UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

For the transition period from           to

 

Commission File Number 1-13873

 

 

 

 

STEELCASE INC.

(Exact name of registrant as specified in its charter)

 

 

(Registrant’s telephone number, including area code) (616) 247-2710
None
(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

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

 

(Do not check if a smaller reporting company)

 

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

 

As of June 29, 2010, Steelcase Inc. had 85,307,120 shares of Class A Common Stock and 47,664,579 shares of Class B Common Stock outstanding.

 

 

STEELCASE INC.
FORM 10-Q

FOR THE QUARTER ENDED MAY 28, 2010

INDEX

 

 

 

STEELCASE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except per share data)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended February 26, 2010 (“Form 10-K”). The Condensed Consolidated Balance Sheet as of February 26, 2010 was derived from the audited Consolidated Balance Sheet included in our Form 10-K.

 

As used in this Quarterly Report on Form 10-Q (“Report”), unless otherwise expressly stated or the context otherwise requires, all references to “Steelcase,” “we,” “our,” “Company” and similar references are to Steelcase Inc. and its subsidiaries in which a controlling interest is maintained. Unless the context otherwise indicates, reference to a year relates to the 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, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.

 

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

 

 

 

In Q4 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to add new requirements regarding fair value disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. We adopted the new guidance in Q1 2011. See Note 5 for additional information.

 

 

In Q2 2010, the FASB issued a new accounting statement which changes the consolidation model for variable interest entities. This statement requires companies to qualitatively assess the determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the beneficiary (1) has the power to direct matters that most significantly impact the activities of the VIE and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. We adopted the new guidance in Q1 2011.

 

Based on this statement, we deconsolidated a variable interest dealer in Q1 2011 which had no effect on net income. In addition, we deconsolidated a variable interest dealer in Q3 2010 under the previous accounting statement. For the year ended February 26, 2010 and the interim periods therein,

STEELCASE INC.

 

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

 

our Condensed Consolidated Statements of Operations included the following related to the consolidation of these dealers:

 

 

 

Basic earnings per share is based on the weighted-average number of shares of common stock outstanding during each period, plus participating securities, which include performance shares and performance units in which the participants have non-forfeitable rights to dividends during the performance period. Diluted earnings per share includes the effects of options and certain performance shares and performance units in which the participants have forfeitable rights to dividends during the performance period. However, for the three months ended May 28, 2010 and May 29, 2009, diluted earnings per share does not reflect the effects of options, performance shares and certain performance units totaling 3.3 million and 3.9 million, respectively, because their effect would have been anti-dilutive.

 

STEELCASE INC.

 

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

 

 

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

 

Foreign currency translation adjustments reflect the impact of the changes in certain foreign currency values (principally the euro, pound sterling and Canadian dollar) relative to the U.S. dollar. As of May 28, 2010, approximately 24% of our assets were denominated in currencies other than the U.S. dollar, the majority of which were denominated in euros.

 

 

The carrying amounts for many of our financial instruments, including cash and cash equivalents, accounts and notes receivable, accounts and notes payable, short-term borrowings and certain other liabilities, approximate their fair value due to their relatively short maturities. Our short-term investments, foreign exchange forward contracts and long-term investments are measured at fair value on the Condensed Consolidated Balance Sheets. We carry our long-term debt at cost. The fair value of our long-term debt is measured using a discounted cash flow analysis based on current market interest rates for similar types of instruments and was approximately $305 and $309 as of May 28, 2010 and February 26, 2010, respectively.

STEELCASE INC.

 

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

 

We periodically use derivative financial instruments to manage exposures to movements in interest rates and foreign exchange rates. The use of these financial instruments modifies the exposure of these risks with the intention to reduce our risk of short-term volatility. We do not use derivatives for speculative or trading purposes.

 

 

STEELCASE INC.

 

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

 

There were no transfers between Level 1 and Level 2 of the fair value hierarchy for any period presented. Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for the three months ended May 28, 2010:

 

 

The other-than-temporary impairments recognized on our auction rate securities in Q1 2011 were recognized in Other income (expense), net on the Condensed Consolidated Statement of Operations.

 

 

 

The portion of inventories determined by the LIFO method aggregated $41.2 as of May 28, 2010 and $39.0 as of February 26, 2010.

 

 

 

Our investments in company-owned life insurance (“COLI”) policies, while an available source of liquidity, were made with the intention of utilizing them as a long-term funding source for post-retirement

STEELCASE INC.

 

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

 

medical benefits, deferred compensation and supplemental retirement plan obligations. The cash surrender value of our COLI investments exceeds these long-term benefit obligations on a tax-adjusted basis and therefore, to more efficiently manage our balance sheet and liquidity position, beginning in Q1 2011 we consider our variable life COLI policies to be primarily a source of corporate liquidity. As a result of this change, we adjusted the target asset allocation of the investments in the variable life COLI policies to more heavily weight the portfolio to fixed income securities. We continue our intention to utilize our whole life COLI policies as the funding source for post-retirement medical benefits and other employee obligations. We believe the whole life COLI policies, which are with highly-rated insurance companies, represent a stable source for these long-term benefit obligations. These designations do not result in our investments in COLI representing a committed funding source for liquidity or long-term employee benefit obligations. They are subject to claims from creditors, and we can designate them to another purpose at any time.

 

This change had no impact on the financial statement classification of the net returns in cash surrender value, normal insurance expenses and any death benefit gains (“COLI income”) related to our investments in whole life COLI policies, which are allocated between Cost of sales and Operating expenses on the Condensed Consolidated Statements of Operations consistent with the costs associated with the long-term employee benefit obligations that the investments in whole life policies are intended to fund. However, beginning in Q1 2011, COLI income related to our investments in variable life COLI policies is recorded in Other income (expense), net on the Condensed Consolidated Statements of Operations consistent with our other investments. The whole life and variable life policies are recorded at their net cash surrender values, as reported by the three issuing insurance companies, whose Standard & Poor’s financial strength ratings range from AA- to AAA.

 

Following is a summary of the allocation of COLI income for the three months ended May 28, 2010 and May 29, 2009:

 

 

 

The provision for income taxes for 2011 includes a discrete item of $11.4 to recognize a reduction in deferred tax assets. In Q1 2011, the U.S. enacted significant healthcare reform legislation which changes the tax treatment of the federal subsidies received by employers who provide certain prescription drug benefits for retirees (the “Medicare Part D subsidy”) for fiscal years beginning after December 31, 2012. We are required to recognize the impact of the tax law change in the period in which the law is enacted. We had previously recorded deferred tax assets based on the liability for post-retirement benefit obligations related to prescription drug benefits for retirees. As a result of the law change, deferred tax assets were reduced as these obligations will no longer be deductible for purposes of determining taxable income to the extent they are reimbursed by the Medicare Part D subsidy. Excluding this discrete item, income tax expense recorded in Q1 2011 reflects an estimated annual effective tax rate of 36%.

STEELCASE INC.

 

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

 

 

In Q1 2011, we awarded a target of 779,000 performance units under the Steelcase Inc. Incentive Compensation Plan to our executive officers. The performance units are earned after a three-year performance period, from 2011 through 2013, based on our total shareholder return relative to a comparison group of companies. The number of shares that may be earned can range from 25% to 200% of the target amount. A number of units equal to 25% of the target level of each award will be earned if the participant remains employed through the end of 2013 or retires, becomes disabled, dies or is terminated without cause, or a change in control occurs during the performance period, whether or not the minimum performance level is achieved. The minimum award will be forfeited if a participant leaves our company for reasons other than retirement, disability, death or termination without cause prior to the end of the performance period. The remainder of the award will be forfeited if a participant leaves our company for reasons other than retirement, disability or death. During the performance period, participants receive a cash dividend equivalent based on the underlying target award equal to the dividends we declare and pay on our Class A Common Stock. The fair value of the performance units awarded during Q1 2011 was calculated on the grant date using the Monte Carlo simulation model with the following assumptions:

 

 

 

 

The total performance shares and performance units expense and associated tax benefit related to outstanding awards for the three months ended May 28, 2010 and May 29, 2009 were as follows:

 

 

The Q1 2011 activity for performance shares and performance units was as follows:

 

 

 

STEELCASE INC.

 

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

 

 

As of May 28, 2010, there was $6.0 of remaining unrecognized compensation cost related to nonvested performance shares and performance units. That cost is expected to be recognized over a remaining weighted-average period of 2.4 years.

 

 

We operate within North America and International reportable segments plus an “Other” category. The Other category includes the Coalesse Group, PolyVision and IDEO. Unallocated corporate expenses are reported as Corporate.

 

Revenue and operating income (loss) for the three months ended May 28, 2010 and May 29, 2009 and total assets as of May 28, 2010 and February 26, 2010 by segment are presented below:

 

 

 

 

In Q1 2011, we initiated a formal procedure of discussions with local work councils regarding a project to reorganize our European manufacturing operations on the basis of specialized competencies. The primary drivers of the proposed changes included our continued improvements in manufacturing practices, combined with the need for manufacturing footprint optimization and further cost reductions. We expect to incur approximately $17 of cash restructuring costs in connection with this project, with the majority relating to workforce reductions and some additional costs for manufacturing consolidation and production moves. No restructuring costs were recorded for this project in Q1 2011.

STEELCASE INC.

 

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

 

Q1 2011 restructuring costs primarily related to several smaller actions initiated in the last six to nine months to consolidate manufacturing facilities.

 

Restructuring costs are summarized in the following table:

 

 

Below is a summary of the net additions, payments and adjustments to the restructuring reserve balance for the three months ended May 28, 2010:

 

 

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 26, 2010. Reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year, unless indicated by a specific date. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.

 

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

 

Non-GAAP Financial Measures

 

This item contains certain non-GAAP financial measures. A “non-GAAP financial measure” is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the statements of operations, balance sheets or statements of cash flows of the company. Pursuant to the requirements of Regulation G, we have provided a reconciliation below of non-GAAP financial measures to the most directly comparable GAAP financial measure.

 

The non-GAAP financial measures used are: (1) organic revenue growth (decline), which represents the change in revenue over the prior year quarter excluding currency translation effects and the impact of dealer deconsolidations and (2) adjusted operating income (loss), which represents operating income (loss) excluding restructuring costs and the net returns in cash surrender value, normal insurance expenses and any death benefit gains related to our investments in variable life company-owned life insurance policies (“variable life COLI income”). These measures are presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors.

 

Financial Summary

 

 

Results of Operations

 

 

 

 

 

 

Overview

 

We recorded a net loss of $11.1 in Q1 2011 compared to net income of $0 in Q1 2010. Q1 2011 included an income tax charge of $11.4 resulting from the recently enacted U.S. healthcare reform legislation, which changes the tax treatment of the federal subsidies received by employers who provide certain prescription drug benefits for retirees (the “Medicare Part D subsidy”). In addition, the year-over-year comparison is negatively impacted by results from company-owned life insurance (“COLI”), which generated significantly less income in Q1 2011 compared to Q1 2010, and the reinstatement of employee salaries to 2009 levels after a reduction in 2010. Q1 2011 results were favorably impacted by benefits from restructuring activities and other cost reduction efforts, lower commodity costs and modest organic revenue growth.

 

Our operating loss of $1.4 represented an improvement of $3.8 compared to the same period last year, which included $17.2 of variable life COLI income. Variable life COLI income is now reported in Other income (expense), net beginning in Q1 2011. See Note 7 to the condensed consolidated financial statements for additional information. Adjusted operating income increased $20.7 primarily due to benefits from restructuring activities and other cost reduction efforts and lower commodity costs of approximately $5, partially offset by approximately $3 of higher compensation costs related to the reinstatement of employee salaries to 2009 levels.

 

Our revenue decreased $3.8 or 0.7% in Q1 2011 compared to the same period last year. Organic revenue growth from Q1 2010 to Q1 2011 was $4 or 1%. North America, IDEO, PolyVision, Asia Pacific, Latin America, the Middle East and the Coalesse Group delivered organic revenue growth in the quarter. Western Europe reported upper-single digit organic revenue declines, although their order patterns strengthened considerably during Q1 2011.

 

Cost of sales decreased to 69.9% of revenue in Q1 2011, a 100 basis point improvement compared to Q1 2010, driven largely by benefits from restructuring activities and other cost reduction efforts. Lower commodity costs provided an additional 90 basis points of improvement. The year-over-year comparison is negatively affected by 180 basis points associated with variable life COLI income in the prior year.

Operating expenses increased by $0.9 in Q1 2011 compared to the same period last year. The favorable impacts of dealer deconsolidations within the last twelve months and benefits of restructuring activities and other cost reduction efforts were offset by variable life COLI income in the prior year of $7.2 and approximately $2 of higher compensation costs related to the reinstatement of employee salaries to 2009 levels.

 

We recorded restructuring costs of $2.5 in Q1 2011 compared to $2.8 in Q1 2010. Q1 2011 restructuring costs primarily related to several smaller actions initiated in the last six to nine months to consolidate manufacturing facilities. In Q1 2011, we initiated a formal procedure of discussions with local work councils regarding a project to reorganize our European manufacturing operations. No restructuring costs were recorded for this project in Q1 2011. Initial reactions by affected employees included work stoppages and slow-downs, and therefore we initiated back-up manufacturing plans, all of which increased our costs in Q1 2011. On June 25, 2010, we made significant progress in negotiations with the local work councils, and we estimate that the costs associated with this project will be approximately $17 and that approximately $11 will be recognized in Q2 2011. We anticipate annualized savings from these actions to be $7 to $8 when fully implemented by the end of 2011.

 

The provision for income taxes for 2011 includes a discrete item of $11.4 to recognize a reduction in deferred tax assets. In Q1 2011, the U.S. enacted significant healthcare reform legislation which changes the tax treatment of the Medicare Part D subsidy for fiscal years beginning after December 31, 2012. We are required to recognize the impact of the tax law change in the period in which the law is enacted. We had previously recorded deferred tax assets based on the liability for post-retirement benefit obligations related to prescription drug benefits for retirees. As a result of the law change, deferred tax assets were reduced as these obligations will no longer be deductible for purposes of determining taxable income to the extent they are reimbursed by the Medicare Part D subsidy. Excluding this discrete item, income tax expense recorded in Q1 2011 reflects an estimated annual effective tax rate of 36%.

 

Interest Expense and Other Income (Expense), Net

 

 

Beginning in Q1 2011, Other income (expense), net includes gains and losses from variable life COLI policies. See Note 7 to the condensed consolidated financial statements for additional information.

 

Business Segment Review

 

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

North America