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UNITED STATES

FORM 10-Q

STEELCASE INC.

(616) 247-2710

     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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes x          No o

      As of June 26, 2003, Steelcase Inc. had 43,808,262 shares of Class A Common Stock and 104,024,166 shares of Class B Common Stock outstanding.

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STEELCASE INC.

FOR THE QUARTER ENDED MAY 30, 2003

INDEX

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STEELCASE INC.

See accompanying notes to the condensed consolidated financial statements.

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STEELCASE INC.

See accompanying notes to the condensed consolidated financial statements.

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STEELCASE INC.

See accompanying notes to the condensed consolidated financial statements.

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STEELCASE INC.

(Unaudited)

1.     BASIS OF PRESENTATION

      The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended February 28, 2003 (“Form 10-K”). As used in this Report, unless otherwise expressly stated or the content otherwise requires, all references to “Steelcase,” “we,” “our,” “Company” and similar references are to Steelcase Inc. and its majority owned subsidiaries.

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

      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, references to quarters are as follows: Q1 2004 references the first quarter of fiscal 2004. All amounts are in millions, except per share data, data presented as a percentage or unless otherwise indicated.

2.     NEW ACCOUNTING STANDARDS

      Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. In May 2000, we began leasing aircraft through a synthetic lease structure that is currently accounted for as an operating lease. Beginning in Q3 2004, the aircraft will be capitalized on our balance sheet and the related obligation will be recorded as debt as required by the provisions of this Interpretation. The impact of this accounting change on the consolidated statements of income will be an increase in depreciation and interest expense, partially offset by the fact that the recording of rent expense will no longer be required.

      Statement of Financial Accounting Standards (“SFAS”) No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. It is effective for contracts entered into or modified after June 30, 2003, except as stated within the statement, and should be applied prospectively. We do not expect this statement to have a material effect on our financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      SFAS No. 150 clarifies the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. This statement affects the issuer’s accounting for three types of freestanding financial instruments:

	•	Mandatorily redeemable shares;
	•	Put options and forward purchase contracts involving instruments that require or may require the issuer to buy back some of its shares; and
	•	Obligations that can be settled with shares.

      This statement does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety. It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of Q3 2004. We do not have any of the instruments covered by this statement; therefore, we do not expect this statement to have a material effect on our financial statements.

3.     EARNINGS (LOSS) PER SHARE

      Basic earnings per share is based on the weighted average number of shares of common stock outstanding during each period. It excludes the dilutive effects of additional common shares that would have been outstanding if the shares under our Stock Incentive Plans had been issued.

      Diluted earnings per share includes effects of shares issued under our Stock Incentive Plans. However, due to their anti-dilutive effect, we have not included the effects of 10.7 million and 6.0 million options in our calculation of diluted earnings per share for Q1 2004 and Q1 2003, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

4.     STOCK-BASED COMPENSATION

      Prior to 2004, we accounted for our Stock Incentive Plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Given the terms of the Company’s plans, no stock-based employee compensation cost was recognized in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

      Effective at the beginning of 2004, it is the Company’s policy to expense stock-based compensation using the fair value based method of accounting. Fair value is measured on the grant date of the related equity instrument and is recognized as compensation expense over the applicable vesting period. We estimate the fair value of stock options using the Black-Scholes option-pricing model. As permitted by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, we adopted the prospective transition method, under which compensation cost will be recognized for all awards granted, modified or settled on or after March 1, 2003. There were no stock options granted in Q1 2004, therefore, no expense was recorded.

      The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions to all outstanding and unvested awards:

5.     COMPREHENSIVE LOSS

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      Foreign currency translation adjustments of $7.8 in Q1 2004 included the realization of $4.1 of currency translation losses related to our Brazilian operations, which accumulated over many years. In accordance with GAAP, we previously recorded these unrealized losses as a reduction in shareholders’ equity through the Accumulated Other Comprehensive Income line. Now that we are disposing of the underlying assets, we recognized the loss through the Condensed Consolidated Statements of Operations. Since the unrealized currency translation losses were previously recognized as reductions of shareholders’ equity, the current realization of these losses through the Condensed Consolidated Statements of Operations had no effect on shareholders’ equity as of May 30, 2003. The remaining $3.7 of the $7.8 related to other current unrealized foreign currency translation adjustments and is reported within stockholders’ equity in Accumulated Other Comprehensive Loss.

6.     INVENTORIES

      Inventories are stated at the lower of cost or market and are valued based upon the last-in, first-out (“LIFO”) method, the first-in, first-out (“FIFO”) method or the average cost method. The North America segment primarily uses the LIFO method to value its inventory. The companies in the Steelcase Design Partnership (“SDP”) segment use the inventory valuation methods that were in place at the time we acquired them. The subsidiaries in the International segment value their inventory using the FIFO method.

      The portion of inventories determined by the LIFO method aggregated $59.9 as of May 30, 2003 and $61.6 as of February 28, 2003.

7.     GOODWILL AND INTANGIBLE ASSETS

      During Q1 2004, there were no increases in or impairments of goodwill. Additionally, there were no reallocations of goodwill between operating segments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      As of May 30, 2003 and February 28, 2003, our other intangible assets and related accumulated amortization consisted of the following:

      In Q1 2004 we recorded amortization expense of $2.4 on intangible assets subject to amortization compared to $4.5 in Q1 2003. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the following five fiscal years is as follows: 2004: $8.5; 2005: $7.2; 2006: $6.9; 2007: $6.9; and 2008: $6.9. As acquisitions and dispositions occur in the future, these amounts may vary.

8.     RESTRUCTURING CHARGES

      In Q1 2004, we continued to reduce costs by restructuring certain areas of our business. Charges relating to severance, business exit and other restructuring activities are summarized in the following table:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      Below is a reconciliation of the restructuring reserve for activity during Q1 2004:

      During 2003, our restructuring charges for workforce reductions related to 1,425 positions, 1,300 of which occurred as of May 30, 2003. During Q1 2004, we reserved for an additional workforce reduction of 415 positions, 290 of which occurred during the quarter. Therefore, 250 previously announced workforce reductions will occur during the remainder of 2004.

9.     COMMON STOCK

      The Board of Directors has authorized share repurchases of up to 11 million shares. We did not repurchase any common shares during Q1 2004. Approximately 3.8 million shares remain available for repurchase under the program and we have no outstanding share repurchase commitments.

      Under the Steelcase Inc. Incentive Compensation Plan, the Compensation Committee of the Board of Directors approved and granted 200,000 restricted shares of stock and 48,000 restricted stock units (“RSUs”) in March 2003 to certain members of management. These restricted stock shares and RSUs vest in March 2006 and may be forfeited if a participant leaves our Company for reasons other than retirement, disability or death prior to the vesting date. The restricted stock grants are expensed ratably over the vesting period based on the value of the restricted stock grant on the date of the grant. The RSUs are expensed over the 3-year vesting period based on the current market value of the shares to be granted. The aggregate market value of the restricted stock shares at the date of issuance of $1.9 was recorded as deferred compensation, a separate component of shareholders’ equity, and is being amortized over the three-year vesting period of the grants.

10.     BUSINESS SEGMENTS

      We operate on a worldwide basis within three reportable segments: North America, SDP and International, plus an “Other” category.

      Our North America segment consists of manufacturing, sales operations and consolidated dealers in the United States and Canada and includes the Company’s Steelcase and Turnstone brands.

      The SDP includes Brayton International, The Designtex Group, Office Details Inc., Metropolitan Furniture Corporation and Vecta and their brands. These companies operate autonomously and report to the president of the SDP. They focus on higher-end design furniture products and niche applications for lobby and reception areas, conference rooms, private offices, health care and learning environments, as well as the design and distribution of surface materials and ergonomic tools for the workplace.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      Our International segment includes all sales and manufacturing operations of the Steelcase and Werndl brands outside the United States and Canada.

      Within the “Other” category are the Company’s Financial Services, PolyVision, IDEO and Attwood subsidiaries, ventures and unallocated corporate expenses. Financial Services provides leasing services to customers primarily in North America to facilitate the purchase of our products and provides selected financing services to our dealers. Financial Services was a reporting segment in 2003 and is now included in Other because revenue, operating income and assets fall below the threshold required for segment reporting. PolyVision Corporation designs and manufactures visual communications products, such as static and electronic whiteboards. IDEO is a design and innovation services subsidiary. Attwood manufactures hardware and accessories for the marine industry. More than 85% of corporate expenses, which represent shared services, are charged to the operating segments as part of a corporation allocation. We evaluate performance and allocate resources based on operating income.

11.     GUARANTEES AND PRODUCT WARRANTY

      We are contingently liable under loan guarantees for certain Steelcase dealers and joint ventures in the event of default or non-performance of the financial repayment of the liability. The guarantees generally have terms ranging from one to ten years. The guarantees arose out of our relationship with

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

the dealers and joint ventures. No loss has been experienced nor is any anticipated under these agreements. As specified in FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, guarantees and performance bonds (discussed below) issued prior to December 31, 2002 are not required to be nor are they recorded on our balance sheet.

      We are also party to performance bonds for certain installation or construction activities of certain Steelcase dealers and joint ventures. Under these agreements, we are liable to make financial payments if the installation or construction activities are not completed under their specified guidelines and the contractors file claims. No loss has been experienced nor is any anticipated under these agreements. Projects with bonds have completion dates ranging from one to three years. If there was a performance failure by the dealers, we have the ability to step in and cure the problem thereby mitigating potential loss. Where we have supported performance bonds for joint ventures, we require any significant contractors to also provide performance bonds to provide coverage if they cause a performance failure or delay. As required by FIN No. 45, performance bonds issued or modified subsequent to December 31, 2002 should be recognized as a liability at the fair value of the obligation undertaken in issuing the performance bonds. As of May 30, 2003, we did not record a liability for these bonds since we believed the risk and amount of potential loss to be immaterial.

      The maximum amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) we could be required to make under the guarantees are as follows:

      The accrued liability for warranty costs is based on an estimated amount needed to cover future warranty obligations for products sold. This estimated amount is determined by historical product data and management’s knowledge of current events and actions.

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      The following review of our financial condition and results of operations should be read in conjunction with our fiscal year 2003 Form 10-K. All amounts are in millions, except per share data, data presented as a percentage or unless otherwise indicated.

Financial Summary

Results of Operations (Unaudited)

First Quarter Financial Review

      Our first quarter results reflect the difficult economic environment we anticipated, particularly in our North America segment. Revenue in Q1 2004 was $571.9, down 11.1% from Q1 2003.

      With this decline in revenue, we reported a loss of $13.4 in Q1 2004. These results compare to a loss of $15.4, before the cumulative effect of adopting SFAS No. 142 in Q1 2003. The net loss for Q1 2003 was $245.3 including the cumulative effect of adopting SFAS No. 142.

      During Q1 2004, we continued to take actions to improve our operating performance, including:

	•	Continuing the consolidation of manufacturing operations within our North America and International segments to reduce excess capacity and further the implementation of our lean manufacturing model.
	•	Reducing our global workforce by more than 350 positions during Q1 2004, for a total of more than 3,600 positions since Q1 2003 and by more than 10,000 positions since Q3 2001.
	•	Idling our non-selling North America functions for one week in April 2003.
	•	Continuing the implementation of our new leasing strategy in our Financial Services business, which maintains customer service but reduces our long-term credit risk.