Investing.com -- Moody’s Ratings has upgraded the ratings of Steelcase Inc (NYSE: SCS )., including its Corporate Family Rating (CFR) to Ba1 from Ba2, and the Probability of Default Rating (PDR) to Ba1-PD from Ba2-PD. The rating on the company’s senior unsecured notes due 2029 has also been upgraded to Ba2 from Ba3. The speculative grade liquidity rating remains unchanged at SGL-1, while the outlook has shifted from positive to stable.

The ratings upgrade is a reflection of Steelcase’s solid credit metrics, low financial leverage, and strong liquidity, supported by a healthy and expanding cash balance, a low net funded debt position, and a forecast for continued positive annual free cash flow generation. The company’s organic order performance in the fiscal year ending February 2025 and its expectations for organic revenue growth in fiscal 2026 suggest a stabilization of revenue.

In the fourth quarter of fiscal 2025, Steelcase reported an organic order growth of 9%, primarily driven by the Americas, its largest segment, which saw a good order growth of 12%. Despite a 3% decline in the company’s organic revenue during the quarter, the backlog increased by 11% compared to the same period last year. For the full fiscal year 2025, Steelcase reported flat year-over-year organic revenue and company-adjusted EBITDA. The stable revenue and earnings contributed to a positive free cash flow of around $54 million (after dividends) in fiscal 2025, and the company’s debt/EBITDA leverage is low at 2.2x at the end of fiscal 2025, or around 1.0x net of cash.

Steelcase anticipates organic revenue growth in the mid-single digit percentage range and modest operating margin expansion in fiscal 2026. This is expected to be supported by a healthy beginning backlog and a stable macroeconomic environment. The company is also forecasting improved profitability in the international segment, which it expects to break even for the full fiscal 2026 year. Moody’s expects that Steelcase will continue to maintain solid credit metrics including debt/EBITDA in the low 2x range with very good liquidity and low net debt over the next 12-18 months.

However, there are potential downside risks due to challenges in the office space market, including high vacancy rates and macroeconomic uncertainty related to US tariffs that could negatively impact business confidence and lower volumes in the contract office furniture industry. Steelcase is planning to offset increased costs related to tariffs with pricing actions, including a tariff recovery charge in the Americas. Moody’s believes there is a risk that these actions may not fully mitigate the additional costs and that actions such as price increases may result in volume declines. They anticipate the EBITDA margin will remain flat over the next 12-to-18 months in their base case projections, but margin risks are weighted toward the downside.

The company’s Ba1 CFR credit profile reflects its leading market share and strong brands in office furniture, good end market diversification, and good geographic reach in North America, Europe, and Asia. Despite secular shifts toward remote work and less office space demand, offices will remain an important contributor to workplace culture and collaboration. Steelcase’s susceptibility to revenue cyclicality in economic downturns, as well as its moderate size with a low EBITDA margin, constrain the credit profile. The company’s low financial leverage with debt/EBITDA at around 2.2x at the end of fiscal year 2025 and very good liquidity provides good financial flexibility to invest and navigate office space market uncertainties and supports the rating.

Steelcase’s business is exposed to an office space market that remains challenging with low new construction activity and high vacancy rates. The company’s revenue and EBITDA remain below pre-pandemic levels, and office space demand is expected to remain well below pre-pandemic levels for the foreseeable future due to the secular shift towards remote work. The company’s business strategies have led to acquisitions that amidst a shifting demand landscape may add event risk, while also increasing its revenue and earnings base.

The stable outlook reflects Moody’s expectation that Steelcase will maintain good credit metrics with low net debt and very good liquidity over the next 12-18 months, which provides good financial flexibility to navigate the ongoing challenging office space market and macroeconomic uncertainty.

The ratings could be upgraded if Steelcase meaningfully and sustainably increases the EBITDA margin to the low-to-mid teens percentage range, and generates strong and consistent positive free cash flow generation, and maintains conservative financial policies that support low leverage and very good liquidity. A ratings upgrade would also require a track record of organic revenue growth and stability and sustained growth visibility in the office space sector.

The ratings could be downgraded if the company reports ongoing lower organic revenue, or the operating profit margin declines due to factors such as lower demand in the office furniture market, volume or market share losses, rising costs, or tariffs, or if debt/EBITDA is above 3.25x. Additionally, a downgrade could occur if liquidity deteriorates such as a meaningful reduction in the cash and short term investments position or free cash flow generation remains low. A shift in the company’s financial policies to less conservative practices such as distributing meaningful cash to shareholders or completing large debt-financed acquisitions could also lead to a downgrade.

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