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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 September 25, 2003, Steelcase Inc. had 44,573,858 shares of Class A Common Stock and 103,274,533 shares of Class B Common Stock outstanding.

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STEELCASE INC.

FOR THE QUARTER ENDED AUGUST 29, 2003

INDEX

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STEELCASE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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: Q2 2004 references the second 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”) 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 shall be included in the consolidated financial statements of the business enterprise. At its Board meeting on October 8, 2003, the FASB voted to defer the implementation date of FIN 46 relating to potential variable interest entities that existed prior to February 1, 2003. As such, this statement is effective for us beginning 04 2004. We are currently evaluating how the provisions of this Interpretation may apply to our aircraft lease and our equity interests in dealers.

      In May 2000, we began leasing aircraft through a synthetic lease structure that is currently accounted for as an operating lease. Beginning in Q4 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 operations 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.

      From time to time, we obtain equity interests in dealers that we intend to resell as soon as practicable (“dealer transitions”). We use the equity method of accounting for majority-owned dealers with a transition plan in place and where the nature of the relationship is one in which we do not exercise participative control. These unconsolidated dealers are included in Equity Investment in Dealer Transitions in the accompanying Condensed Consolidated Balance Sheets (see Note 7 in our Form 10-K for the year ended February 28, 2003 for additional information). There are also other dealers in ownership transition to which we have provided transition financing and where we do not hold an equity interest. We are currently evaluating whether any of these transition dealers would be defined as variable interest entities under the provisions of this Interpretation and, if so, whether the Company would be deemed the primary beneficiary of the entity.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      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 will have a material effect on our financial statements.

      SFAS No. 150 modifies the traditional definition of liabilities to encompass certain obligations that must be settled through the issuance of equity shares. These obligations are considered liabilities as opposed to equity or mezzanine financing under the provisions of SFAS No. 150. 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 and the dilutive effect of restricted shares to the extent those shares have not vested.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      Diluted earnings per share includes effects of shares issued under our Stock Incentive Plans. Because they were not dilutive, our calculation of diluted earnings per share do not reflect the effects of 8.9 million and 7.4 million options for the quarter and first six months ended August 29, 2003 and August 23, 2002, respectively.

4.     STOCK-BASED COMPENSATION

      Prior to 2004, we accounted for our stock incentive plans under the recognition and measurement principles of Accounting Principles Board 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. Since there have been no stock options granted in 2004, no compensation expense has been recognized.

      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:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

5.     COMPREHENSIVE INCOME (LOSS)

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

      Foreign currency translation adjustments of $8.1 during the first two quarters of 2004 included the realization of $4.1 of currency translation losses in Q1 2004 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 Loss line. Upon disposition, 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 August 29, 2003. The remaining $4.0 of the $8.1 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 $50.6 as of August 29, 2003 and $61.6 as of February 28, 2003.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

7.     GOODWILL AND OTHER INTANGIBLE ASSETS

      There were no impairments of goodwill or reallocations of goodwill between operating segments during Q2 2004. A summary of changes in goodwill during 2004, by business segment, is as follows:

      In Q2 2004, we acquired certain assets of a dealer through one of the dealers we currently consolidate. The purchase price of $2.2 included goodwill and other intangibles of $1.6. A final purchase price allocation will be completed by the end of 2004.

      As of August 29, 2003 and February 28, 2003, our other intangible assets and related accumulated amortization consisted of the following:

      In Q2 2004, we recorded amortization expense of $2.6 on intangible assets subject to amortization compared to $3.3 in Q2 2003. For the six months ended August 29, 2003 we recorded amortization expense of $5.0 compared to $7.8 for the six months ended August 23, 2002. 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

8.     RESTRUCTURING CHARGES

      During Q2 2004, we continued to reduce costs by restructuring certain areas of our business. Severance and impairment costs related to business exit and restructuring activities are summarized in the following table:

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