Steelcase Inc. today reported fourth-quarter revenue of $946.2 million and net income of $66.5 million, or diluted earnings of $0.55 per share, which included a $21.0 million gain and $8.7 million tax benefit related to the sale of PolyVision Corporation on February 24, 2020. Excluding those items, net of related variable compensation expense, adjusted earnings were $0.39 per share, which represented an increase of 34% compared to the prior year. In the prior year, Steelcase reported $912.4 million of revenue and net income of $22.6 million, or diluted earnings of $0.19 per share and adjusted earnings of $0.29 per share.
Revenue increased 4 percent in the fourth quarter compared to the prior year and declined 1 percent on an organic basis after adjusting for currency translation effects and approximately $48 million associated with an extra week of shipments in the current quarter. The results reflected the initial impacts of the coronavirus (COVID-19) which reduced shipments in China in the quarter by approximately $7 million. The organic decline was driven by the Americas and Other category, partially offset by strong growth in EMEA. The Americas declined 3 percent organically compared to the prior year, which grew 17 percent compared to the fourth quarter of fiscal 2018, and was unfavorably impacted by the timing of the U.S. Thanksgiving holiday. The Other category was negatively impacted by the customer requested delivery delays in China as a result of COVID-19.
Orders (adjusted for currency translation effects and the impact of an extra week in the current quarter) grew 7 percent in the fourth quarter compared to the prior year, led by 12 percent growth in EMEA and 6 percent growth in the Americas. The current year included strong growth in both project and day-to-day business in the Americas and EMEA and strength in January and February. Backlog at the end of the quarter was up 17 percent compared to the prior year.
"I want to recognize the efforts of our teams around the globe who drove strong, better-than-expected revenue and earnings per share in our fourth quarter," said Jim Keane, president and CEO. "Through terrific performance by all three regions - Americas, EMEA and Asia Pacific - Steelcase delivered its highest annual revenue and operating income in nearly 20 years."
The company sold its PolyVision subsidiary during the fourth quarter for net proceeds of $72.6 million. This generated a gain on sale of $21.0 million which reduced operating expenses in the Other category. The company realized a net tax benefit on the sale which reduced income tax expense by $8.7 million. Variable compensation expense related to the transaction totaled $13.4 million and was spread across the various business segments in cost of sales and operating expenses.
Fourth quarter operating income of $69.0 million (or 7.3 percent of revenue) represented an increase of $22.0 million or 46.8 percent compared to operating income of $47.0 million (or 5.2 percent of revenue) in the prior year. The increase included a $7.6 million net benefit from the sale of PolyVision. The Americas reported operating income of $42.6 million compared to $51.0 million in the prior year. Adjusted for $10.3 million of variable compensation expense related to the sale of PolyVision, operating income in the Americas increased by $1.9 million. EMEA reported operating income of $8.3 million (which included $1.8 million of variable compensation expense related to the sale of PolyVision), compared to $1.5 million in the prior year, driven primarily by higher revenue and gross margin improvement. The Other category reported operating income of $24.9 million, which included $20.4 million from the gain on the sale of PolyVision, net of variable compensation expense, compared to $3.7 million in the prior year.
"Our EMEA business delivered an outstanding quarter with $8 million of operating income, as our teams drove strong revenue growth and executed against our gross margin improvement and fitness initiatives," said Dave Sylvester, senior vice president and CFO. "The operating income margin of 1.5 percent for the region for the full fiscal year is a great accomplishment and is reflective of the collective effort of the entire organization."
Gross margin of 32.5 percent in the fourth quarter represented an increase of 150 basis points compared to the prior year, with a 90 basis point improvement in the Americas, a 330 basis point improvement in EMEA and a 190 basis point improvement in the Other category. On a consolidated basis, the improvement was driven by pricing benefits and lower commodity costs, partially offset by lower absorption of fixed costs and higher variable compensation expense related to the gain on the sale of PolyVision.
Operating expenses of $238.2 million in the fourth quarter represented an increase of $2.1 million compared to the prior year and included an $11.9 million benefit from the sale of PolyVision, net of variable compensation expense. The year-over-year comparison also included an estimated $10.4 million of operating costs related to the additional week in the current quarter, higher spending to support growth initiatives, higher variable compensation expense and $1.2 million of favorable currency translation effects.
Interest expense of $7.2 million in the fourth quarter compared to $23.5 million in the prior year, which included $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 new term notes.
The company recorded a net income tax benefit of $1.3 million in the fourth quarter, which included a $8.7 million tax benefit related to the sale of PolyVision and $3.6 million of other net discrete tax benefits. Adjusted for those items, the company's effective tax rate approximated 25 percent in the fourth quarter. In the prior year, income tax expense was $5.7 million, which included $1.7 million of net discrete tax benefits.
Fiscal 2020 Results
For fiscal 2020, the company recorded $3.7 billion of revenue and net income of $199.7 million, or diluted earnings per share of $1.66. Adjusted earnings were $1.50 per share. In fiscal 2019, the company recorded $3.4 billion of revenue, net income of $126.0 million, diluted earnings per share of $1.05 and adjusted earnings per share of $1.20.
Revenue increased 8 percent in fiscal 2020, with an 8 percent increase in the Americas, a 9 percent increase in EMEA and a 7 percent increase in the Other category. On an organic basis, fiscal 2020 revenue increased 5 percent, with a 5 percent increase in the Americas, a 6 percent increase in EMEA, and a 7 percent increase in the Other category.
Operating income for fiscal 2020 of $257.0 million, or 6.9 percent of revenue, represented an increase of $73.4 million compared to operating income for fiscal 2019 of $183.6 million, or 5.3 percent of revenue. The improvement was driven by the revenue growth, improved gross margin, and operating expense leverage. The gross margin improvement was primarily driven by pricing benefits, lower commodity costs and higher absorption of fixed costs, partially offset by unfavorable business mix.
Liquidity
The company is taking steps to maximize liquidity in recognition of the increased risk and uncertainty related to the COVID-19 crisis. At year end, total liquidity, comprised of cash, cash equivalents and the cash surrender value of company-owned life insurance, aggregated to $701.0 million. This represents the company's highest year-end liquidity in more than 10 years. In addition, during March, as the virus began to affect EMEA and the Americas, the company drew $250 million under its new five-year unsecured revolving syndicated credit facility to provide additional liquidity. This facility was established in the fourth quarter as a replacement for the company's previous $200 million facility.
Total debt was $484.3 million at the end of the fourth quarter which included $450 million maturing in 2029. To maximize liquidity, the company elected to forgo using a portion of the PolyVision sale proceeds to pay off a note payable as had been previously planned.
The company did not repurchase any shares during the fourth quarter and repurchased approximately 0.5 million shares in the full fiscal year. During the first few weeks of March 2020, the company repurchased, through an existing 10b5-1 plan, 3.0 million shares of its Class A Common Stock at an aggregate cost of $38.6 million, which represented the total amount authorized under that plan.
The Board of Directors has declared a quarterly cash dividend of $0.07 per share, to be paid on or before April 17, 2020, to shareholders of record as of April 3, 2020. In making their decision, the board considered both the strong performance in the fourth quarter and the objective to maximize liquidity.
"Cash flow from operations totaled $142 million in the quarter and $361 million for the year which, along with $73 million of net proceeds from the sale of PolyVision, contributed to the $282 million increase in cash during the year," said Dave Sylvester. "This build-up in cash, along with the renewal and expansion of our global credit facility, put us into a very strong position going into our new fiscal year and to weather the growing economic uncertainty driven by the COVID-19 pandemic."
Actions to Conserve Capital
The company has temporarily reduced or suspended operations at many of its manufacturing locations and distribution centers around the world, typically in response to government orders related to COVID-19. This currently includes facilities in the U.S., France, India and Malaysia and will soon include Spain and the U.K. The affected U.S. facilities currently include manufacturing and distribution centers in Michigan, California, Pennsylvania and Texas. This will temporarily, but significantly, reduce the company's ability to make and ship products and therefore recognize revenue and generate cash beginning in the first quarter of fiscal 2021.
The company is taking a series of measures to conserve capital during this period of disruption. Cash outflows related to operating expenses are being reduced by eliminating travel and events, overtime, temporary labor and annual merit increases and scaling back project spending. The company is also taking steps to significantly reduce capital expenditures by delaying longer-term projects.
Operating expenses are being further reduced by lowering people costs. This includes temporarily reducing the base pay of the CEO to $1 and of members of the company’s executive team by 60%. The Board of Directors has elected to reduce their cash retainer to zero. The actions being taken by the company also include significant reductions in people costs for those plants which reduce or suspend operations. As an example, nearly all of the company's hourly manufacturing and distribution employees in Michigan are beginning a temporary layoff today, and the company has committed to pay the full cost of employee health insurance premiums during this period. The company's salaried workers in many countries are working from home, and the company continues to serve customers planning future projects and to support many other activities. In order to conserve capital during this period of disruption, the company announced today that nearly all U.S.-based salaried employees will temporarily take a 50% base pay cut and a similar reduction in hours. The reductions will be less for some lower-paid workers and higher for some higher-paid workers. The company is taking these actions in an effort to avoid permanent headcount reductions so the company and its employees can come through this crisis together.
The company is also taking steps to manage working capital carefully. The company anticipates its finished goods inventory could increase as customers face their own local closures and are unable to receive products. The company's raw material and work in process inventories also could increase as it receives order cancellations. The company is taking steps to work with its customers and anticipate these problems to reduce the potential impact. The company also intends to closely manage its receivables and payables as it scales down operations in affected areas.
“As we enter fiscal 2021, we had strong backlog, strong orders and a growing pipeline, particularly in EMEA and the Americas, but the COVID-19 crisis has interrupted our operations in a way that makes it impossible to provide meaningful estimates of revenues or earnings per share," said Jim Keane. “In the short run, we are confident the actions we are taking will protect our people and therefore our relationships with customers, dealers and suppliers. These actions will also protect the company’s capital, so we can navigate through this crisis and emerge strong and ready to compete.”
