UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

For the transition period from           to

 

Commission File Number 1-13873

 

 

 

 

STEELCASE INC.

(Exact name of registrant as specified in its charter)

 

 

(Registrant’s telephone number, including area code) (616) 247-2710

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of October 6, 2008, Steelcase Inc. had 78,573,663 shares of Class A Common Stock and 55,703,531 shares of Class B Common Stock outstanding.

 

STEELCASE INC.
FORM 10-Q

FOR THE QUARTER ENDED AUGUST 29, 2008

INDEX

 

 

 

STEELCASE INC.

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended February 29, 2008 (“Form 10-K”).

 

The Condensed Consolidated Balance Sheet at February 29, 2008 was derived from the audited Consolidated Balance Sheet included in our Form 10-K. During Q2 2009, we determined that we had not appropriately recorded deferred tax liabilities on certain intangible assets acquired prior to February 29, 2008. Accordingly, we restated our February 29, 2008 balance sheet to correct goodwill and deferred tax liabilities related to prior acquisitions. These corrections increased goodwill by $35.4 ($32.8 in our Other category, $1.4 in our North America segment and $1.2 in our International segment) as reported in the Condensed Consolidated Balance Sheet as Goodwill and other intangibles, net and decreased deferred tax assets by a corresponding amount as reported in the Condensed Consolidated Balance Sheet as Other assets. We did not amend our February 29, 2008 Form 10-K or any other prior period filing, as these corrections were not considered material to the Consolidated Balance Sheet and had no impact on our Consolidated Statements of Income, earnings per share, retained earnings or our cash flows from operating, financing or investing activities.

 

As used in this Report, unless otherwise expressly stated or the content otherwise requires, all references to “Steelcase,” “we,” “our,” “Company” and similar references are to Steelcase Inc. and its majority-owned subsidiaries. In addition, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.

 

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation.

 

 

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS No. 141(R)”), to create greater consistency in the accounting and financial reporting of business combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any controlling interest, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies to fiscal years beginning after December 15, 2008. Earlier adoption is prohibited.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51 (“SFAS No. 160”), to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented on the balance sheet within equity, but separate from the parent’s equity, (ii) the amount of net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the statement of income and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently. SFAS No. 160 applies to fiscal years beginning after December 15, 2008. Earlier adoption is prohibited.

 

 

In February 2008, the FASB issued FASB Staff Position on Statement 157, Effective Date of FASB Statement No. 157 (“FSP No. 157-2”). FSP No. 157-2 delays the effective date of SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), for all nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis, to fiscal years beginning after November 15, 2008. Although we believe the adoption may impact the way in which we calculate fair value of goodwill, indefinite-lived intangible assets, and other long-lived assets, we do not believe the adoption of FSP No. 157-2 will have a material impact on our consolidated financial statements. We applied SFAS No. 157 to all other fair value measurements effective March 1, 2008. See Note 6 for additional information.

 

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB Statement No. 133 (“SFAS No. 161”), to improve financial reporting of derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 applies to fiscal years and interim periods beginning after November 15, 2008. We have not determined the effect, if any, the adoption of this statement will have on our future disclosures.

 

 

During Q2 2009, we sold Custom Cable Industries, Inc. (“Custom Cable”), a wholly-owned subsidiary in our North America segment. Total proceeds, including limited seller financing are expected to aggregate $17.7. In connection with the sale, we recorded an operating loss of $1.8 within our Corporate costs and also recorded net tax benefits of $2.3. As a result, the net income impact of the sale was a gain of $0.5. Our Condensed Consolidated Statement of Income for the six months ended August 29, 2008 includes $11.2 of revenue, $3.9 of gross profit, $2.1 of operating expenses and $1.8 of operating income related to Custom Cable.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

Basic earnings per share is based on the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share also includes the effects of shares and potential shares issued under our stock incentive plans. However, diluted earnings per share does not reflect the effects of 4.1 million options for 2009 and 1.1 million options for 2008 because those potential shares were not dilutive.

 

 

 

Comprehensive income is comprised of net income and all changes to shareholders’ equity except those due to investments by, and distributions to, shareholders.

 

 

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

 

We adopted SFAS No. 157 as of March 1, 2008. SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. SFAS No. 157 also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. In accordance with SFAS No. 157, fair value measurements are classified under the following hierarchy:

 

Level 1 — Quoted prices for identical instruments in active markets.

 

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

 

Level 3 — Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

 

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be other significant inputs that are readily observable.

 

Assets and liabilities measured at fair value in our Condensed Consolidated Balance Sheet as of August 29, 2008 are summarized below:

 

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

Our managed investment portfolio consists of short-term investments, U.S. Government agency and corporate debt instruments. Fair values for investments in our managed investment portfolio and our available-for-sale securities are based upon valuations for identical instruments in active markets.

 

 

As of August 29, 2008, we held auction rate securities (“ARS”) totaling $26.5 of par value for which the auction market remains effectively shut-down. We recorded unrealized losses of $2.9 in previous quarters in Accumulated other comprehensive income on the Condensed Consolidated Balance Sheet, as we believe the impairment is temporary. During Q2 2009, we recorded an additional unrealized loss of $0.5. We concluded no permanent impairment loss occurred as of the end of Q2 2009 as the decline in market value is due to general market conditions. We have the intent and ability to hold these securities until a recovery in market value occurs given our current liquidity and capital structure. We estimated the fair value of the ARS based on prices provided by the firm holding our investments, supported by our own analysis. Our estimates were based on assumptions we believe market participants would use in pricing the assets in a current transaction, which could change significantly over time based on market conditions.

 

 

As of August 29, 2008, we held one investment in Canadian asset-backed commercial paper (“ABCP”) with an original cost of Canadian $5.0. As a result of a lack of liquidity in the Canadian ABCP market, the ABCP did not settle on maturity and is considered to be in default. We recorded an impairment of our investment in Q4 2008 of $0.9. A restructuring was effected in June 2008 which will result in the exchange of the ABCP currently held by investors for a variety of new long-term floating-rate notes. The restructuring is expected to close in October 2008. We expect the majority of our replacement notes to receive a AA credit rating by Dominion Bond Rating Service, the highest credit rating issued for Canadian commercial paper.

 

Using a discounted cash flow analysis, based on the types of securities we expect to receive from the restructuring plan, we evaluated our investment for impairment as of August 29, 2008. Our analysis concluded that no additional impairment was necessary.

 

 

From time to time, we enter into forward contracts to mitigate the risk of translation into U.S. dollars of certain foreign-denominated net income, assets and liabilities. We primarily hedge intercompany working capital loans and certain forecasted transactions. The fair value of foreign exchange forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.

 

 

Privately-held equity investments are carried at the lower of cost or estimated fair value. For these non-quoted investments, we review the underlying performance of the privately-held companies to determine if potential declines in estimated fair value exist and are other than temporary.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for the six months ended August 29, 2008.

 

 

 

Following is a summary of inventories as of August 29, 2008 and February 29, 2008:

 

 

The portion of inventories determined by the LIFO method aggregated $59.8 as of August 29, 2008 and $54.4 as of February 29, 2008.

 

 

 

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

We expect to contribute approximately $3 to our pension plans and $12 to our post-retirement benefit plans during 2009. As of August 29, 2008, contributions of approximately $1.6 and $6.1 have been made to our pension and post-retirement plans, respectively.

 

We expect to receive approximately $1.2 in Medicare Part D subsidy reimbursements during 2009. During the first two quarters of 2009, we received $0.1 in Medicare Part D subsidy reimbursements.

 

 

The accrued liability for warranty costs, included within Accrued expenses: Other on the Condensed Consolidated Balance Sheets, is based on an estimated amount needed to cover future warranty obligations for products sold as of the balance sheet date and is determined by historical product data and management’s knowledge of current events and actions.

 

 

 

We operate within two reportable segments (North America and International), plus an “Other” category. Our Other category includes the Coalesse Group (formerly the Premium Group), PolyVision and IDEO subsidiaries.

 

Prior to Q1 2009, the Other category also included our Financial Services subsidiary. In recent years, we have significantly reduced the capital invested in, and related operations of, Financial Services. We now use third parties to provide lease funding to customers and have reduced the nature and level of financing services provided to our dealers. As a result, we integrated the remaining operations of Financial Services into the North America segment beginning in Q1 2009. Due to the change in the nature of the operations, we have not reclassified prior year financial results of Financial Services to North America; accordingly, the 2008 financial results remain in the Other category. Unallocated corporate expenses are reported as Corporate.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Revenue and operating income (loss) for the three and six months ended August 29, 2008 and August 24, 2007 and total assets as of August 29, 2008 and February 29, 2008 by segment are presented below:

 

 

 

 

The following actions announced in March 2008 are targeted toward further modernizing our industrial system, rebalancing our workforce to better align with our growth opportunities and improving profitability at PolyVision.

 

Within the North America segment, we are closing one manufacturing facility and transferring its production, along with certain products from another facility, to other manufacturing facilities within our network. We expect these actions to be completed by the end of Q3 2009. During Q2 2009, we recorded $4.7 in costs associated with these actions which included employee termination costs, impairment of certain fixed assets and relocation costs. We have incurred a cumulative total of $9.0 in costs related to this initiative.

 

We recorded a charge of $3.7 in our Other category during Q2 2009 related to the closure of our Oakland, California (Metro) manufacturing facility, as we continue to consolidate front office and manufacturing operations with other Coalesse Group and North America locations. As of the end of Q2 2009, we incurred a cumulative total of $7.0 in costs related to employee termination, relocation and impairment of certain fixed assets in connection with this initiative. We expect to complete this initiative by the end of Q3 2009.

Also within the Other Category, we closed a PolyVision facility during Q1 2009. This closure was linked to a decision to exit a portion of the public-bid contractor whiteboard fabrication business where profit margins are the lowest. During Q2 2009, we incurred $0.5 in employee termination costs and relocation costs associated with this action, resulting in cumulative costs of $1.2. We also recorded a credit of $0.9 related to the disposition of a product line within PolyVision’s business.

 

We launched various white-collar “reinvention” initiatives across our business in an effort to curb the automatic replacement of future attrition and retirements and to rebalance our workforce to better align with our growth opportunities. In connection with these efforts, we are estimating a net reduction of 200 to 250 white-collar jobs across our North America segment and Other category by the end of 2010. Some of those jobs will relocate to a company-owned shared service center, some to third parties and some may be eliminated as we continue to modernize our processes. We incurred $1.0 in costs in Q2 2009, for a cumulative total of $3.5 in employee termination costs associated with these initiatives.

 

Restructuring costs are summarized in the following table:

 

 

Below is a summary of the net additions, payments and adjustments to the restructuring reserve balance during 2009:

 

 

The reserve balance as of August 29, 2008 is primarily related to employee termination costs associated with our recently announced restructuring activities.

 

 

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our February 29, 2008 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on April 28, 2008. Unless the context otherwise indicates, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter,

respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.

 

Financial Summary

 

 

Results of Operations (Unaudited)

 

 

 

Overview

 

Net income decreased by $6.3 in Q2 2009 to $31.4, or $0.23 per share, compared to $37.7, or $0.26 per share, in the same quarter last year. The decrease was primarily the result of increased restructuring costs, less interest income, lower performance within our Other category and significant commodity inflation, which has out-paced benefits of previous pricing actions.

 

Net income decreased by $17.7 year-to-date to $53.6, or $0.39 per diluted share, compared to $71.3, or $0.49 per diluted share, in the same period last year. The year-to-date decrease was primarily the result of lower performance within our Other category, increased restructuring costs and less interest income.

 

Revenue was $901.8 in Q2 2009, compared to $825.2 in the same quarter last year. Revenue increased by 34.0% in our International segment primarily due to strength in Germany, China, the United Kingdom, Angola, Mexico and India. In addition, International revenue included approximately $22 of favorable currency translation effects versus the same quarter last year and a $4 unfavorable impact due to net dispositions during the last four quarters. Revenue increased by 2.1% in our North America segment, which included a $14 unfavorable impact related to net dispositions during the last four quarters.

 

Year-to-date revenue increased $83.9 or 5.1% compared to the same period last year. Revenue increased by 31.5% in our International segment offset in part by a 3.3% decrease in our North America segment compared to the same period last year. Year-to-date revenue included approximately $53 of favorable currency translation effects and an unfavorable impact of $15 related to net dispositions during the last four quarters.

 

Cost of sales increased as a percentage of revenue by 170 basis points during Q2 2009 and 70 basis points year-to-date, compared to the same periods last year, primarily due to significant commodity inflation. In addition, cost of sales continued to be negatively impacted by International business mix shifts and currency effects in the United Kingdom, and temporary inefficiencies related to

restructuring actions in the Other category. The 2009 increase in cost of sales and higher restructuring charges resulted in gross margin of 30.8% in Q2 2009 compared to 33.7% in Q2 2008, and 31.7% year-to-date compared to 33.2% in the same period last year.

 

Operating expenses increased by $8.9 in Q2 2009 and by $20.2 year-to-date, compared to the same periods last year, but decreased significantly as a percentage of revenue due to volume leverage. The increase in operating expenses for the quarter was primarily due to unfavorable currency translation effects. The year-to-date increase in operating expenses was due to unfavorable currency translation effects, increased product development and showroom spending, increased spending related to the launch of our Coalesse brand and additional growth-related spending in Asia.

 

Q2 2009 operating income was $46.0, a decrease of $9.0 compared to the prior year. Year-to-date operating income of $82.8 decreased by $20.5 compared to the prior year. The decrease was primarily due to higher restructuring costs and lower performance in our Other category.

 

Restructuring costs of $9.0 incurred in Q2 2009 and $16.2 year-to-date primarily related to the restructuring activities we announced in March 2008. See Note 11 to the condensed consolidated financial statements for additional information.

 

Our effective tax rate in Q2 2009 was 31.7%, which included certain tax adjustments associated with the sale of a non-core business in our North America segment. See Note 3 to the condensed consolidated financial statements for additional information. We expect our effective tax rate to approximate 35% for 2009.

 

Interest Expense and Other Income, Net

 

 

Interest income in Q2 2009 and year-to-date was lower than the prior year due to lower average cash balances as a result of the $1.75 per share special cash dividend paid in Q4 2008 and lower interest rates earned on those balances.

 

Business Segment Review

 

See additional information regarding our business segments in Note 10 to the condensed consolidated financial statements.

North America

 

 

Operating income was 8.0% of revenue in Q2 2009 compared to 10.1% of revenue in the same quarter last year. Year-to-date operating income was 8.0% of revenue compared to 8.7% of revenue in the prior year. The decrease was due to increased restructuring charges and significant commodity inflation within cost of sales, which has out-paced benefits of previous pricing actions. During Q2, we increased list prices and announced a commodity surcharge in North America effective September 1, 2008.

 

North America revenue, which accounted for approximately 54% of consolidated year-to-date revenue, increased by 2.1% from the prior year quarter and decreased by 3.3% year-to-date, including unfavorable impacts from dispositions of approximately $14 and $34, respectively. Current year revenue otherwise reflected decreased volume in the financial services sector, offset by increases in the energy, government, higher education, healthcare, and technical/professional sectors. Most other sectors posted modest increases or decreases in revenue versus the same periods last year.

 

Cost of sales increased as a percentage of revenue by 180 basis points in the current quarter versus the same quarter last year and by 10 basis points year-to-date. The Q2 deterioration was driven by significant commodity inflation and a decrease in the cash surrender value of our company owned life insurance. The year-to-date deterioration was due to significant commodity inflation, partially offset by a favorable property tax settlement, improved pricing yield and continued plant efficiencies. We expect the negative effects of commodity inflation to continue during Q3 2009.

 

Operating expenses decreased in both dollars and as a percentage of revenue during the quarter and year-to-date. The decrease in operating expense dollars was primarily due to dispositions during the last four quarters.

 

Restructuring costs of $5.7 incurred in Q2 2009 and $9.3 year-to-date primarily related to the restructuring activities we announced in March 2008. See Note 11 to the condensed consolidated financial statements for additional information.

 

International