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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

For the fiscal year ended February 27, 2004

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

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

    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 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. x

    Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

    As of April 28, 2004, the registrant had outstanding 50,686,926 shares of Class A Common Stock and 97,577,207 shares of Class B Common Stock. The aggregate market value of the Class A Common Stock held by non-affiliates of the registrant was $584,914,032 computed by reference to the closing price of the Class A Common Stock on August 29, 2003 as reported by the New York Stock Exchange. Although there is no quoted market for registrant’s Class B Common Stock, shares of Class B Common Stock may be converted at any time into an equal number of shares of Class A Common Stock. Using the closing price of the Class A Common Stock on August 29, 2003, as reported by the New York Stock Exchange as the basis of computation, the aggregate market value of the Class B Common Stock held by non-affiliates was $920,044,830.

    Portions of the registrant’s definitive proxy statement for its 2004 Annual Meeting of Shareholders, to be held on June 24, 2004, are incorporated by reference in Part III of this Form 10-K.

STEELCASE INC.

YEAR ENDED FEBRUARY 27, 2004

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PART I

      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 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.

GENERAL

      Steelcase is the world’s leading designer and manufacturer of office furniture, with 2004 revenue of approximately $2.3 billion. Founded and incorporated in 1912 as the Metal Office Furniture Company, we are a global company headquartered in Grand Rapids, Michigan. We employ approximately 14,200 employees, have manufacturing facilities in over 35 locations and distribute products through a network of independent dealers in more than 900 locations around the world.

      We operate on a worldwide basis within three reportable segments: North America, the Steelcase Design Partnership (“SDP”) and International, plus an “Other” category. Previously, we reported under four reportable segments, plus an “Other” category. However, beginning in Q1 2004, our Financial Services business was no longer reported as a separate segment since its results and asset base were below the threshold requirements. For comparative purposes, prior year information has been restated to reflect the new segmentation of the Company. See further information about our segments below.

      On August 29, 2003, the Company sold substantially all of the net assets of its marine hardware and accessories business (previously reported under the Other category). In accordance with generally accepted accounting principles, the operating results of this business have been segregated as discontinued operations for all periods presented. See further information regarding this disposition in Note 18 to the consolidated financial statements.

NARRATIVE DESCRIPTION OF BUSINESS

Business Segments

      Additional information about our reportable segments, including financial information about geographic areas, is contained in this Report under Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 17 to the consolidated financial statements.

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      Our North America segment consists of manufacturing and sales operations in the United States and Canada. This segment includes 16 manufacturing facilities, represents approximately 8,000 employees and serves customers through a network of over 330 independent dealer locations. Our offerings in North America include architecture, furniture and technology products, as described below, under the Steelcase and Turnstone brands. For example, Pathways is an evolving portfolio of integrated architecture, furniture and technology products that enable customers to create flexible, user-centered work environments. In 2004, the North America segment accounted for $1,280.4, or 54.6% of our total revenue.

      The SDP includes the following companies and their brands: Brayton International, The Designtex Group, Office Details Inc., Metropolitan Furniture Corporation and Vecta. 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. The SDP segment has approximately 1,200 employees and distributes its products through many of the same dealers as the North America segment. In 2004, SDP accounted for $275.6, or 11.7% of our total revenue.

      Our International segment includes all sales and manufacturing operations of the Steelcase and Werndl brands outside the United States and Canada. It develops and manufactures most of the products it sells. The International segment includes 12 manufacturing facilities located in 8 countries, over 3,500 employees and serves customers through a network of approximately 570 independent dealer locations. We hold the market leadership position in Europe and leading positions in several individual countries. In 2004, our International segment accounted for $539.2, or 23.0% of our total revenue.

      The Other category includes our Financial Services, PolyVision and IDEO subsidiaries, ventures and unallocated corporate expenses. Steelcase Financial Services Inc. provides leasing services to customers primarily in North America to facilitate the purchase of our products and provides selected financing services to our dealers. PolyVision Corporation designs and manufactures visual communications products, such as static and electronic whiteboards, for learning environments and office settings. IDEO Inc. provides product design and innovation services. Approximately 85% of corporate expenses representing shared services are charged to the operating segments as part of a corporate allocation. Unallocated expenses are reported within the Other category. In 2004, the Other category accounted for $250.4, or 10.7% of our total revenue.

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Our Products

      We are a global work effectiveness company, focused on providing knowledge, products and services that enable our customers to create work environments that help people in offices work more effectively while helping organizations utilize space more efficiently.

      Because of this focus, we have a broad offering of products with a variety of aesthetic options and performance features, and at various price points that address the three core elements of a work environment: architecture, furniture and technology. Our reportable segments generally offer similar products under some or all of the categories listed below:

      Panel-based and freestanding furniture systems. Moveable and reconfigurable furniture components used to create individual workstations and complete work environments. Systems furniture provides visual and acoustical privacy, accommodates power and data cabling, and supports technology and other worktools.

      Storage. Lateral and vertical files, cabinets, bins and shelves, carts, file pedestals and towers.

      Seating. High-performance, ergonomic, executive, guest, lounge, team, health care, stackable and general use chairs.

      Tables. Meeting, personal, learning and café tables.

      Textiles and surface materials. Seating upholstery, panel fabric and wall coverings.

      Desks and Suites. Wood and non-wood desks, credenzas and casegoods.

      Worktools. Computer support, technology management, information management products and portable whiteboards.

      Interior architecture. Full and partial height walls and doors with a variety of surface materials, raised floors and modular post and beam products.

      Lighting. Task, ambient and accent lighting with energy efficient and user control features.

      Infrastructure. Infrastructure products, such as modular communications, data and power cabling.

      Appliances. Group communication tools, such as interactive whiteboards, image capturing devices and web-based interactive space-scheduling devices.

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Raw Materials and Suppliers

      The Company’s manufacturing materials are available from a significant number of sources within the United States, Canada, Europe and Asia. Through collaboration, our goal is for both our suppliers and Steelcase to prosper by continuously improving our products and manufacturing processes. To date, we have not experienced difficulties obtaining raw materials, which include steel and other metals, lumber, paper, paint, plastics, laminates, particleboard, veneers, glass, fabrics, leathers and upholstery filling material. These raw materials are not unique to the industry nor are they rare. Steel and other metal prices have significantly increased in recent months due to unprecedented changes in global supply and demand. There is some risk that these changes could lead to future supply interruptions although we do not expect nor have we experienced any such interruptions. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of raw materials prices.

Product Research, Design and Development

      Our product development process begins with research aimed at identifying emerging patterns of user behavior in the workplace and changes in the ways people work. Our research methods include on-site observation of people working in their offices, human factor studies, and often include collaboration with universities and other companies. Our research activity is a corporate function and occurs primarily in North America and Europe.

      Understanding patterns of work enables us to identify and anticipate user needs. Our design teams develop prototypical solutions to address these needs. These solutions are sometimes single products and/or enhancements to existing products, and are sometimes integrated architecture, furniture and technology solutions. Design work is organizationally distributed across our major businesses and can involve outside design services. At times, we also utilize IDEO, a design and innovations subsidiary, in the development of new and enhanced products.

      Our marketing team evaluates product concepts using several criteria, including financial return metrics, and chooses which products will be developed and launched. Next, designers work closely with our engineers and outside suppliers to co-develop products and processes that lead to more efficient manufacturing while incorporating innovative user features. Products are tested for performance, quality and compliance with applicable standards and regulations.

      Exclusive of royalty payments, we have invested approximately $150.0 in research, design and development activities over the past three years. Royalties are sometimes paid to outside designers of our products as the products are sold and are not included in the research, design and development costs since they are variable based on product sales. See Note 2 to the consolidated financial statements for more information regarding research, design and development costs.

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Manufacturing

      We manufacture our products in more than 35 locations throughout the world, with facilities predominantly in North America and Europe. Substantially all of our manufacturing facilities “assemble to order” rather than to “forecast,” which minimizes finished goods inventory levels and emphasizes continuous improvement and delivery time to customers. We have an extensive physical distribution system in North America and Europe and utilize both our company-owned trucking fleet and commercial transport and delivery services.

      We are implementing lean manufacturing principles in many of our plants. Lean manufacturing involves smaller batch sizes, cellular or team-based manufacturing, flow and pull methods of managing work in process, and other world-class production techniques. We are also implementing enhanced planning and scheduling systems to help coordinate production of a given order across multiple plants and multiple delivery times. We explore opportunities to outsource certain manufacturing processes when suppliers can offer additional efficiencies or other performance benefits. These strategies along with other initiatives are helping us create the new “Steelcase Production System.” As we continue with implementation, we expect to improve our productivity, increase the effective capacity of each plant, improve inventory turns, and create a less capital-intensive industrial model. For example, over the past two fiscal years we have sold or closed properties representing approximately 4.3 million square feet, including current property which is held for sale or idle. In 2004 alone, approximately 1.5 million square feet of facilities were closed and 1.0 million square feet were sold. See Item 2: Properties for additional information regarding real estate held for sale and idle property. We will continue to examine opportunities to consolidate manufacturing and distribution operations and dispose of assets that represent excess capacity.

Working Capital

      Our receivables are primarily from our dealers, and to a lesser degree, direct sell customers. Payment terms vary by country and region. The terms of our North America and SDP segments, and certain markets within the International segment, encourage prompt payment. 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 four 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.

Intellectual Property

      Our wholly-owned subsidiary, Steelcase Development Corporation, acquires, manages, licenses, and enforces our intellectual property rights.

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      We own approximately 1,400 designs and patents throughout the world. Of these, we have over 640 active utility and design patents for current and anticipated products in the United States. We own the remaining designs and patents in a number of other countries. The average remaining life of the utility patents in our United States portfolio is approximately 11 years. 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 also registered various trademarks and service marks in the United States and other countries. Collectively, we hold registrations for approximately 150 United States and 1,340 foreign trademarks. We have established a global network of intellectual property licenses with our affiliates. We also selectively license our intellectual property to third parties as a revenue source. For example, our Leap® seating technology has been licensed for use in automotive and aircraft seating, and we are pursuing other licensing opportunities for this technology.

      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, except the “Brayton,” “Designtex,” “Details,” “Leap,” “Metro,” “Pathways,” “PolyVision,” “Steelcase,” “Vecta” and “Werndl” trademarks.

Distribution and Customer Base

      We primarily sell our products through a network of independent dealers. Each dealership has its own sales force, supported by our sales representatives, who work closely with dealers throughout the sales process. We have historically experienced minimal turnover in our dealer network. No single dealer accounted for more than 2.8% of our consolidated revenue for 2004. The five largest dealers collectively accounted for approximately 9.5% of our consolidated revenue. We do not believe our business is dependent on any single dealer, the loss of which would have a material effect upon our business. However, temporary disruption of dealer coverage within a specific local market due to financial failure or the inability to smoothly transition ownership could temporarily have an adverse impact on our business within the affected market. See Notes 9 and 16 to the consolidated financial statements for further discussion.

      Our largest end-use customer accounted for approximately 1.0% of our consolidated revenue and our five largest customers accounted for approximately 4.0% of consolidated revenue. However, these percentages do not include revenue from various government agencies and other entities purchasing under the General Services Administration (“GSA”) contract, which in the aggregate accounted for approximately 2.0% of our consolidated revenue. We do not believe our business is dependent on any single or small number of end-user customers, the loss of which would have a material effect upon our business.

      Historically, our North America and SDP segments experience seasonal patterns with second and third quarter revenue levels higher than first and fourth quarter revenue levels. However, this seasonal trend was not as evident during the office furniture industry recession of the past few years. Our International segment experiences seasonal patterns with lower revenue in the second quarter.

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Competition

      The United States and Canadian office furniture markets are highly competitive, with a number of competitors offering similar categories of product. In these markets, companies compete on price, delivery and service, product design and features, product quality, strength of dealers and other distributors, and relationships with customers, architects and designers. We have held the position as the United States revenue leader in our industry for nearly 30 years. Our most significant competitors are Haworth, Inc., Herman Miller, Inc., HNI Corporation (f/k/a HON Industries Inc.) and Knoll, Inc. Together with Steelcase, these companies represent approximately 55% of the market share of the United States office furniture market.

      The international office furniture market is highly competitive and fragmented. We compete with many different local or regional manufacturers in many different markets. In most cases, these competitors focus their strengths on selected product categories. We also compete with certain North American based competitors. No single company competes with us in all markets.

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”). Subject to the matters noted below and under Item 3, Legal Proceedings, we believe our operations are in substantial compliance with all Environmental Laws. Additionally, we do not believe that existing Environmental Laws and regulations have had or will have any material effects upon the capital expenditures, earnings or competitive position of the Company.

      On June 18 and 19, 2002, the United States Environmental Protection Agency (“EPA”) and Michigan Department of Environmental Quality (“MDEQ”) conducted an inspection of the energy centers and other air emission sources at the Steelcase facilities in Kentwood and Grand Rapids, Michigan. Following the inspection, the EPA requested stack testing of emissions from the two energy centers. MDEQ subsequently requested additional stack testing at the Grand Rapids energy center to confirm compliance with air emission permit requirements because of anomalous results for sulfur dioxide and nitrogen oxide in portions of the initial testing. The additional testing confirmed that a supplier providing coal not meeting Steelcase’s purchase specifications caused the anomalous results. To avoid future occurrences, Steelcase has changed the process for testing coal prior to its delivery to the Company. Although the MDEQ has concurred informally with our assessment of the last round of testing and the changes in coal testing, it is possible that a notice of violation, together with penalties or other costs could be sought by MDEQ or EPA based on the initial anomalous tests results. Potential penalties or costs cannot be estimated at this time.

      Under certain Environmental Laws, Steelcase 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

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Employees

      As of February 28, 2004, Steelcase had approximately 14,200 employees, including approximately 8,000 hourly, 5,500 salaried and 500 temporary workers. Over 10,500 workers are located in the United States, Canada and Mexico, approximately 6.5% of which are covered by collective bargaining agreements in the United States.

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 450 Fifth Street NW, 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 http://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, http://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, the Company’s governance guidelines and the charters for the Audit, Compensation, Investment 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.

      The Company adopted a code of ethics, known as the Steelcase Inc. Code of Ethics for Chief Executive and Senior Financial Officers, which applies to our chief executive officer, chief financial officer, controller and other persons performing similar functions. In addition, the Company adopted the Steelcase Inc. Code of Business Conduct, which applies to all directors and employees worldwide. These codes, including future amendments, are available free of charge through our website or by writing to Investor Relations, PO Box 1967, Grand Rapids,

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

      The Company, including joint ventures, has operations at locations throughout the United States and around the world. Our North America and SDP segments operate approximately 25 manufacturing and distribution facilities in 12 states, Canada and Mexico, while our International segment operates 12 manufacturing and distribution facilities in 8 countries.

      Our office, showroom, manufacturing and distribution facilities total approximately 24.0 million square feet, including real estate held for sale, idle property and approximately 5.0 million square feet of leased space. None of our owned properties is held in fee or is held subject to any significant encumbrance. We believe our facilities are in good operating condition and sufficient to meet current volume needs and future volume increases.

      Due to restructuring and plant rationalizations over the past several years, we are currently holding for sale several facilities that are no longer in use. These facilities represent approximately 560,000 square feet and 260 acres and are reported as real estate held for sale included in Other Current Assets on our Consolidated Balance Sheets.

      In addition, approximately 1.5 million square feet of manufacturing and office space is idle and does not qualify as real estate held for sale since we do not expect to sell the space within the next twelve months or are not currently marketing the space. We are currently evaluating our options with regards to these properties. See Note 4 of our consolidated financial statements for further information on property.

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

      Notwithstanding the above, in February 2003, the diameter of the exhaust stack at the Company’s Grand Rapids Energy Center was questioned. The interior diameter of the stack was measured and found to be wider than the diameter specified in the permit. The Company subsequently discovered that in 1984, a larger diameter-reducing cone was installed when a boiler was added to the energy center. On April 24, 2003, MDEQ issued a letter of violation based on the non-compliant stack diameter. Steelcase conducted emission modeling and concluded that the difference in stack diameter had not resulted in a violation of the permit’s emissions requirements. The MDEQ agreed with that conclusion. Although these developments are positive, the MDEQ and/or the EPA could seek to impose penalties or other costs in connection with the April 2003 notice of violation. Penalties, costs or assessments have not been sought and cannot be estimated at this time.

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      For a description of other matters relating to our compliance with applicable environmental laws, rules and regulations, see Environmental Matters in Item 1 of this Report.

      In addition to the above, on October 14, 1999, Propulsion Technologies, Inc. d/b/a PowerTech! Marine Propellers (“PowerTech”) filed a civil action against Steelcase Inc. and its subsidiary, AW Corporation (“AW”) (f/k/a Attwood Corporation) in the United States District Court, Southern District of Texas, Brownsville Division. AW had supplied certain propeller castings to PowerTech, but discontinued the arrangement when it closed its Reynosa, Mexico plant. Among other things, PowerTech contended that AW’s termination of the supply arrangement without having supplied a full 12-month advance notice breached a requirement in the supply arrangement between the parties. The trial judge dismissed all claims against Steelcase. However, at the conclusion of the trial, the jury ruled in favor of PowerTech against AW. In August 2002, the judge entered judgment against AW in the amount of approximately $7.1, which included compensatory damages of approximately $2.0 and punitive damages of approximately $5.1. AW filed an appeal to the United States Court of Appeals for the Fifth Circuit asserting numerous claims, and PowerTech filed a cross-appeal. Oral arguments were heard on the appeal on March 3, 2004. However, litigation is inherently uncertain and we can give no assurance that we will be successful in the appeal. AW is vigorously prosecuting the appeal, and believes that its appeal grounds are meritorious.

      None.

PART II

      The Class A Common Stock of Steelcase Inc. is listed on the New York Stock Exchange under the symbol “SCS”. Our Class B Common Stock is neither registered under the Securities Act of 1933 nor publicly traded. See Note 12 to the consolidated financial statements for further discussion of our common stock. As of April 28, 2004, we had outstanding 148,264,133 shares of common stock with 11,568 shareholders of record. Of these

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      The declaration and payment of dividends are subject to the discretion of the Board and to compliance with applicable law. Dividends in 2004 were declared and paid quarterly. 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 the Board may deem relevant at the time.

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(2)	As of March 31, 1999 Steelcase S.A. became a wholly owned subsidiary, the results of which are included in our consolidated statements.
(3)	Income and gain from discontinued operations relate to the disposition of our Attwood subsidiary. See the Consolidated Statements of Income and Note 18 to the consolidated financial statements for more information.
(4)	Cumulative effect of accounting change for the fiscal year ended February 27, 2004 relates to our adoption of FASB Interpretation Number (“FIN”) 46(R), Consolidation of Variable Interest Entities. See Note 2 to the consolidated financial statements for more information. Cumulative effect of accounting change for the fiscal year ended February 28, 2003 relates to our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. See Note 8 to the consolidated financial statements for more information.

      The following review of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included within this Form 10-K.

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Financial Summary

Results of Operations

Overview

      The office furniture industry has experienced about a 36% decline in shipments over the past three years in the United States, as reported by the Business and Institutional Furniture Manufacturer’s Association (“BIFMA”) International. In response to this decline, we implemented several operational, organizational and financial restructuring activities including plant rationalizations and workforce reductions. Through these actions we have reduced our cost structure significantly, but not enough to offset the dramatic decline in revenue, therefore, we reported losses in 2004 and 2003.

      Revenue declined annually 7.3% in 2004, 16.7% in 2003 and 23.8% in 2002. Our acquisitions of PolyVision Corporation and Custom Cable Industries, both completed in the second half of fiscal 2002, contributed $168.7 to our total revenue in 2004, $174.0 in 2003 and $47.9 in 2002. The dealer transition completed during 2003 contributed $46.6 to our total revenue in 2004 and $24.3 in 2003.

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      Revenue in 2004 benefited by $77.1 from favorable currency translation in the Company’s International segment when compared to 2003 revenue. Revenue in 2003 benefited from an extra week in the fourth quarter, which we estimate added $44.6 in revenue.

      Although there appears to be an overall economic recovery underway in the United States, we believe the lack of sustained job growth has delayed a similar recovery for the office furniture industry. There has been some recent improvement in United States job growth, which if continued, could be an important driver for renewed growth in our United States’ markets in the coming year. Many of our major international markets are not showing signs of growth and may lag a United States recovery.

      Gross margins declined to 26.2% of revenue in 2004 because of higher cost of sales and increased restructuring costs. Cost of sales increased to 72.0% of sales in 2004 primarily because of underabsorption of fixed overhead. Our efforts to consolidate operations and reduce excess capacity are having an impact, but not quickly enough to offset the decline in volume. Additionally, intense competition for project business increased product discounts in all markets during the second half of the year. In the North America segment alone, higher discounts decreased revenue and thus gross margins by nearly $13.0 compared to 2003. The restructuring costs related to the consolidation activity described above were $42.3 or 1.8% of revenue, a significant increase in these charges versus the prior year.

      We expect to continue to incur restructuring charges related to manufacturing operations as we continue to take steps to transform our industrial model. However, the cost of these activities in 2005 is expected to be less than in 2004. We expect additional plant consolidation activity in 2005, though not at the same level as in 2004. We also expect to continue to expand implementation of lean manufacturing principles in our plants.

      Operating expenses declined significantly in 2004 despite a $24.6 unfavorable currency translation effect. Operating expenses were also lower as a percent of revenue. These reductions reflect the savings from restructuring activities, including headcount reductions, which took place in the current and prior years.

      Current year restructuring costs related to operating expenses were $11.2, a significant decrease compared to the prior year, because the number of salaried workforce reductions was lower in 2004.

      In total, we recorded net pre-tax operating charges for restructuring items totaling $53.5 in 2004, $61.2 in 2003 and $50.3 in 2002. The net charges in 2004 consisted of $28.4 in severance charges for workforce reductions completed or underway and $25.1 in other restructuring charges, primarily for asset impairments. We also recorded a net pre-tax gain of $8.1, of which $4.4 was included in Non-operating items, net, primarily for gains on the sale of real estate and a curtailment gain related to our post-retirement medical and pension benefit plans. The net charges in 2003 consisted of $48.3 in severance charges for workforce reductions and $12.9 in other restructuring charges, primarily for business exit costs. Other items recorded in 2003 totaling a net pre-tax gain of $27.5, of which $16.9 was included in Non-operating items, net, were primarily for gains on the sale of real estate and a curtailment gain related to our post-retirement medical and pension benefit plans. See further discussion and detail of all these items in the Segment Disclosure analysis below and in Note 19 and Note 20 to the consolidated financial statements.

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      During Q4 2004, we recorded $15.9 of favorable tax adjustments, which are included in the 2004 income tax benefit in the table above. These adjustments consisted of two items. Based on the results of a recently completed IRS tax audit, we recorded a net adjustment of $5.3 reversing reserves that were no longer necessary related to the years that were audited. As of February 27, 2004, we feel the level of remaining reserves appropriately reflects our probable income tax exposures. In addition, we recorded a $10.6 favorable adjustment to income tax expense related to the Q4 2004 review of the annual tax provision and related liability. Although our effective tax rate for 2004 relating to continuing operations is calculated to be 55%, we expect our long-term effective tax rate to remain between 37% and 38%.

      As mentioned in the General section of Part I, Item 1, during Q2 2004, we sold substantially all of the net assets of our marine hardware and accessories business. In accordance with SFAS No. 144, the operating results of this business have been segregated as discontinued operations for all periods presented. See further discussion and detail in Note 18 to the consolidated financial statements.

      The cumulative effect of accounting change in 2004 represents the net after-tax charge related to our adoption of FIN 46(R), Consolidation of Variable Interest Entities. See further discussion and detail in Note 2 to the consolidated financial statements. The cumulative effective of accounting change in 2003 represents the net after-tax charge related to our adoption of SFAS No. 142, Goodwill and Other Intangible Assets. See Note 8 to the consolidated financial statements for more information regarding goodwill and other intangible assets.

      In February 2004, we initiated a change in our participative control of eight dealers where we hold a majority position in the voting stock. Accordingly, we consolidated the balance sheets of these dealers as of February 27, 2004. The consolidation of these dealers had the effect of increasing our total assets and liabilities by $10.9. There was no effect on equity as we previously accounted for these dealers as equity investments on our balance sheets. The results of operations of these dealers will be included in our consolidated results beginning in Q1 2005. We expect these newly consolidated dealers will add approximately $60 to $100 of revenue in 2005, with no corresponding impact on net income because we either do not share in the earnings or, where we do share in the earnings, we previously accounted for the dealer under the equity method of accounting and our share of the earnings were included within Other Income (Expense), net.

      Market prices for steel have risen up to 50% over the past several months due to unprecedented changes in global supply and demand. We did not experience any material effect of the rise in these prices during 2004 because much of our steel purchases were on fixed-priced contracts that were put in place prior to the rise in prices. However, we expect our quarterly steel costs will rise $5.0 to $7.0 pre-tax by Q2 2005 as we enter into new contracts. We have taken actions to partially offset the impact of these price increases, including announcing a temporary surcharge on North America customer orders placed after April 25, 2004. Because customers may place orders earlier than they otherwise would have, the temporary surcharge could positively impact Q1 2005 orders and revenue with a corresponding negative impact to Q2 2005 orders and revenue. We anticipate the revenue from the temporary surcharge to largely offset the steel price increase beginning in Q2 2005. The surcharge will continue until steel prices fall below certain thresholds.

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Interest Expense; Other Income (Expense), Net; and Income Taxes

      The majority of the Company’s debt over the past several years is related to term notes with fixed interest rates. Because the balance of the term notes has been stable, and the interest rates are fixed, interest expense has been relatively stable since 2002.

      Interest income has declined over the past three years primarily due to lower average short-term interest rates.

      Losses on dealer transitions relate to uncollectible funds loaned to or invested in dealers to finance ownership changes. The majority of the loss recorded in 2004 related to an International dealer transition investment originally made in 1999. We took over full ownership of this dealer during 2004 and reduced the carrying value of the investment to the net book value of the underlying tangible assets, which approximated its fair value. During 2003, we recognized losses on dealer transitions primarily related to two International dealers that were significantly affected by the office furniture recession in their markets. During 2002, we recognized losses on dealer transitions primarily related to a North America dealer whose operating results deteriorated due to a significant decline in business activity in its local market and several other performance issues. As a result, this dealer was restructured and ownership was transitioned to new dealer principals. Losses on dealer transitions do not include write-offs of receivables that have arisen as a result of product sales. Charges for write-offs associated with trade receivables from these affiliates are recorded as operating expenses.

      We carefully monitor the financial condition of dealers in ownership transition. Most of the dealers that have transition financing from Steelcase have successfully reduced costs and taken other steps to manage through the downturn. Some individual dealers are facing difficult financial challenges. We believe our reserves adequately reflect these credit risks. However, if these dealers experience prolonged or deepening reduction in revenues, the likelihood of losses would increase and we would record additional charges or reserves, as necessary.

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      During 2004, we recorded a gain on disposal of property and equipment primarily related to property sold in the United Kingdom for net cash proceeds of about $11.5 and a pre-tax non-operating gain of $7.0. This facility was idle for about three years as a result of prior restructuring activities. The gain in 2003 was primarily related to the sale of our Tustin, California manufacturing facility following the relocation of the operations to a smaller, more efficient facility. We received net cash proceeds of $35.7 and recorded a gain of $15.1 on the Tustin facility sale.

      Our income tax benefit is a function of actual taxable loss earned by the Company in different countries, the tax rates in various countries and tax planning strategies we implement. We expect these strategies to result in a long-term effective tax rate of between 37% and 38%.

Segment Disclosure

      See more information regarding segments in Part I Item 1 and Note 17 of the consolidated financial statements included with this Report.

North America

      Revenue in 2004 declined 14.5% in the North America segment following a 22.4% decline from 2002 to 2003. It is important to note 2003 contained an extra week.

      The decline in North America revenue was deeper than our other segments, and reflects differences in the customer base and product mix for this business. North America traditionally serves larger customers who, we believe, have continued to tightly control their spending on facilities and to delay hiring during the early phases of the economic recovery. The North America product mix has a high proportion of systems furniture, which has declined as a category across the industry during the downturn. We believe these two trends are related since large customers represent a major portion of the installed base of systems furniture and are therefore an important driver of demand for those products. We expect to see these trends reverse if the economic recovery continues and larger companies begin expanding their workforce.

      Cost of sales continued to be negatively impacted by higher discounts due to intense competition, underabsorption of overhead due to lower volume, disruption caused by consolidation activity and excess plant

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      As volume declined during the year, North America took additional steps to reduce the fixed component of cost of sales. North America reduced the hourly and salaried manufacturing workforces, rationalized and consolidated facilities and continued to implement lean manufacturing. However, the benefits from these actions did not fully offset the underabsorption of fixed manufacturing overhead.

      Restructuring costs included within 2004 cost of sales included $7.6 of severance costs for workforce reductions and $14.0 for asset impairments. Also included within cost of sales during 2004 were curtailment gains of $1.7 for post-retirement medical and pension benefits. Restructuring items included within 2003 and 2002 cost of sales primarily consisted of severance costs for workforce reductions and asset impairment charges. Also included within 2003 cost of sales were curtailment gains of $10.2 for post-retirement medical and pension benefits.

      In 2005, we expect gross margins as a percent of revenue to continue to be pressured by high discounts, excess capacity and rising steel prices, as discussed above under the Overview section. Restructuring activities are expected to continue, but at a lesser pace and cost than in 2004. For example, we expect to consolidate our wood manufacturing from three plants to one. However, as the pace of restructuring activity declines, we expect plant operations will stabilize and productivity improvements will be more evident. Therefore, we expect to see reduced cost of sales as a percent of revenue in 2005.

      Operating expenses decreased 27.5% since 2002. This decrease is a result of salaried workforce reductions, restructuring activities and reductions in discretionary and external spending, including elimination of bonuses and reduction of retirement contributions. Restructuring charges included within 2004, 2003 and 2002 operating expenses represented severance costs for workforce reductions. Also included within 2004 and 2003 operating expenses were curtailment gains of $1.2 and $4.2, respectively, for post-retirement medical and pension benefits.

      We maintain loss reserves related to dealer trade receivables, and we closely monitor the financial condition of our dealers. Generally, Steelcase dealers in North America have successfully reduced costs and taken other steps to manage through the industry downturn. We have processes that allow us to monitor and react quickly to changes in the credit quality of our dealers. We believe our reserves adequately reflect the credit risks associated with the dealer trade receivables. However, if our dealers experience a prolonged or deeper reduction in revenues, the likelihood of losses would increase and additional charges or reserves would be necessary.

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Steelcase Design Partnership

      Revenue for the SDP segment declined 5.4% in 2004 following an 11.9% decline in 2003. It is important to note 2003 contained an extra week. For the two-year period the decline for SDP was approximately 17% and was less than our consolidated decline of nearly 23%. SDP revenue is generally less dependent on large project orders and is less affected by declines in business capital spending due to its differentiated, design-oriented product portfolio and focus on niche applications.

      SDP margins are higher than our other segments’ margins. Gross margins as a percent of revenue decreased over the past two years due to higher reserves for slow moving inventory in the fabric and wall covering business, restructuring costs for workforce reductions and underabsorption of fixed overhead costs.

      By reducing operating expense spending over the past two years, we held operating expenses as a percent of revenue relatively constant. Restructuring costs recorded within operating expenses in 2004 included $0.7 for lease impairments and $0.2 of severance charges for workforce reductions. Restructuring charges in 2003 and 2002 related to workforce reductions.

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International

      International revenue increased 11.0% in 2004 due to the benefit of $77.1 from favorable currency translation effects. It is important to note 2003 contained an extra week. This increase follows a decrease of 18.6% from 2002 to 2003.

      International revenue is closely linked to economic conditions in key European countries. Certain of these countries are seeing ongoing weakness and others are experiencing instability related to geopolitical factors. We believe a recovery in these international markets may lag the United States recovery.

      Cost of sales of 71.1% was relatively flat compared to 71.0% in the prior year. International shipped some large, unusual and low-margin projects during the year which masked modest improvements in underlying cost of sales performance driven by previous restructuring efforts.

      Gross margins as a percent of revenue declined in 2004 primarily due to higher restructuring costs. These restructuring costs consisted primarily of costs associated with the closure or consolidation of manufacturing facilities, including workforce reductions of 425 employees or approximately 10.5%. International gross margins remained relatively flat in 2003 compared to 2002 due to the implementation of social plans and workforce reduction efforts launched in 2002, which resulted in a workforce reduction of 16% in 2003, the completion of the divestiture of two under-performing businesses in Q1 2003, both of which generated negative margins in 2002 and the implementation of additional cost reduction efforts aimed at lean manufacturing initiatives. Restructuring costs in 2003 and 2002 primarily related to charges for workforce reductions and business exit costs. Other selected charges included in 2003 cost of sales were costs of $4.0 related to asset impairments. We expect to continue consolidation activity in 2005 including actions that have already been announced related to our French operations. We expect these actions will continue to improve our competitiveness.

      Operating expenses in absolute terms increased in 2004, because of $24.6 of currency translation effects. Operating expenses as a percent of revenue declined compared to 2003 primarily due to the realization of cost reductions related to previous restructuring efforts. Compared to 2002, operating expenses in 2003 decreased both in absolute terms and as a percent of revenue. The decrease can be attributed to a $13.0 reduction in

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      Economic conditions in certain countries continue to put pressure on some of our dealers. We continue to monitor the financial condition of dealers for changes in credit quality. We believe our reserves adequately reflect these credit risks. However, if dealers experience a deeper reduction in revenues, the likelihood of losses would increase and additional charges or reserves would be necessary.

Other

      As mentioned in Part I, Item 1, our Other category includes our Financial Services, PolyVision and IDEO subsidiaries, ventures and unallocated corporate expenses. The increase in revenue from 2002 to 2003 was largely due to the acquisition of PolyVision in late 2002.

      The reduction in operating loss from 2003 to 2004 was due to several factors including:

	•	the divestiture of an unprofitable business venture in 2003;
	•	improvements in the operating results of Financial Services primarily due to lower credit charges in 2004; and
	•	improvements in the operating results of IDEO, partially offset by a decline in profitability at PolyVision.

      Approximately 85% of corporate expenses representing shared services are charged to the operating segments as part of a corporate allocation. The unallocated portion of these expenses is considered general corporate costs and is reported within the Other category. Revenue and costs of exploring new business opportunities within new market niches or areas related to, but not part of, our core business activities are considered ventures, and are reported in the Other category.

      Restructuring costs included in 2004 operating results included $3.5 of severance costs for workforce reductions. Also included in 2004 operating results were curtailment gains of $0.8 related to post-retirement benefits. Restructuring costs included in 2003 operating results included $8.0 for business exit costs related to a venture and $2.6 of severance costs for workforce reductions. Also included in 2003 operating results were

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      Our Financial Services subsidiary provides lease financing to end customers and various forms of financing primarily to North America dealers. Our underlying net investment in leases represents multiple sales to individual end customers and there are some concentrations of credit risk with certain customers. We have processes that allow us to monitor and react quickly to changes in the credit quality of our lease customers. While the overall credit quality of our portfolio remained stable in 2004, our risk of exposure decreased as leased assets were sold and customers became more financially stable. We closely monitor our receivable exposure and the overall financial condition of the dealers in North America to whom we extend financing. Although we believe reserves are adequate in total, deterioration in the financial stability of larger customers and dealers would likely require us to record additional charges and reserves. During Q1 2004, we outsourced lease fundings to a third party, therefore we no longer carry credit or residual risk for new leases.

Liquidity and Capital Resources

Liquidity

      The following table summarizes our statement of cash flows:

      We increased cash and cash equivalents by $133.3 during 2004 to a balance of $262.2 as of February 27, 2004, our highest level of cash since 1998. Of our total cash, 79.1% was located in the United States and the remaining 20.9% was located outside of the United States, primarily Europe and Canada. These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance our known or foreseeable liquidity and capital needs. The increase in cash and cash equivalents was due to a number of factors. Operating activities generated cash as depreciation and amortization is added back to the net loss. Depreciation and amortization continue to be much higher than current levels of capital

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      We look at various scenarios for cash planning purposes. In one possible scenario— a substantial and rapid increase in revenue in a short period of time— we anticipate we would likely experience a corresponding rapid increase in accounts receivables and inventories. This rapid increase in required working capital would represent a significant use of cash and is the primary reason we are holding a relatively large cash balance.

Cash provided by operating activities