Steelcase reports second quarter 2014 results. American manufacturer of professional furniture Steelcase reported second quarter revenue of $786.7 million (+3.8% compared with Q2 2013) and net income of $30.5 million, or diluted earnings per share of $0.24. Excluding restructuring costs, adjusted earnings were $0.27 per share.
In the prior year, Steelcase reported $757.6 million of revenue in the second quarter, diluted earnings per share of $0.22 and adjusted earnings of $0.24 per share.
Organic revenue growth over the prior year was 3% after adjusting for favourable currency translation effects. In the Americas, organic revenue growth was 4%. The EMEA segment posted an organic revenue decline of 4%. The Other category posted organic revenue growth of 13%, with PolyVision, Designtex and Asia Pacific all contributing to the growth.
Current quarter operating income of $52.8 million compares to operating income of $52.0 million in the prior year. Excluding restructuring costs, second quarter adjusted operating income of $59.2 million improved modestly compared with adjusted operating income of $55.3 million in the prior year.
Operating leverage from the revenue growth and benefits of improved pricing in the Americas was partially offset by approximately $9 million of disruption and inefficiencies associated with the manufacturing footprint changes in EMEA.
“We were very pleased with the rebound in Americas performance compared to the prior quarter,” said Jim Keane, president and CEO. “This strong performance in the Americas, driven again by strong project business, helped to offset the losses in EMEA, where our teams continue to implement the required business model changes in Europe.”
Cost of sales of 68.1% of revenue in the current quarter increased 30 basis points compared to the prior year. In the Americas, cost of sales of 65.6% was flat in the second quarter compared to the prior year, a significant improvement compared to the year-over-year increase of 70 basis points experienced in the first quarter.
In the current quarter, the year-over-year benefits of operating leverage from the revenue growth and improved pricing in the Americas were offset by the impact of a higher mix of project business and higher freight and distribution costs.
In EMEA, cost of sales increased by 330 basis points driven largely by disruption and inefficiencies associated with the manufacturing footprint changes. The Other category cost of sales improved by 100 basis points over the prior year, largely driven by better absorption of fixed costs associated with the revenue growth.
Operating expenses were $191.4 million in the second quarter, an increase of $2.5 million over the prior year. This increase was due to higher variable compensation expense. As a percentage of revenue, operating expenses improved by 50 basis points.
Restructuring costs of $6.4 million in the current quarter included costs primarily related to the manufacturing footprint changes in EMEA. Steelcase announced in August a proposed transfer of its Wisches, France facility to a third party, and the majority of the costs associated with the transfer are expected to be recognized during the second half of the current fiscal year, with the timing dependent on the completion of the applicable legal requirements.
Investment income of $0.5 million in the second quarter compared to an investment loss of $1.8 million in the prior year, which included losses on variable life company-owned life insurance (COLI). Other income, net in the second quarter of $3.2 million increased $2.6 million compared to the prior year, primarily due to lower foreign exchange losses and higher equity in income of unconsolidated ventures.
Cash, short-term investments and the cash surrender value of COLI totalled $387 million and total debt was $286 million at the end of the second quarter.
“Excluding the impact of incremental disruption and inefficiencies associated with the manufacturing footprint changes in EMEA, the underlying operating results for that segment improved compared to the prior year, despite a 4% organic revenue decline in the quarter,” said Dave Sylvester, senior vice president and CFO.
“Some of this improvement was driven by overhead absorption associated with a large project which was manufactured in the first half of the year and for which revenue is expected to be recognized beginning in the third quarter, but the balance of the improvement is linked directly to our sales and distribution strategies and various cost reduction efforts.”
All business segments posted positive order growth in the second quarter. Compared to the prior year, Americas orders grew 2% and EMEA orders grew approximately 10 percent. Both segments had strong backlog at the end of the second quarter fuelled by continued strength in project business.
Steelcase expects third quarter fiscal 2015 revenue to be in the range of $810 to $835 million, which reflects expected organic revenue growth in the range of 4 to 7% over the prior year. The company reported revenue of $784.8 million in the third quarter of fiscal 2014.
“The second quarter order growth of 2% in the Americas included a significant decline in one particular region, which faced a very strong prior year comparison,” said Mr. Sylvester. “Across all other regions in the Americas, second quarter order growth averaged approximately 8 percent.”
Steelcase expects to report diluted earnings between $0.20 to $0.24 per share for the third quarter of fiscal 2015. This estimate includes approximately $0.04 per share of restructuring costs but does not include any restructuring costs associated with the proposed transfer of the Wisches facility due to the uncertainty of the timing of such costs.
Adjusted for the estimated restructuring costs, the company expects to report adjusted earnings between $0.24 to $0.28 per share. The estimates also include approximately $9 million of disruption and inefficiencies associated with the manufacturing footprint changes in EMEA, an unfavourable shift in business mix and higher operating expenses on both a sequential and year-over-year basis associated with various product development and growth initiatives and a biennial dealer conference in the Americas. Steelcase reported diluted earnings per share of $0.18 and adjusted earnings per share of $0.19 in the third quarter of fiscal 2014.
“Our employees did a terrific job delivering strong results, while also launching new products and continuing restructuring efforts to improve our future capabilities,” Jim Keane said. “We will work together to take on similar challenges in the third quarter, as we continue to build a stronger Steelcase, ready to serve the changing needs of our customers around the world.”