The Daily Magic Formula Stock for 09/05/2008 is Steelcase Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is 25-50 %.
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Steelcase is the worldâ€™s leading designer, marketer and manufacturer of office furniture and complementary products and services, with 2008 revenue of approximately $3.4 billion. We were incorporated in 1912 as The Metal Office Furniture Company and changed our name to Steelcase Inc. in 1954. We became a publicly-traded company in 1998, and our stock is listed on the New York Stock Exchange.
Our mission is to help people work more effectively by providing knowledge, products and services that result in a better work experience for our customers. We expect to grow our business by focusing on new geographic and customer market segments while continuing to leverage our existing customer base, which we believe represents the largest installed base in the industry.
Headquartered in Grand Rapids, Michigan, USA, Steelcase is a global company with approximately 13,500 employees. We sell our products through various channels including independent dealers, company-owned dealers and directly to end users and governmental units. Various other channels are employed to reach new customers and to serve existing customer segments more efficiently. We operate using a global network of manufacturing, assembly and distribution facilities to supply product to our various business units.
We study work, workers and workplaces to fully understand the ever-changing needs of individuals, teams and organizations all around the world. We then take our knowledge, couple it with products and services inspired by what weâ€™ve learned about the workplace, and create solutions that help people work more effectively. This knowledge is embedded in our product portfolio, which includes a broad range of products with a variety of aesthetic options and performance features at various price points that address three core elements of a work environment: furniture, interior architecture and technology. Our reportable segments generally offer similar or complementary products under some or all of the categories listed below.
Panel-based and freestanding furniture systems. Moveable and reconfigurable furniture components used to create individual workstations and complete work environments. Systems furniture provides visual and acoustical privacy, accommodates power and data cabling and supports technology and other worktools.
Storage. Lateral and vertical files, cabinets, bins and shelves, carts, file pedestals and towers.
Seating. High-performance, ergonomic, executive, guest, lounge, team, healthcare, stackable and general use chairs.
Tables. Conference, training, personal and cafĂ© tables.
Textiles and surface materials. Upholstery, wall covering, drapery, panel fabrics, architectural panels, shades and screens and surface imaging.
Desks and Suites. Wood and non-wood desks, credenzas and casegoods.
Worktools. Computer support, technology management and information management products and portable whiteboards.
Interior architecture. Full and partial height walls and doors with a variety of surface materials and modular post and beam products.
Lighting. Task, ambient and accent lighting with energy efficient and user control features.
Infrastructure. Infrastructure products, such as modular communications, data and power cabling.
Appliances. Group communication tools, such as interactive and static whiteboards, image capturing devices and web-based interactive space-scheduling devices.
We provide lease origination services to customers and selected financing services to our dealers. We offer services to help our customers more fully leverage their physical space to drive down and control occupancy costs while at the same time enhance the performance of their employees. Our services include furniture and asset management and workplace strategies consulting.
IDEO provides product design and innovation services to a variety of organizations in the business, government, education and social sectors.
We operate on a worldwide basis within our North America and International reportable segments, plus an â€śOtherâ€ť category. During 2008, we made changes in our organizational structure which resulted in changes to our segment reporting. As a result of these changes, certain components have been reclassified between our North America segment and our Other category, including Vecta, which moved from North America to our Premium Group unit, and a health-care product line within Brayton, which moved from our Premium Group unit to Nurture by Steelcase. Segment information for prior years has been restated to reflect these changes.
In recent years, we have significantly decreased our investment in the activities of the Financial Services business. While we continue to originate leases to customers and earn an origination fee for that service, a third party provides the lease funding. In addition, we have significantly reduced the nature and level of financing services provided to our dealers. As a result, we intend to wind down the operation of our Financial Services subsidiary and transition its residual activities to our North America segment during 2009.
Additional information about our reportable segments, including financial information about geographic areas, is contained in Item 7: Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations and Note 15 to the consolidated financial statements.
North America Segment
Our North America segment serves customers in the United States (â€śU.S.â€ť) and Canada mainly through approximately 230 independent and company-owned dealers. The North America segment includes furniture, interior architecture and technology environment solutions as described above, under the Steelcase, Turnstone, Details and Nurture by Steelcase brands. The Steelcase brand delivers insight-led products, services and experiences that elevate performance of the worldâ€™s leading organizations.
Turnstone targets smaller to medium-sized companies and offers furniture that features smart design and provides good value for people at work in all types of organizations. Details designs and markets ergonomic tools and accessories for the workplace. Nurture by Steelcase creates healthcare products and environments that seek to provide patients, caregivers and patientsâ€™ families a more comfortable, efficient and favorable healing process.
Our end-use customer sales are distributed across a broad range of industries and vertical markets including financial services, healthcare, insurance, government, higher education and technology, none of which individually exceeded 17% of the North America segment revenue in 2008.
Each of our dealers maintains their own sales force which is complemented by our sales representatives who work closely with the dealers throughout the selling process. The largest independent dealer in North America accounted for approximately 5% of our segment revenue in 2008. The five largest independent dealers collectively accounted for approximately 16% of our segment revenue. We do not believe our business is dependent on any single dealer, the loss of which would have a sustained material adverse effect upon our business. However, temporary disruption of dealer coverage within a specific local market due to financial failure, the inability to smoothly transition ownership or termination of the dealer relationship could temporarily have an adverse impact on our business within the affected market. From time to time, we obtain a controlling interest in dealers that are undergoing an ownership transition. It is typically our intent to divest our interest in these dealerships as soon as it is practical.
In 2008, the North America segment had revenue of $1,936.6, or 56.6% of our consolidated revenue, and at the end of the year had approximately 7,100 employees and 500 temporary workers. Approximately 4,300 of the total workers related to manufacturing.
The North America office furniture markets are highly competitive, with a number of competitors offering similar categories of products. In these markets, companies compete on price, product performance, design, delivery and relationships with customers, architects and designers. Our most significant competitors in the U.S. are Haworth, Inc., Herman Miller, Inc., HNI Corporation, Kimball International Inc. and Knoll, Inc. Together with Steelcase, these companies represent approximately 65% of the U.S. office furniture market.
Our International segment serves customers outside of the U.S. and Canada primarily under the Steelcase brand, with an emphasis on freestanding furniture systems, storage and seating solutions. The international office furniture market is highly competitive and fragmented. We compete with many local and regional manufacturers in many different markets. In many cases, these competitors focus on specific product categories. Our largest presence is in Europe, where we have the leading market share in Germany, France and Spain. We serve customers through approximately 430 independent and company-owned dealers. In certain geographic markets we sell directly to end customers. No single independent dealer in the International segment accounted for more than 5% of our segment revenue in 2008. The five largest independent dealers collectively accounted for approximately 7% of our segment revenue.
During 2008, we acquired 100% of the outstanding stock of Ultra Group Company Limited (â€śUltraâ€ť). Ultra is an office furniture manufacturer with headquarters in Hong Kong, manufacturing in China and sales and distribution throughout Asia.
In 2008, our International segment had revenue of $893.8, or 26.1% of our consolidated revenue, and at the end of the year had approximately 4,100 employees and 700 temporary workers. Approximately 3,100 of the total workers related to manufacturing.
The Other category includes our Premium Group (formerly Design Group), PolyVision, IDEO, and, through 2008, Financial Services business. The Premium Group is comprised of the following four brands focused on providing architects and designers with unique products and premium experiences.
â€˘ Designtex focuses on surface materials including textiles, wall coverings, shades, screens and surface imagings.
â€˘ Vecta designs and creates learning, meeting and teaming environments.
â€˘ Brayton focuses on lounge and executive seating and tables.
â€˘ Metro creates refined, modern furniture for meeting spaces, private offices and the open floor plan.
Designtex primarily sells products specified by architects and designers directly to end-use customers through a direct sales force. Vecta, Brayton and Metro sales are primarily generated through our North America dealer network.
PolyVision designs and manufactures visual communication products, such as static and electronic whiteboards. The majority of PolyVisionâ€™s revenue relates to the manufacturing of steel and ceramic surfaces and the fabrication of related static whiteboards sold in the primary and secondary education markets. PolyVisionâ€™s revenue generated from whiteboards and group communication tools are sold through audio-visual resellers and our North America dealer network. PolyVision also sells fabricated static whiteboards to general contractors through a direct bid process; however, we intend to exit this portion of the business during 2009.
IDEO is an innovation and design firm that uses a human-centered, design-based approach to generate new offerings and build new capabilities for its customers. IDEO serves Steelcase and a variety of organizations within consumer products, financial services, healthcare, information technology, government, transportation and other industries. In 2008, we entered into an agreement which will allow certain members of the management of IDEO to potentially purchase a controlling equity interest in IDEO in two phases before 2013. As of February 29, 2008, IDEO management effectively purchased approximately 12% of IDEO under the first phase of the agreement.
In 2008, the Other category accounted for $590.4, or 17.3% of our total revenue, and at the end of the year had approximately 2,300 employees and 100 temporary workers. Approximately 1,100 of the total workers related to manufacturing.
Approximately 85% of corporate expenses are charged to the operating segments as part of a corporate allocation. Unallocated corporate expenses are reported as Corporate. Corporate costs include executive and portions of shared service functions such as information technology, human resources, finance, legal, research and development and corporate facilities.
We enter into joint ventures from time to time to expand our geographic presence, support our distribution network or invest in complementary products and services. As of February 29, 2008, our investment in these unconsolidated joint ventures was $16.7. Our portion of the income or loss from the joint ventures is recorded in Other income, net on the Consolidated Statements of Income.
Customer and Dealer Concentrations
Our largest direct-sale customer accounted for approximately 1.0% of our consolidated revenue in 2008 and our five largest direct-sale customers accounted for approximately 2.4% of consolidated revenue. However, these percentages do not include revenue from various government agencies and other entities purchasing under our U.S. General Services Administration contract, which in the aggregate accounted for approximately 2.2% of our consolidated revenue. We do not believe our business is dependent on any single or small number of end-use customers, the loss of which would have a material adverse effect on our business.
No single independent dealer accounted for more than 3% of our consolidated revenue for 2008. The five largest independent dealers collectively accounted for approximately 10% of our consolidated revenue.
Our accounts receivable are primarily from our dealers, and to a lesser degree, direct-sale customers. Payment terms vary by country and region. The terms of our North America segment, and certain markets within the International segment, encourage prompt payment by offering a discount. Other international markets have, by market convention, longer payment terms. We are not aware of any special or unusual practices or conditions related to working capital items, including accounts receivable, inventory and accounts payable, which are significant to understanding our business or the industry at large.
Our products are generally manufactured and shipped within four to six weeks following receipt of order; therefore, we do not view the amount of backlog at any particular time as a meaningful indicator of longer-term shipments.
Global Manufacturing and Supply Chain
Manufacturing and Logistics
We have manufacturing operations throughout North America, Europe (principally in France, Germany and Spain) and in Asia. In order to serve the growth needs of our Asian market, we continue to expand production in our plants in Kuala Lumpur, Malaysia and in Shenzhen, China, and we acquired additional capacity in Zhaoqing, China in 2008 as a result of the Ultra acquisition.
We have evolved our manufacturing and supply chain systems significantly over the past several years by implementing lean manufacturing principles. In particular, we have focused on implementing continuous one-piece flow, streamlining our product offerings and developing a global network of integrated suppliers. Anything which cannot be part of one-piece flow may be evaluated to see whether outside partners would offer better levels of service, quality and cost. Our global manufacturing operations are centralized under a single organization to serve our customersâ€™ needs across multiple brands and geographies.
This approach has reduced the capital needs of our business, reduced inventories and reduced the footprint of our manufacturing space while at the same time, allowing us to improve quality, delivery performance and the customer experience. We continue to identify opportunities to eliminate excess capacity and redundancy while continuing to focus on our growth strategies. We recently announced that we will be closing three U.S. manufacturing facilities in 2009 and relocating the majority of their operations to other manufacturing facilities.
In addition to our continued focus on enhancing the efficiency of our manufacturing operations, we also seek to reduce costs through our global sourcing effort. We have capitalized on raw material and component cost savings available through lower cost suppliers around the globe. This global view of potential sources of supply has enhanced our leverage with domestic supply sources, and we have been able to reduce cycle times through improvements from all levels throughout the supply chain.
Our physical distribution system utilizes dedicated fleet, commercial transport and company-owned delivery services. Over the past several years, we have implemented a network of regional distribution centers to reduce freight costs and improve service to our dealers and customers. Some of these distribution centers are located within our manufacturing facilities, and we have contracted with third party logistics providers to operate some of these regional distribution centers.
Raw Materials and Energy Prices
We source raw materials and components from a significant number of suppliers around the world. Those raw materials include steel and other metals, plastics, wood, fabrics, paint, packaging, acoustical materials, foam, veneers, laminates, glass and leather. To date, we have not experienced any significant difficulties in obtaining these raw materials.
The prices for certain commodities such as steel, aluminum, wood, particleboard and petroleum-based products have fluctuated in recent years due to changes in global supply and demand. Our global supply chain team continually evaluates market conditions and supply options on the basis of cost, quality and reliability of supply.
Research, Design and Development
Our extensive global researchâ€”a combination of user observations, feedback sessions and sophisticated network analysisâ€”has helped us develop unique expertise in helping people work more effectively. We team up with external world-class innovators, including leading universities, think tanks and knowledge leaders, to expand and deepen our understanding of how people work.
Understanding patterns of work enables us to identify and anticipate user needs across the globe. Our design teams explore and develop prototypical solutions to address these needs. These solutions vary from furniture, architecture and technology solutions to single products or enhancements to existing products and different vertical market applications such as healthcare, higher education and professional services. Organizationally, design responsibility is distributed globally across our major businesses and may involve external design services.
Our marketing team evaluates product concepts using several criteria, including financial return metrics, and chooses which products will be developed and launched. Designers then work closely with our engineers and external suppliers to co-develop products and processes that lead to more efficient manufacturing while incorporating innovative user features. Products are tested for performance, quality and compliance with applicable standards and regulations.
Exclusive of royalty payments, we invested $152.5 in research, design and development activities over the past three years. We continue to invest approximately one to two percent of our revenue in research, design and development each year. Royalties are sometimes paid to external designers of our products as the products are sold. These costs are not included in the research, design and development costs since they are variable, based on product sales.
We generate and hold a significant number of patents in a number of countries in connection with the operation of our business. We also hold a number of trademarks that are very important to our identity and recognition in the marketplace. We do not believe that any material part of our business is dependent on the continued availability of any one or all of our patents or trademarks, or that our business would be materially adversely affected by the loss of any of such, except the â€śSteelcase,â€ť â€śTurnstone,â€ť â€śPolyVision,â€ť â€śDesigntexâ€ť and â€śIDEOâ€ť trademarks.
We occasionally enter into license agreements under which we pay a royalty to third parties for the use of patented products, designs or process technology. We have established a global network of intellectual property licenses with our subsidiaries. We also selectively license our intellectual property to third parties as a revenue source.
As of February 29, 2008, we had approximately 13,500 employees including 7,600 hourly employees and 5,900 salaried employees. Additionally, we had 1,300 temporary workers who primarily work in manufacturing. Approximately 340 employees in the U.S. are covered by collective bargaining agreements. Internationally, a significant number of employees are covered by workersâ€™ councils that operate to promote the interests of workers. Management believes we continue to maintain positive relations with our employees.
We are subject to a variety of federal, state, local and foreign laws and regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment (â€śEnvironmental Lawsâ€ť). We believe our operations are in substantial compliance with all Environmental Laws. We do not believe existing Environmental Laws and regulations have had or will have any material effects upon our capital expenditures, earnings or competitive position.
Under certain Environmental Laws, we could be held liable, without regard to fault, for the costs of remediation associated with our existing or historical operations. We could also be held responsible for third-party property and personal injury claims or for violations of Environmental Laws relating to contamination. We are a party to, or otherwise involved in, proceedings relating to several contaminated properties being investigated and remediated under Environmental Laws, including as a potentially responsible party in several Superfund site cleanups. Based on our information regarding the nature and volume of wastes allegedly disposed of or released at these properties, other financially viable potentially responsible parties and the total estimated cleanup costs, we do not believe the costs to us associated with these properties will be material, either individually or in the aggregate. We have established reserves that we believe are adequate to cover our anticipated remediation costs. However, certain events could cause our actual costs to vary from the established reserves. These events include, but are not limited to: a change in governmental regulations or cleanup standards or requirements; undiscovered information regarding the nature and volume of wastes allegedly disposed of or released at these properties; and other factors increasing the cost of remediation or the loss of other potentially responsible parties that are financially capable of contributing toward cleanup costs.
Earl D. Holton
Director since 1998
Mr. Holton held various management positions at Meijer, Inc., a Grand Rapids, Michigan-based operator of retail food and general merchandise stores, including Vice Chairman from 1999, until his retirement in 2004. Age 74.
Michael J. Jandernoa
Director since 2002
Mr. Jandernoa has been a general partner of Bridge Street Capital Fund I, L.P., a Grand Rapids, Michigan venture capital fund, since 2004. He served as Chairman of the Board of Directors of Perrigo Company, a manufacturer of over-the-counter store-brand pharmaceutical and nutritional products, from 1991 through 2003. Mr. Jandernoa is also a director of Perrigo Company and Fifth Third Bankâ€”a Michigan banking corporation. Age 58.
Peter M. Wege II
Director since 1979
Mr. Wege II has been Chairman of the Board of Directors of Contract Pharmaceuticals Ltd., a manufacturer and distributor of prescription and over-the-counter pharmaceuticals, since 2000. From 1981 to 1989, he held various positions at Steelcase, including President of Steelcase Canada Ltd. Age 59.
Kate Pew Wolters
Director since 2001
Ms. Wolters has been engaged in philanthropic activities since 1996. She is currently President of the Kate and Richard Wolters Foundation and is a community volunteer and advisor. She also serves as Chair of the Board of Trustees of the Steelcase Foundation. Age 50.
William P. Crawford
Director since 1979
Mr. Crawford held various positions at Steelcase from 1965 until his retirement in 2000, including President and Chief Executive Officer of the Steelcase Design Partnership. Mr. Crawford is also a director of Fifth Third Bankâ€”a Michigan banking corporation. Age 65.
Elizabeth Valk Long
Director since 2001
Ms. Long held various management positions, including Executive Vice President, at Time Inc., a magazine publisher, until her retirement in 2001. Ms. Long also serves on the Board of Directors of Belk, Inc. and The J.M. Smucker Company. Age 58.
Robert C. Pew III
Director since 1987
Mr. Pew III has been a private investor since 2004 and operated Cane Creek Farm from 1995 to 2003. From 1974 to 1984 and from 1988 to 1994, Mr. Pew III held various positions at Steelcase, including President, Steelcase North America and Executive Vice President, Operations. Mr. Pew III has served as Chair of our Board of Directors since June 2003. Age 57.
Cathy D. Ross
Director since 2006
Ms. Ross has been Senior Vice President and Chief Financial Officer of Federal Express Corporation, an express transportation company and subsidiary of FedEx Corporation, since 2004. Ms. Ross also held a variety of other positions at FedEx, including Vice President, Express Financial Planning from 1998 to 2004. Age 50.
James P. Hackett
Director since 1994
Mr. Hackett has been President and Chief Executive Officer of Steelcase since 1994. Mr. Hackett also serves as a member of the Board of Trustees of The Northwestern Mutual Life Insurance Company and the Board of Directors of Fifth Third Bancorp. Age 53.
David W. Joos
Director since 2001
Mr. Joos has been President and Chief Executive Officer of CMS Energy Corporation, an energy company, and Chief Executive Officer of its primary electric utility, Consumers Energy Company, since 2004. Mr. Joos served as President and Chief Operating Officer of CMS Energy Corporation and Consumers Energy Company from 2001 to 2004. Mr. Joos serves on the Board of Directors of CMS Energy Corporation and Consumers Energy Company. Age 55.
P. Craig Welch, Jr.
Director since 1979
Mr. Welch, Jr. has been Manager and a member of Honzo LLC, an investment/venture capital firm, since 1999. From 1967 to 1987, Mr. Welch, Jr. held various positions at Steelcase, including Director of Information Services and Director of Production Inventory Control. Age 63.
MANAGEMENT DISCUSSION FROM LATEST 10K
Net income improved significantly in 2008 and 2007. The $26.3 improvement in 2008 net income was due to increased volume and price yield, reduced cost of sales, lower restructuring costs and significant improvements in the performance of our wood business, partially offset by lower favorable tax adjustments, higher intangible asset and goodwill impairment-related charges at PolyVision and increased spending related to longer-term growth initiatives. The $58.0 improvement in 2007 net income was due to increased volume and price yield, favorable tax adjustments, reduced cost of sales, lower restructuring costs and higher interest income on increased cash balances, partially offset by higher variable compensation costs, intangible asset and goodwill impairment-related charges at PolyVision, lower cash surrender value appreciation on company-owned life insurance policies and increased spending related to longer-term growth initiatives.
Our revenue increased 10.4% in 2008 compared to 2007 following an increase of 8.0% from 2006 to 2007. Revenue in 2008 increased for all of our reportable segments, but growth in our International segment of 21.5% was the strongest. As compared to 2007, revenue excluded $79.6 of sales related to dealer deconsolidations and other divestitures, net of acquisitions. Current year revenue was positively impacted by $73.2 from currency translation effects and approximately $64.0 from an extra week of shipments as compared to the prior year.
Cost of sales, which is reported separately from restructuring costs, decreased to 67.1% of revenue in 2008, a 160 basis point improvement compared to the prior year. Improvements in the North America segment and the Other category of 220 and 240 basis points, respectively, were the key drivers of this improvement. The improvements were due to volume leverage, improved pricing yields, benefits of restructuring efforts and product simplicity initiatives and continued implementation of lean manufacturing principles, partially offset by lower cash surrender value appreciation on our company-owned life insurance in the North America segment.
Gross margin increased to 32.9% because of the improvements in cost of sales and lower restructuring costs.
Operating expenses increased $91.3 in 2008 compared to 2007. Currency translation effects, higher intangible asset and goodwill impairment-related charges at PolyVision, higher spending related to longer-term growth initiatives, lower cash surrender value appreciation on company-owned life insurance and costs associated with an additional week of operations in 2008 were the primary reasons for the increase.
Operating income improved by $89.1 in 2008 compared to 2007, due to better performance in our North America and International segments and lower restructuring costs, offset by lower operating income in the Other category, primarily due to intangible asset and goodwill impairment-related charges at PolyVision.
We recorded net restructuring credits of $0.4 in 2008, compared to net restructuring costs of $23.7 in 2007 and $38.9 in 2006. The net credit in 2008 primarily consisted of a gain on the sale of real estate related to our former headquarters campus for our International segment in Strasbourg, France offset by charges related to the completion of a two-year facility rationalization initiative at our Grand Rapids, Michigan campus.
Interest income decreased in 2008 compared to 2007 due to lower average cash and investment balances, lower interest rates and a $0.9 impairment charge recorded against a Canadian commercial paper investment that remains in default. Interest income increased in 2007 compared to 2006 due to higher average cash and investment balances and higher interest rates.
Our consolidated results include the results of several dealers in which we either own a majority interest or we maintain participative control, but our investments are structured such that we do not share in the profits or losses. Elimination of minority interest in consolidated dealers represents the elimination of earnings where either our class of equity does not share in the earnings or the earnings are allocated to the minority interest holder.
Other income, net consists of foreign exchange gains and losses, unrealized gains and losses on derivative instruments and miscellaneous income and expenses in 2008, 2007 and 2006. Included in this amount for 2008 and 2007 is $3.9 and $3.6, respectively related to gains on dealer transitions.
During 2007, we recorded favorable tax adjustments of $25.1. These adjustments included a $13.6 reduction of deferred tax asset valuation allowances related to International and U.S. net operating losses and U.S. foreign tax credit carryforwards. These reductions were the result of improved profitability and the implementation of tax planning strategies, which increased the likelihood of utilizing foreign net operating losses, U.S. state net operating losses and U.S. foreign tax credit carryforwards. We reduced specific tax reserves by $7.5 due to the completion of a long-outstanding audit of a foreign subsidiary and other adjustments related to open tax periods in the U.S. In addition, we recorded a $4.0 adjustment to recognize the future benefit of U.S. foreign tax credits resulting from a change in an election for the treatment of foreign taxes on our 2004 to 2006 U.S. tax returns. See further discussion of these items in Note 12 to the consolidated financial statements. The favorable tax adjustments had the effect of reducing the 2007 effective tax rate from approximately 34% to 14.2%.
We operate on a worldwide basis within North America and International reportable segments, plus an â€śOtherâ€ť category. During 2008, we made changes in our organizational structure which resulted in changes to our segment reporting. As a result of these changes, certain components have been reclassified between our North America segment and our Other category, including Vecta, which moved from North America to our Premium Group unit, and a health-care product line within Brayton, which moved from our Premium Group unit to Nurture by Steelcase. Segment information for prior years has been restated to reflect these changes. Additional information about our reportable segments is contained in Item 1: Business and Note 15 to the consolidated financial statements included with this report.
The North America segment increased operating income by $70.4 in 2008 compared to 2007 after an increase of $18.3 between 2006 and 2007. The 2008 improvement was driven by volume growth, improved pricing yield, significant improvements in the performance of our wood business, benefits of prior restructuring activities and lower restructuring costs, partially offset by lower cash surrender value appreciation on company-owned life insurance policies and higher spending related to longer-term growth initiatives.
Revenue increased 7.8% in 2008 compared to 2007 and represented 56.6% of consolidated revenue. Revenue growth in 2008 was driven by relatively strong sales across the Steelcase Group, Nurture by Steelcase and Details brands and benefited from an extra week of shipments as compared to the prior year. While positive, growth at Turnstone moderated in 2008 compared to strong double digit percentages in recent years. As compared to the prior year, current year revenue excluded $80.6 of sales related to dealer deconsolidations, net of acquisitions, and included additional sales from an extra week of shipments and $9.2 from favorable currency translation effects related to sales by our subsidiary in Canada.
Cost of sales, which is reported separately from restructuring costs, decreased 220 basis points from the prior year as a percent of revenue. The improvement was the result of volume leverage, improved pricing yields, benefits from prior restructuring activities and product simplicity initiatives and continued implementation of lean manufacturing principles, including significant improvement in the performance of our wood product category. These improvements were partially offset by lower cash surrender value appreciation on company-owned life insurance.
As disclosed in Note 7 to the consolidated financial statements, we have made investments in company-owned life insurance policies with the intention of using them as a long-term funding source for post-retirement medical benefits, deferred compensation and other supplemental retirement benefits. Income from these investments was $11.8 lower in 2008 compared to 2007, with $6.3 of the decrease negatively impacting cost of sales.
Gross margin as a percent of revenue improved from 28.4% in the prior year to 31.6% in the current year, due to improved operating performance and lower restructuring costs. Restructuring costs of $0.8 in 2008 and $18.5 in 2007 included in gross profit consisted of moving and severance costs associated with our plant consolidation initiative at our Grand Rapids, Michigan manufacturing campus, which we completed during 2008, offset in part by realization of conditional proceeds related to the sale of related properties.
Operating expenses were 23.0% of revenue in 2008 compared to 22.9% of revenue in 2007. Operating expenses increased in absolute dollars compared to 2007 primarily due to costs associated with an additional week of operations in 2008, higher spending related to longer-term growth initiatives, marketing and product development and lower cash surrender value appreciation on company-owned life insurance, partially offset by lower costs resulting from dealer deconsolidations, net of acquisitions.
International reported operating income of $57.0, an improvement of $22.8 compared to 2007. The 2008 improvement was driven by increased profitability in certain markets, most notably Germany, France and Latin America, lower restructuring costs and benefits of currency translation.
Revenue increased 21.5% in 2008 compared to 2007 and represented 26.1% of consolidated revenue. The growth was relatively broad-based across most of our International regions, but was particularly strong in Germany, France, eastern Europe, Spain and Portugal, Latin America and Asia. Currency translation had the effect of increasing revenue by $64.0 in 2008 as compared to the prior year. Revenue also included $13.6 of incremental sales related to net acquisitions.
Cost of sales, which is reported separately from restructuring costs, increased by 20 basis points as a percentage of revenue compared to 2007. Improvements due to volume leverage and benefits from prior restructuring activities were more than offset by operational issues at a small subsidiary, higher material and transportation costs and unfavorable currency impacts, most notably in the U.K.
Gross margin as a percent of revenue was 33.4% in 2008 compared to 33.0% in 2007. The change in gross margin was influenced by the cost of sales items discussed above and a restructuring credit in 2008 related to a gain on the sale of real estate associated with our former headquarters campus in Strasbourg, France.
Operating expenses increased by $33.0 in 2008 compared to 2007, primarily due to currency translation impacts of $17.6, higher spending on growth initiatives in Asia and net acquisitions.
The Other category reported operating income of $5.4, a $4.8 decline compared to the prior year. The decline was primarily the result of higher intangible asset and goodwill impairment-related charges at PolyVision which offset improved profitability in the Premium Group and PolyVision, excluding the impact of the impairment-related charges. IDEOâ€™s business grew significantly in 2008, but operating income growth was offset by higher variable compensation earned by certain members of IDEO management in connection with an agreement to enable them to acquire an ownership interest in IDEO.
Over the past few years, PolyVision faced intense price competition in the U.S. contractor whiteboard business sold through a direct bid process, and consequently financial performance within this portion of their business continued to lag our expectations. Accordingly, during our annual strategic planning process in Q3 2008, we evaluated several alternative strategies to address its financial performance. As a result, we performed impairment testing and recorded a non-cash charge of $21.1 in Q3 2008, of which $15.8 related to intangible assets and $5.3 related to goodwill. We recorded $10.7 of similar non-cash intangible asset and goodwill impairment-related charges at PolyVision in 2007.
In 2008, we entered into an agreement which will allow certain members of the management of IDEO to potentially purchase a controlling equity interest in IDEO in two phases before 2013. The agreement includes a variable compensation program which provides these employees higher variable compensation to acquire ownership, provided certain performance targets are met. As of February 29, 2008, IDEO management effectively purchased approximately 12% of IDEO under the first phase of the agreement.
Revenue increased by $25.0 in 2008 due to growth at IDEO and across most of the Premium Group companies.
Gross margin as a percent of revenue was 36.6% in 2008 compared to 34.3% in 2007. The improvement in gross margin was primarily due to improvements at IDEO, PolyVision and across most of the Premium Group companies.
Restructuring costs included in 2008 related to initial costs associated with the announced closure of one of the Premium Group plants, which we expect to complete by Q3 2009.
During Q1 2009, we announced a restructuring plan at PolyVision, linked to a decision to exit a portion of the contractor whiteboard fabrication business which typically carries the lowest gross margins. Under the current restructuring plan, we expect to close one facility before the end of Q3 2009.
Approximately 85% of corporate expenses are charged to the operating segments as part of a corporate allocation. Unallocated portions of these expenses are considered general corporate costs and are reported as Corporate. Corporate costs include executive and portions of shared service functions such as information technology, human resources, finance, legal, research and development and corporate facilities.
Liquidity and Capital Resources
We believe we currently need approximately $50 in cash to fund the day-to-day operating needs of our business. However, we intend to maintain a minimum of $100 of additional cash and investments as ready liquidity for funding investments in growth initiatives and as a cushion against volatility in the economy. Our cash balances seasonally decline in Q1 due to the timing of variable compensation, retirement plan funding and annual insurance payments. We plan to use ongoing cash generation to reinvest in the business and to return value to shareholders in the form of dividends and share repurchases. These are general guidelines and our cash balance may be higher or lower at any point in time. We also may change this approach as conditions change or new opportunities emerge.
During 2008, cash and cash equivalents decreased by $313.3 to a balance of $213.9 as of February 29, 2008. Of our total cash and cash equivalents, approximately 77% was located in the U.S. and the remaining 23% was located outside of the U.S., primarily in Canada and Europe. These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance our foreseeable liquidity and capital needs.
We currently have investments in auction rate securities (â€śARSâ€ť) and one Canadian asset-backed commercial paper (â€śABCPâ€ť) investment with a total par value of $31.5 and an estimated fair value of $28.0. With the tightening of the U.S. credit markets, there is no liquid market for the ARS or ABCP at this time. As a result, we have reclassified these securities to Long-term investments on the Consolidated Balance Sheets, as we do not reasonably expect to sell the securities in the near term. We intend to hold these investments until the market recovers and do not anticipate having to sell these investments in order to operate our business. See Note 4 to the consolidated financial statements for additional information.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Net income decreased by $11.5 in Q1 2009 to $22.1, or $0.16 per share, compared to $33.6, or $0.23 per share, in the same quarter last year. The decrease was primarily the result of an operating loss in the Other category, increased restructuring charges and less interest income in Q1 2009 versus the same quarter last year.
Revenue was $815.7 in Q1 2009, a slight increase compared to the same period last year. Revenue decreased by 9.0% in our North America segment, offset by a 29.1% increase in our International segment. Q1 2009 revenue included $30.6 of favorable currency translation effects versus the same quarter last year, offset in part by a $10.9 decrease due to dealer deconsolidations, net of acquisitions that were completed during the last four quarters.
Cost of sales, which is reported separately from restructuring costs, decreased as a percentage of revenue by 30 basis points during Q1 2009, primarily due to improvements in our North America segment, largely offset by increases in our International segment and Other category. The net improvement was offset by higher restructuring charges in the current year, which resulted in gross margin of 32.6% in Q1 2009 compared to 32.7% in Q1 2008.
Operating expenses, which are reported separately from restructuring costs, increased by $11.3 in Q1 2009, compared to the same period last year. The increase in operating expenses for the quarter was due to unfavorable currency translation effects, increased product development and showroom spending, increased spending related to the launch of our Coalesse brand and our on-going expansion efforts in emerging markets. The increases were partially offset by the timing of a national sales and dealer conference included in the first quarter of the prior year, currently scheduled for the third quarter of this year, lower expenses due to dealer deconsolidations, net of acquisitions completed during the last four quarters and lower variable compensation.
Q1 2009 operating income was $36.8 compared to $48.3 in the prior year. The decrease was primarily due to higher restructuring costs and an operating loss in our Other category.
Restructuring costs of $7.2 incurred in Q1 2009 primarily related to the consolidation of manufacturing facilities within our North America segment and Other category, and our white-collar reinvention initiatives, partially offset by final post-sale gains related to the exit of our Grand Rapids manufacturing campus and certain other credits related to previous restructuring activities.
We expect our effective tax rate to approximate 35% for 2009.
Interest income in Q1 2009 was lower than the prior year due to lower average cash balances and lower interest rates earned on those balances.
Business Segment Review
Operating income improved to 8.0% of revenue in Q1 2009 compared to 7.3% of revenue in the same quarter last year, driven by lower cost of sales, offset in part by higher restructuring costs and higher operating expenses as a percent of revenue.
North America revenue, which accounted for approximately 53% of consolidated revenue for the quarter, decreased by 9.0% from the same quarter last year. The Q1 2009 decrease was primarily due to a $20.1 negative impact from dealer deconsolidations completed during the last four quarters and decreased volume in the financial services sector, compared to a strong quarter last year. Most other sectors had modest increases or decreases in revenue versus the same period last year, except for healthcare, which had double-digit revenue growth again this quarter. Additionally, growth in Canada and various cities across the Southern U.S. partially offset declines experienced in the financial services sector in the New York region.
Cost of sales, which is reported separately from restructuring costs, improved as a percent of revenue by 190 basis points in the current quarter versus the same quarter last year. The Q1 2009 improvement was driven by a $3.8 favorable property tax settlement, improved pricing yield and continued plant efficiencies, partially offset by increased direct material and energy-related inflation. We expect the effects of such inflation to continue to increase during Q2 2009.
Operating expenses, which are reported separately from restructuring costs, increased to 24.2% of revenue in the current quarter from 23.5% in the same quarter last year, although in absolute dollars, operating expenses decreased by $7.1. The decrease in absolute dollars was primarily due to dealer deconsolidations completed during the last four quarters, lower variable compensation and the timing of a national sales and dealer conference included in the first quarter of the prior year, currently scheduled for the third quarter of this year, offset in part by increased product development and showroom spending.
International reported operating income of 4.9% of revenue in Q1 2009 compared to 6.7% of revenue in the same quarter last year, driven by lower gross margins.
International revenue represented approximately 31% of consolidated revenue in Q1 2009 and increased by 29.1% from the same quarter last year. Revenue growth was primarily due to increases in Germany, the Middle East, Benelux, Africa and Latin America. Currency translation and net acquisitions completed during the last four quarters had the effect of increasing revenue by $26.2 and $9.2, respectively, in Q1 2009 as compared to the same quarter last year.
Cost of sales, which is reported separately from restructuring costs, as a percentage of revenue increased by 180 basis points in Q1 2009 compared to the same quarter last year. The deterioration was due to unfavorable currency impacts in the United Kingdom, higher costs in a few small markets, including China, Italy and Morocco, and other product and business mix shifts.
Operating expenses, which are reported separately from restructuring costs, increased by $15.5 during Q1 2009 compared to the same quarter last year. The increases were driven by unfavorable currency translation effects, net acquisitions completed during the last four quarters, additional growth-related spending in Asia and dealer-related charges.
Our Other category includes the Coalesse Group, PolyVision and IDEO subsidiaries. As discussed in Note 9 to the condensed consolidated financial statements, prior to Q1 2009, the Other category also included our Financial Services subsidiary. We have not reclassified prior year financial results of Financial Services to North America; accordingly, the Q1 2008 financial results remain in the Other category. The Other category included approximately $4 of operating income from Financial Services in Q1 2008 which primarily related to residual gains from several early lease terminations that we had originated and funded in prior years.
The operating loss for the Other category was $4.2 during Q1 2009, an $11.9 deterioration compared to the same quarter last year. The decrease was primarily due to lower operating income performance within the Coalesse Group, prior year gains within Financial Services and current year restructuring costs. Restructuring costs of $3.2 incurred in Q1 2009 primarily related to the closure of two manufacturing facilities; one within the Coalesse Group and one at PolyVision.
The Coalesse Group recorded a small operating loss (before restructuring costs) in Q1 2009, which represented a significant decline from the same quarter last year. The current year loss resulted from decreased volume, temporary inefficiencies associated with the consolidation of manufacturing activities announced last quarter and investments underlying the launch of the Coalesse brand and various new products.
PolyVision results improved compared to Q1 2008 despite lower sales associated with exiting a portion of the public-bid contractor whiteboard fabrication business. We incurred restructuring costs in Q1 2009 related to the closure of a manufacturing facility that supported this portion of the business.
IDEO sales increased compared to the same quarter in the prior year, but operating income growth was offset by higher variable compensation earned by certain members of IDEO management in connection with an agreement to enable them to acquire an ownership interest in IDEO.
Thank you Danielle, good morning everyone. Thank you for joining us for the recap of our first quarter fiscal year 2009 financial results. Here with me today are Jim Hackett, our President and Chief Executive Officer; Dave Sylvester, our Chief Financial Officer; Mark Mossing, Corporate Controller and Chief Accounting Officer; Terry Linhardt, Vice President North America Finance.
Weâ€™ve also asked Mark Baker, Senior Vice President of Global Operations to join us on the call to answer any questions related to the commodity cost environment, both domestically and around the world.
Our first quarter earnings release dated June 27, 2008 crossed the wires this morning and is accessible on our website. This conference call is being webcast and is a copyright production of Steelcase Inc. Presentation slides that accompany this webcast are available on Steelcase.com and a replay of this call will also be posted to the site later today. In addition to our prepared remarks we will respond to questions from investors and analysts.
Our discussion today will include references to non-GAAP financial measures. These measures are presented because management believes this information useful to monitor and evaluate financial results and trends. Therefore management believes this information is also useful for investors.
Reconciliations to the most comparable GAAP measures are included in the earnings release and webcast slides. At this time we are incorporating by reference into this conference call and subsequent transcript the text of our Safe Harbor Statement included in this morningâ€™s release.
Certain statements made within this release and during the conference call constitute forward-looking statements. There are risks associated with the use of this information for investment decision making purposes. For more details on these risks please refer to todayâ€™s earnings release and form 8-K, the companyâ€™s 10-K for the year ended February 29, 2008 and our other filings with the Securities and Exchange Commission.
With those formalities out of the way Iâ€™ll turn the call over to our President and CEO Jim Hackett.
Raj, thank you very much. Iâ€™d like to start my comments this morning with three insights for the listeners on todayâ€™s call. First, the nature of our business performance is that it can be affected by the short and midterm issues that are part of the evolving events or stories in the world economy.
Said another way, we can be affected by some of the economic stories that are capturing the headlines these days. Given its large office buildings and higher concentration of knowledge workers, New York City is an important market for us. Weâ€™re a major player in this market and as you might suspect, the impact of the banking industry deterioration has tested us.
We have news in this broadcast of its relative impact and in turn how we have worked hard to develop a revenue base that can offset that effect. And secondly the impact of steel and energy inflation has the potential to limit our year. Again I say potential because we have plans to address this and are committed to aggressive strategies so that we donâ€™t lose ground to inflation.
But there can be a lag with positive or negative impact of inflation in this business, hence we intend to provide more color here today. But I have to admit, the steepness or slope of the recent run up defies logic given the news in the automotive industry about car production being flat to shrinking. We werenâ€™t contemplating the levels that have materialized.
Finally, as you will see, we have kept our investment continuing in future ideas and developments that are key to meeting our financial goals over the long term. Iâ€™ve started off with confirming these impacts because I think the company has fared well in spite of those challenges and is in excellent shape.
Iâ€™m intent on ensuring that the performance is top of mind for those running our business. Let me illustrate. In June of this year, Steelcase enjoyed one of its most exciting NeoCons in recent memory. The press labeled this as the year of Steelcase. We were able to relocate our presence in the merchandise [mart] which gave us the stage to expose our multi brand strategy.
These investments donâ€™t replicate quarterly and while we annually invest in this trade show, this is the first major relocation of the company in this setting in 30 years. We received seven best of NeoCon awards, including three gold or the highest award, three silver awards and the innovation award.
The gold awards were for two very exciting products called Seascape and Mediascape. This portfolio of furniture products embodies a connection between our user base research and our product development. They enable the connections our customers must make within their organizations around the world.
These products ship in 2009 but in our business customers who are planning projects are interested right now. These awards validate our comments in the past on these calls when we claimed we had to prioritize the reshaping of our massive industrial system. And once that was in good shape, we turn our attention to the front end of the business.
Well weâ€™re doing that and new products are the lifeblood of our expansion strategy and Iâ€™ve directed the folks in the business to keep on investing in order to meet our two market commitments and our future growth targets.
Iâ€™ve also been clear that we need to continue our pace of expansion into other international geographies that we detailed in earlier calls, for example, China and India. Additionally on this investment side, our early commitment in the clinical healthcare arena continues to grow faster than the market by a wide factor.
This business has helped to offset some of the shrinkage I mentioned earlier in the financial sectors. In fact one of the gold awards was for a product line weâ€™ve introduced for oncology treatment areas within hospitals.
The tension for protecting the longer term investments while there is short term pressure is the classic business management paradox. Steelcase has a history of taking a long view on its prospects and we have no plans to become weak kneed here. However, management is not asking for a pass either as we get paid to deal with unintended events.
As you read in our earnings release today, we had some challenges, but our track record demonstrates that we can address them. I am proud of the fact that we announced a series of actions a number of months ago to address further efficiencies in the industrial system and a commitment to build a shared service center in Asia.
These actions have traction and while theyâ€™re not offsetting some of the turmoil today, theyâ€™re large and important cost reduction projects for our near term. Of course if we saw further erosion of the economy which would threaten the threshold of where we are now, of course we would have lists of contingency ideas where we can take action.
But I like the longer term prospects of our business for these reasons. First, Steelcase was the first in the industry to invest meaningfully in the trend of workers spending more time in group settings versus individual settings. Our effort to translate our insights into better healthcare environments is the second reason and itâ€™s proving to be a winner.
Third, our investment in growth in international was ahead of our competitors. We achieved this by being in these markets with commitments to servicing our customers locally. And we do that so we get quicker lead times for our customers.
Fourth, weâ€™ve built a more variable cost structure since the last time we were in a recession. You saw us making continued progress last year in our margin improvements and we do remain focused on hitting our longer term goals of 10-11% operating income.
Fifth, Iâ€™m very involved in the visits to our headquarters by our customers. And the daily activity is still vibrant. These customers are coming because the R word hasnâ€™t changed their plans. So my intent for this call was to attempt to provide answers to the questions you might have about the large economic forces, our responses to them and the midterm prospects.
Letâ€™s move to Dave Sylvester, our Chief Financial Officer, who will walk through the quarter and then Iâ€™ll join Dave and Mark Baker who is our Global Operations Officer, that includes responsibility for the industrial system and procurement for Q&A at the end of Daveâ€™s comments. Dave.
Thank you Jim. Today we reported a first quarter profit of $22.1 million, or $0.16 per share which compares to $33.6 million or $0.23 per share in the first quarter of last year. These results were within our earnings estimate of $0.14 to $0.19 per share that we provided last quarter.
Revenue of $815.7 million in the quarter represented a slight increase over the prior year and was also within the estimated range of plus or minus 2% growth that we provided last quarter.
North America revenue which represented approximately 53% of our total revenue declined by 9% compared to the prior year, influenced by the negative impacts of dealer deconsolidations which totaled $20 million and soft demand in the financial services sector.
The international segment which totaled approximately 31% of total revenue reported another quarter of strong sales growth over the prior year or 29.1%. While currency translation and acquisition benefits contributed to the growth rate, we estimated organic growth approximated 10% driven by strength in Germany, the Middle East, Benelux, Africa and Latin America.
In total current quarter revenue included $31 million of favorable currency translation effects versus the same quarter last year, offset in part by $11 million of less revenue from dealer deconsolidations net of acquisitions completed within the last 12 months.
Operating income of $36.8 million compared to $48.3 million in the prior year. Included in our first quarter operating income were pretax restructuring costs of $7.2 million compared to $1.7 million last year. Operating income, excluding restructuring costs was $44 million or 5.4% of sales compared to $50 million or 6.2% of sales in the prior year.
While we continued to expand operating margins in our North America segment, despite the initial impact of growing inflationary headwinds, the performance within our international segment and other category did not meet our expectations.
Restructuring costs of $4.7 million after tax primarily related to the strategic actions announced last quarter. Recall that we announced three plant closures and certain product moves that we plan to complete by the end of November 2008. We also announced white color reinvention initiatives targeted for completion over the next 18-24 months.
These actions are aimed at further modernizing our industrial system, improving the profitability of PolyVision and rebalancing our workforce to better align with our growth opportunities.
The net charges in the quarter also included the realization of remaining post sale gain contingencies related to the Grand Rapids manufacturing campus and certain other credits related to previous restructuring activities.
While the net charges incurred were below our estimate of approximately $7 million after tax, the announced initiatives remain on track to be completed in the same timeframes and with the same costs and benefits as outlined in our last call. Cost of sales which does not include restructuring costs was 66.8% of sales compared to 67.1% of sales in the prior year.
North America realized a 190 basis point reduction in its cost of sales percentage while international and the other category experienced respective increases of 180 and 140 basis points compared to last year.
I will provide additional color around each of these variations when I comment on segment performance. The net improvements in costs of sales were essentially offset by higher restructuring costs in the current year which resulted in gross margin of 32.6% in the first quarter compared to 32.7% in the prior year quarter.
Operating expense of $227 million which do not include restructuring costs were 27.8% of sales, up from $215.7 million or 26.7% in the prior year. The $11.3 million increase was driven by $8 million of unfavorable currency translation effects as compared to the prior year.
Increased spending associated with new products and showrooms previewed at NeoCon earlier this month and $3 million of increased spending related to the launch of Coalesse and our ongoing expansion efforts in emerging markets.
These increases over last year were offset in part by approximately $3 million of spending related to last yearâ€™s sales and dealer conference which occurred in the first quarter of last year, while this yearâ€™s conference is scheduled for the third quarter, $3 million of operating expenses associated with dealer deconsolidation net of acquisitions and $3 million of lower variable compensation expense.
Other income net was $1.5 million for the quarter compared to $7.4 million in the prior year quarter. Interest income decreased by nearly $5 million compared to the prior year because of lower cash and investment balances and lower interest rates earned on those balances.
Our effective tax rate of 35% for the quarter was consistent with what we communicated during our last call and represents our current estimate for the full fiscal year, taking into consideration the assumptions we communicated in last quarterâ€™s call.
Next Iâ€™ll talk about the balance sheet and cash flow. Our cash and short term investment balances approximated $143 million at the end of the quarter and a $120 million decrease from total cash and short term investments at the end of the fourth quarter but in line with our expectations.
Compared to the first quarter of the prior year, cash and short term investments decreased by approximately $307 million, primarily due to the payment of a special cash dividend in January 2008 and share repurchases over the past four quarters, which in the aggregate totaled nearly $400 million.
Consistent with last year we had a significant use of cash related to changes in operating assets and liabilities. This is a normal impact resulting from cash payments in the first quarter of each fiscal year associated with variable compensation and contributions to employee retirement funds.
Capital expenditures of $17.9 million during the first quarter reflect increased new product development efforts and further investments in our showrooms and corporate facilities.
We currently estimate fiscal 2009 capital expenditures to approximately $100 million, including the replacement of a corporate aircraft compared to $80 million in fiscal 2008. However we also anticipate selling the aircraft that is being replaced and estimate the net proceeds will likely offset the increased capital expenditures.
During the quarter we repurchased 3.8 million shares of common stock at a total cost of $46.3 million or at an average price of $12.32 per share. The majority of the repurchases were completed pursuant to a stock repurchase agreement which was established in January 2008 in accordance with rule 10B5-1 or the Securities Exchange Act and has since expired as the preset authorization of $60 million was fully utilized.
In addition, weâ€™ve paid quarterly dividends of $20.3 million or $0.15 per share in the first quarter and our Board recently approved maintaining this level of dividend for the second quarter as well.
Over the past four quarters, we have returned $474 million to shareholders through quarterly dividends, a special cash dividend and share repurchases. As of the end of the quarter, we had $228 million remaining under the $250 million share repurchase authorization announced in December 2007.
Steelcase remains committed to striking a responsible balance between returning value to shareholders in the form of dividends and share repurchases while maintaining a strong capital structure and liquidity position that can fuel future growth as well as protect the company through the typical up and downs of business cycles.
As a brief update, there has been no change to the two components of our investment portfolio that we continue to classify as long term. As you know, we hold $26.5 million of auction rate securities where the auction market is no longer performing.
The underlying assets continue to perform, paying interest at higher penalty rates, but we did take additional reserves this quarter of $300,000 based on updated valuation work completed by our broker, bringing the total temporary allowance to $2.9 million.
We also continue to hold the $5 million of defaulted Canadian asset backed commercial paper and have made no change to the $900,000 estimated impairment we recorded last quarter.
The impairment was based on information coming out of the pan-Canadian resolution process which is now nearly completed. As a result of information received from this process, we expect an exchange of our current commercial paper investment for longer dated securities in the coming weeks.
Now I will discuss the quarterly operating results for each of our segments and the other categories, starting with North America. In North America, sales were $430.7 million in the quarter, or 9% lower than the prior year, which was a strong quarter and reflected the double digit growth rate compared to the previous year. Approximately half of the decline was due to dealer deconsolidations completed within the past 12 months.
The remainder was due to the tough prior year comparison and soft demand in the financial services sector. Beyond the financial services sector which experienced significant declines, largely driven by lower project business in the New York region, most other sectors posted modest increases or slight decreases in revenue versus the prior year.
Healthcare was an exception, posting another quarter of double digit growth. In addition we continue to experience nice growth throughout Canada and in various cities across the southern US. During last quarterâ€™s call we noted that average weekly orders in the fourth quarter followed a typical seasonal pattern, declining through mid January and rebuilding thereafter, finishing the quarter essentially at the same level as orders in the prior year.
We highlighted that a double digit decline within the financial service sector was offset by order growth in other vertical markets, including healthcare, government and higher education. In addition we shared that customer visits decreased year over year for the first time in several quarters and also that we were beginning to hear about various project deferrals, primarily within the financial services sector.
During the first quarter, the same story largely continued but to a different degree. Specifically the decrease in project related orders within the financial services sector was more severe compared to the order patterns last year. However, we experienced strength in a number of other sectors, including technical professional, Federal government, higher education, healthcare and energy, all of which in total essentially offset the decline in financial services.
Further, these orders patterns which resulted in an ending backlog which was slightly higher than the prior year have continued through the first few weeks of June, but have reflected modest growth compared to last year.
One other point is that customer visits rebounded in the first quarter, reflecting growth over the prior year quarter which is a marked increased from the double digit decline in the fourth quarter.
Operating income for the quarter was $34.3 million including $3.7 million of pretax restructuring costs related to the strategic actions announced last quarter, net of remaining gain contingencies realized in connection with the sale of our Grand Rapids manufacturing campus.
Prior year operating income was $34.4 million including $1.7 million of pretax restructuring costs. Operating income excluding restructuring costs was $38 million or 8.9% of sales compared to $36.1 million or 7.7% of sales in the prior year.
The increase in operating income as a percent of sales was driven by higher gross margin in the current year quarter offset in part by higher operating expenses as a percent of sales despite lower spending in absolute dollars. Cost of sales which is reported separately from restructuring costs improved 190 basis points over the prior year quarter.
Gains have been realized from a favorable property tax settlement recognized in the quarter which aggregated $3.8 million, improved price in yields and continued plant efficiencies. These gains were offset in part by increased direct material and energy related inflation which was consistent with our estimate provided last quarter.
The improvement in cost of sales compared to the prior year was the primary driver of North America gross margin increasing to 32.4% in the first quarter compared 30.8% in the prior year quarter. North America operating expense which are reported separately from restructuring costs were 24.2% of sales compared to 23.5% of sales in the prior year.
Operating expenses decreased $7.1 million compared to the prior year primarily due to $6 million related to dealer deconsolidations completed within the past 12 months and a $2 million decrease in variable compensation expense.
In addition the prior year first quarter included approximately $3 million of spending related to our sales and dealer conference which is scheduled this year for the third quarter as well as certain bad debt provisions recognized in connection with dealer transitions in various markets.
These decreases were partially offset by increased spending associated with the new products and new showrooms we unveiled at NeoCon earlier this month. International sales were $252.8 million in the quarter which represented an increase of 29.1% compared to the prior year quarter.
The growth this quarter was primarily driven by strength in Germany, the Middle East, Benelux, Africa and Latin America. In addition currency translation had the effect of increasing revenue by approximately $26 million as compared to the prior year and current year revenue also included $9 million from net acquisitions completed during the past 12 months.
Adjusting for the impact of currency translation and acquisitions, we estimate organic revenue growth in the quarter to approximate 10%. However, orders during the first quarter were essentially the same as one year ago, stated in terms of local currency and adjusted for acquisition impacts, reflecting mixed results.
Strength in markets such as Germany, Angola, Mexico, Australia, China and India was offset by weakness in three core markets, France, Japan and Spain, in addition to soft demand in Morocco.
While we began experiencing these mixed order patterns in the second half of last year, up until this quarter the areas of growth outweighed the areas of decline. Nevertheless, the outlook for the second quarter anticipates the continuation of organic revenue growth as backlog remains relatively strong and order patterns in total have regained some momentum in recent weeks.
International reported operating income of $12.4 million in the current quarter which includes $300,000 of restructuring costs. In the prior year quarter, international reported operating income of $13.1 million which did not include any restructuring costs.
Operating income excluding restructuring costs was $12.7 million, or 5.0% of sales compared to $13.1 million or 6.7% of sales in the prior year. The decline in operating income as a percent of sales is primarily linked to gross margin, which declined from 34.4% of sales in the prior year quarter to 32.8% in the current year.
The primary drivers include negative currency impacts associated with the weak UK pound sterling compared to the Euro given our Euro zone industrial model in Western Europe, the effects of consolidating Ultra which currently has lower gross margins than average and rising costs in China driven by regulatory reform in the areas of employee compensation and VAT recovery on exports, lower gross margins in Italy and Morocco where we are implementing structural changes and other product and business mix issues.
International operating expenses which are reported separately from restructuring costs were $69.8 million or 27.6% of sales in the current quarter compared to $54.3 million or 27.7% of sales in the prior year quarter.
The $15.5 million increase in year over year operating expense dollars includes $7 million in unfavorable currency translation effects as compared to the prior year, $3 million from net acquisitions completed within the past 12 months, $1 million in growth related spending in Asia and $1 million of dealer related charges.
Our other category includes the Coalesse group, formerly the Premium Group, PolyVision and IDEO in the current year. In the prior years, the other category also included our financial services subsidiary which now rolls up within the North America segment.
While we continue to originate leases to customers and earned an origination fee for that service, a third-party continues to provide lease funding. In addition, we continued to reduce the nature and level of financing services provided to our dealers. As a result, we transitioned its residual activities to our North America segment on a prospective basis at the start of the current fiscal year.
The other category reported revenue of $132.2 million in the quarter, a 5.2% decrease compared to the prior year. The decrease in revenue was driven by soft order patterns in the Coalesse Group early in the quarter, the impact of transferring financial services to the North America segment in the current year and a decrease in revenue at PolyVision related primarily to our decision to exit a portion of the public bid contractor whiteboard fabrication business where profit margins are the lowest.
Offsetting a portion of these declines, IDEO grew revenue again this quarter. The other category reported an operating loss of $4.2 million during the first quarter which included $3.2 million of restructuring costs. The current year operating loss, excluding restructuring costs of $1.0 million compares to operating income of $7.7 million in the prior year.
The decrease was primarily driven by current year weaker performance in the Coalesse Group and prior year gains from our financial services subsidiary. PolyVision results continued to improve despite lower sales. The Coalesse Group recorded a modest operating loss, excluding restructuring costs in the current quarter compared to nearly $5 million of operating income in the prior year.
The current year loss resulted from poor order patterns early in the quarter which have since rebounded to double digit levels over the past several weeks, temporary inefficiencies associated with the consolidation of manufacturing activities announced last quarter and investments underlying the launch of the brand and various new products at NeoCon.
The strong performance in our financial services subsidiary last year contributed approximately $4 million of operating income in the first quarter of fiscal 2008 and was primarily related to residual gains from several large early lease terminations that we had originated and funded years back, restructuring costs of $3.2 million in the current year related to the two facility closures announced last quarter, one within the Coalesse Group and another at PolyVision.
Now I will review our outlook for the second quarter of fiscal 2009. Overall we expect revenue growth to be within a range of 3-7% compared to the second quarter of fiscal 2008. This projected range takes into consideration the following factors: first, based on exchange rates at the end of the first quarter, our second quarter revenue estimates contemplate approximately $25 million of favorable currency translation effects compared to the prior year.
Second, we expect the negative impact of dealer deconsolidations completed within the past 12 months to net out the positive impacts of acquisitions completed in the same period, essentially have no collective impact on our top line in the second quarter.
Third, North America revenue estimates for the second quarter are based on a slightly higher beginning backlog coming into the quarter compared to the prior year, as well as June order patterns which have approximated last year.
While we expect the challenges confronting the financial services sector to continue for at least the next few quarters, we are estimating that orders across other sectors will continue to grow in the second quarter compared to the prior year and offset the decline within the financial services sector. Therefore we are currently estimating North America organic revenue growth to be relatively flat.
Fourth, international revenue in the second quarter is expected to benefit from a relatively strong backlog and favorable order patterns in recent weeks, resulting in estimated organic growth rates in local currency of mid to upper single digits over the prior year. As you know, we are in the midst of implementing the strategic actions we announced last quarter.
As a result, the operational inefficiencies we experienced in the first quarter associated with the facility rationalizations may continues as these actions are completed over the next two quarters.
In addition we are facing significant inflationary headwinds which are estimated to increase our global costs in the second quarter by approximately $15-$20 million compared to the prior year.
The current level of inflation exceeds that contemplated in setting the upcoming July list price adjustment in the US. And since it takes several quarters to realize the full impact of price adjustments, it will only begin to offset some of this inflationary impact in the third quarter.
We are facing similar challenges in most international markets where inflation is also beginning to outpace our most recent list price adjustments. As is always the case, we continue to monitor inflation and other economic factors as we make strategic pricing decisions.
We expect reported earnings per share for the second quarter will be in the range of $0.15-$0.20 per share, including after tax restructuring costs of approximately $7 million. We reported earnings of $0.26 per share in the second quarter of the prior year which included $1 million of after tax restructuring credits.
In addition, we recorded non-operating income in the prior year of approximately $10 million related to interest income on higher cash balances, gains from dealer transitions and the disposition of an equity interest in a company outside of our industry.
Regarding the overall US economy and the potential spillover effects around the globe, we like you continue to wonder what the full extent of the economic environment will be on our industry. While we estimate the financial services sector will continue to be negatively impacted for the next several quarters, we also believe our revenue diversification strategies will allow us to continue growing in other geographic, vertical and customer segments of our business.
So for now, we will remain focused on expanding our operating margins by implementing the announced restructuring actions and as we have discussed in the past several quarters, we will continue to invest in longer term growth initiatives related to the expansion into vertical and emerging markets, strengthening of our brands around the world and new product development in our core markets, as evidenced by the significant portfolio of new products and solutions we introduced at our recent industry trade show in Chicago.
In the end, we donâ€™t know how long the economic climate in the US will remain uncertain or the extent of the spillover effect around the globe, but what we do know is that Steelcase will continue to modernize its industrial system, improve its fitness across front end processes and invest in strategies we believe will serve to strengthen our global leadership position in this industry.
Now weâ€™ll turn it over for questions.