Steelcase Inc. today reported second quarter revenue of $998.0 million and net income of $60.5 million, or diluted earnings of $0.50 per share. In the prior year, Steelcase reported $875.8 million of revenue and net income of $49.1 million, or diluted earnings of $0.41 per share.
Revenue increased 14 percent in the second quarter compared to the prior year, reflecting double-digit growth across all segments. The growth included benefits from acquisitions and organic revenue growth of 9 percent, which was driven by high order backlog at the beginning of the quarter. Orders (adjusted for currency translation effects, acquisitions and divestitures) grew 3 percent compared to orders in the second quarter of fiscal 2019, which grew 12 percent compared to the previous year.
"We delivered one of our strongest quarters in the past 20 years, exceeding our expectations," said Jim Keane, president and CEO. "These results demonstrate the effectiveness of our growth strategies and reflect the efforts of our employees around the world. Our new products are strengthening our portfolio in all geographies, our acquisitions and partnerships are providing additional solutions to our dealers and customers, and the war for talent continues to motivate organizations to invest in workspaces that inspire their people."
Second quarter operating income of $85.3 million (or 8.5 percent of revenue) increased by $17.4 million or 26 percent compared to operating income of $67.9 million (or 7.8 percent of revenue) in the prior year. The Americas reported operating income of $90.3 million compared to $77.2 million in the prior year. The Americas' operating income margin improved 40 basis points compared to the prior year driven by higher gross margins and lower operating expenses as a percentage of revenue. EMEA reported an operating loss of $5.5 million compared to an operating loss of $6.0 million in the prior year, while the Other Category reported operating income of $8.9 million compared to $4.8 million in the prior year.
"We delivered another record level of quarterly revenue in Asia Pacific, as well as year-over-year improvement in EMEA, which posted 5 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. "The business environment in EMEA continues to be challenging, but our opportunity pipeline for the region reflects growth and our teams remain solidly focused on achieving profitability for fiscal 2020."
Gross margin of 33.4 percent in the second quarter represented an increase of 40 basis points compared to the prior year, with a 30 basis point improvement in the Americas, a 60 basis point improvement in EMEA and a 90 basis point improvement in the Other category. The improvement was driven by pricing benefits, lower commodity costs, and higher absorption of fixed costs, partially offset by unfavorable business mix and investments to support growth initiatives.
Operating expenses of $248.2 million in the second quarter represented an increase of $27.5 million, but an improvement of 30 basis points as a percentage of revenue, compared to prior year. The increase in expense was primarily driven by $9.2 million from acquisitions, the impact of a $7.5 million property gain in the prior year and higher spending to drive growth, partially offset by $1.8 million of favorable currency translation effects.
Interest expense of $6.7 million in the second quarter represented an increase of $1.8 million compared to $4.9 million in the prior year due to the higher level of outstanding debt.
Income tax expense of $21.6 million in the second quarter reflected an effective tax rate of 26.3 percent. In the prior year, income tax expense was $18.1 million and reflected an effective tax rate of 26.9 percent.
Total liquidity, comprised of cash, cash equivalents and the cash surrender value of company-owned life insurance, aggregated to $385.3 million and total debt was $485.0 million at the end of the second quarter.
The Board of Directors has declared a quarterly cash dividend of $0.145 per share, to be paid on or before October 14, 2019, to shareholders of record as of September 30, 2019.
Outlook
The company expects third quarter fiscal 2020 revenue to be in the range of $920 to $945 million, which would represent 2 to 5 percent growth. The company reported revenue of $900.9 million in the third quarter of fiscal 2019, which represented a 17 percent increase and 13 percent organic growth compared to the previous year.
Steelcase expects to report diluted earnings per share between $0.33 to $0.37 for the third quarter of fiscal 2020. Steelcase reported diluted earnings per share of $0.31, and adjusted earnings per share of $0.36, in the third quarter of fiscal 2019. The prior year included a $3.6 million favorable tax adjustment, which had the impact of increasing diluted earnings by approximately $0.02 per share, after consideration of the related variable compensation effect.
"The outlook in our industry remains positive," said Jim Keane. "We believe there is significant potential to expand our earnings by continuing to improve our profitability in EMEA, leveraging our broadened product portfolio and delivering on the value creation plans for our acquisitions.”
