GRAND RAPIDS, Mich. — Steelcase's second quarter results, announced Sept. 19, drew praise such as steller and soar from stock analysts. Second quarter earnings were up, and the future outlook looks bright with many companies releasing "return-to-office mandates, and we're optimistic that our demand levels will improve as customers seek our help to evolve their workplaces to engage, connect, and work better for their employees."  

Steelcase Inc., which ranked #5 on the FDMC 300 ranking of wood products companies, reported second-quarter revenue of $854.6 million, net income of $27.5 million, or $0.23 per share, and adjusted earnings per share of $0.31. In the prior year, Steelcase reported revenue of $863.3 million, net income of $19.6 million, or $0.17 per share, and adjusted earnings per share of $0.21.

The earnings per share increased 35% compared to the prior year driven by "strong improvement in gross margin, total liquidity strengthened by $115 million during the second quarter, and the outlook projects full-year adjusted EPS of $0.80 to $0.90, significantly above the fiscal 2024 target.

Revenue decreased 1 percent in the second quarter compared to the prior year and decreased 1 percent on an organic basis, including 1 percent organic growth in the Americas and an 8 percent organic decline in International. The overall organic decline was driven by lower volume (due to lower beginning backlog and lower orders, partially offset by faster order fulfillment patterns), offset in part by higher pricing.

Orders (adjusted for the impact of an acquisition, divestitures, and currency translation effects) declined 7 percent compared to the prior year. Orders declined by 7 percent in the Americas and 5 percent in International. In the Americas, orders reflected a decline in project business, partially offset by double-digit growth in continuing business. In International, growth in Asia Pacific partially offset declines in EMEA. On a consolidated basis, orders declined 5 percent sequentially versus the first quarter, which is consistent with the seasonal decrease in the prior year.

"We delivered better than expected revenue and earnings in a dynamic environment due primarily to continued improvement in our order fulfillment patterns and pricing benefits," said Sara Armbruster, president and CEO. "Through the first half of the year, although project activity has softened, we've seen strong growth in our continuing business as customers make investments to refresh their existing spaces."

Operating income of $41.0 million in the second quarter was 4.8 percent of revenue, which represented an increase of $12.1 million, or an improvement of 150 basis points, compared to the prior year. Adjusted operating income of $53.3 million in the second quarter (which excludes $7.9 million of restructuring costs and $4.4 million of amortization of purchased intangible assets) represented an increase of $17.5 million compared to the prior year, with a $19.9 million improvement in the Americas partially offset by a $2.4 million decline in International. The increase in the Americas was primarily driven by improved gross margin, while the decrease in International was primarily driven by lower revenue and higher operating expenses, which more than offset improved gross margin.

"The macro-economic environment across our international markets has been mixed, which led us to take the previously announced restructuring actions in the International segment," said Dave Sylvester, senior vice president and CFO. "As the projected benefits of those actions become more fully realized in the third and fourth quarters and volume is anticipated to seasonally improve, we expect our adjusted operating results for the second half of the year in International to approach breakeven."

A gross margin of 33.2 percent in the second quarter represented an increase of 410 basis points compared to the prior year and reflected a 430 basis point improvement in the Americas and a 300 basis point improvement in International. The improvements were primarily driven by higher pricing benefits of approximately $80 million and operational improvements, partially offset by the impacts of lower volume.

Operating expenses of $235.9 million in the second quarter represented an increase of $14.5 million compared to the prior year. The increase was primarily driven by $14.6 million of higher variable compensation expense, partially offset by $5.1 million of gains primarily related to the sale of an aircraft and other aviation assets.

Total liquidity, comprised of cash and cash equivalents and the cash surrender value of company-owned life insurance, aggregated to $314.5 million at the end of the second quarter, representing an increase of $114.6 million from the end of the first quarter. Total debt was $451.1 million. Trailing four-quarter adjusted EBITDA of $251.0 million (or 7.8 percent of revenue) represented an increase of 63 percent compared to the prior year.

The Board of Directors has declared a quarterly cash dividend of $0.10 per share, to be paid on or before October 13, 2023, to shareholders of record as of October 3, 2023.

Outlook

At the end of the second quarter, the company’s backlog of customer orders was approximately $700 million, which was 26 percent lower than the prior year. Backlog in the prior year was 38 percent higher than at the end of the second quarter of fiscal 2022 in part due to the impacts of supply chain disruptions and extended delivery timeframes. As a result, the company expects third-quarter fiscal 2024 revenue to be in the range of $780 to $805 million. The company reported revenue of $826.9 million in the third quarter of fiscal 2023. The projected revenue range translates to a decline of 3 to 6 percent, including on an organic basis, compared to the prior year.

The company expects to report earnings per share of between $0.19 to $0.23 for the third quarter of fiscal 2024 and adjusted earnings per share of between $0.23 to $0.27. The company reported earnings per share of $0.10 and adjusted earnings per share of $0.20 in the third quarter of fiscal 2023.

The third quarter estimates include:

• gross margin of approximately 32 percent (compared to 28.8 percent in the prior year),
• projected operating expenses of between $215 to $220 million, which includes $4 million of amortization of purchased intangible assets and $10 million of expected gains from the sale of fixed assets,
• projected interest expense, investment income, and other income, net, of approximately $4 million and
• a projected effective tax rate of 26 percent.
• For fiscal 2024, the company expects a modest organic revenue decline compared to fiscal 2023 and significantly improved adjusted earnings per share of between $0.80 to $0.90. The company reported adjusted earnings per share of $0.56 in fiscal 2023.

“Based on the strength of our first half results and current market conditions, we expect our full-year adjusted earnings to finish above the target we set at the beginning of the year,” said Sara Armbruster. "Our improved operating results and strengthened liquidity provide capital to invest in our strategy and are supportive of our goal to drive shareholder value. More companies are issuing return-to-office mandates, and we're optimistic that our demand levels will improve as customers seek our help to evolve their workplaces to engage, connect, and work better for their employees."