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Steelcase Reports 3rd Quarter Results

Thursday 19 December 2013

Steelcase Inc. today reported third quarter revenue of $784.8 million and net income of $23.0 million, or $0.18 per share, including restructuring costs of approximately $0.01 per share. Current quarter results included goodwill and intangible asset impairment charges related to Asia Pacific, which had the effect of reducing earnings by approximately $12.9 million, or $0.10 per share. Steelcase reported $727.2 million of revenue and earnings of $0.19 per share in the third quarter of the prior year, including restructuring costs of approximately $0.03 per share.
Organic revenue growth over the prior year was 8% after adjusting for $3.6 million of favorable currency translation effects and $1.5 million related to a dealer divestiture, net of acquisitions. The Americas organic revenue growth was 11 % compared to the prior year and reflected a higher mix of project business from some of the company's largest corporate customers compared to the prior year. EMEA and Asia Pacific experienced small organic revenue declines, which included higher levels of competitive discounting compared to the prior year.
Current quarter operating income of $39.3 million compares to operating income of $38.4 million in the prior year. Excluding goodwill and intangible asset impairment charges and restructuring costs, third quarter adjusted operating income of $53.9 million compares with $44.4 million in the prior year. The improvement was driven by strength in the Americas, offset in part by operating losses in EMEA and Asia Pacific compared to profitability in the prior year.
"The strong performance in the Americas continues to illustrate our competitive advantage related to helping our customers amplify organizational performance through the modernization of their spaces. We expect the momentum in the Americas to be further propelled by the launch of Gesture, which is now shipping to customers, and other new products expected to begin shipping in the fourth quarter and early next fiscal year," said James P. Hackett, CEO. "We recently announced changes in our EMEA manufacturing footprint as part of our multi-year strategy to improve revenue and the fitness of our business model in EMEA, and we continue to believe that EMEA and Asia Pacific are key parts of our long-term global strategy."
Cost of sales increased 50 basis points to 69.0 % of revenue in the current quarter compared to 68.5 % in the prior year. Year-over-year improvement in the Americas was more than offset by higher costs of sales in EMEA and Asia Pacific, which were primarily driven by higher competitive discounting and adjustments to reserves for slow-moving inventory and sales allowances.
Operating expenses in the third quarter were $189.8 million compared with $184.8 million in the prior year. The increase was largely due to higher spending on marketing, product development and other initiatives, offset in part by lower variable compensation expense.
Other income, net of $3.0 million in the current quarter increased by $1.2 million compared to the prior year primarily due to higher equity in income of unconsolidated ventures.
Income tax expense of $15.5 million in the current quarter reflects the non-deductible nature of the goodwill and intangible asset impairment charges and included $4.0 million of other net discrete tax benefits.
Cash, short-term investments and the cash surrender value of company-owned life insurance totaled $449 million and total debt was $287 million at the end of the third quarter.
The Board of Directors today declared a cash dividend of $0.10 per share, to be paid on or before January 13, 2014 to shareholders of record as of December 30, 2013.
"Despite seasonal revenue improvement in EMEA compared to the second quarter, we continued to post operating losses in this region," said David C. Sylvester, senior vice president and CFO. "We expect the macro-economic environment to remain challenging and result in quarterly operating losses for the near term. Our focus remains on allocating resources to areas of potential growth and reducing our cost structure wherever possible to improve the long-term competitiveness of the business."
In the Americas, third quarter order growth approximated 9% compared to the prior year and customer order backlog at the end of the third quarter increased approximately 15% compared to the prior year. EMEA third quarter orders declined by approximately 10% compared to the prior year. The company expects fourth quarter 2014 revenue to be in the range of $760 to $785 million. This estimate includes approximately $35 million associated with an extra week in the Americas and Other category compared to the prior year. Adjusted for this impact, the company projects fourth quarter organic revenue growth in the range of 1 to 4 % over the prior year. The company reported revenue of $721.4 million in the fourth quarter of fiscal 2013.
Steelcase expects to report earnings between $0.22 to $0.25 per share for the fourth quarter of fiscal 2014, including net restructuring benefits of approximately $0.07 per share primarily related to expected gains associated with pending facility sales. In addition, the estimate for earnings includes higher operating expenses as compared to the third quarter (including costs associated with the extra week and incremental variable compensation expense associated with the restructuring benefits) and an estimated effective tax rate of approximately 42%. Steelcase reported a net loss of $0.22 per share in the fourth quarter of fiscal 2013, including restructuring costs of approximately $0.10 per share. In addition, fourth quarter of fiscal 2013 results included goodwill impairment charges, tax valuation allowance adjustments, foreign tax credit benefits and environmental reserve adjustments, which had the aggregate net effect of reducing earnings by approximately $0.31 per share.
"For a large portion of my nearly 20 years as CEO, Steelcase has been reinventing itself to keep pace with technology, globalization and other changes in the world of work," said Mr. Hackett, who earlier this year announced his intention to retire as CEO in February 2014. "I have great confidence in our management team and our incoming CEO, Jim Keane, to build on great performance in the Americas and continue Steelcase's transformation in other regions of the world."

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