agile work processes and attract, retain and inspire their workforce," said Jim Keane. "Our new Steelcase Flex Collection, Steelcase Roam products and the Orangebox product offering were featured in our NeoCon showroom and are designed specifically to meet these challenges. We also introduced updated tools for dealers and designers to select, specify and order an expanding assortment of products.”

Business Segment Footnotes

The Americas segment serves customers in the U.S., Canada, the Caribbean Islands and Latin America with a portfolio of integrated architecture, furniture and technology products marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Coalesse, Turnstone, Smith System, AMQ and Orangebox brands.
The EMEA segment serves customers in Europe, the Middle East and Africa primarily under the Steelcase, Orangebox and Coalesse brands, with an emphasis on freestanding furniture systems, storage and seating solutions.
The Other category includes Asia Pacific, Designtex and PolyVision.
Corporate costs include unallocated portions of shared service functions, such as information technology, corporate facilities, finance, human resources, research, legal and customer aviation, plus deferred compensation expense and income or losses associated with company-owned life insurance.