Steelcase Walks Fine Line As Earnings Drop

June 5, 2002
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GRAND RAPIDS — Steelcase Inc. faces a "rough and bumpy" year ahead as the company works to cut costs and increase earnings, plus cope with a soft U.S. economy that's taking a bite out of sales.

As executives announced record revenues of nearly $3.9 billion for 2000, they warned of tough times ahead for the rest of 2001.

"It's likely that the year is going to be a rough and bumpy year," Chief Executive Officer Jim Hackett told brokerage analysts last week during a conference to discuss Steelcase's latest sales and earnings report.

Steelcase will "react appropriately" to the economic downturn and a sharp decline in quarterly earnings by balancing the need to cut costs with maintaining an organization that can adapt quickly when the economy turns around, Hackett said. He left no doubt that Steelcase needs to become a leaner company that provides a higher rate of return.

Steelcase is taking "very stern and strict efforts to reduce costs," he said.

"We need to become a healthier, stronger organization because of these tough times," Hackett said. "We'll get there as fast as we can."

"There's little love in the idea of increasing sales and not having bottom line results, he said.

The CEO's comments to Wall Street analysts came after Steelcase last week announced lower quarterly earnings.

Net income for the fourth quarter that ended Feb. 23 plunged 41.5 percent from a year earlier, from $44 million to $25.7 million. Annual earnings, minus one-time items, rose 9.7 percent, from $189.9 million in fiscal year 2000 to $203.6 million in FY 2001.

The company's operating margin declined for both the quarter and the year, from 7.3 percent to 6.5 percent in the fourth quarter, and from 8.9 percent to 8.5 percent annually.

Sales for the fourth quarter grew from $919.6 million a year ago to $942.4 million, a 2.5 percent gain that came as the brakes were slammed on the U.S. economy.

Annual sales grew 16.2 percent, from $3.34 billion in FY 2000 to $3.88 billion in FY 2001.

Hackett attributed the quarterly earnings slide to a trend that at least bodes well for the future: The growing popularity of new products, which have a lower profit margin initially because of high launch and tooling costs. Sales of new products accounted for about 25 percent of Steelcase's revenues last year, compared to 17 percent in the earlier year. That rate is running "slightly ahead" of last year, he said.

"There's some good new in this," Hackett said.

Last week's financial report came after Steelcase launched a major initiative to cut costs and increase corporate profitability. Steelcase in February said it would trim its North American workforce 10 percent through the elimination of temporary manufacturing positions and about 300 salaried positions in North America. The company has already eliminated about 200 salaried positions and expects to cut the rest by June, Hackett said.

If necessary, "we're prepared to make more cuts," he said. The job cuts are expected to reduce costs by $20 million.

Another $50 million in savings is targeted in the company's global purchasing of materials, he said.

Other cost-cutting initiatives being implemented or examined include filling only "mission critical" new positions, reducing payouts under a revised employee bonus program that aligns bonuses with profit levels, and deferring or eliminating discretionary spending, Chief Financial Officer Alwyn Rogier-Chapman said.

"Expenditures early in the year will be tightly controlled," Rogier-Chapman told analysts.

Those tight controls come as the souring U.S. economy cuts into sales. They could fall as much as 5 percent from the previous year volumes during the first half of the fiscal year, Rogier-Chapman said.

Earnings will also take a hit. Steelcase has targeted FY 2002 earnings of $1.00 to $1.15 per share, which compares to the $1.30 per share recorded in FY 2001.

"We anticipate a challenging year ahead," he said. "We're just hoping the last six months (of the fiscal year) will improve."

Despite the relative gloom of the fourth quarter report, Hackett remained upbeat about Steelcase's long-term outlook and business strategy of linking furnishings with architectural design. Steelcase's revenues should grow at an 8 percent to 10 percent rate annually, and earnings per share should increase 10 percent to 15 percent per year, once the economy improves "and things get normal."

"The company is in fantastic shape to weather any kind of buffeting that we might experience this year," Hackett said. "In spite of these gloomy perspectives for the next year, I'm quite bullish on the fact that the investment in the company and the future for our customers is quite bright."

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