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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 25, 2004, Steelcase Inc. had 51,374,113 shares of Class A Common Stock and 96,884,347 shares of Class B Common Stock outstanding.

STEELCASE INC.

FOR THE QUARTER ENDED MAY 28, 2004

INDEX

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

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 of America (“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 27, 2004 (“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.

      Unless the context otherwise indicates, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year. Additionally, Q1 2005 references the first quarter of fiscal 2005. All amounts are in millions, except per share data, data presented as a percentage or unless otherwise indicated.

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

      As discussed in Form 10-K, we consolidated the balance sheets of certain North America and International dealers as of February 27, 2004. In Q1 2005, we consolidated the balance sheets of two additional International dealers. The consolidation of all these dealers had the effect of increasing Q1 2005 revenue by $15.9, cost of sales by $9.2 and operating expenses by $7.0. There was no material effect on operating loss or net loss as either earnings do not accrue to the class of stock we own or these dealers were previously accounted for under the equity method of accounting.

2.     NEW ACCOUNTING STANDARDS

      Financial Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46(R) is effective in Q1 2005 for variable interest entities (“VIEs”) that are not defined as special-purpose entities. We completed our evaluation of our unconsolidated dealers where we have provided either equity or debt financing to determine whether those dealers are VIEs as defined by FIN 46(R). Based on our evaluation, we do not believe any of the dealers to which we provide financing require consolidation pursuant to FIN 46(R).

      In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act entitles employers who provide certain prescription drug benefits for retirees to receive a federal subsidy beginning in calendar 2006, thereby creating the potential for significant benefit cost savings. FASB Staff Position (“FSP”) 106-2 requires companies to record the amount expected to be received under the Act as an actuarial gain, to the extent the related post-retirement medical plan’s (the “plan”) total unrecognized actuarial gains or losses exceed certain thresholds, to be amortized into income over time. FSP 106-2 is effective beginning

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Q3 2005. We are a sponsor of a plan that provides prescription drug benefits. We are currently evaluating any effects the Act may have on the plan and our financial statements. Accordingly, any measures of the accumulated post-retirement benefit obligation or net periodic post-retirement benefit cost in the financial statements or accompanying notes do not reflect the effects of the Act on the plan.

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 outstanding restricted shares to the extent those shares have not vested.

      Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. However, diluted earnings per share does not reflect the effects of 8.7 million shares related to outstanding stock incentive plan awards as of Q1 2005 and 10.7 million as of Q1 2004 because those shares or potential shares were not dilutive.

4.     STOCK-BASED COMPENSATION

      We account for stock-based compensation issued prior to March 1, 2003 under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.

      For all awards granted, modified or settled on or after March 1, 2003, our policy is to expense stock-based compensation under SFAS No. 123, Accounting for Stock-Based Compensation, using the fair value based method of accounting. Fair value is measured on the grant date of the related equity instrument using the Black-Scholes option-pricing model and is recognized as compensation expense over the applicable vesting period. After-tax compensation expense related to restricted stock and restricted stock units was $0.5 in Q1 2005 and $0.2 in Q1 2004.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      The following table illustrates the effect on net income (loss) and earnings (loss) per share as if we had applied the fair value recognition provisions of SFAS No. 123 to all outstanding awards. Further information regarding our stock incentive plans is presented in Note 10.

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.

      We incurred unrealized foreign currency translation losses of $5.8 in Q1 2005. Foreign currency translation of $7.8 during 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 currency translation losses as a reduction in shareholders’ equity through the Accumulated Other Comprehensive Loss line. Upon disposition of our Brazilian operations, we recognized the losses 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 had no effect on shareholders’ equity. The remaining $3.7 of the $7.8, related to unrealized foreign currency translation gains.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

6.     INVENTORIES

      Inventories are stated at the lower of cost or market. The North America segment primarily uses the last in, first out (“LIFO”) method to value its inventories. Companies in the Steelcase Design Partnership (“SDP”) segment primarily use the first in, first out (“FIFO”) or the average cost inventory valuation methods. Companies in the International segment value their inventories using the FIFO method.

      The portion of inventories determined by the LIFO method aggregated $46.6 as of May 28, 2004 and $46.3 as of February 27, 2004.

7.     GOODWILL AND OTHER INTANGIBLE ASSETS

      There were no acquisitions, dispositions, adjustments or impairments of goodwill during Q1 2005. A summary of goodwill, by business segment and category, is as follows:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      As of May 28, 2004 and February 27, 2004, our other intangible assets and related accumulated amortization consisted of the following:

      In Q1 2005, we recorded amortization expense of $2.3 on intangible assets subject to amortization compared to $2.4 in Q1 2004. 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:

      As events, such as acquisitions, dispositions or impairments, occur in the future, these amounts may vary.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

8.     EMPLOYEE BENEFIT PLAN OBLIGATIONS

      As of February 27, 2004, we expected to contribute approximately $13.0 to our pension and post-retirement medical plans during 2005. As of May 28, 2004, contributions of approximately $6.5 have been made. Based upon updated actuarial information, we anticipate contributing an additional $9.4 in 2005, for a total of $15.9, to fund our pension and post-retirement medical plans.

9.     RESTRUCTURING CHARGES

      During Q1 2005, we continued efforts to reduce our cost structure by restructuring certain areas of our business. Restructuring activities can include, but are not limited to, workforce reductions, facility consolidations, relocation of production lines and the exit of certain businesses. Costs associated with these activities include, but are not limited to, severance, asset impairments and lease impairments. Restructuring costs are summarized in the following table:

      See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for explanations of Q1 2005 restructuring charges.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      Below is a reconciliation of the restructuring reserve for activity during 2005:

      At the beginning of 2005, approximately 820 positions remained to be eliminated primarily relating to North America wood manufacturing and International rationalization activities announced prior to February 28, 2004. As of May 28, 2004, approximately 790 of these positions remain to be eliminated and are expected to occur during the remainder of 2005 with additional reserves recorded as appropriate. Additions, payments and adjustments to the workforce reductions reserve related to these activities are recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. No new workforce reduction activities were announced during Q1 2005.

      The reserve balance as of May 28, 2004 for other costs primarily relates to restructuring efforts within our International segment.

10.     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 2005. Approximately 3.8 million shares remain available for repurchase under the Board’s authorization and we have no outstanding share repurchase commitments.

      Under the Steelcase Inc. Incentive Compensation Plan (the “Compensation Plan”), the Compensation Committee of the Board of Directors approved and granted 259,000 restricted shares of stock and 36,500 restricted stock units (“RSUs”) during 2005. During 2004, 220,000 restricted shares of stock and 48,000 restricted stock units (“RSUs”) were issued. These restricted stock shares and RSUs vest over a three year period and may be forfeited if a participant leaves the Company for reasons other than retirement, disability or death prior to the vesting date. When the RSUs vest, they will be converted to unrestricted common stock shares. As of May 28, 2004, shares forfeited totaled 6,250. The aggregate market value of the restricted stock shares at the date of issuance of $3.5 in 2005 and $2.1 in 2004 was recorded as deferred compensation, a separate component of shareholders’ equity, and is being amortized over the three-year vesting period of the grants. The RSUs are expensed over the three-year vesting period based on the current market value of the shares to be issued.

      In Q1 2005, the Compensation Committee of the Board of Directors established a program to provide performance share unit awards (“PSUs”) under the Compensation Plan. The performance measure for these awards is based on a cumulative three-year cash flow calculation as defined by the Compensation Plan. After completion of the performance period, the number of PSUs earned under the agreement will be converted to common stock shares. One-third of the shares vest at the time of conversion and one-third vest at the end of each of the next two years. The target award granted in

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Q1 2005 was 188,000 PSUs. The actual number of common shares that ultimately may be issued ranges from zero to 376,000 shares based on actual performance levels.

11.     OPERATING SEGMENTS

      We operate on a worldwide basis within three reportable segments: North America, SDP and International, plus an “Other” category. We evaluate performance and allocate resources based on operating income.

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

      The SDP includes the following companies and their brands: Brayton International, The Designtex Group, Office Details Inc., Metropolitan Furniture Corporation and Vecta. 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.

      Our International segment consists of manufacturing operations, sales activities and consolidated dealers outside the United States and Canada, and includes the Company’s Steelcase and Werndl brands.

      The Other category includes Financial Services, PolyVision and IDEO subsidiaries, ventures and unallocated corporate expenses. Steelcase Financial Services Inc. provides leasing services to customers 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, which represent shared services, are charged to the operating segments as part of a corporate allocation. Unallocated expenses are reported within the Other category.

      During 2004, we sold substantially all of the net assets of our marine hardware and accessories business, Attwood Corporation. The operating results of this business, formerly included within the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Other category, have been segregated and reported as discontinued operations for all periods presented.

12.     GUARANTEES, PERFORMANCE BONDS 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. No losses have been experienced; however, reserves totaling $0.6 are recorded as of May 28, 2004 to cover potential losses for loan guarantees entered into subsequent to December 31, 2002, in accordance with GAAP.

      We are also party to performance bonds for certain installation or construction activities of certain Steelcase dealers and a joint venture. Under these agreements, we are liable to make financial payments if the installation or construction activities are not completed under their specified guidelines and claims are filed. Projects with performance bonds have completion dates ranging from one to three years. Approximately $60.0 in performance bonds relate to a construction project that is completed and being used as intended, however, we have not received final approval from the customer. We estimate that our maximum exposure from these performance bonds is less than $1.0.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

      Where we have supplied performance bonds related to a joint venture, we require any significant subcontractors to supply us with performance bonds to provide coverage in the event they cause a performance failure or delay. Performance bonds supplied by subcontractors totaled $40.0 as of May 28, 2004, which reduces our risk of exposure. Additionally, our joint venture agreement requires our partner to share in any losses related to these performance bonds. Where we have supplied performance bonds for dealers, we have the ability to step in and cure performance failures by the dealers thereby mitigating our potential losses. No loss has been experienced under these performance bonds; however, reserves totaling $0.3 are recorded as of May 28, 2004 to cover potential losses.

      The maximum amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered from third parties) we could be required to make under the guarantees and performance bonds are as follows:

      The accrued liability for warranty costs, included within other accrued expenses on the Condensed Consolidated Balance Sheets, is based on an estimated amount needed to cover future warranty obligations for products sold as of the balance sheet date and is determined by historical product data and management’s knowledge of current events and actions.

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Financial Summary

Results of Operations (Unaudited)