Back to GetFilings.com

Table of Contents

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 December 22, 2004, Steelcase Inc. had 60,354,377 shares of Class A Common Stock and 88,163,271 shares of Class B Common Stock outstanding.

STEELCASE INC.

FOR THE QUARTER ENDED NOVEMBER 26, 2004

INDEX

2

Table of Contents

PART I—FINANCIAL INFORMATION

STEELCASE INC.

See accompanying notes to the condensed consolidated financial statements.

3

Table of Contents

STEELCASE INC.

See accompanying notes to the condensed consolidated financial statements.

4

Table of Contents

STEELCASE INC.

See accompanying notes to the condensed consolidated financial statements.

5

Table of Contents

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 in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the consolidated financial statements 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, Q3 2005 references the third 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 and the previous 10-Qs of 2005, we consolidated the financial results of certain North America and International dealers during Q1 2005 and Q2 2005. The consolidation of these dealers had the effect of increasing Q3 2005 revenue by $19.8, cost of sales by $14.6 and operating expenses by $6.5. In addition, the consolidation of these dealers increased year-to-date revenue by $56.7, cost of sales by $37.5 and operating expenses by $21.0. There was no material effect on operating income or net income 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.

      In May 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) 106-2 as a result of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Subsidy Act”). The Medicare Subsidy 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. FSP 106-2 requires companies to record the amount expected to be received under the Medicare Subsidy Act as an actuarial gain, to the extent the related post-retirement medical plan’s total unrecognized actuarial gains or losses exceed certain thresholds, to be amortized into income over time. Based on current regulations, we expect we will qualify for a subsidy of $1.2 in fiscal 2007 and up to $1.9 in future years. We adopted the provisions of this pronouncement in Q3 2005. See Note 8 for more information.

      In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), to expand and clarify SFAS No. 123 in several areas. The Statement requires companies

6

Table of Contents

(Unaudited)

to measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. The cost is recognized over the requisite service period (usually the vesting period) for the estimated number of instruments where service is expected to be rendered. This Statement is effective beginning in Q3 2006 for awards issued beginning June 15, 2005. Since we previously adopted the provisions of expensing stock-based compensation using the fair value based method of accounting as permitted under SFAS No. 123 (see Note 4), we do not expect our financial statements will be materially impacted by SFAS No. 123(R).

      SFAS No. 151 amends Accounting Research Bulletin (“ARB”) No. 43, Chapter  4, “Inventory Pricing,” to clarify the accounting for idle facility expense, freight, handling costs and waste (spoilage). Previously, these costs were recognized as current period expenses when they were considered “so abnormal.” SFAS No. 151 requires those items be recognized as current period charges regardless of whether they meet the “so abnormal” criteria. In addition, this Statement clarifies that fixed overhead allocations to inventory costs be based on normal capacity of production facilities. This Statement is effective for inventory costs incurred during 2007 and earlier application is permitted. We believe our current accounting policies closely align to the new rules. Accordingly, we do not believe this new standard will have a material impact on our financial statements.

      SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value accounting for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of an entity are expected to change significantly as a result of the exchange. This statement is effective beginning in Q3 2006 and is not expected to have a significant impact on our financial statements.

7

Table of Contents

(Unaudited)

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 5.8 million shares related to outstanding stock incentive plan awards as of Q3 2005 and for the nine month period then ended and 8.7 million as of Q3 2004 and for the nine month period then ended because those shares or potential shares were anti-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 based on the market price of the related equity instrument or by using the Black-Scholes option-pricing model for stock options. Compensation expense is recognized over the applicable vesting period.

8

Table of Contents

(Unaudited)

      The following table illustrates the effect on net income and earnings 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 INCOME (LOSS)

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

      In 2005, foreign currency translation of $16.6 for the three months ended November 26, 2004 is primarily due to the weakening of the U.S. dollar against the Canadian dollar. There were no unusual transactions within the categories of other comprehensive income during 2005.

      In 2004, foreign currency translation of $6.2 for the nine months ended November 28, 2003 included the realization of $4.1 of currency translation losses related to our Brazilian operations, which accumulated over many years. The remainder of the 2004 amount in foreign currency translation related to net unrealized foreign currency translation gains.

9

Table of Contents

(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 $51.4 as of November 26, 2004 and $49.0 as of February 27, 2004.

7.     Goodwill and Other Intangible Assets

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

10

Table of Contents

(Unaudited)

      As of November 26, 2004 and February 27, 2004, our other intangible assets and related accumulated amortization consisted of the following:

      In Q3 2005, we recorded amortization expense of $2.0 on intangible assets subject to amortization compared to $2.3 in Q3 2004. For the nine months ended November 26, 2004, we recorded amortization expense of $6.5 compared to $7.3 for the nine months ended November 28, 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:

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

8.     EMPLOYEE BENEFIT PLAN OBLIGATIONS

      In Q3 2005, we recorded a curtailment gain of $2.2 in our post-retirement plans related to workforce reductions in one of our North America wood plants.

      In connection with FSP 106-2 (see Note 2), we remeasured our accumulated post-retirement benefit obligation (“APBO”) as of September 1, 2004 to consider the effects of the Medicare Subsidy Act and the curtailment. As a result, the APBO decreased approximately $19.0 due to the Medicare subsidy and $18.0 due to other assumption changes. The net expense for Q3 2005 decreased $1.2 due to the remeasurement. Based on the Medicare Subsidy Act, trends and recent

11

Table of Contents

(Unaudited)

experience, key assumptions revised to determine the APBO and the net expense in the September 1, 2004 valuation versus the February 27, 2004 valuation are as follows:

[Additional columns below]

[Continued from above table, first column(s) repeated]

			Nine Months Ended
			Post-retirement Plans
			November 26,				November 28,
Components of Expense			2004				2003
	Components of expense:
Service cost			$	2.6			$	3.2
	Interest cost			9.9				10.9
	Amortization of prior year service cost (gain)			(4.1	)			(2.9	)
	Expected return on plan assets			—				—
	Adjustment due to plan curtailment			(2.2	)			(2.9	)
	Adjustment due to plan settlement			—				—
	Amortization of unrecognized net actuarial loss			2.9				2.7
	Net expense		$	9.1			$	11.0

      As of February 27, 2004 we expected to contribute approximately $13.0 to our pension and post-retirement medical plans during 2005. As of November 26, 2004, contributions of approximately $12.7 have been made. Based upon updated actuarial information, we anticipate contributing an additional $3.2 in 2005, for a total of $15.9 of benefit payments related to our pension and post-retirement medical plans.

      During Q3 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

12

Table of Contents

(Unaudited)

associated with these activities include, but are not limited to, severance, asset impairments and lease impairments. Restructuring costs are summarized in the following table: