UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-K

 

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

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Securities registered pursuant to 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No x

 

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 x     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceeding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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):

 

Large accelerated filer x          Accelerated filer o          Non-accelerated filer o        Smaller reporting company o

(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 Act).  Yes o     No x

 

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates, computed by reference to the closing price of the Class A Common Stock on the New York Stock Exchange, as of August 29, 2008 (the last day of the registrant’s most recently completed second fiscal quarter) was approximately $762 million. There is no quoted market for registrant’s Class B Common Stock, but shares of Class B Common Stock may be converted at any time into an equal number of shares of Class A Common Stock.

 

As of April 23, 2009, 77,875,649 shares of the registrant’s Class A Common Stock and 55,604,152 shares of the registrant’s Class B Common Stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the registrant’s definitive proxy statement for its 2009 Annual Meeting of Shareholders, to be held on June 25, 2009, are incorporated by reference in Part III of this Form 10-K.

 

 

STEELCASE INC.
FORM 10-K

 

YEAR ENDED FEBRUARY 27, 2009

 

TABLE OF CONTENTS

 

 

 

The following business overview is qualified in its entirety by the more detailed information included elsewhere or incorporated by reference in this Annual Report on Form 10-K (“Report”). As used in this Report, unless otherwise expressly stated or the context otherwise requires, all references to “Steelcase,” “we,” “our,” “the Company” and similar references are to Steelcase Inc. and its consolidated subsidiaries. Unless the context otherwise indicates, reference to a year relates to a fiscal year, ended in February of the year indicated, rather than a calendar year. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter of the fiscal year indicated, respectively. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.

 

Our Business

 

Steelcase is the global leader in furnishing the work experience in office environments. Our brands offer a comprehensive portfolio of products and services for the workplace, inspired by nearly 100 years of insight gained serving the world’s leading organizations.

 

We design for a wide variety of customer needs through our three core brands: Steelcase, Turnstone and Coalesse. The primary focus of these brands is the office furniture segment, but we also extend our capabilities to serve specialty needs in areas such as healthcare, education and distributed work. Our strategy is to grow by leveraging our deep understanding of the patterns of work, workers and workspaces to offer solutions for new ways of working, new customer markets and new geographies.

 

We market our products and services primarily through a highly networked group of independent and company-owned dealers. We extend our reach with a presence in retail and web-based channels. We are recognized as a responsible company that helps create social, economic, and environmentally sustainable value.

 

Founded in 1912, Steelcase became a publicly-traded company in 1998. Headquartered in Grand Rapids, Michigan, USA, Steelcase is a global company with approximately 13,000 employees and 2009 revenue of approximately $3.2 billion.

 

Our Offerings

 

We actively collaborate with leading organizations to create productive and inspiring work experiences, and we translate our research into human-centered products, services and workspaces.

 

Our brands provide an integrated portfolio of interior architectural products, furniture systems and seating, and user-centered technologies, across a range of price points. Our interior architectural products offering includes full and partial height walls and doors as well as lighting. The Steelcase furniture portfolio includes panel-based and freestanding furniture systems and complementary products such as storage, tables, and worktools, and the seating offering includes high-performance ergonomic chairs, lounge seating, general use chairs, and specialty healthcare seating. Our technology solutions support group collaboration with interactive whiteboards and web-based communication tools.

 

Steelcase’s services are designed to reduce costs and enhance people performance. Among these services are workplace strategy consulting, product design and innovation services through IDEO, lease origination services, and furniture and asset management.

 

Our products and services are designed with a complete lifecycle in mind, from planning, through use and reuse, to recycling.

Reportable Segments

 

We operate on a worldwide basis within our North America and International reportable segments, plus an “Other” category. Additional information about our reportable segments, including financial information about geographic areas, is contained in Item 7: Management’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 (“U.S.”) and Canada mainly through approximately 235 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 world’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 patients’ families a more comfortable, efficient and favorable healing environment.

 

Our end-use customer sales are distributed across a broad range of industries and vertical markets including financial services, healthcare, government, higher education and technology, none of which individually exceeded 15% of the North America segment revenue in 2009. Healthcare, government and higher education collectively represented approximately 36% of 2009 North America revenue. On a comparative basis we expect these vertical markets to perform better than other vertical markets in 2010.

 

Each of our dealers maintains its own sales force, which is complemented by our sales representatives who work closely with our dealers throughout the selling process. The largest independent dealer in North America accounted for approximately 5% of our segment revenue in 2009. The five largest independent dealers collectively accounted for approximately 17% 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. 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 2009, the North America segment recorded revenue of $1,740.0, or 54.7% of our consolidated revenue, and as of the end of the year had approximately 6,600 employees, of which approximately 4,400 related to manufacturing.

 

The North America office furniture market is highly competitive, with a number of competitors offering similar categories of products. In these markets, companies compete on insight, product performance, design, price 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 more than half of the U.S. office furniture market.

 

International Segment

 

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 Western Europe, where we have the leading market share in Germany, France and Spain. In 2009, approximately 70% of International revenue was from Western Europe. The remaining revenue was from Central and Eastern Europe, Latin America, Asia

Pacific, the Middle East and Africa. No individual country represents more than 8% of our consolidated revenue.

 

We serve international 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 2009. The five largest independent dealers collectively accounted for approximately 6% of our segment revenue.

 

In 2009, our International segment recorded revenue of $922.2, or 29.0% of our consolidated revenue, and as of the end of the year had approximately 4,300 employees, of which approximately 2,500 related to manufacturing.

 

Other Category

 

The Other category includes the Coalesse Group, PolyVision and IDEO.

 

The Coalesse Group is comprised of the Coalesse brand and Designtex:

 

 

PolyVision designs and manufactures visual communication products, such as static and electronic whiteboards. The majority of PolyVision’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 in the U.S. and Europe. In 2009, PolyVision exited a portion of the public bid contractor whiteboard fabrication business and transferred corporate whiteboard and certain other corporate technology products to the Steelcase brand in the North America segment. PolyVision’s revenue generated from electronic whiteboards and group communication tools are sold through audio-visual resellers and our North America dealer network.

 

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 other organizations within consumer products, financial services, healthcare, information technology, government, transportation and other industries. We have a collaborative relationship with IDEO which generates innovative solutions and customer experience insights.

 

In 2008, we entered into an agreement which will allow certain members of the management of IDEO to purchase a controlling equity interest in IDEO in two phases by 2013. The agreement provides that, under any circumstance, we will retain a minimum 20% equity interest in IDEO, and we expect to continue our collaborative relationship with IDEO during and after this ownership transition. As of February 27, 2009, IDEO management effectively purchased 20% of IDEO under the first phase of the agreement. Phase two of the agreement begins in 2010 and allows IDEO management to purchase an additional 60% equity interest. Phase two also includes a variable compensation program that may provide IDEO management with a portion of the funding for the remaining purchase.

 

In 2009, the Other category accounted for $521.5, or 16.3% of our total revenue, and as of the end of the year had approximately 2,100 employees, of which approximately 800 related to manufacturing.

Corporate Expenses

 

Approximately 82% of corporate expenses were charged to the operating segments in 2009 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, corporate facilities, legal and research and development.

 

Joint Ventures and Other Equity Investments

 

We enter into joint ventures and other equity investments from time to time to expand or maintain our geographic presence, support our distribution network or invest in complementary products and services. As of February 27, 2009, our investment in these unconsolidated joint ventures and other equity investments was $25.7. Our portion of the income or loss from the joint ventures and other equity investments is recorded in Other income, net on the Consolidated Statements of Operations.

 

Customer and Dealer Concentrations

 

Our largest direct-sale customer accounted for 1.3% of our consolidated revenue in 2009 and our five largest direct-sale customers accounted for 3.6% 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 aggregate accounted for approximately 5% 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 in 2009. The five largest independent dealers collectively accounted for approximately 10% of our consolidated revenue.

 

Working Capital

 

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.

 

Backlog

 

Our products are generally manufactured and shipped within two 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 (principally in China and Malaysia).

 

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. Any operation 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 customers’ needs across multiple brands and geographies.

 

This approach has reduced the capital needs of our business, inventories and 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 we will be closing additional manufacturing facilities in the U.S. and Canada in 2010 and relocating the majority of their operations to other North America 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, fabrics, wood, paint and other materials and components. 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 significantly in recent years due to changes in global supply and demand. Our global supply chain team continually evaluates current market conditions, the financial viability of our suppliers and available supply options on the basis of cost, quality and reliability of supply.

 

Research, Design and Development

 

Our extensive global research—a combination of user observations, feedback sessions and sophisticated network analysis—has helped us develop social, spatial and informational insights into work effectiveness. We maintain exclusive and collaborative relationships 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 across different vertical market applications such as healthcare, higher education and professional services. Organizationally, global design leadership directs strategy and project work, which is distributed to design studios across our major businesses and often involves 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 engineers and suppliers to co-develop products and processes that incorporate innovative user features and lead to more efficient manufacturing. Products are tested for performance, quality and compliance with applicable standards and regulations.

 

Exclusive of royalty payments, we invested $50.0, $60.9 and $44.2 in research, design and development activities in 2009, 2008 and 2007, respectively. 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.

 

Intellectual Property

 

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 “Steelcase,” “Turnstone,” “PolyVision,” “Designtex,” “IDEO,” “Nurture by Steelcase” and “Coalesse” 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.

 

Employees

 

As of February 27, 2009, we had approximately 13,000 employees including 6,800 hourly employees and 6,200 salaried employees. Additionally, we had approximately 500 temporary workers who primarily work in manufacturing. Approximately 265 employees in the U.S. are covered by collective bargaining agreements. Internationally approximately 1,600 employees are covered by workers’ councils that operate to promote the interests of workers. Management believes we have positive relations with our employees.

 

Environmental Matters

 

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 (“Environmental Laws”). 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.

 

Available Information

 

We file annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room

at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, including Steelcase, that file electronically with the SEC.

 

We also make available free of charge through our internet website, www.steelcase.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, as soon as reasonably practicable after we electronically file such reports with or furnish them to the SEC. In addition, our Corporate Governance Principles and the charters for the Audit, Compensation and Nominating and Corporate Governance Committees are available free of charge through our website or by writing to Investor Relations, PO Box 1967, Grand Rapids, Michigan 49501-1967.

 

We are not including the information contained on our website as a part of, or incorporating it by reference into, this Report.

 

 

The following risk factors and other information included in this annual report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also adversely affect our business, operating results, cash flows and financial condition. If any of the following risks actually occur, our business, operating results, cash flows and financial condition could be materially adversely affected.

 

Business cycles and other changes in demand could adversely impact our revenue and profits.

 

Office furniture industry revenues are impacted by a variety of cyclical macroeconomic factors such as corporate profits, non-residential fixed investment, white-collar employment growth and commercial office construction and vacancy rates. Our product sales are directly tied to corporate capital spending, which is outside of our control. Geopolitical uncertainties, terrorist attacks, acts of war, natural disasters, other world events or combinations of such and other factors outside of our control could also have a significant effect on business confidence and the global economy and therefore, our business.

 

Other demand influences on our industry include the evolving nature of collaborative and distributed work, technology changes, organizational changes, employee health and safety concerns and the globalization of companies. The trend towards off-shoring white collar jobs could cause our major customers in our core markets to shift employment growth to countries where our market share is not as strong. If we are unsuccessful in adapting our business to these changes and trends, our revenues and profits may be adversely impacted.

 

The current deteriorating global economic conditions and financial markets may adversely affect our business.

 

The recent distress in the financial market has resulted in extreme volatility in the capital markets and diminished liquidity and credit availability. There can be no assurance our access to liquidity will not be adversely affected by changes in the financial markets and the global economy. In addition, deterioration in our financial results could negatively impact our credit ratings. The tightening of the credit markets or a downgrade in our credit ratings could increase our borrowing costs and make it more difficult for us to access funds, refinance our existing indebtedness, enter into agreements for new indebtedness or obtain funding through the issuance of securities.

In addition, the stress in the credit markets is having a significant negative impact on many businesses around the world. The current credit market could adversely impact our customers, dealers and suppliers as follows:

 

 

In response to the recent economic downturn and declines in our revenue, in Q4 2009 we announced a number of reductions to the compensation and benefits of our North American workforce. We expect to reverse these reductions when general economic conditions improve. In addition, the decline in our revenue has had and will continue to have a negative impact on the amount of performance-based incentive compensation earned by our employees. While we do not expect these events will have a significant impact on our ability to retain our employees in the near-term, as the global economy improves, our ability to attract and retain appropriately-skilled employees may be negatively impacted if we do not offer market-competitive levels of compensation and benefits.

 

We may not be able to successfully implement and manage our growth strategies.

 

We believe our future success depends upon our ability to deliver a great experience to our customers, which includes innovative, well-made products and world-class processes. Our success relies in part on our research and development and engineering efforts, our ability to manufacture or source the products and customer acceptance of our products. As it relates to new markets, our success also depends on our ability to create and implement local supply chain and distribution strategies to reach these markets. The potential inability to successfully implement and manage our growth strategies could adversely affect our business and our results of operations.

 

Our growth strategies call for:

 

 

 

The successful implementation of our growth strategies will depend, in part, on our ability to attract and retain an appropriately-skilled workforce. Competition for highly skilled and talented employees could result in higher compensation costs, difficulties in maintaining a capable workforce and leadership succession planning challenges.

 

We could be adversely affected by changes in raw material and commodity costs.

 

We procure raw materials from a significant number of sources within the U.S., Canada, Mexico, Europe and Asia. These raw materials are not rare or unique to our industry. The cost of steel, aluminum, wood, particleboard, petroleum-based products and other commodities, such as fuel and energy, has fluctuated significantly in recent years due to changes in global supply and demand. These changes can also lead to supply interruptions. Our gross margins could be affected if these types of costs continue to fluctuate. In the short term, rapid changes in raw material costs can be very difficult to offset with price increases because of contractual agreements we have entered into with our customers. It is difficult to find effective financial instruments to hedge against these risks. We may not be successful in passing along a portion of higher raw materials costs to our customers because of competitive pressures.

 

Disruptions to the supply of raw materials, component parts and labor in our manufacturing operations could adversely affect our supply chain management.

 

We are reliant on the timely flow of raw materials and components from third party suppliers and our own manufacturing operations. The flow of such materials and components may be affected by:

 

 

Our migration to a less vertically integrated manufacturing model has increased our reliance on a global network of suppliers. Any disruptions in the supply and delivery of component parts and products or deficiencies in our ability to develop and manage our network of suppliers could have an adverse impact on our business, operating results or financial condition.

 

We operate in a highly competitive environment and may not be able to compete successfully.

 

The office furniture industry is highly competitive, with a number of competitors offering similar categories of product. We compete on a variety of factors, including: brand recognition and reputation, price, lead time, delivery and service, insight from our research, product design and features, product quality, strength of dealers and other distributors and relationships with customers and key influencers, such as architects, designers and facility managers.

 

In the North America segment, our top competitors in our primary markets are Haworth, Inc., Herman Miller, Inc., HNI Corporation, Inc., Kimball International Inc. and Knoll, Inc., and our competitors

generally offer products which are similar to the products we offer. Some of our competitors may have lower cost structures and a broader offering of moderately priced products, potentially making it more difficult for us to compete in certain customer segments. In addition, such competition may prevent us from maintaining or raising the prices of our products in response to rising raw material prices and other inflationary pressures or in an industry downturn.

 

Although we do not have major offshore competitors in our North America segment, there are other segments of the North America furniture industry, notably the residential furniture and made-to-stock office furniture segments sold through retailers, where lower-cost imports have become dominant. While customer lead time and customization requirements are currently inhibiting factors, it is possible we could see increased competition from imports in our core markets.

 

In the International segment, we compete against a larger number of smaller size competitors. Our North America competitors also compete in some of our International markets, but their market share varies significantly by market. Most of our top competitors have strong relationships with their existing customers that can be a source of significant future sales through repeat and expansion orders. These competitors manufacture products with strong acceptance in the marketplace and can develop products that could have a competitive advantage over Steelcase products. In certain markets, we compete using an import model which requires longer lead times than local competitors with domestic supply chains, and poses foreign currency exposures that we may not be able to hedge entirely.

 

We also compete in adjacent markets such as healthcare and higher education where competition is more fragmented. We could face increased competition from incumbent players as well as difficulty in penetrating related channels of distribution which could impact our success in these markets.

 

Our continued success depends upon many things, including our ability to continue to manufacture and market high quality, high performance products at competitive prices and our ability to evolve our business model and implement world-class processes to enable us to effectively compete in the office furniture and adjacent industries. Our success is also dependent on our ability to sustain our positive brand reputation and recognition among existing and potential customers and use our brand and our trademarks effectively as we enter new markets.

 

Our global operations subject us to risks that may negatively affect our results of operations and financial condition.

 

We have sales offices and manufacturing facilities in many countries, and as a result, we are subject to risks associated with doing business globally. Our global operations are subject to risks that may limit our ability to manufacture, design, develop or sell products in particular countries, which in turn could have an adverse effect on our results of operations and financial condition, including:

 

 

In the U.S. and most countries in Europe, our revenue and costs are typically in the same currency. However, there are some situations where we export and import products in different currencies. We also may hold assets, such as equity investments, real estate investments and cash balances, or carry

liabilities in currencies other than the U.S. dollar. Fluctuations in the rate of exchange between the U.S. dollar and the currencies of other countries in which we conduct business, and changes in currency controls with respect to such countries, could negatively impact our business, operating results and financial condition. In addition, changes in tariff and import regulations and changes to U.S. and international monetary policies may also negatively impact our revenue.

 

Disruptions within our dealer network could adversely affect our business.

 

We rely largely on a network of independent and company-owned dealers to market, deliver and install our products to customers. Our business is influenced by our ability to initiate and manage new and existing relationships with dealers.

 

From time to time, an individual dealer or Steelcase may choose to terminate the relationship, or the dealership could face financial difficulty leading to failure or difficulty in transitioning to new ownership. In addition, our competitors could engage in a strategy to attempt to acquire or convert a number of our dealers to carry their products. 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 could temporarily have an adverse impact on our business within the affected market. The loss or termination of a significant number of dealers could cause difficulties in marketing and distributing our products and have an adverse effect on our business, operating results or financial condition. In the event that a dealer in a strategic market experiences financial difficulty, we may choose to make financial investments in the dealership, reducing the risk of disruption, but increasing our financial exposure. Establishing new dealers in a market can take considerable time and resources.

 

A portion of our distribution network is company-owned because of the need for us to make financial investments in dealerships in order to preserve our market share and profitability in the affected regions. In certain international markets, we have adopted a direct model of distribution through which we establish company-owned sales and service capabilities. If we are not able to effectively manage these businesses, they could have a negative effect on our operating results. Our direct-sale and owned-dealer models sell non-Steelcase products where product gaps exist. These models involve increased operational risk, the risk of conflict with other distribution channels and the risk we will not be able to compete effectively to win business in those markets because of a more limited breadth of product offering than a dealer who carries multiple lines of products.

 

We could be adversely affected by product defects.

 

Product defects can occur within our own product development and manufacturing processes or through our increasing reliance on third parties for product development and manufacturing activities. Our migration to a less vertically integrated manufacturing model has increased our reliance on a global network of suppliers, which subjects us to higher levels of risk associated with maintaining acceptable quality levels. We incur various expenses related to product defects, including product warranty costs, product recall and retrofit costs and product liability costs. The amount of our product defect expenses relative to product sales varies from time to time and could increase in the future. We maintain a reserve for our product warranty costs based on certain estimates and our knowledge of current events and actions, but our actual warranty costs may exceed our reserve, resulting in a need to increase our accruals for warranty charges. In addition, the reputation of our brands may be diminished by product defects and recalls. We purchase insurance coverage to reduce our exposure to significant levels of product liability claims and maintain a reserve for our self-insured losses based upon estimates of the aggregate liability using claims experience and actuarial assumptions. Any significant increase in the rate of our product defect expenses could have a material adverse effect on our results of operations.

There may be significant limitations to our utilization of net operating loss carryforwards to offset future taxable income.

 

We have significant deferred tax asset values related to net operating loss carryforwards (“NOLs”) primarily in various non-U.S. jurisdictions. We may be unable to generate sufficient taxable income from future operations in the applicable jurisdiction or implement tax, business or other planning strategies to fully utilize our NOLs. We have NOLs in various currencies that are also subject to foreign exchange risk, which could reduce the amount we will ultimately realize. Additionally, future changes in tax laws or interpretations of such tax laws may limit our ability to fully utilize our NOLs.

 

 

None.

 

 

We have operations at locations throughout the U.S. and around the world. None of our owned properties are mortgaged or are held subject to any significant encumbrance. We believe our facilities are in good operating condition and, at present, are in excess of that needed to meet volume needs currently and for the foreseeable future. Our global headquarters is located in Grand Rapids, Michigan, U.S.A. Our owned and leased principal manufacturing and distribution center locations with greater than 50,000 square feet are as follows:

 

 

In Q4 2009, we announced we will be closing two additional North America facilities. These facilities are leased and included in the table above and are expected to be vacated in 2010.

 

 

We are involved in litigation from time to time in the ordinary course of our business. Based on known information, we do not believe we are a party to any lawsuit or proceeding that is likely to have a material adverse effect on the Company.

 

 

None.

 

Our executive officers are:

 

 

Mark A. Baker has been Senior Vice President, Global Operations Officer since September 2004. Mr. Baker held the position of Senior Vice President, Operations from 2001 to September 2004.

 

Mark T. Greiner has been Senior Vice President, WorkSpace Futures since November 2002.

 

James P. Hackett has been President, Chief Executive Officer and Director of the Company since December 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.

 

Nancy W. Hickey has been Senior Vice President, Chief Administrative Officer since November 2001. Ms. Hickey also served as Secretary on an interim basis from March to July 2007.

 

James P. Keane has been President, Steelcase Group since October 2006. Mr. Keane was Senior Vice President, Chief Financial Officer from 2001 to October 2006.

 

Michael I. Love has been President, Nurture by Steelcase since May 2006. Mr. Love was President and Chief Executive Officer, Steelcase Design Partnership from 2000 to May 2006.

 

John S. Malnor has been Vice President, Growth Initiatives since December 2008. Mr. Malnor was President, Turnstone from October 2007 to December 2008 and General Manager, Turnstone from 2004 to October 2007. From 2001 to 2004, Mr. Malnor held the position of Director, Market Development for Turnstone.

 

Frank H. Merlotti, Jr. has been President, Coalesse since October 2006 (Coalesse was known as the Premium Group from October 2007 to June 2008 and the Design Group from October 2006 to October 2007). From 2002 to October 2006, Mr. Merlotti held the position of President, Steelcase North America.

 

James G. Mitchell has been President, Steelcase International since June 2004 and was Managing Director, United Kingdom from 2003 to June 2004.

 

Mark T. Mossing has been Corporate Controller and Chief Accounting Officer since April 2008. Mr. Mossing served as Vice President, Corporate Controller from 1999 to April 2008.

 

Lizbeth S. O’Shaughnessy has been Vice President, Chief Legal Officer and Secretary since July 2007 and was Assistant General Counsel from 2000 to July 2007. From 2005 to July 2007, Ms. O’Shaughnessy also held the position of Assistant Secretary.

 

David C. Sylvester has been Vice President, Chief Financial Officer since October 2006 and was Vice President, Global Operations Finance from 2005 to October 2006. From 2001 to 2005, Mr. Sylvester held the position of Vice President, International Finance.

 

 

Common Stock

 

Our Class A Common Stock is listed on the New York Stock Exchange under the symbol “SCS.” Our Class B Common Stock is not registered under the Exchange Act or publicly traded. See Note 11 to the consolidated financial statements for additional information. As of the close of business on April 23, 2009, we had outstanding 133,479,801 shares of common stock with 8,603 shareholders of record. Of these amounts, 77,875,649 shares are Class A Common Stock with 8,492 shareholders of record and 55,604,152 shares are Class B Common Stock with 111 shareholders of record.

 

 

Dividends

 

The declaration of dividends is subject to the discretion of our Board of Directors and to compliance with applicable laws. Dividends in 2009 and 2008 were declared and paid quarterly. In Q4 2008, our Board of Directors declared and paid a special cash dividend of $1.75 per share on our Class A Common Stock and Class B Common Stock. The payment of this dividend aggregated $247.5. The amount and timing of future dividends depends upon our results of operations, financial condition, cash requirements, future business prospects, general business conditions and other factors that our Board of Directors may deem relevant at the time.

 

 

 

Fourth Quarter Share Repurchases

 

The following table is a summary of share repurchase activity during Q4 2009:

 

 

 

 

 

 

 

 

The following review of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere within this Report. Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. During 2009, we completed a review of certain indirect manufacturing costs to determine the consistency of classification of these costs across our business units and reportable segments. Based on our analysis, we adjusted our results to increase costs of sales and decrease operating expenses by the following amounts:

 

 

Financial Summary

 

Results of Operations

 

 

Overview

 

2009 compared to 2008

 

We recorded a net loss of $11.7 in 2009 compared to net income of $133.2 in 2008. The 2009 deterioration was driven by a number of factors, including lower volume within our North America segment and Other category, increased impairment charges and restructuring costs, a significant reduction in cash surrender value of our company-owned life insurance policies (“COLI”), lower interest income and higher commodity cost inflation which exceeded benefits from pricing actions. These factors were partially offset by lower variable compensation costs and benefits from restructuring and other cost reduction activities completed during the year.

Our revenue decreased $237.1 or 6.9% in 2009 compared to 2008. 2009 revenue was negatively impacted by $30.8 of sales related to net divestitures compared to 2008 and an estimated $45 from an extra week of shipments in the prior year, as our fiscal year 2008 consisted of 53 weeks. The balance of the decline in 2009 revenue was in our North America segment and Other category. The overall global economic slowdown in the last six months of 2009 and factors contributing to the turmoil in the capital markets influenced the decreased demand for office furniture, though revenue in our International segment did not initially deteriorate as quickly as in our North American segment. We expect the effects of the global economic slowdown and related turmoil in the capital markets to decrease the demand for office furniture across all segments in 2010.

 

Cost of sales increased to 70.3% of revenue in 2009, a 240 basis point deterioration compared to 2008. We estimate that the majority of the deterioration was due to lower fixed cost absorption related to lower volume, which had the effect of increasing cost of sales as a percent of revenue compared to the prior year. Other factors contributing to the increase were a reduction in cash surrender value of COLI, which accounted for approximately 80 basis points of the decline, and higher commodity cost inflation, which exceeded benefits from pricing actions and occurred primarily within our North America segment, impacting consolidated cost of sales by approximately 40 basis points. The deterioration in cost of sales was partially mitigated by lower variable compensation expense, which was approximately $18 lower than in 2008, and benefits from restructuring and other cost reduction activities completed during the year.

 

Operating expenses decreased by $31.8 compared to 2008, with approximately $40 of lower variable compensation in 2009 and an estimated $12 of expenses associated with the additional week in 2008, partially offset by a $13.8 decline in cash surrender value of COLI and an $8.5 impairment charge related to a corporate aircraft classified as held for sale. Operating expenses increased as a percent of revenue due to reduced volume leverage.

 

Goodwill and intangible assets impairment charges were primarily related to PolyVision, which is included in the Other category. These charges in 2009 were primarily due to the impact of the substantial decline in our stock price and market capitalization. As part of our annual goodwill impairment testing, we prepared a reconciliation of the fair value of our reporting units to our adjusted market capitalization as of February 27, 2009. We determined the fair value of PolyVision (using a discounted cash flow method) was less than its carrying value, resulting in non-cash impairment charges of $63.0 in Q4 2009.

 

Operating income decreased by $201.8 in 2009 compared to 2008. The North America segment declined $100.0 due to the reduction in revenue, the decline in cash surrender value of COLI and increased restructuring costs, partially offset by lower variable compensation. The International segment declined $16.0 primarily due to a decline in revenue in Q4 2009 compared to the prior year. The Other category declined $84.7 due to higher impairment charges at PolyVision and a decline in revenue in the Coalesse Group and PolyVision, as well as temporary inefficiencies associated with the consolidation of manufacturing activities in the Coalesse Group.

 

We recorded restructuring costs of $37.9 in 2009, compared to net restructuring credits of $0.4 in 2008. The 2009 charges primarily related to the consolidation of additional manufacturing and distribution facilities in North America, employee termination costs related to the reduction of our global white-collar workforce and further modernization of our industrial system in the Other category. See further discussion and detail of these items in the Segment Disclosure analysis below and in Note 17 to the consolidated financial statements.

 

2008 compared to 2007

 

Net income improved by $26.3 in 2008 compared to 2007. The improvement 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 impairment charges at PolyVision and increased spending related to longer-term growth initiatives.

Our revenue increased 10.4% in 2008 compared 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 was lower by $79.6 related to net divestitures. 2008 revenue was positively impacted by approximately $73 from currency translation effects and an estimated $45 from an extra week of shipments as compared to 2007.

 

Cost of sales decreased to 67.9% of revenue in 2008, a 170 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 fixed cost leverage associated with higher volume, improved pricing yields, benefits from restructuring and product simplicity initiatives and continued implementation of lean manufacturing principles, partially offset by lower cash surrender value appreciation on COLI in the North America segment.

 

Operating expenses along with goodwill and intangible assets impairment charges increased $91.0 in 2008 compared to 2007. Currency translation effects, higher impairment charges at PolyVision, increased spending related to longer-term growth initiatives, lower cash surrender value appreciation on COLI and costs associated with an additional week of operations in 2008 primarily drove 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 impairment charges at PolyVision.

 

We recorded net restructuring credits of $0.4 in 2008, compared to net restructuring costs of $23.7 in 2007. 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.

 

Other (Expense) Income, Net and Effective Income Tax Rate

 

 

Interest income decreased in 2009 compared to 2008 due to lower average cash and investment balances and lower interest rates.

 

Our consolidated results include the results of several dealers in which either we own a majority interest or we maintain participative control, but our investments are structured such that we do not share in their 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.

 

Miscellaneous consists of foreign exchange gains and losses, unrealized gains and losses on derivative instruments and other income and expenses. Included in this amount for 2009 is a $6.6 gain

related to the sale of an investment, offset by $5.9 of foreign exchange losses and $2.0 of impairment charges related to our auction rate security investments. Included in this amount for 2008 and 2007 is $3.9 and $3.6, respectively, related to gains on dealer transitions.

 

Our 2009 effective tax rate was negatively impacted by $36.6 of non-deductible losses associated with declines in cash surrender value of COLI, and favorably impacted by $7.5 of tax reserve reductions related to the completion of U.S. Internal Revenue Service examinations of 2004 through 2008. During 2007, we recorded a number of favorable tax adjustments that lowered our effective tax rate, including reductions in net operating loss valuation allowances and the reversal of reserves in connection with the favorable resolution of a Canadian tax audit. See further discussion and detail of these items in Note 12 to the consolidated financial statements.

 

Segment Disclosure

 

We operate on a worldwide basis within North America and International reportable segments, plus an “Other” category. Our Other category includes the Coalesse Group, PolyVision and IDEO. Unallocated corporate expenses are reported as Corporate. Additional information about our reportable segments is contained in Item 1: Business and Note 15 to the consolidated financial statements included within this report.

 

North America

 

 

2009 compared to 2008

 

Operating income in the North America segment decreased by $100.0 in 2009 compared to 2008. The 2009 deterioration was driven by lower fixed cost absorption related to lower volume, decreases in cash surrender value of COLI, higher commodity cost inflation which exceeded benefits from pricing actions and increased restructuring costs and impairment charges, partially offset by lower variable compensation and benefits from restructuring and other cost reduction activities completed during the year.

 

North America revenue, which accounted for 54.7% of consolidated 2009 revenue, decreased by $196.6 or 10.2% from 2008. Net divestitures had the effect of decreasing revenue by $54.3 as compared to 2008. Current year revenue was also negatively impacted by an estimated $34 from an extra week of shipments in the prior year and approximately $6 from currency translation effects related to our subsidiary in Canada. The remaining decrease in revenue was primarily due to decreased volume across most of our vertical markets and geographic regions throughout the U.S. These declines were mitigated in part by relative stability in the federal government, healthcare, technology and higher education vertical markets. Order rates deteriorated significantly throughout the second half of the year as business capital spending declined in connection with the deteriorating U.S. and global economic environment, which we believe led to an increase in project deferrals and cancellations.

 

Cost of sales as a percent of revenue increased 250 basis points compared to the prior year. The deterioration was primarily the result of lower fixed cost absorption related to lower volume, which we

estimate impacted cost of sales by 150 basis points. Other factors contributing to the increase were a reduction in cash surrender value of COLI, which represented 130 basis points of the decline, and higher commodity cost inflation which exceeded benefits from pricing actions and we estimate represented 60 basis points of the decline. The deterioration in cost of sales was partially offset by variable compensation expense which was $13.8 lower than in 2008 and benefits from restructuring and cost reduction efforts.

 

Operating expenses were 22.7% of revenue in 2009, compared to 21.7% of revenue in 2008. Operating expenses decreased in absolute dollars compared to 2008 primarily due to variable compensation expense which was $32.0 lower than in 2008, an $11.4 reduction resulting from net divestitures and benefits from restructuring and cost reduction efforts, partially offset by a $14.1 impact from the decline in cash surrender value of COLI and an $8.5 impairment charge related to a corporate aircraft classified as held for sale.

 

Restructuring costs of $14.0 in 2009 included in gross profit primarily consisted of move and severance costs associated with the closure of three manufacturing facilities within our network. Restructuring costs of $8.4 included in operating expenses primarily consisted of employee termination costs related to the reduction of our white-collar workforce.

 

2008 compared to 2007

 

Operating income increased by $70.4 in 2008 compared to 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 COLI policies and higher spending related to longer-term growth initiatives.

 

Revenue growth of 7.8% in 2008 was driven by relatively strong sales across the Steelcase Group, Nurture by Steelcase and Details brands. While positive, growth at Turnstone moderated in 2008 compared to strong double digit percentages in prior years. As compared to 2007, North America revenue for 2008 was lower by $80.6 related to net divestitures and included an estimated $34 of additional sales from the extra week of shipments and approximately $9 from favorable currency translation effects related to sales by our subsidiary in Canada.

 

Cost of sales decreased 220 basis points from 2007 as a percent of revenue. The improvement was the result of fixed cost leverage associated with higher volume, 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 COLI.

 

Income from COLI was $11.8 lower in 2008 compared to 2007, with $6.3 of the decrease negatively impacting cost of sales and the remainder of the decrease impacting operating expenses.

 

Operating expenses were 21.7% of revenue in 2008 compared to 21.6% of revenue in 2007. Operating expenses increased in absolute dollars compared to 2007 primarily due to costs associated with the 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 COLI, partially offset by lower expenses associated with net divestitures.

 

Restructuring costs of $0.8 in 2008 and $18.5 in 2007 included in gross profit consisted of move 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.

International

 

 

2009 compared to 2008

 

International reported operating income of $41.0, a decrease of $16.0 compared to 2008. The 2009 deterioration was driven by commodity cost inflation, unfavorable currency impacts and significant declines in volume in Q4 2009. Operating income also decreased as a percent of revenue due to the dilutive impact of consolidating our acquisition of Ultra in Asia in Q4 2008. These decreases were partially offset by improved fixed cost leverage related to higher volume during the first three quarters of 2009 and operational improvements at a small subsidiary which negatively impacted 2008 results.

 

Revenue increased $28.4 or 3.2% in 2009 compared to 2008 and represented 29.0% of consolidated revenue. Current year revenue was positively impacted by $23.5 of incremental sales related to net acquisitions and approximately $4 from currency translation effects. Strong growth in revenue in Germany was offset by decreases in Spain, France and the United Kingdom. The increase was partially offset by a substantial drop in revenue in Q4 as the global economic slowdown and related turmoil in the capital markets dramatically decreased the demand for office furniture across all International markets.

 

Cost of sales increased by 130 basis points as a percent of revenue compared to 2008. The deterioration was primarily due to higher commodity cost inflation, unfavorable currency impacts, which represented approximately 30 basis points of the decline, and the dilutive impact of consolidating our acquisition of Ultra in Asia, which represented approximately 30 basis points of the decline.

 

Operating expenses increased by $9.4 in 2009 compared to 2008, primarily due to $8.5 related to net acquisitions and unfavorable currency translation impacts of approximately $3, partially offset by variable compensation expense which was approximately $3 lower than in 2008.

 

2008 compared to 2007

 

International reported operating income of $57.0 in 2008, 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. The growth was relatively broad-based across most of our International regions, but was particularly strong in Germany, France, Eastern Europe, Spain, Latin America and Asia Pacific. Currency translation had the effect of increasing revenue by approximately $64 in 2008 as compared to 2007. Revenue also included $13.6 of incremental sales related to net acquisitions.

 

Cost of sales increased by 30 basis points as a percent 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 United Kingdom.

Operating expenses increased by $32.5 in 2008 compared to 2007, primarily due to currency translation impacts of approximately $18, higher spending on growth initiatives in Asia and the effects of net acquisitions.

 

Other

 

 

2009 compared to 2008

 

Our Other category includes the Coalesse Group (formerly known as the Premium Group), PolyVision and IDEO. The Other category reported an operating loss of $79.3 in 2009, compared to operating income of $5.4 in 2008. The decline was primarily the result of higher goodwill and intangible assets impairment charges at PolyVision, lower fixed cost absorption related to lower volume within the Coalesse Group and PolyVision, increased restructuring costs and disruption costs associated with the consolidation of manufacturing activities, partially offset by lower variable compensation expense. Additionally, prior to 2009, the Other category also included our Financial Services subsidiary, which had $13.8 of revenue and $8.6 of operating income from Financial Services in 2008, primarily related to residual gains from early lease terminations we originated and funded in prior years.

 

2009 revenue decreased by $68.9 or 11.7% compared to 2008. The decrease in revenue includes the effects of our decisions to exit a portion of the PolyVision public bid contractor whiteboard fabrication business and to transfer corporate whiteboard and certain other corporate technology products to the Steelcase brand in the North America segment during the first six months of 2009. In addition, the weakening economy in the U.S. contributed to decreases in revenue in the Coalesse Group, PolyVision and IDEO.

 

Cost of sales as a percent of revenue increased by 350 basis points in 2009 compared to 2008 primarily due to the reduction in volume, higher commodity cost inflation which exceeded benefits from pricing actions and disruption costs associated with the consolidation of manufacturing activities.

 

Operating expenses were 33.2% of revenue in 2009 compared to 31.6% of revenue in 2008. Operating expenses decreased in absolute dollars compared to 2008 primarily due to variable compensation expense, which was approximately $3 lower than in 2008 and benefits from restructuring and other cost reduction activities efforts.

 

During the second half of 2009, there was a substantial decline in the market price of our Class A common stock and thus our market capitalization. As part of our annual goodwill impairment testing, we prepared a reconciliation of the fair value of our reporting units to our adjusted market capitalization as of February 27, 2009. We determined that the fair value of PolyVision (using a discounted cash flow method) was less than its carrying value, resulting in non-cash goodwill and intangible assets impairment charges of $63.0 in Q4 2009. See Note 8 to the consolidated financial statements for additional information.

In 2008, we entered into an agreement which will allow certain members of the management of IDEO to purchase a controlling equity interest in IDEO in two phases by 2013. The agreement provides that, under any circumstance, we will retain a minimum 20% equity interest in IDEO. As of February 27, 2009, IDEO management effectively purchased 20% of IDEO under the first phase of the agreement. Phase two of the agreement begins in 2010 and allows IDEO management to purchase an additional 60% equity interest. Phase two also includes a variable compensation program that may provide IDEO management with a portion of the funding for the remaining purchase.

 

Restructuring costs of $13.5 in 2009 primarily related to the closure of two manufacturing facilities: one within the Coalesse Group and one at PolyVision.

 

2008 compared to 2007

 

The Other category reported operating income of $5.4 in 2008, a $4.8 decline compared to 2007. The decline was primarily the result of higher impairment charges at PolyVision which offset improved profitability in the Coalesse Group and PolyVision, excluding the impact of the impairment charges. IDEO’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, as described above.

 

Revenue increased by $25.0, or 4.4% in 2008 compared to 2007 due to growth at IDEO and across most of the Coalesse Group.

 

Cost of sales as a percent of revenue decreased by 240 basis points in 2008 compared to 2007 primarily due to improvements at IDEO, PolyVision and across most of the Coalesse Group companies.

 

We recorded goodwill and intangible assets impairment charges of $21.1 at PolyVision in 2008 related to a deterioration in their financial performance, which was primarily driven by intense price competition in the public bid contractor whiteboard fabrication business. We recorded $10.7 of similar charges at PolyVision in 2007.

 

Corporate

 

 

Approximately 82% of corporate expenses were charged to the operating segments in 2009 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, corporate facilities, legal and research and development.

 

The reduction in variable compensation expense in 2009 was offset by an increase in general accounts receivable reserves and lower gains recognized from the transfer of equity interests of IDEO to certain members of its management.

 

Liquidity and Capital Resources

 

Liquidity

 

We believe we currently need approximately $50 of cash to fund the day-to-day operations of our business. Our current target is to maintain a minimum of $100 of additional cash and short-term investments as available liquidity for funding investments in growth initiatives and as a cushion against volatility in the economy. Our actual cash and short-term investment balances will fluctuate from quarter to quarter as we plan for and manage certain seasonal disbursements, particularly the annual payment

of accrued variable compensation and retirement plan contributions in Q1 of each fiscal year. These are general guidelines; we may modify our approach in response to changing market conditions or opportunities. As of February 27, 2009, we held a total of $193.6 in cash and cash equivalents and short-term investments.

 

The following table summarizes our consolidated statements of cash flows:

 

 

During 2009, cash and cash equivalents decreased by $96.3 to a balance of $117.6 as of February 27, 2009. Of our total cash and cash equivalents, approximately 75% was located in the U.S. and the remaining 25% was located outside of the U.S., primarily in Canada and Europe. These funds, in addition to short-term investments, cash generated from future operations, funds available from COLI and other long-term investments and available credit facilities, are expected to be sufficient to finance our foreseeable liquidity and capital needs.

 

We have short-term investments of $76.0 as of February 27, 2009 maintained in a managed investment portfolio which consists of short-term investments in U.S. Treasury, U.S. Government agency and corporate debt instruments.

 

We also have investments in auction rate securities (“ARS”) with a par value of $26.5 and an estimated fair value of $21.5 as of February 27, 2009 and one Canadian asset-backed commercial paper (“ABCP”) investment with a par value of Canadian $5.0 and an estimated fair value of $3.3 as of February 27, 2009. These securities are included in Other assets on the Consolidated Balance Sheets due to the tightening of the U.S. credit markets and current lack of liquid markets for ARS or Canadian ABCP. We intend to hold these investments until the market recovers and do not anticipate the need to sell these investments in order to operate our business or fund our growth initiatives. See Note 4 to the consolidated financial statements for additional information.

Cash provided by operating activities

 

 

The decrease in cash provided by operating activities in 2009 was primarily due to a significant decline in net income largely driven by the recent effects of deteriorating global economic conditions and the related impacts on business capital spending and our revenue. The associated cash generated from reductions in working capital was more than offset by payments earlier in the year related to variable compensation and other benefit costs earned in prior years.

 

Cash used in investing activities

 

 

We continue to closely scrutinize capital spending to ensure we are making the right investments to sustain our business and to preserve our ability to introduce innovative, new products. Capital expenditures in 2009 included investments in product development, showrooms and corporate facilities and progress payments toward the replacement of an existing corporate aircraft in April 2009. Capital expenditures during 2009 and 2008 included $13.2 and $13.6, respectively, for payments related to the replacement aircraft.

 

Net cash used in investing activities in 2009 and 2008 included the allocation of $20 and $50, respectively, of cash and cash equivalents into a managed investment portfolio, which consists of short-term investments in U.S. Treasury, U.S. Government agency and corporate debt instruments. In 2008 and 2007, we purchased ARS, certain of which we continue to hold due to a current lack of liquidity in the marketplace.

 

Proceeds from the disposal of fixed assets primarily related to the sale of real estate, facilities and equipment associated with manufacturing consolidation initiatives completed in Grand Rapids, Michigan and Strasbourg, France.

 

Divestitures in 2009 represent the proceeds from the sale of Custom Cable and an international dealer. In 2008, the amount related to the acquisition of Ultra, partially offset by cash proceeds from the

divestiture of an owned dealer. The 2007 amount related to an acquisition within our healthcare business offset by the sale of a small subsidiary of PolyVision.

 

Cash used in financing activities

 

 

We used cash related to financing activities in 2009 primarily to return value to shareholders through dividend payments and common stock repurchases. We paid dividends of $0.15 per share in Q1, Q2 and Q3 2009 and $0.08 per share in Q4 2009. We paid dividends of $2.35 per share in 2008 consisting of quarterly dividends of $0.15 per share and a special cash dividend of $1.75 during Q4 2008. Dividends in 2007 were $0.45 per share. During Q1 2010, we announced a quarterly dividend of $0.08 per share.

 

During 2009 and 2008, we made common stock repurchases of $59.2 and $165.3, respectively. All of the 2009 repurchases related to our Class A Common stock. Of the 2008 repurchases, $132.3 related to the repurchase of 7.7 million shares of our Class A Common Stock, and $33.0 related to the repurchase of 1.7 million shares of our Class B Common Stock from entities affiliated with a member of our Board of Directors. As of February 27, 2009, $215.1 remained available under our repurchase authorizations. We have no outstanding share repurchase commitments.

 

Share repurchases of Class A common stock to enable participants to satisfy tax withholding obligations upon vesting of restricted stock and restricted stock units, pursuant to the terms of our Incentive Compensation Plan, were $1.7 and $3.2 in 2009 and 2008, respectively.

 

In 2009 and 2008, we received proceeds of $0.5 and $11.5, respectively, from the issuance of shares of Class A common stock as a result of the exercise of stock options. See Note 13 to the consolidated financial statements for additional information.

 

Capital Resources

 

Off-Balance Sheet Arrangements

 

We are contingently liable under loan and lease guarantees for certain Steelcase dealers and joint ventures in the event of default or non-performance of the financial repayment of a liability. In certain cases, we also guarantee completion of contracts by our dealers. Due to the contingent nature of guarantees, the full value of the guarantees is not recorded on our Consolidated Balance Sheets; however, when necessary we record reserves to cover potential losses. See Note 14 to the consolidated financial statements for additional information.

Contractual Obligations

 

Our contractual obligations as of February 27, 2009 were as follows:

 

 

Total consolidated debt as of February 27, 2009 was $255.7. Of our total debt, $249.6 is in the form of term notes due in August 2011. As of February 27, 2009, our debt to total capital ratio was 25.9%, an increase from 22.1% in 2008 due to lower shareholders’ equity at the end of 2009 as a result of the 2009 net loss and dividend payments and share repurchases during the year.

 

We have commitments related to certain sales offices, showrooms and equipment under non-cancelable operating leases that expire at various dates through 2019. Minimum payments under operating leases having initial or remaining non-cancelable terms in excess of one year are presented in the contractual obligations table above.

 

Committed capital expenditures represent obligations we have related to property, plant and equipment purchases and include outstanding commitments of $44.4 to purchase two corporate aircraft that are intended to replace existing aircraft.

 

We define purchase obligations as non-cancelable signed contracts to purchase goods or services beyond the needs of meeting current backlog or production.

 

Other long-term liabilities represent contributions and benefit payments expected to be made for our post-retirement, pension, deferred compensation, defined contribution and variable compensation plans. It should be noted that our obligations related to post-retirement benefit plans are not contractual and the plans could be amended at the discretion of the Compensation Committee of the Board of Directors. We limited our disclosure of contributions and benefit payments to 10 years as information beyond this time period was not available. See Note 10 to the consolidated financial statements for additional information.

 

The contractual obligations table above is current as of February 27, 2009. The amounts of these obligations could change materially over time as new contracts or obligations are initiated and existing contracts or obligations are terminated or modified.

Liquidity Facilities

 

Our total liquidity facilities as of February 27, 2009 were:

 

 

The global committed bank facility has a five year term and matures in July 2011. We have the option of increasing the facility from $200 to $300, subject to customary conditions. Borrowings under this facility are unsecured and unsubordinated. There are currently no borrowings outstanding under this facility; however, there is an $18.4 standby letter of credit issued in Q4 2009 in support of self-insured workers’ compensation reserves that reduced our available credit line.

 

The facility requires us to satisfy two financial covenants: a maximum leverage ratio covenant, which is measured by the ratio of debt to trailing four quarter EBITDA (as defined in the credit agreement) and is required to be less than 3:1, and a minimum interest coverage ratio, which is measured by the ratio of trailing four quarter EBITDA (as defined in the credit agreement) to trailing four quarter interest expense and is required to be greater than 4:1. As of February 27, 2009, we were in compliance with all covenants under this facility and our other financing facilities, and they are fully available for our use, although the various uncommitted lines may be changed or cancelled by the banks at any time. We anticipate our borrowing capacity under the unsecured credit facility could be reduced if our trailing four quarter EBITDA levels continue to decline due to the deterioration in the global market conditions. However, we do not currently anticipate needing to access the revolver in the near term. In addition, we reviewed the current financial stability of the lenders participating in our global committed bank facility in light of the recent distress in the financial market and believe they have the ability to fulfill all existing commitments.

 

Outstanding borrowings on uncommitted facilities of $3.9 as of February 27, 2009 are primarily related to short-term liquidity management within our International segment. In addition to the borrowings, we had $3.0 as of February 27, 2009 in outstanding standby letters of credit against these uncommitted facilities which primarily relate to our self-insured workers’ compensation programs. We had no draws on our standby letters of credit during 2009.

 

Total consolidated debt as of February 27, 2009 was $255.7. Our debt primarily consists of $249.6 in term notes due in August 2011 with an effective interest rate of 6.3%. The term notes contain no financial covenants. See Note 9 to the consolidated financial statements for additional information.

 

Our long-term debt ratings are investment grade BBB with a stable outlook from Standard & Poor’s and Baa3 with a negative outlook from Moody’s Investor Service.

 

The deterioration in the global economy and recent related decline in global equity markets has adversely impacted our revenue and operating profitability, particularly in North America. Accordingly, we have initiated a variety of actions to improve our operating efficiencies and to conserve cash and maintain liquidity.

 

 

 

The current cash and short-term investment balances, cash generated from future operations, funds available under existing credit facilities and funds available from COLI and other long-term investments are expected to be sufficient to finance our known or foreseeable liquidity needs.

 

Critical Accounting Estimates

 

Management’s Discussion and Analysis of Results of Operations and Financial Condition is based upon our consolidated financial statements and accompanying notes. Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and accompanying notes. Although these estimates are based on historical data and management’s knowledge of current events and actions it may undertake in the future, actual results may differ from the estimates if different conditions occur. The accounting estimates that typically involve a higher degree of judgment and complexity are listed and explained below. These estimates were discussed with the Audit Committee of the Board of Directors and affect all segments of the Company.

 

Impairment of Goodwill and Other Intangible Assets

 

Goodwill represents the difference between the purchase price and the related underlying tangible and identifiable intangible net asset values resulting from business acquisitions. Annually, or earlier if conditions indicate it necessary, the carrying value of the reporting unit is compared to an estimate of its fair value. If the estimated fair value is less than the carrying value, goodwill is impaired and is written down to its estimated fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. We evaluated goodwill and intangible assets using seven reporting units where goodwill is recorded—specifically, North America excluding consolidated dealers and North America consolidated dealers within the North America segment; International; and Coalesse, Designtex, PolyVision and IDEO within the Other category.

 

Annually, we perform an impairment analysis on our intangible assets not subject to amortization using an income approach based on the cash flows attributable to the related products. We also perform an annual impairment analysis for our intangible assets subject to amortization and our other long-lived assets including property, plant and equipment. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and its carrying amount exceeds its fair value. In testing for

impairment, we first determine if the asset is recoverable and then compare the discounted cash flows over the asset’s remaining life to the carrying value.

 

As of February 27, 2009, we had $181.1 of goodwill and $29.6 of net intangible assets recorded on our Consolidated Balance Sheet as follows:

 

 

During Q4 2009, we performed our annual impairment assessment of goodwill in our reporting units. In the first step to test for potential impairment, we measured the estimated fair value of our reporting units using a discounted cash flow valuation (“DCF”) method and reconciled the fair value of our reporting units to the sum of our total market capitalization plus a control premium as of February 27, 2009 (our “adjusted market capitalization”). The control premium was based on the discounted cash flows associated with obtaining control of the company in an acquisition of the outstanding shares of Class A common stock and Class B common stock. The DCF analysis used the present value of projected cash flows and a residual value. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows in measuring fair value. Assumptions used in our impairment valuations, such as forecasted growth rates and cost of capital, are consistent with our current internal projections.

 

During the second half of 2009, there was a substantial decline in the market price of our Class A common stock and thus our market capitalization. As part of our annual goodwill impairment test, we prepared a reconciliation of the fair value of our reporting units to our adjusted market capitalization as of February 27, 2009. As part of the reconciliation to our adjusted market capitalization, we made adjustments to the estimated future cash flows, as well as the discount rates used in calculating the estimated fair value of the reporting units. The discount rates ranged from 12.5% to 15.0%. Due to the subjective nature of this reconciliation process, these assumptions could change over time, which may result in future impairment charges.

 

As of the valuation date, the enterprise value available for goodwill determined by each method described above is in excess of the underlying reported value of the goodwill as follows:

 

 

Within the Other category, PolyVision’s DCF analysis indicated a ($54.3) shortfall in enterprise value available for goodwill. As the available enterprise value for PolyVision was less than reported goodwill and intangible assets, respectively, in the first step of our impairment testing, we were required to perform the second step of the goodwill impairment test. As a result of our step two analysis, we recorded total impairment charges of $63.0, of which $52.1 related to goodwill and $10.9 related to intangible assets. These charges were primarily due to the impact of the substantial decline in our stock price and related market capitalization. As of February 27, 2009, PolyVision had remaining goodwill and intangible assets of $8.1 and $11.2, respectively.

 

For each reporting unit other than PolyVision, the excess enterprise value available for goodwill is primarily driven by the residual value of future years. Thus, increasing the discount rate by 1%, leaving all

other assumptions unchanged, would reduce the enterprise value in excess of goodwill to the following amounts:

 

 

Based on the sensitivity analysis above, the Coalesse reporting unit would have had goodwill balances in excess of enterprise value available for goodwill, and would have triggered the second step of our impairment testing. This reporting unit had recorded goodwill aggregating $24.9 as of February 27, 2009.

 

See Notes 2 and 8 to the consolidated financial statements for more information regarding goodwill and other intangible assets.

 

Income Taxes

 

Our annual effective tax rate is based on income, statutory tax rates and tax planning strategies available in various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating tax positions. Tax positions are reviewed quarterly and balances are adjusted as new information becomes available.

 

During 2009, the U.S. Internal Revenue Service closed its examination of our tax returns for 2004 through 2008 and two State audits covering various years were also closed. In connection with the closure of these audits, we paid tax deficiencies and adjusted reserves for uncertain tax positions resulting in a $7.5 tax benefit in 2009. We are audited by the U.S. Internal Revenue Service under the Compliance Assurance Process (CAP). Under CAP, the U.S Internal Revenue Service works with large business taxpayers to identify and resolve issues prior to the filing of a tax return. Accordingly, we expect to record minimal liabilities for U.S. Federal uncertain tax positions in future years.

 

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.

 

Future tax benefits of tax losses and credit carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. We estimated a tax benefit from the operating loss carryforwards before valuation allowances of $72.0, but we recorded a valuation allowance of $25.1, which reduced our estimated tax benefit to $46.9. Additionally, we estimated a tax benefit from tax credit carryforwards of $11.3. It is considered more likely than not that a combined benefit of $58.2 will be realized on these carryforwards. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies will enable us to utilize the carryforwards. To the extent that available evidence raises doubt about the realization of a deferred tax asset, a valuation allowance is established. A 10% decrease in the expected amount of benefit to be realized on the carryforwards would result in a decrease in net income of approximately $5.8.

 

Pension and Other Post-Retirement Benefits

 

The Company sponsors a number of domestic and foreign plans to provide pension, medical and life insurance benefits to retired employees.

The post-retirement medical and life insurance plans are unfunded, but we purchased COLI policies with the intention of utilizing them as a long-term funding source for benefit obligations. The asset values of the COLI policies are not segregated in a trust specifically for the plans, thus are not considered plan assets. Changes in the values of these policies have no effect on the post-retirement benefits expense or benefit obligations recorded in the consolidated financial statements.

 

A significant portion of our defined benefit pension obligations relates to our non-qualified supplemental retirement plans that are limited to a select group of management approved by the Compensation Committee. These plans are unfunded, but we purchased COLI policies with the intention of utilizing them as a long-term funding source for benefit obligations. The asset values of the COLI policies are not segregated in a trust specifically for the plans, thus are not considered plan assets. Changes in the values of these policies have no effect on the defined benefit pension expense or benefit obligations recorded in the consolidated financial statements.

 

We follow Statement of Financial Accounting Standards (“SFAS”) No. 87, Employers’ Accounting for Pensions and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (as amended by SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans) for the measurement and recognition of obligations and expense related to our retiree benefit plans. Embodied in both of these standards is the concept that the cost of benefits provided during retirement should be recognized over the employees’ active working lives. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Key actuarial assumptions that require significant management judgment and have a material impact on the measurement of our consolidated benefits expense and accumulated obligation include, among others, the discount rate and health cost trend rates. These assumptions are reviewed with our actuaries and updated annually based on relevant external and internal factors and information, including but not limited to, expenses paid from the fund, rates of termination, medical inflation, technology and quality care changes, regulatory requirements, plan changes and governmental coverage changes.

 

To conduct our annual review of discount rates, we perform a matching exercise of projected plan cash flows against spot rates on a yield curve comprised of high quality corporate bonds as of the measurement date, with a primary focus for our domestic plans on the Ryan ALM 45/95 curve in 2009 and an average of the Citigroup Regular Curve and Citigroup Above Median Curve in 2008. The measurement dates for our retiree benefit plans are consistent with our fiscal year end. Accordingly, we select discount rates to measure our benefit obligations that are consistent with market indices during February of each year.

 

Based on consolidated obligations as of February 27, 2009, a one percentage point decline in the weighted-average discount rate used for benefit plan measurement purposes would change the 2009 benefits expense by less than $1. All obligation-related experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants.

 

To conduct our annual review of healthcare cost trend rates, we model our actual claims cost data over a historical period, including an analysis of pre-65 versus post-65 age groups and other important demographic components of our covered retiree population. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the underlying cost inflation trends. Our initial healthcare cost trend rate is reviewed annually and adjusted as necessary to remain consistent with recent historical experience and our expectations regarding short-term future trends. As of February 27, 2009, our initial rate of 10.6% for pre-age 65 retirees and 9.5% for post-age 65 retirees was trended downward by each year, until the ultimate trend rate of 4.5% is reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate healthcare cost premium.

 

Based on consolidated obligations as of February 27, 2009, a one percentage point increase or decrease in the assumed healthcare cost trend rates would change the 2009 benefits expense by less

than $1. All experience gains and losses are amortized using a straight-line method, resulting in at least the minimum amortization prescribed by SFAS No. 106.

 

Despite the previously described policies for selecting key actuarial assumptions, we periodically experience material differences between assumed and actual experience. As of February 27, 2009, we had consolidated unamortized prior service credits and net experience gains of $36.8, as compared to $32.2 as of February 29, 2008.

 

See Note 10 to the consolidated financial statements for additional information on employee benefit obligations.

 

Forward-Looking Statements

 

From time to time, in written and oral statements, we discuss our expectations regarding future events and our plans and objectives for future operations. These forward-looking statements generally are accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to vary from our expectations because of factors such as, but not limited to, competitive and general economic conditions domestically and internationally; acts of terrorism, war, governmental action, natural disasters and other Force Majeure events; changes in the legal and regulatory environment; our restructuring activities; currency fluctuations; changes in customer demand; and the other risks and contingencies detailed in this Report and our other filings with the Securities and Exchange Commission. We undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

 

Recently Issued Accounting Standards

 

See Note 3 to the consolidated financial statements for information regarding recently issued accounting standards.

 

 

The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed include foreign exchange risk, interest rate risk and fixed income and equity price risk.

 

Foreign Exchange Risk

 

Operating in international markets involves exposure to the possibility of volatile movements in foreign exchange rates. These exposures may impact future earnings or cash flows. Revenue from foreign locations (primarily Europe and Canada) represented approximately 37% of our consolidated revenue in 2009 and 33% in 2008. We actively manage the foreign currency exposures that are associated with committed foreign currency purchases and sales created in the normal course of business at the local entity level. Exposures that cannot be naturally offset within a local entity to an immaterial amount are often hedged with foreign currency derivatives or netted with offsetting exposures at other entities.

 

Changes in foreign exchange rates that had the largest impact on translating our international operating profit for 2009 related to the euro and the Canadian dollar versus the U.S. dollar. We estimate that an additional 10% devaluation of the U.S. dollar against the local currencies would have increased our operating income by approximately $5.3 in 2009, assuming no changes other than the exchange rate itself. However, this quantitative measure has inherent limitations. The sensitivity analysis disregards the possibility that rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency.