American producer of professional furniture, Steelcase, reported its results for Q4 of fiscal 2014 and for the full year.
For fiscal 2014, Steelcase recorded $3.0 billion of revenue and net income of $87.7 million, or diluted earnings per share of $0.69. Adjusted earnings per share were $0.82.
Revenue increased by 4.2% compared with fiscal 2013 (organic growth was 2% in 2014 and 5% in 2013).
In fiscal 2013, Steelcase recorded $2.9 billion of revenue and net income of $38.8 million, or diluted earnings per share of $0.30. Adjusted earnings per share were $0.88.
Fiscal 2013 results also included foreign tax credit benefits, tax valuation allowance adjustments and environmental reserve adjustments that had the aggregate net effect of increasing earnings by approximately $0.10 per share.
The Americas and the Other category, driven by PolyVision, posted organic revenue growth of 5% and 2%, respectively, while EMEA experienced an 8% organic revenue decline.
Operating income of $165.9 million for fiscal 2014 compares to operating income of $59.3 million in fiscal 2013. Adjusted operating income grew 20 percent to $185.4 million in fiscal 2014 as compared to $153.9 million in the prior year.
“Adjusted operating income in the Americas improved 170 basis points to 11.5% of revenue in fiscal 2014 compared to fiscal 2013,” said David C. Sylvester, senior vice president and CFO.
“However, EMEA posted its third consecutive annual adjusted operating loss this year. We remain focused on the implementation of our multi-year strategy necessary to safeguard our global competitiveness and restore profitability in this region.”
Fourth quarter revenue of $779.4 million and net income of $23.9 million, or diluted earnings per share of $0.19. Excluding net restructuring benefits, adjusted earnings were $0.18 per share.
Steelcase reported $721.4 million of revenue and a diluted loss per share of $0.22 in the fourth quarter of the prior year. Excluding restructuring costs and goodwill impairment charges, adjusted earnings were $0.28 per share in the prior year. Prior year results also included foreign tax credit benefits, tax valuation allowance adjustments and environmental reserve adjustments, which had the aggregate net effect of increasing earnings by approximately $0.10 per share.
Organic revenue growth over the prior year was 2% after adjusting for approximately $42.0 million associated with an extra week of shipments in the current quarter.
The Americas and Other category, driven largely by Asia Pacific, posted organic revenue growth of 6% and 11% respectively, compared to the prior year. Revenue in the Americas continues to reflect a higher mix of project business from some of the company’s largest corporate customers compared to the prior year.
The EMEA segment posted an organic revenue decline of 13% compared to the prior year, which included revenue from several large projects.
Current quarter operating income of $54.2 million compares to an operating loss of $45.2 million in the prior year. Fourth quarter adjusted operating income of $51.4 million (or 6.6% of revenue) improved significantly compared with adjusted operating income of $34.6 million (or 4.8% of revenue) in the prior year.
The improvement was driven by strength in the Americas, lower corporate costs and improved results in the Other category, partially offset by continued weakness in EMEA.
“The Americas segment continues to deliver exemplary performance, realizing an adjusted operating margin of 11.5% in the fourth quarter and for fiscal 2014 and gaining market share in the U.S. for the third consecutive year,” said James P. Keane, president and CEO.
“Our investment in research and our ability to monetize our insights through new products and applications are helping to drive these strong results.”
Cost of sales improved 100 basis points to 68.6% of revenue in the current quarter compared to 69.6% in the prior year.
Cost of sales in the Americas improved by 200 basis points while cost of sales in EMEA increased by 330 basis points. The improvement in the Americas was driven by favourable business mix, higher absorption of fixed costs associated with the organic revenue growth (including benefits of improved pricing) and various cost reduction efforts.
The increase in cost of sales for EMEA was driven by approximately $4 million of costs associated with changes in the EMEA manufacturing footprint, lower absorption of fixed costs associated with the organic revenue decline (including higher competitive discounting) and unfavourable business mix.
The current quarter results in EMEA also included a favourable adjustment to accrued expenses compared to an unfavourable adjustment to warranty reserves in the prior year.
Operating expenses in the fourth quarter were $193.2 million compared with $184.5 million in the prior year. Beyond the extra week of operating costs of approximately $10.3 million in the current quarter, the year-over-year comparison was also impacted by higher spending in the Americas and higher variable compensation expense.
Offsetting these increases were the benefits of restructuring activities and other cost reduction efforts in EMEA compared to the prior year. In addition, corporate costs in the prior year included $3.6 million in environmental reserve adjustments.
Other income (expense), net in the fourth quarter of $(5.4) million compared to $2.4 million in the prior year. The current quarter included $6.0 million of charges related to a minority equity investment and $2.9 million of foreign exchange losses compared to small foreign exchange gains in the prior year.
Income tax expense of $20.7 million in the current quarter included approximately $3 million of additional tax valuation allowance adjustments and other discrete charges and resulted in an overall effective tax rate of approximately 46% for the fourth quarter.
“The unfavourable impacts of the non-operating items and tax adjustments recorded this quarter were reduced by lower than expected variable compensation expense linked to those charges and the deferral of an expected facility sale and related gain from the fourth quarter to the first quarter of fiscal 2015,” said David Sylvester.
“Setting aside the lower variable compensation expense associated with these items, adjusted operating income was otherwise better than expected.”
Cash, short-term investments and the cash surrender value of company-owned life insurance totalled $476 million and total debt was $287 million at the end of the fourth quarter.
In the fourth quarter, the company repurchased approximately 1.2 million shares under its share repurchase authorization program at a total cost of $16.9 million and paid a cash dividend of $0.10 per share.
The Board of Directors today declared a cash dividend of $0.105 per share, to be paid on or before April 14, 2014 to shareholders of record as of April 4, 2014.
Business segment results
In the Americas, fourth quarter order growth, excluding an estimate for the extra week, approximated 5% (driven by strength in February), and customer order backlog at the end of the fourth quarter increased approximately 18% compared to the prior year.
EMEA fourth quarter orders grew approximately 3% (driven by strength in February) and customer order backlog at the end of the fourth quarter increased approximately 26% compared to the prior year.
Fourth quarter orders were also strong at PolyVision and across Asia Pacific.
Steelcase expects first quarter fiscal 2015 revenue to be in the range of $715 to $740 million, which reflects expected organic revenue growth in the range of 7 to 11% over the prior year. The company reported revenue of $667.1 million in the first quarter of fiscal 2014.
Steelcase expects to report diluted earnings per share between $0.12 to $0.15 per share for the first quarter of fiscal 2015. The company expects to report adjusted earnings per share between $0.14 to $0.17, reflecting restructuring costs associated with EMEA actions announced in Q3 2014, offset in part by an expected gain associated with a pending facility sale.
In addition, the estimate for earnings includes approximately $5 million of operating costs associated with changes in the EMEA manufacturing footprint, approximately $3 million of incremental variable compensation expense associated with the pending facility sale gain and an estimated effective tax rate of approximately 44%. Steelcase reported diluted earnings per share of $0.10 in the first quarter of fiscal 2014 and adjusted earnings per share of $0.13.
“Steelcase serves leading organizations who share our view that the strategic use of space helps companies stay ahead,” Mr. Keane said. “Our customers look to us for help in striking the balance between open floor plans and quiet spaces, or between mobile work and collaboration in the office.
Our new V.I.A. architectural portfolio is the most recent example of how we have translated our insights into solutions that give people choice and control over where and how they work.”