David C. Sylvester
Thank you Jim and good morning everyone. My comments today will start with some highlights related to our fourth quarter results, balance sheet, and cash flow and then I will share a few summary remarks about the full fiscal year before talking about our outlook for the first quarter and targets for all of fiscal 2020.
As Jim said we finished the year very strong with fourth quarter revenue of $912 million and $0.29 of adjusted earnings per share both of which exceeded the top end of our guidance for the quarter. The organic revenue growth of 15% was better than the 9% to 12% we expected for the quarter. We exceeded the top-end of our range primarily due to strength throughout December in both the Americas and EMEA and a lower than expected impact from project delays at the end of the quarter globally.
In addition the mix of revenue growth included higher than expected revenue from one of our owned dealers and some of our direct customers which was primarily driven by third party products not our partnerships. From an earnings perspective the $0.29 exceeded the top end of our estimated range by a penny, the operating leverage from the better than expected revenue was a positive contributor but it was dampened by increased spending in support of our growth strategies, relatively high healthcare costs in advance of a change in planned design, and some year-end adjustments to various accounting reserves which netted to an unfavorable impact in the quarter.
In addition the contribution margin associated with the third party product revenue I just mentioned was relatively low.
We also had a net -- this favorable discrete tax benefits in the quarter which contributed about a penny to our earnings. Switching to year-over-year comparisons we grew revenue by $140 million in the quarter with $121 million representing broad based organic growth of 15% with the Americas growing 17%, EMEA growing 9%, and the other category growing 17%. I won't repeat everything Jim just summarized but simply reiterate our strategy is working and customers are responding and it's showing up in our recent market share gains in the U.S. and many other markets around the world.
For earnings the $0.29 of adjusted earnings in the quarter represented more than a 50% improvement compared to the prior year when you take into account both the impacts of U.S. tax reform and a non-operating gain in the prior year.
Our operating margin improved by 110 basis points due to a significant improvement in our operating expense leverage. In the second half of fiscal 2017 we began ramping up our investments in product development and other growth strategies including partnerships and acquisitions and in fiscal 2019 we've seen accelerating quarterly revenue growth as we have been realizing the benefits of those investments which improved our leverage and our operating expenses.
In addition we continue to drive fitness across other areas of our business model which is helping to reallocate existing resources to support growth and investments. The improvement in operating expense leverage was offset in part by a decline in our gross margin in the quarter which was largely driven by shifts in our business mix.
Our overhead is also higher than a year ago in support of our growth and business continuity strategies but this was partially offset by cost reduction initiatives and the absorption benefits associated with the higher volume.
As it relates to price yield the benefits from our recent pricing actions more than offset the higher commodity freight and labor costs in the quarter modestly contributing to our gross margin after three consecutive quarters of the opposite effect. And we recently announced another price adjustment to take effect in April.
Over the past few quarters we have mentioned shifts in our business mix as a contributor to year-over-year declines in our gross margin.
While we have referenced the year-over-year implications I want to share a few additional thoughts about the longer-term benefits.
For example first by winning a relatively high mix of project business now as more and more companies modernize their workplaces we're also winning the continuing agreements with these same customers which can generate additional business of similar magnitude over subsequent periods.
Second the success of our new products is helping to offset the declines in legacy applications.
Some of our older products have higher than average gross margins due to fully depreciated tooling and equipment, years of cost reduction emphasis, and in some cases pricing actions.
While we target our new products at or above our average gross margins across their life cycles initial margins can be lower before overhead investments are more fully absorbed with increased volume.
In addition some of our newest products are outperforming our initial expectations and therefore we have been accelerating some of our localization and business continuity strategies which requires investment in the short-term but we expect will improve our gross margin in the longer-term. And finally because we owned some of our distribution and sell direct in other markets and the ancillary applications have been growing significantly, our revenue and share of wallet from customers in these markets have occasionally benefited from some pass through business which can be at lower gross margins. It's still good business for us but it can impact our overall average gross margin percentage when volumes are more significant.
As it relates to orders and backlog for the quarter, orders in the Americas grew 4% and backlog at the end of the quarter was approximately 3% higher than the prior year.
While orders in EMEA grew 9% and backlog at the end of the quarter was approximately 10% higher than the prior year. These comparisons were negatively impacted by a list price adjustment in the prior year which we estimate accelerated approximately 20 million of orders into the fourth quarter of last year.
Moving to the balance sheet and cash flow, we generated $85 million of operating cash flow in the quarter which more than funded capital expenditures, the full repayment of acquisition related borrowings under our credit facility, and our $0.135 cent quarterly dividend.
In addition we issued $450 million of 10 year senior notes in January and used a portion of the proceeds to fund the early retirement of our $250 million notes in February. The effective interest rate on our new notes approximate 5.6% or 100 basis points lower than the notes we retired in the quarter. And the rating agencies rated our new notes two notches into the investment grade scale with stable outlooks. Replenishing our liquidity following the recent acquisitions allows us to run our operations from cash and investments on our balance sheet and continue to use the credit facility as a tool to move quickly on strategic opportunities or serve as a liquidity backstop during a downturn.
Lastly yesterday the Board of Directors approved a $0.145 dividend for the first quarter of fiscal 2020 which represents more than a 7% increase over the quarterly dividend paid in fiscal 2019.
Before I get into fiscal 2020 I would like to first make a few comments about fiscal 2019 as there are some important points to take into consideration as you update your financial models for next year.
Our adjusted earnings of a $1.20 per share take into consideration the pension charge in the third quarter and the charges related to the early retirement of debt in the fourth quarter.
However, there are a few additional non-recurring items in the year that we have highlighted in our earnings releases which had the effect of increasing our earnings by approximately $0.06 per share after taking into consideration the related variable compensation and income tax effects. They include the property gain reported in the second quarter which had a $0.03 positive effect on earnings per share and net discrete tax benefits during the third and fourth quarters which totaled approximately $6 million and had the effects of lowering our effective tax rate below our ongoing estimate of 27% and increasing earnings by another $0.03 per share.
Some of you have also asked about other puts and takes like the initial effects of purchase accounting related to acquired inventory and backlog or the lower warranty product liability and workers' compensation costs we recorded during the year.
We aren’t suggesting an adjustment for those as they largely offset and we will have ongoing amortization expense related to our acquisitions and our estimated reserves for these types of costs could change as our claims experience continues to evolve.
So for purposes of building your year-over-year models we think a $1.14 is a good estimated baseline for recurring earnings per share in fiscal 2019.
For next year the earnings release included our estimates for the first quarter and our targets for the full fiscal year. We're projecting a strong start to fiscal 2020 with first quarter revenue estimated to fall within a range of $830 million to $855 million which translates to expected organic revenue growth of between 7% to 10% and from an earnings perspective we expect to report $0.16 to $0.20 per share which compares to $0.14 in the prior year.
For the full year we are targeting another year of strong revenue growth and continued earnings expansion.
As it relates to revenue we are targeting organic revenue growth between 2% and 6% for fiscal 2020. This target assumes that average industry growth percentages across our markets will be in the low single-digits and we are targeting to grow faster than the industry again in fiscal 2020 by continuing to implement our growth strategies. Based on how our organic revenue growth accelerated during fiscal 2019, flat in Q1, 8% in Q2, 13% in Q3, and 15% in Q4 the organic revenue target for fiscal 2020 anticipates higher growth rates in the first half of the year compared to the second half.
In addition our revenue will benefit from the inorganic impact of consolidating Smith System and Orangebox for a full year which will mostly benefit the first half of the year. Plus we will report an extra week of revenue in the fourth quarter of fiscal 2020 due to the timing of our year-end. Together these impacts are expected to contribute approximately 4% growth in our reported revenue next year.
Lastly our revenue could be negatively impacted by approximately 1.5% related to foreign currency translation assuming the exchange rate at the end of fiscal 2019.
For earnings we are targeting to report fully diluted earnings for fiscal 2020 between $1.20 and $1.35 per share. This target is consistent with our mid-term objective to grow earnings at two times the rate of organic revenue growth by continuing to leverage our scale to drive improvements in our operating margin.
We are targeting improvement in our gross margins during fiscal 2020 as we continue to benefit from recent pricing actions which are now exceeding the significant inflationary pressures we experienced for much of fiscal 2019.
We are targeting additional improvements through cost reduction initiatives across our global operations and by continuing to drive our gross margin improvement strategies in EMEA. But some of these benefits could be offset by continued investments to support growth and additional shifts in business mix.
As it relates to operating expenses we improved our operating expense leverage in fiscal 2019 by 150 basis points.
For fiscal 2020 we are targeting additional benefits from our fitness initiatives but we're also planning additional investments to drive innovation across worker and workplace and broaden our addressable market through new products, partnerships, and acquisitions.
In addition we expect a few pennies of earnings associated with the inorganic growth I just mentioned.
Lastly a couple of other data points for your fiscal 2020 modeling.
We expect interest expense to approximate $27 million for next year assuming current levels of debt.
As I said earlier we continue to estimate our effective tax rate will approximate 27% for the year and as it relates to uses of cash we expect capital expenditures to fall within a range of $85 million to $95 million compared to the $81 million we reported in fiscal 2019. In summary our revenue target for fiscal 2020 assumes a relatively stable geopolitical environment and continued growth in the major economies around the world. In a relatively stable growing environment we believe our industry will continue to grow as organizations continue to modernize their workplaces to drive growth and productivity, compete for talent, and strengthen their cultures. And we believe our innovation and knowledge uniquely positions us to strengthen our global leadership position.
Our gross margin target assumes benefits from our recent pricing actions in the targeted revenue growth.
We expect continued commodity costs and labor inflation but at a low single-digit percentage verses the significant levels of inflation we experienced through much of fiscal 2019. Similarly we are assuming continued shifts in our business mix which we expect could have an unfavorable impact on our gross margins next year but to a lesser extent than the impact in fiscal 2019. From there we will turn it over for questions.