Steelcase Reports Third Quarter Results - Revenue and Earnings Exceed Expectations
Strong Growth Projected for Fourth Quarter
GRAND RAPIDS, Mich., Dec. 16, 2010 -- Steelcase Inc. (NYSE:SCS) today reported third quarter revenue of $672.6 million and net income of $18.3 million, or $0.14 per share, both ahead of company estimates. Excluding restructuring costs, adjusted earnings equaled $0.18 per share. Steelcase reported $616.1 million of revenue and break-even net income in the third quarter of the prior year.
Organic revenue growth in the third quarter was 15 percent over the prior year after adjusting for negative impacts of $(21) million from the deconsolidation of dealers completed in the last twelve months and approximately $(10) million related to unfavorable currency translation effects. Growth was prevalent across most geographies and vertical markets.
"Our strong recovery continues to be fueled by the improving stability of the economies around the world coupled with the portfolio of innovative solutions we offer our customers," said James P. Hackett, president and CEO. "Our International segment posted organic growth of 20 percent, led by strong performance in Germany, France and the Asia Pacific region, while North America had broad-based organic growth of 16 percent."
Current quarter operating income of $26.8 million represents an improvement of $12.0 million over the prior year operating income of $14.8 million, which included $4.3 million of income associated with an increase in cash surrender value of variable life company-owned life insurance policies ("variable life COLI income"). Current quarter results include $(8.0) million of restructuring costs compared to $(4.8) million of restructuring costs in the prior year. Adjusted for these items, third quarter adjusted operating income of $34.8 million improved $19.5 million compared to the prior year driven by organic revenue growth.
"With the improved demand patterns, we are able to demonstrate the earnings power of a much fitter business model," said David C. Sylvester, vice president and CFO. "Operating margins, excluding restructuring costs, reached 6.8 percent in North America and 5.5 percent in International, where we continue to invest in emerging markets."
Cost of sales improved to 68.7 percent of revenue in the current quarter compared with 70.8 percent in the prior year. The benefits from previous restructuring activities and higher absorption of fixed costs associated with the revenue growth in the quarter were partially offset by higher commodity costs and lower variable life COLI income compared to prior year.
Operating expenses in the third quarter were $176.0 million compared with $160.4 million in the prior year which included the favorable impacts of variable life COLI income. Current quarter expenses increased largely due to higher variable compensation expense.
Other income, net of $3.8 million in the current quarter includes variable life COLI income, which is now recorded as a non-operating item given the designation of these assets as an additional source of corporate liquidity.
Income tax expense for the third quarter included benefits associated with the IDEO ownership transition described below and higher non-taxable COLI income.
Cash, short-term investments and the cash surrender value of variable life company-owned life insurance totaled $303 million and total debt was $299 million at the end of the third quarter.
On November 30, 2010, the company completed the sale of a facility in Canada, which generated $25 million of cash and resulted in an $11 million pre-tax gain. The gain will be reflected as a fourth quarter restructuring item in the North America segment and will result in approximately $4 million of incremental variable compensation expense, which will be recorded in cost of sales and operating expenses. The company is leasing back a small portion of the facility to support its current level of activity.
On December 14, 2010, the company transitioned a controlling interest of IDEO to certain members of its management pursuant to an agreement entered into during fiscal 2008. The company retained a 20 percent equity interest in IDEO. This transaction generated $30 million of cash and is expected to result in a pre-tax gain of approximately $9 million, net of incremental variable compensation expense. Beginning in the fourth quarter, the company will no longer consolidate the operations of IDEO and will record its share of IDEO's earnings as equity in income of unconsolidated ventures in other income, net.
"IDEO has been part of the Steelcase family since 1996, and this relationship has provided a strategic advantage for Steelcase as we worked together to advance the cause of user-centered design," Mr. Hackett said. "We are happy that the IDEO management team is in a position to take a controlling interest and equally happy that Steelcase and IDEO will continue to have an alliance. We wish them continued success."
Orders grew by more than 20 percent in the International and North America segments in the third quarter, compared to the prior year. The company expects fourth quarter fiscal 2011 revenue to reflect typical seasonal patterns and be in the range of $580 to $605 million. This estimate includes an assumption of approximately $(7) million from unfavorable currency translation effects compared to the prior year. The company reported revenue of $551.9 million in the fourth quarter of fiscal 2010, which included $43 million of revenue from IDEO and a dealer which has since been deconsolidated. Adjusting for these impacts, the company projects organic revenue growth in the range of 16 to 21 percent over the prior year.
Steelcase expects to report net income of $0.11 to $0.15 per share for the fourth quarter of fiscal 2011, including a net restructuring credit of approximately $0.02 per share. In addition, this estimate includes approximately $0.05 per share related to the IDEO ownership transition gain, net of incremental variable compensation expense. Steelcase reported a net loss of $(0.10) per share in the fourth quarter of fiscal 2010.
Mr. Hackett concluded, "Looking forward, we are encouraged by our prospects to realize continued growth in a broader economic recovery, which seems to be gaining additional traction around the world, and we remain committed to strengthening the fitness of our business model."
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