Steelcase Inc. today reported third-quarter revenue of $617.5 million and net income of $2.1 million, or diluted earnings of $0.02 per share, which included $11.4 million of pre-tax restructuring costs related to previously announced workforce reductions. Excluding those charges, net of related income tax benefits, adjusted earnings were $0.08 per share. The results also reflected a delay of approximately $60 million of revenue to the fourth quarter due to a temporary global operations shutdown implemented to protect the company’s systems during a cyberattack. In the prior year, Steelcase reported $955.2 million of revenue and net income of $54.9 million, or diluted earnings of $0.46 per share.
Revenue decreased 35 percent in the third quarter compared to the prior year, with approximately 6 percent attributable to the shipment delays associated with the temporary operations shutdown. All segments were impacted by the prolonged economic uncertainty and delay in return-to-the-office plans across the world. The revenue decrease included a decline of 40 percent in the Americas, 15 percent in EMEA and 40 percent in the Other category. On an organic basis, EMEA revenue declined by 20 percent and the Other category revenue declined by 29 percent. The company estimates third-quarter revenue was negatively impacted by shipment delays of approximately $50 million in the Americas and approximately $10 million in EMEA due to the temporary operations shutdown. Third-quarter revenue in EMEA benefited from $17 million of shipments for a project in the education sector that was in the order backlog at the beginning of the quarter.
Yesterday, Herman Miller reported net sales of $626.3 million, beating Steelcase’s quarterly sales of $617.5 million. For the first time ever, this moves Herman Miller into the number 1 position in the office furniture industry as the largest manufacturer in the world.
Orders (adjusted for the impact of the PolyVision divestiture and currency translation effects) declined 39 percent in the third quarter compared to the prior year, driven by broad-based declines across all segments and most major markets. The Americas declined 42 percent compared to the prior year, reflecting a modest sequential decline in average weekly order levels from the second quarter, compared to a historical seasonal strengthening of order patterns. EMEA declined 29 percent compared to the prior year, with broad-based declines across all markets. The Other category declined 36 percent compared to the prior year and included a decline of 40 percent in China, which had grown 32 percent in the third quarter of fiscal 2020 compared to the prior year.
"I'm proud of the dedication and agility of our employees, who helped us deliver a profit this quarter despite the challenges our business faced from the second wave of COVID cases and the temporary shutdown of our operations in response to the cyberattack," said Jim Keane, president and CEO. "We maintained our aggressive cost controls given the current environment, while staying focused on meeting customer needs."
Break-even operating income in the third quarter included $11.4 million of restructuring costs related to the previously announced workforce reductions. Adjusted operating income of $11.4 million represented a decrease of $63.7 million compared to operating income of $75.1 million in the prior year. The decrease was driven by lower revenue across all segments, partially offset by approximately $92 million of savings from cost reduction actions, which included reduced discretionary spending and lower employee costs, and lower variable compensation expense. The Americas reported operating income of $13.8 million, and adjusted operating income of $25.2 million, compared to operating income of $74.7 million in the prior year. EMEA reported an operating loss of $3.7 million compared to operating income of $6.3 million in the prior year. The Other category reported an operating loss of $2.2 million compared to operating income of $3.3 million in the prior year, which included $1.2 million from PolyVision.
“The EMEA operating loss this quarter was largely attributable to the delayed revenue and incremental costs to recover from the temporary operational shutdown,” said Dave Sylvester, senior vice president and CFO. “In Asia Pacific, although our third quarter orders weren’t as strong as the second quarter, our backlog going into the fourth quarter is on par with the prior year, and our pipeline continues to reflect year-over-year growth."
Gross margin of 28.8 percent in the third quarter represented a 430 basis point decline compared to the prior year, with a 40 basis point decline attributable to restructuring costs. The remaining decline was driven by the impact of the lower revenue, and higher labor and freight costs due to the temporary operations shutdown, partially offset by lower variable compensation expense and lower overhead costs.
Operating expenses of $168.8 million in the third quarter represented a decrease of $72.2 million compared to the prior year. The decrease was primarily driven by an approximately $29 million reduction in discretionary spending, $25.5 million of lower variable compensation expense and approximately $12 million of lower wage and benefit expenses as a result of workforce reductions.
The company recorded $11.4 million of restructuring costs in the third quarter related to the actions, which was in addition to $15.6 million of restructuring costs recorded in the second quarter. These restructuring costs related to previously announced workforce reductions, which the company estimates will result in savings of approximately $10 million per quarter. The company also restored most of its salaried workers to their full base pay at the beginning of the third quarter, which resulted in approximately $20 million of additional costs in the third quarter as compared to the second quarter.
Investment income of $0.2 million in the third quarter represented a decrease of $1.1 million compared to the prior year due to lower market interest rates. Other income, net decreased by $1.9 million compared to the prior year, due primarily to lower income from unconsolidated affiliates.
The company recorded an income tax benefit of $6.3 million in the third quarter, which was primarily driven by benefits available under the U.S. Coronavirus Aid, Relief, and Economic Security Act. In the prior year, income tax expense was $18.9 million and represented an effective tax rate of approximately 26 percent.
Total liquidity, comprised of cash, cash equivalents and the cash surrender value of company-owned life insurance, aggregated to $652.1 million. Total debt was $482.8 million at the end of the third quarter. There were no borrowings under the company's $250 million global credit facility during the quarter, and there are currently no restrictions on the company's ability to borrow under the facility.
The Board of Directors has declared a quarterly cash dividend of $0.10 per share, to be paid on or before January 11, 2021, to shareholders of record as of December 28, 2020.
Outlook
At the end of the third quarter, the company’s backlog of customer orders was $545 million, or 15 percent lower than the prior year and includes approximately $60 million of delayed shipments from the third quarter. Going into the fourth quarter, average weekly order levels during the first two weeks of December remained similar to the third quarter. As a result, the company expects fourth quarter fiscal 2021 revenue to be approximately $650 million. The company reported revenue of $946.2 million in the fourth quarter of fiscal 2020. Adjusted for $48.4 million associated with an extra week of shipments in the fourth quarter of fiscal 2020, the divestiture of PolyVision and currency translation effects, the projected revenue translates to an expected organic decline of 28 percent compared to the fourth quarter of fiscal 2020.
The company expects diluted earnings per share for the fourth quarter of fiscal 2021 to be approximately breakeven. The estimate includes: (1) projected operating expenses of between $180 million to $185 million, and (2) projected interest expense, net of investment income and other income, net, of approximately $5 million. Steelcase reported diluted earnings per share of $0.55, and adjusted earnings per share of $0.39, in the fourth quarter of fiscal 2020.
“With the early stages of vaccine deployment beginning, some customers are reactivating idled project opportunities so they will be ready to return to their offices next year," said Jim Keane. “We are continuing to invest in new products designed to help customers make their offices safe, flexible, productive and inspiring.”
