Professional furniture, architecture, and technology design products provider Steelcase Inc. (SCS 0.93%) enjoyed profitable growth during its fiscal third quarter thanks to a heavy slate of project work in the Americas segment, which supplemented expansion in higher-growth markets. Below, we'll zero in on the factors that contributed to Steelcase's successful quarter. Note that all comparative numbers in this article are presented against the prior-year quarter (the fiscal third quarter of 2018).
Steelcase Inc.: The raw numbers
| Metric | Q3 2019 | Q3 2018 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $901 million | $772.1 million | 16.7% |
| Net income | $37.3 million | $25.7 million | 45.1% |
| Diluted earnings per share | $0.31 | $0.22 | 40.9% |
Data source: Steelcase Inc.
What happened at Steelcase this quarter?
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The company's reported revenue was undergirded by strong organic revenue growth (i.e. reported revenue adjusted for acquisitions, divestitures, and currency translation effects). Steelcase achieved 13% organic revenue expansion in the third quarter, which follows 8% year-over-year expansion in the sequential previous quarter (the second fiscal quarter of 2019).
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The company's Americas segment booked 16% revenue growth and 12% organic growth, which was driven by "strong project business from both large and small customers."
- The Europe, Middle East, and Africa (EMEA) segment notched reported and organic top-line improvements of 16% and 12%, respectively. Management attributed EMEA's gains to an order backlog at the beginning of the quarter.
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"Other" revenue (which includes the Asia Pacific region as well as the Designtex textiles and PolyVision ceramic surfaces businesses) improved 17%, and the segment's organic revenue jumped 20% on crisp business in Asia.
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Order flow, another important gauge of Steelcase's relative business strength, gained 10% on the back of higher project business. This metric was again led by the Americas, which saw orders increase by 14%.
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EMEA orders, however, declined by 6%, which the company attributed to weaker order patterns at the beginning of the quarter, which improved through the course of the three months. Given EMEA's top-line advance, we can infer that its heavy backlog allowed the segment to continue to ship product and record higher sales as orders stabilized and resumed a positive direction during the quarter.
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Steelcase took an $11.2 million charge during the quarter in relation to its pension plan, which lowered net income growth by approximately 1.2%.
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Gross margin dipped by 1.6 percentage points, of which 1.1 percentage points can be traced to the pension charge. The adjusted 0.5 percentage-point drop in gross margin was due to a variety of factors, including higher commodity and freight costs, an unfavorable product mix, and the discounting of large projects in Asia.
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Operating margin crept up by 0.3 percentage points to 5% during the quarter, as lower overhead expenses offset the weakness in gross margin.
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During the quarter, Steelcase acquired Orangebox Group Ltd, a designer of collaboration-oriented furniture based in London, for $79.1 million in cash. The acquisition is part of Steelcase's attempt to expand its offerings to benefit from rapidly evolving trends in contemporary office settings.
Image source: Getty Images.
What management had to say
In Steelcase's earnings press release, CEO Jim Keane alluded to both the company's acquisition strategy and faster internal innovation in summing up the quarter's results:
The successful implementation of our growth strategies to broaden our product offering contributed to another quarter of strong organic revenue growth, which continued to outpace recent industry trends in the U.S. and many other markets... The 41 percent improvement in earnings per share in the third quarter was even stronger than the 32 percent growth in the second quarter and was driven by our target to expand earnings through revenue growth while continuing to drive fitness across our business mode.
Dave Sylvester, Steelcase's CFO, provided additional insight into primary drivers of the quarter's growth, including commentary on the volatile order flow in Europe:
In the Americas, we achieved strong operating leverage from the $68 million of organic revenue growth even though revenue from our recent pricing actions was offset by inflation...In EMEA, we were pleased to report year-over-year improvement in our operating results again this quarter, despite political and economic uncertainty in the U.K. and France, which may have negatively impacted demand patterns across the region.
Looking forward
In the fourth quarter of fiscal 2019, Steelcase expects to book revenue of $860 million to $885 million. At the midpoint, this will represent a year-over-year improvement of roughly 13% and an organic revenue advance of 10.5%.
As for the bottom line, Steelcase is projecting a diluted earnings-per-share (EPS) range of $0.24 to $0.28 for the fourth quarter, which if met will mark a 37% leap over the comparable quarter's unadjusted diluted EPS of $0.19. Management has not issued fiscal 2020 targets yet, but affirmed in its earnings report that it expects to amplify both revenue and earnings again next year.
