Contemporary office environment furnisher Steelcase Inc. (SCS +0.00%) reported on its first quarter of fiscal 2019 Wednesday after the close of trading. While the company managed a better year-over-year revenue comparison than the fourth quarter of 2018, in which revenue dipped nearly 5%, top-line performance was still lukewarm at best.
Steelcase Inc.: The raw numbers
| Metric | Q1 2019 | Q1 2018 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $754.0 million | $735.1 million | 2.6% |
| Net income | $17.0 million | $18.1 million | (6.1%) |
| Diluted earnings per share | $0.14 | $0.15 | (6.7%) |
Data source: Steelcase Inc.
What happened at Steelcase this quarter?
Image source: Getty Images.
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While reported revenue increased modestly, organic revenue was flat during the first quarter. The Americas, Steelcase's largest segment (representing roughly 71% of total revenue) posted an organic revenue decline of 1%, while the EMEA segment (Europe, Middle East, and Africa) achieved 8% organic revenue growth, which the company attributed to strength in Germany, Iberia, and the United Kingdom.
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Conversely, new order growth exhibited momentum, as orders rose by 6% in the Americas and 7% in EMEA, for a total order expansion rate of 5%, the result of new project work in both major segments. In another positive sign for future revenue, the company's backlog expanded by 14% at the end of the quarter versus the prior year.
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Though reported revenue remained stable, Steelcase realized lower profit for each revenue dollar. Operating income dipped by nearly $12.0 million to $23.3 million.
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The company blamed its operating performance on weaker gross margins. In the Americas segment, higher commodity costs, unfavorable product mix, and soft pricing all drove gross margin lower by 170 basis points. This was somewhat offset by 250 basis points of gross margin improvement in the EMEA division, which resulted from a higher absorption of fixed costs, the benefits of recent cost cutting, and foreign currency translation.
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Despite the margin pressure, Steelcase was able to keep selling, general, and administrative expenses in check. Operating expense as a percentage of sales decreased by just 10 basis points to 28.4%, versus the first quarter of fiscal 2018.
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Subsequent to quarter-end, the company announced an agreement on June 8 to acquire Smith System Manufacturing Company, a privately held leader in school furniture for the pre-K-12 market. Terms have not yet been disclosed, and the acquisition is expected to be completed by the end of June.
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Steelcase informed investors that it's expanding its relationship with Microsoft. For example, Steelcase is developing wall mount hangings and a rolling stand to be used with Microsoft's next-generation interactive whiteboard, the Surface Hub 2:
Image source: Microsoft Corporation.
What management had to say
As I discussed this spring in regard to both Steelcase and competitor Herman Miller, office furnishings manufacturers are still gauging the effect of tariffs levied on imported steel and aluminum that the Trump administration enacted earlier this year. In Steelcase's earnings press release, CFO Dave Sylvester noted that higher commodity costs are already pressuring gross margin:
In response to quickly rising steel prices and other commodity costs, we implemented an additional list price adjustment earlier this month, which represented our second increase in four months... We expect commodity cost increases to continue pressuring our gross margin for another quarter or two while these price adjustments take fuller effect. In addition, our revenue in the Americas over the same period is expected to include a growing mix of project business, including projects won at earlier price levels, which will impact our year-over-year gross margin comparisons.
While margin compression from external sources isn't a happy circumstance for shareholders, it's positive that the company has enough pricing power to pass on some of the pain to customers -- at least in the near term.
Looking forward
Steelcase's management expects organic revenue growth of 6% to 9% in the second quarter, and projects that the organization's reported revenue will reach between $865 million and $890 million. The company's diluted earnings per share (EPS) is slated to fall between $0.28 and $0.33.
Last year, second-quarter EPS of $0.31 equaled the midpoint of Q2 2019's projected band. To hit the high end of the range and advance beyond last year's earnings, Steelcase will need to continue to control costs, work off some of its backlog, and convert its higher first-quarter order flow into finished projects during the current three-month period.
