Steelcase Inc. (NYSE:SCS) expects third quarter fiscal 2010 revenue to approximate $600 million, compared to $811.3 million in the prior year, which marked the beginning of the current downturn in the office furniture industry. The revenue estimate includes an assumption of approximately $9 million of favorable currency translation effects as compared to the prior year.
Steelcase expects to report modestly positive operating income (excluding an estimated $5 million of restructuring costs) and approximately break-even net income for the third quarter of fiscal 2010. The net income estimate is based on an estimated effective tax rate similar to the first and second quarters, which is subject to changes in COLI income or other operating results. The company reported approximately break-even earnings in the third quarter of fiscal 2009, which included a $(27.5) million pre-tax charge related to a decrease in the cash surrender value of COLI and $(4.7) million of pre-tax restructuring costs.
Total pre-tax restructuring costs for the full fiscal year are now expected to approximate $30 million.
“Throughout this economic crisis, we have focused on providing value to our customers while preparing to participate fully in the eventual recovery. The number of customer and designer visits to Grand Rapids has held steady this year, helping us gain traction with our new products and related insights. We are well positioned for growth when our industry begins to recover,” said James P. Hackett, president and CEO, in a written statement.
In September, Steelcase reported break-even net income for the second quarter of fiscal 2010, in line with estimates the company communicated last quarter. Current quarter results included a $12.4 million benefit associated with increases in the cash surrender value of company-owned life insurance policies The company reported net income of $31.4 million, or $0.23 per share, in the second quarter of fiscal 2009.
Second quarter revenue of $578.1 million represented a decline of 35.9 percent compared to $901.8 million in the prior year quarter, which was the highest quarterly revenue in more than 5 years. Revenue comparisons were negatively impacted by approximately $(23) million of unfavorable currency translation effects compared to the prior year and $(5) million from divestitures completed within the last twelve months.
Cost of sales increased to 69.8 percent of sales in the quarter from 68.9 percent in the prior year, primarily due to lower absorption of fixed costs associated with the revenue decline. The increase in cost of sales over the prior year was partially offset by benefits from prior restructuring activities and cost control efforts, lower commodity costs, increases in COLI cash surrender value and reductions in employee compensation costs.
Operating expenses fell $66.9 million to $158.6 million, or 27.4 percent of revenue, from $225.5 million, or 25.0 percent of revenue, in the prior year. The decrease in absolute dollars was primarily driven by benefits from prior restructuring activities and cost control efforts, reduced employee compensation costs, favorable currency translation effects and increases in COLI cash surrender value.
“Amid the volatility, demand levels appear to be stabilizing in advance of a potential broader economic recovery,” Hackett said. “Our employees have remained diligent in reducing and deferring spending while staying focused on executing our growth strategies.”
The current quarter operating loss of $(1.0) million compares with operating income of $46.0 million in the prior year. Operating income excluding restructuring costs was $16.4 million compared to $55.0 million in the prior year. Current quarter restructuring costs relating to workforce reductions and facility consolidations totaled $(17.4) million and were significantly higher than company estimates, largely due to the earlier than anticipated completion of negotiations related to International workforce reductions. Restructuring costs were $(9.0) million in the prior year.
The income tax benefit recorded in the quarter approximated the loss before income taxes. The resulting effective tax rate of 100 percent was driven in large part by significant non-taxable income from COLI.
Cash and short-term investments increased to $142.0 million compared to $118.5 at the end of the first quarter driven by the financing of existing corporate aircraft, which increased cash and long-term debt by $47 million in the second quarter. Total debt at the end of the quarter was approximately $302 million.
“We are pleased to report positive operating income, excluding restructuring costs, despite a $324 million decline in revenue compared to the prior year,” said David C. Sylvester, vice president and CFO. “Since the start of this downturn, we have taken both permanent and temporary actions to reduce our annualized operating costs by approximately $140 million. Based on the success we have had in reducing costs, we believe we can achieve break-even or better operating income for the full fiscal year (excluding restructuring costs and year to date excess COLI income of approximately $26 million), provided revenue does not decline greater than 27 percent compared to fiscal 2009.”