Steelcase Inc. (NYSE: SCS) tuesday reported fourth quarter revenue of $912.4 million and net income of $22.6 million, or diluted earnings of $0.19 per share, which included $16.9 million of charges related to the early retirement of debt. Excluding these charges, net of related income tax effects, adjusted earnings were $0.29 per share. In the prior year, Steelcase reported $772.7 million of revenue, breakeven net income and adjusted earnings per share of $0.24. Prior year results also included non-operating gains related to an investment in an unconsolidated affiliate which increased earnings by approximately $0.05 per share.
18 percent increase
Revenue increased 18 percent in the fourth quarter compared to the prior year, or 15 percent on an organic basis, reflecting double-digit growth across all segments driven by strong project business from large customers. Orders (adjusted for constant currency, acquisitions and divestitures) grew 5 percent in the fourth quarter compared to the prior year, driven by growth across all segments. Orders in the prior year reflected the impact of a list price adjustment which accelerated orders into the fourth quarter.
‘Organic growth above industry performance’
“I am pleased with our fourth quarter and fiscal 2019 results, as we’ve delivered three consecutive quarters of strong organic revenue growth, which is above industry performance in the U.S. and many of our other markets,” said Jim Keane, president and CEO. “Our success comes from the launch of new products, the acquisition of three great companies in AMQ, Smith System and Orangebox, and the strengthening of our portfolio through partnerships with companies such as West Elm. We also protected our profitability by implementing price increases in response to inflationary pressures.“
Fourth quarter operating income of $47.0 million (or 5.2 percent of revenue) increased by $15.6 million compared to operating income of $31.4 million (or 4.1 percent of revenue) in the prior year. The Americas reported operating income of $51.0 million (or 7.9 percent of revenue) compared to $37.7 million (or 7.0 percent of revenue) in the prior year. EMEA reported operating income of $1.5 million, which included $0.9 million of amortization expense related to the purchase of Orangebox, compared to $1.5 million of operating income in the prior year.
Five consecutive quarters of growth in the EMEA region
“In EMEA, we reported year over year operating income improvement in the fourth quarter before consideration of the amortization expense related to the Orangebox acquisition, which marks five consecutive quarters in which we’ve delivered significant year over year operating improvements in the region,” said Dave Sylvester, senior vice president and CFO. “Our EMEA strategies are working, as evidenced by our results this fiscal year, which included 10 percent organic revenue growth and $14 million of improvement in operating results excluding a $4 million gain on sale of property in the prior year and $2.5 million of amortization expense in the current year.”
Gross margin of 31.0 percent in the fourth quarter represented a decrease of 160 basis points compared to the prior year, driven by higher cost of sales in the Americas. Gross margin decreased by 200 basis points in the Americas and 80 basis points in EMEA due to unfavorable business mix and higher overhead investments to support growth, partially offset by benefits from the higher volume and cost reduction initiatives. Benefits from pricing actions more than offset higher commodity, freight and labor costs in the quarter after three quarters of the opposite effect. Gross margin in the Other category decreased by 70 basis points.
Operating expences significantly lower
Operating expenses of $236.1 million in the fourth quarter represented an increase of $15.5 million compared to the prior year but declined significantly as a percentage of revenue from 28.5 percent in the prior year to 25.8 percent in the current year. The increase in expense was primarily driven by $13.9 million from acquisitions, net of divestitures (including $2.3 million of amortization expense) and $2.2 million of higher variable compensation costs, partially offset by $2.4 million of favorable currency translation effects.
Fiscal 2019 Results
For fiscal 2019, the company recorded $3.4 billion of revenue and net income of $126.0 million, or diluted earnings per share of $1.05. Adjusted earnings were $1.20 per share. In fiscal 2018, the company recorded $3.1 billion of revenue, net income of $80.7 million, diluted earnings per share of $0.68 and adjusted earnings per share of $0.91.
Revenue increased 13 percent in fiscal 2019, with a 13 percent increase in the Americas, an 18 percent increase in EMEA and a 5 percent increase in the Other category. On an organic basis, fiscal 2019 revenue increased 9 percent, with a 9 percent increase in the Americas, a 10 percent increase in EMEA, and a 6 percent increase in the Other category.
Operating income of $183.6 million, or 5.3 percent of revenue, for fiscal 2019 increased by $28.4 million compared to operating income of $155.2 million, or 5.1 percent of revenue, for fiscal 2018. The improvement was driven by the revenue growth and improved operating expense leverage, partially offset by a decline in gross margin. The gross margin decline was largely driven by the Americas due to unfavorable business mix, higher commodity, freight and labor costs, net of pricing benefits and an $11.2 million pension charge recorded in the third quarter of fiscal 2019.
The company paid $64.3 million in dividends and repurchased 0.3 million shares under its share repurchase authorization program during fiscal 2019 at a cost of $4.2 million. There is $98.9 million remaining on the company’s share repurchase authorization.
“Fiscal 2019 represented one of the best years Steelcase has reported in over a decade,” said Jim Keane. “Our revenue grew 13 percent this year as our solutions directly address the most critical needs of our customers around the world to drive innovation, to attract talent and to change the culture of the workplace.”
The company expects first quarter fiscal 2020 revenue to be in the range of $830 to $855 million. Adjusted for the impact of acquisitions and unfavorable currency translation effects, the projected revenue range translates to expected organic growth of 7 to 10 percent. In the first quarter of fiscal 2019, the company reported revenue of $754.0 million.
Steelcase expects to report diluted earnings per share between $0.16 to $0.20 for the first quarter of fiscal 2020. Steelcase reported diluted earnings per share of $0.14 in the first quarter of fiscal 2019.