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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 22, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-13873
-----------------
STEELCASE INC.
Michigan 38-0819050
(State of incorporation) (I.R.S. Employer Identification No.)
901 44th Street Grand Rapids, Michigan 49508
(Address of principal executive offices) (Zip Code)
(616) 247-2710
Registrant's telephone number, including area code
-----------------
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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: As of December 27, 2002,
Steelcase Inc. had 40,379,025 shares of Class A Common Stock and 107,216,426
shares of Class B Common Stock outstanding.
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STEELCASE INC.
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 22, 2002
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
November 22, 2002 and November 23, 2001............................................... 3
Condensed Consolidated Balance Sheets as of November 22, 2002 and February 22, 2002..... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
November 22, 2002 and November 23, 2001............................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6-14
Item 2. Management's Discussion and Analysis................................................... 15-26
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 26
Item 4. Controls and Procedures................................................................ 26
Part II. Other Information
Item 1. Legal Proceedings...................................................................... 26
Item 2. Changes in Securities and Use of Proceeds.............................................. 26
Item 3. Defaults upon Senior Securities........................................................ 26
Item 4. Submission of Matters to a Vote of Security Holders.................................... 26
Item 5. Other Information...................................................................... 26
Item 6. Exhibits and Reports on Form 8-K....................................................... 27
Signatures..................................................................................... 28
Certification of Chief Executive Officer--Sarbanes-Oxley Act Section 302....................... 29
Certification of Chief Financial Officer--Sarbanes-Oxley Act Section 302....................... 30
Exhibit Index.................................................................................. 31
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except per share data)
Three Months Ended Nine Months Ended
---------------- ------------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
2002 2001 2002 2001
-------- -------- -------- --------
Furniture revenue..................................................... $640.2 $712.3 $1,925.4 $2,368.0
Finance revenue....................................................... 6.5 19.1 23.7 61.1
------ ------ -------- --------
Total revenue.................................................. 646.7 731.4 1,949.1 2,429.1
Cost of sales......................................................... 465.0 503.6 1,384.7 1,663.3
Restructuring costs................................................... 5.7 6.3 10.7 8.9
------ ------ -------- --------
Gross profit................................................... 176.0 221.5 553.7 756.9
Operating expenses.................................................... 187.8 213.7 574.1 679.7
Restructuring costs................................................... 23.3 1.1 40.0 9.5
------ ------ -------- --------
Operating income (loss)............................................... (35.1) 6.7 (60.4) 67.7
Interest expense...................................................... (5.3) (3.9) (15.5) (13.9)
Other income (expense), net........................................... (6.7) 4.6 (9.9) 2.4
------ ------ -------- --------
Income (loss) before income tax provision (benefit), equity in net
income (loss) of joint ventures and dealer transitions and
cumulative effect of accounting change.............................. (47.1) 7.4 (85.8) 56.2
Income tax provision (benefit)........................................ (17.7) 2.7 (32.2) 20.8
------ ------ -------- --------
Income (loss) before equity in net income (loss) of joint ventures and
dealer transitions and cumulative effect of accounting change....... (29.4) 4.7 (53.6) 35.4
Equity in net income (loss) of joint ventures and dealer transitions.. (1.7) 0.2 (0.2) (0.1)
------ ------ -------- --------
Income (loss) before cumulative effect of accounting change........... (31.1) 4.9 (53.8) 35.3
Cumulative effect of accounting change (Notes 2 and 7)................ -- -- (170.6) --
------ ------ -------- --------
Net income (loss)..................................................... $(31.1) $ 4.9 $ (224.4) $ 35.3
====== ====== ======== ========
Basic and diluted per share data:
Earnings (loss) per share before cumulative effect of accounting
change........................................................... $(0.21) $ 0.03 $ (0.36) $ 0.24
Cumulative effect per share of accounting change................... -- -- (1.16) --
====== ====== ======== ========
Earnings (loss) per share............................................. $(0.21) $ 0.03 $ (1.52) $ 0.24
====== ====== ======== ========
Dividends declared per common share................................... $ 0.06 $ 0.11 $ 0.18 $ 0.33
====== ====== ======== ========
See accompanying notes to the condensed consolidated financial statements.
3
STEELCASE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(Unaudited)
Nov. 22, Feb. 22,
ASSETS 2002 2002
------ ----------- --------
Current assets:
Cash and cash equivalents........................................ $ 52.1 $ 69.4
Accounts receivable, net......................................... 365.6 367.2
Notes receivable and leased assets, net.......................... 135.6 194.5
Inventories...................................................... 133.9 147.1
Other current assets............................................. 69.8 103.8
--------- --------
Total current assets.................................. 757.0 882.0
Property and equipment, net......................................... 822.2 896.8
Notes receivable and leased assets, net............................. 183.9 335.8
Joint ventures and dealer transitions............................... 28.4 42.4
Goodwill, net....................................................... 268.8 431.6
Other intangible assets, net........................................ 98.3 108.6
Other assets........................................................ 318.6 270.3
--------- --------
Total assets.......................................... $2,477.2 $2,967.5
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................................. $ 143.8 $ 163.5
Short-term borrowings and current portion of long-term debt...... 57.8 160.1
Accrued expenses:
Employee compensation..................................... 95.8 84.6
Employee benefit plan obligations......................... 33.2 51.0
Other..................................................... 211.0 213.9
--------- --------
Total current liabilities............................. 541.6 673.1
--------- --------
Long-term liabilities:
Long-term debt................................................... 303.6 433.6
Employee benefit plan obligations................................ 251.0 248.3
Other long-term liabilities...................................... 65.5 57.0
--------- --------
Total long-term liabilities........................... 620.1 738.9
--------- --------
Total liabilities..................................... 1,161.7 1,412.0
--------- --------
Shareholders' equity:
Common stock..................................................... 286.0 282.3
Accumulated other comprehensive income (loss).................... (40.1) (47.4)
Retained earnings................................................ 1,069.6 1,320.6
--------- --------
Total shareholders' equity............................ 1,315.5 1,555.5
--------- --------
Total liabilities and shareholders' equity............ $2,477.2 $2,967.5
========= ========
See accompanying notes to the condensed consolidated financial statements.
4
STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Nine Months Ended
----------------
Nov. 22, Nov. 23,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income (loss).................................................... $(224.4) $ 35.3
Depreciation and amortization........................................ 115.9 128.5
Cumulative effect of accounting change............................... 170.6 --
Loss on sales of leased assets....................................... 6.2 --
Restructuring charges, net........................................... 5.9 6.2
Changes in operating assets and liabilities.......................... (12.0) 57.4
Other, net........................................................... (6.6) 23.2
------- -------
Net cash provided by operating activities........................ 55.6 250.6
------- -------
INVESTING ACTIVITIES
Capital expenditures................................................. (63.8) (91.4)
Proceeds from the sales of leased assets............................. 185.7 --
Proceeds from the disposal of fixed assets........................... 23.2 16.4
Net decrease in notes receivable and leased assets................... 20.4 39.1
Acquisitions, net of cash acquired, and business divestitures........ (3.1) (203.9)
Other, net........................................................... 17.4 (2.6)
------- -------
Net cash provided by (used in) investing activities.............. 179.8 (242.4)
------- -------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt............................. 0.5 264.1
Repayments of long-term debt......................................... (130.4) (369.9)
Short-term borrowings (repayments), net.............................. (101.5) 252.2
Common stock issuance................................................ 3.7 0.3
Common stock repurchase.............................................. -- (4.4)
Dividends paid....................................................... (26.6) (48.6)
------- -------
Net cash provided by (used in) financing activities.............. (254.3) 93.7
------- -------
Effect of exchange rate changes on cash and cash equivalents..... 1.6 (1.9)
------- -------
Net increase (decrease) in cash and cash equivalents.......... (17.3) 100.0
Cash and cash equivalents, beginning of period............ 69.4 25.3
------- -------
Cash and cash equivalents, end of period.................. $ 52.1 $ 125.3
======= =======
See accompanying notes to the condensed consolidated financial statements.
5
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("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 22, 2002 ("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.
Effective in the third quarter of fiscal year 2003 ("Q3 2003" or "the
quarter"), the Company changed the classification of its reportable segments.
Details of this change are highlighted in Note 12.
During Q3 2003, the Company completed a transaction to help transition a
dealer to new ownership. The Company owns 100% of one class of stock, and
controls the Board of Directors of the dealer. As a result, the balance sheet
and results of operations of the dealer were consolidated into the Company's
financial statements, which added $18.5 million of revenue, $6.8 million of
gross margin and $1.8 million of operating income to the Company's third
quarter results. However, since earnings do not accrue to the Company's class
of stock, 100% of the operating profits were eliminated in the Equity in Net
Income of Joint Ventures and Dealer Transitions line. As a result, there was no
effect on net income.
2. NEW ACCOUNTING STANDARDS
Accounting for Business Combinations
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets, change the
accounting for business combinations by, among other things, requiring
companies to stop amortizing goodwill and certain intangible assets with an
indefinite useful life. Instead, goodwill and intangible assets with an
indefinite useful life are subject to an annual review for impairment. SFAS No.
141 became effective in the second quarter of fiscal year 2002 ("Q2 2002").
Upon adoption of SFAS No. 142 in the first quarter of fiscal year 2003 ("Q1
2003"), we recorded a one-time, non-cash charge of $170.6 million to reduce the
carrying value of our goodwill. This charge is non-operational in nature and is
reflected as a cumulative effect of an accounting change in the accompanying
consolidated statement of operations. For additional discussion on the impact
of adopting SFAS No. 142, see Note 7.
Accounting for the Impairment or Disposal of Long-Lived Assets
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, became effective for the Company beginning in Q1 2003. SFAS No. 144
establishes accounting and reporting standards for the impairment or disposal
of long-lived assets. The adoption of SFAS No. 144 did not have a material
effect on our financial results.
Accounting for Costs Associated with Exit or Disposal Activities
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, requires a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and at its fair value.
6
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
We implemented the provisions of this statement during Q3 2003. The adoption of
SFAS No. 146 did not have a material effect on our financial results.
Accounting for Stock-Based Compensation-Transition and Disclosure
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation,
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. This statement is effective for
fiscal years ending after December 15, 2002.
The Company intends to begin expensing the cost of employee stock options in
the first quarter of fiscal year 2004 ("Q1 2004") and is currently evaluating
the impact of the statement and the transition method to be utilized.
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others (FASB Interpretation No. 45)
This Interpretation elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company is currently
evaluating the impact of the Interpretation.
3. EARNINGS (LOSS) PER SHARE
Three Months Ended Nine Months Ended
----------------- -----------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
Components of Earnings (Loss) Per Share 2002 2001 2002 2001
--------------------------------------- -------- -------- -------- --------
(in millions)
Numerator:
Income (loss) before cumulative effect of accounting change. $(31.1) $ 4.9 $ (53.8) $ 35.3
Cumulative effect of accounting change...................... -- -- (170.6) --
------ ------ ------- ------
Net income (loss) numerator for both basic and diluted EPS.. $(31.1) $ 4.9 $(224.4) $ 35.3
------ ------ ------- ------
Denominators:
Denominator for basic EPS--Weighted average common
shares outstanding........................................ 147.6 147.3 147.5 147.3
Potentially dilutive shares resulting from stock options (1) -- 0.2 0.4 0.3
------ ------ ------- ------
Denominator for diluted EPS (1)............................. 147.6 147.5 147.9 147.6
====== ====== ======= ======
- --------
(1) The denominator for basic EPS is used for calculating EPS for Q3 2003 and
the first nine months of fiscal 2003 because potentially dilutive shares
and diluted EPS are not applicable when a loss from continuing operations
is reported.
Basic earnings per share is based on the weighted average number of shares
of common stock outstanding during each period. It excludes the dilutive
effects of additional common shares that would have been outstanding if the
shares under our Stock Incentive Plans had been issued. Diluted earnings per
share includes effects of our Stock Incentive Plans. Due to their anti-dilutive
effect, we have not included the effects of 7.8 million and 3.9 million options
in our calculation of diluted earnings per share for the quarter and first nine
months ended November 22, 2002 and November 23, 2001, respectively.
7
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
4. 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.
Three Months Ended Nine Months Ended
---------------- ----------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
Components of Comprehensive Income (Loss) 2002 2001 2002 2001
----------------------------------------- -------- -------- -------- --------
(in millions)
Net income (loss).................................. $(31.1) $ 4.9 $(224.4) $35.3
Other comprehensive income (loss):
Foreign currency translation gain (loss)........ (1.1) (8.0) 2.8 (8.6)
Derivative adjustments, net of tax (see Note 5). (0.2) (2.2) 4.5 (9.8)
------ ----- ------- -----
Comprehensive income (loss)........................ $(32.4) $(5.3) $(217.1) $16.9
====== ===== ======= =====
5. DERIVATIVE INSTRUMENTS
Information regarding our interest rate swaps is summarized below.
As of November 22, 2002 As of February 22, 2002
------------------------------------ ------------------------------------
Fair Value Notional Fair Value Notional
Interest Rate Swaps of Liability Amount Interest Rates of Liability Amount Interest Rates
- ------------------- ------------ -------- -------------- ------------ -------- --------------
(in millions, except data as a percentage)
Cash flow hedges.. $5.8 $59.8 6.18%-6.64% $12.8 $248.1 4.8%-7.1%
Fair value hedges. -- -- -- 2.1 48.1 4.8%-7.1%
The notional amounts shown above do not necessarily represent amounts
exchanged by the parties and, therefore, are not a direct measure of our
exposure from our use of derivatives. The amounts exchanged are calculated by
reference to the notional amounts and by other terms of the derivatives, such
as interest rates, exchange rates or other financial indices. The fair value
and notional amounts of foreign exchange contracts were immaterial at November
22, 2002 and February 22, 2002.
We recognized a loss of $7.7 million related to the settlement of certain
swap agreements in connection with the sale of leased assets during Q1 2003
(see Note 8).
Other comprehensive income (loss) related to derivatives consisted of the
following components:
Three Months Nine Months
Ended Ended
- - ---------------- ----------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
Derivative Adjustments, net of tax 2002 2001 2002 2001
---------------------------------- -------- -------- -------- --------
(in millions)
Cumulative effect of accounting change (SFAS No. 133), as of
February 24, 2001......................................... $ -- $ -- $ -- $(5.1)
Change in fair value of derivative instruments.............. 0.3 0.4 1.1 1.3
Adjustment due to swap settlement........................... -- -- 7.7 --
Settlement to interest expense.............................. (0.5) (2.6) (4.3) (6.0)
----- ----- ----- -----
Derivative adjustments, net of tax....................... $(0.2) $(2.2) $ 4.5 $(9.8)
===== ===== ===== =====
8
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories are
valued based upon the last-in, first-out ("LIFO") method or the average cost
method. The portion of inventories determined by the LIFO method aggregated
$82.1 million and $91.0 million at November 22, 2002 and February 22, 2002,
respectively.
Nov. 22, Feb. 22,
Inventories 2002 2002
----------- -------- --------
(in millions)
Finished goods. $ 71.1 $ 72.3
Work in process 27.7 31.1
Raw materials.. 71.2 82.2
------ ------
170.0 185.6
LIFO reserve... (36.1) (38.5)
------ ------
$133.9 $147.1
====== ======
7. GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 2, in Q1 2003, we adopted SFAS No. 142, which requires
companies to stop amortizing goodwill and certain intangible assets with an
indefinite useful life. Instead, SFAS No. 142 requires goodwill and intangible
assets with an indefinite useful life be reviewed for impairment annually. Upon
adoption, we used the expertise of an outside valuation specialist to help us
determine the fair values of our reporting units. We will perform the annual
impairment review for all of our reporting units during the fourth quarter of
each year, commencing in the fourth quarter of fiscal 2003 ("Q4 2003").
Under SFAS No. 142, goodwill impairment exists if the net book value of a
reporting unit exceeds its estimated fair value. Goodwill is assigned to and
the fair value is tested at the reporting unit level. We evaluated goodwill
using six reporting units--North America, Steelcase Design Partnership,
International, Financial Services, PolyVision and IDEO. The information for
PolyVision and IDEO is included in the "Other" category for operating segment
reporting purposes.
Upon adoption of SFAS No. 142 in Q1 2003, we recorded a one-time, non-cash
charge of $170.6 million to reduce the carrying value of goodwill in our
International reporting unit. The decline in the fair value of our
International reporting unit is primarily attributable to the decline in
revenue and profitability of the unit, which is the result of the industry-wide
decline in office furniture revenue. This decline has led to a significant
reduction in our three to five year projection of operating income for the
International unit. The fair value of the remaining reporting units exceeded
the net book value of the units, therefore, no impairment charge was recorded
relative to these units. The $170.6 million charge related to the international
reporting unit is non-operational in nature and is reflected as a cumulative
effect of an accounting change in the accompanying consolidated statement of
operations. In calculating the impairment charge, the fair value of the
International reporting unit was determined by using a combined discounted cash
flow and market value approach.
9
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
A summary of changes in net goodwill during the nine month period ended
November 22, 2002, by business segment is as follows (in millions):
Goodwill, net
------------------------------------------
Feb. 22, Nov. 22,
2002 Acquisitions Impairments 2002
-------- ------------ ----------- --------
North America............... $ 33.5 $7.8 $ -- $ 41.3
Steelcase Design Partnership 63.2 -- -- 63.2
International............... 271.9 -- (170.6) 101.3
Financial Services.......... -- -- -- --
Other....................... 63.0 -- -- 63.0
------ ---- ------- ------
Total.................... $431.6 $7.8 $(170.6) $268.8
====== ==== ======= ======
During Q3 2003, the Company consolidated a dealer into its financial
statements (see Note 1) that resulted in an increase of goodwill amounting to
$5.5 million. The remaining $2.3 million increase in goodwill is related to an
additional acquisition of a portion of the minority interest in another
consolidated dealer of the Company.
Fiscal 2002 results as reported do not reflect the provisions of SFAS No.
142. Had we adopted SFAS No. 142 on February 24, 2001, our reported net income
and basic and diluted net income per common share would have been the adjusted
amounts indicated below:
Three Months Ended November 23, 2001 Nine Months Ended November 23, 2001
(millions, except per share amounts) (millions, except per share amounts)
------------------------------------ ------------------------------------
Net income Net income Net income Net income
per basic per diluted per basic per diluted
Net income common share common share Net income common share common share
---------- ------------ ------------ ---------- ------------ ------------
As reported... $4.9 $0.03 $0.03 $35.3 $0.24 $0.24
Add: Goodwill
amortization 2.2 0.02 0.02 6.6 0.04 0.04
---- ----- ----- ----- ----- -----
As adjusted... $7.1 $0.05 $0.05 $41.9 $0.28 $0.28
==== ===== ===== ===== ===== =====
As of November 22, 2002 and February 22, 2002, our other intangible assets
and related accumulated amortization consisted of the following (in millions):
As of November 22, 2002 As of February 22, 2002
------------------------ ------------------------
Accumulated Accumulated
Other Intangible Assets Gross Amortization Net Gross Amortization Net
----------------------- ----- ------------ ----- ----- ------------ -----
Intangible assets subject to
amortization:
Proprietary technology....... $48.5 $ 3.6 $44.9 $48.5 $ -- $48.5
Trademarks................... 32.5 17.1 15.4 32.5 12.0 20.5
Non-compete agreements....... 1.9 0.9 1.0 1.9 0.4 1.5
Other........................ 7.0 2.2 4.8 7.1 1.2 5.9
----- ----- ----- ----- ----- -----
Total.................... $89.9 $23.8 $66.1 $90.0 $13.6 $76.4
----- ----- ----- ----- ----- -----
Intangible assets not subject to
amortization:
Trademarks................... $32.2 $ -- $32.2 $32.2 $ -- $32.2
===== ===== ===== ===== ===== =====
10
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
We recorded amortization expense of $2.4 million during Q3 2003 compared to
$2.4 million during Q3 2002, on a pro forma basis excluding the impact of
goodwill amortization. For the nine months ended November 22, 2002 we recorded
amortization expense of $10.2 million compared to $8.5 million on a pro forma
basis during the first nine months of fiscal 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
million; 2005: $7.2 million; 2006: $6.9 million; 2007: $6.9 million; and 2008:
$6.9 million. As acquisitions and dispositions occur in the future, these
amounts may vary.
8. SALE OF LEASED ASSETS
In Q3 2003, Steelcase Financial Services, Inc sold leased assets for $7.7
million. The proceeds from this sale were primarily used to retire debt
incurred to fund the leases. We recorded a pre-tax loss of $0.1 million on the
sale.
For the nine months ended November 22, 2002, total proceeds on the sale of
leased assets were $185.7 million. We recorded total pre-tax charges of $6.2
million related to the sales, $5.7 million of which was incurred in Q1 2003 and
included the settlement of interest rate swaps associated with the leased
assets sold, the recognition of a gain on the portfolio and payment of
transaction costs.
9. RESTRUCTURING CHARGES
During Q3 2003, we continued to reduce costs by restructuring certain areas
of our business. Q3 2003 charges, summarized in the following table, related to
workforce reductions and restructuring activities.
Fiscal 2003
----------------------
Restructuring Charges Q1 Q2 Q3 Total
--------------------- ---- ----- ----- -----
(in millions)
Cost of sales:
North America................ $2.7 $ 0.9 $ 5.6 $ 9.2
Steelcase Design Partnership. -- -- -- --
International................ 0.9 -- 0.1 1.0
Financial Services........... -- -- -- --
Other........................ -- 0.5 -- 0.5
---- ----- ----- -----
3.6 1.4 5.7 10.7
---- ----- ----- -----
Operating expenses:
North America................ 2.7 2.5 16.9 22.1
Steelcase Design Partnership. -- 0.4 0.3 0.7
International................ 1.5 -- 5.6 7.1
Financial Services........... -- -- 0.5 0.5
Other........................ -- 9.6 -- 9.6
---- ----- ----- -----
4.2 12.5 23.3 40.0
---- ----- ----- -----
Total.................... $7.8 $13.9 $29.0 $50.7
==== ===== ===== =====
11
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Below is a summary of the charges and payments during the first nine months
of 2003 that have been applied against the reserve as of November 22, 2002.
Business
Workforce Exit and
Restructuring Reserve Reductions Other Costs Total
--------------------- ---------- ----------- ------
(in millions)
Reserve balance as of February 22, 2002 $ 11.5 $ 10.2 $ 21.7
Additions........................... 38.0 12.7 50.7
Payments and write-offs............. (28.2) (16.6) (44.8)
------ ------ ------
Reserve balance as of November 22, 2002 $ 21.3 $ 6.3 $ 27.6
====== ====== ======
During fiscal 2002, our restructuring charges for workforce reductions
related to approximately 1,300 identified salary positions--all of which
occurred as of November 22, 2002. During the first nine months of fiscal 2003,
we reserved for additional salary workforce reductions of approximately 1,300,
of which approximately 1,000 had occurred as of November 22, 2002. The
remaining terminations are expected to take place in Q4 2003 and Q1 2004.
10. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
During Q3 2003, the Company amended the minimum interest coverage covenant
for its global multi-currency committed credit facility and two other
structured financing arrangements. The calculation is based on a 4-quarter
rolling average, and therefore, still includes interest expense on $161.7
million of debt retired shortly after related lease assets were sold during Q1
2003. The amended covenant allows for a lower ratio in Q3 2003 and gradually
steps back up to the original ratio over the following three quarters.
11. COMMON STOCK REPURCHASE PROGRAM
On June 17, 1998, our Board of Directors approved a common stock repurchase
program authorizing the repurchase of up to three million shares of Class A and
Class B common stock. On September 22, 1999 and September 20, 2000, the Board
authorized common stock repurchases of up to an additional three million and
five million shares, respectively. The total shares authorized for repurchase
is now 11 million shares.
During the first nine months of fiscal 2003, we made no repurchases of our
common shares. As of November 22, 2002, total repurchases of 7,175,407 shares
since the inception of our repurchase program amounted to $112.7 million;
3,824,593 shares remain available for repurchase under the program and we have
no outstanding share repurchase commitments.
12. OPERATING SEGMENTS
We operate on a worldwide basis within four reportable segments: North
America, Steelcase Design Partnership, International and Financial Services.
The North America segment includes the Company's Steelcase and Turnstone brands
and consolidated dealers in the U.S. and Canada. The Steelcase Design
Partnership includes Brayton, The Designtex Group, Details, Metro and Vecta.
The International segment includes the Company's Steelcase and Werndl brands
outside the U.S. and Canada. The Financial Services business segment includes
customer leasing and dealer financing services. Within the "Other" category are
the Company's
12
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
PolyVision, IDEO and Attwood subsidiaries, ventures and unallocated corporate
expenses. More than 85% of corporate expenses for shared services have been
charged to the operating segments as part of a general allocation.
Three Months Ended Nine Months Ended
---------------- ------------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
Operating Segment Income Statement Data 2002 2001 2002 2001
--------------------------------------- -------- -------- -------- --------
(in millions)
Revenue
North America........................ $372.5 $460.4 $1,141.2 $1,549.1
Steelcase Design Partnership......... 79.3 80.5 223.1 264.6
International........................ 123.9 144.4 348.8 463.3
Financial Services................... 6.5 19.1 23.7 61.1
Other................................ 64.5 27.0 212.3 91.0
------ ------ -------- --------
Consolidated revenue................. $646.7 $731.4 $1,949.1 $2,429.1
====== ====== ======== ========
Operating income (loss)
North America........................ $(28.1) $ 8.8 $ (37.2) $ 61.8
Steelcase Design Partnership......... 7.2 6.8 15.9 25.7
International........................ (6.7) (0.2) (21.4) (4.4)
Financial Services................... (4.0) 2.2 0.9 8.8
Other................................ (3.5) (10.9) (18.6) (24.2)
------ ------ -------- --------
Consolidated operating income (loss). $(35.1) $ 6.7 $ (60.4) $ 67.7
====== ====== ======== ========
Nov. 22, Feb. 22,
Operating Segment Balance Sheet Data 2002 2002
------------------------------------ -------- --------
(in millions)
Total assets
North America.................. $1,122.0 $1,194.4
Steelcase Design Partnership.... 165.8 173.1
International.................. 479.7 668.9
Financial Services............. 312.5 514.9
Other.......................... 397.2 416.2
-------- --------
Consolidated total assets...... $2,477.2 $2,967.5
======== ========
13
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Effective for the quarter ended November 22, 2002, we changed the
classification of our reportable segments. Restated quarterly data is provided
below for our new or revised segments, which include North America, Steelcase
Design Partnership and the Other category. There were no changes for the
International or Financial Services segments.
Fiscal 2003 Fiscal 2002 Fiscal 2001
---------------------- ------------------------------ ------------------------------
North America Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
- ------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Revenue.................... $372.5 $377.7 $391.0 $380.9 $460.4 $503.3 $585.4 $634.4 $686.1 $675.0 $655.9
Cost of Sales.............. 288.3 285.3 293.9 284.8 337.2 364.5 422.1 459.9 482.5 473.0 448.2
Restructuring costs........ 5.6 0.9 2.7 10.1 6.3 2.6 -- 9.5 -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross Margin............ 78.6 91.5 94.4 86.0 116.9 136.2 163.3 165.0 203.6 202.0 207.7
Operating expenses......... 89.8 91.8 98.0 94.2 107.8 113.3 124.8 114.7 142.0 134.8 130.1
Restructuring costs........ 16.9 2.5 2.7 2.0 0.3 8.4 -- 14.4 -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss).. $(28.1) $ (2.8) $ (6.3) $(10.2) $ 8.8 $ 14.5 $ 38.5 $ 35.9 $ 61.6 $ 67.2 $ 77.6
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Fiscal 2003 Fiscal 2002 Fiscal 2001
---------------------- ------------------------------ ------------------------------
Steelcase Design Partnership Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
- ---------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Revenue.................... $ 79.3 $ 75.1 $ 68.7 $ 65.9 $ 80.5 $ 87.1 $ 97.0 $111.0 $114.1 $109.1 $108.0
Cost of Sales.............. 49.4 45.5 41.7 41.0 48.3 52.8 57.9 78.4 71.6 66.1 66.1
Restructuring costs........ -- -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross Margin............ 29.9 29.6 27.0 24.9 32.2 34.3 39.1 32.6 42.5 43.0 41.9
Operating expenses......... 22.4 24.1 23.4 25.7 25.4 26.0 28.5 39.7 29.6 29.4 27.2
Restructuring costs........ 0.3 0.4 -- 1.2 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss).. $ 7.2 $ 5.1 $ 3.6 $ (2.0) $ 6.8 $ 8.3 $ 10.6 $ (7.1) $ 12.9 $ 13.6 $ 14.7
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Fiscal 2003 Fiscal 2002 Fiscal 2001
---------------------- ------------------------------ ------------------------------
Other Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Revenue.................... $ 64.5 $ 79.5 $ 68.3 $ 61.5 $ 27.0 $ 30.3 $ 33.7 $ 35.0 $ 32.4 $ 38.2 $ 39.2
Cost of Sales.............. 40.5 48.4 44.2 39.9 17.5 18.9 21.2 24.0 19.1 24.4 26.2
Restructuring costs........ -- 0.5 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross Margin............ 24.0 30.6 24.1 21.6 9.5 11.4 12.5 11.0 13.3 13.8 13.0
Operating expenses......... 27.5 29.9 30.3 28.3 19.6 18.7 18.5 16.8 16.0 17.4 17.4
Restructuring costs........ -- 9.6 -- 0.1 0.8 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss).. $ (3.5) $ (8.9) $ (6.2) $ (6.8) $(10.9) $ (7.3) $ (6.0) $ (5.8) $ (2.7) $ (3.6) $ (4.4)
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
14
Item 2. Management's Discussion and Analysis
The following review of our financial condition and results of operations
should be read in conjunction with our fiscal year 2002 Form 10-K.
Current Business Overview
Office furniture demand continues to track well below historical levels
across our industry, which has experienced nearly a 35% decline in shipments
over the past two years in the U.S. alone and approximately a 13% decline in
shipments for the three months ended October 2002 versus the same three months
in 2001, as reported by the Business and Institutional Manufacturer's
Association International. Reduced business capital spending has been the
primary driver behind our industry recession and weak demand. In response to
lower demand levels, we have completed or are in process of implementing
several operational, organizational and financial restructuring activities
aimed at reducing our breakeven point, improving our cash flow, strengthening
our balance sheet and stimulating top line growth. Some of these actions
include:
. reducing our global workforce by 36% since December 2000
. implementing lean manufacturing in our operations
. selling leased assets to generate cash and using the proceeds to further
reduce debt
. cutting capital expenditures by focusing on shorter payback projects
. developing a strategic procurement program
. outsourcing non-strategic manufacturing operations and other activities
. consolidating manufacturing operations to reduce excess capacity
. selling non-strategic and redundant assets
. closing non-strategic operations not meeting financial return targets
These actions will help position Steelcase to better serve our customers and
to compete aggressively to win new business while positioning our company to
return to profitability.
Financial Summary
Results of Operations
Three Months Ended Nine Months Ended
---------------------------- ---------------------------------
Nov. 22, 2002 Nov. 23, 2001 Nov. 22, 2002 Nov. 23, 2001
------------- ------------ --------------- ---------------
(in millions, except data as a percentage)
Revenue................................................. $646.7 100.0% $731.4 100.0% $1,949.1 100.0% $2,429.1 100.0%
Cost of sales........................................... 465.0 71.9 503.6 68.9 1,384.7 71.0 1,663.3 68.5
Restructuring costs..................................... 5.7 0.9 6.3 0.8 10.7 0.6 8.9 0.3
------ ----- ------ ----- -------- ----- -------- -----
Gross profit......................................... 176.0 27.2 221.5 30.3 553.7 28.4 756.9 31.2
Operating expenses...................................... 187.8 29.0 213.7 29.2 574.1 29.5 679.7 28.0
Restructuring costs..................................... 23.3 3.6 1.1 0.2 40.0 2.0 9.5 0.4
------ ----- ------ ----- -------- ----- -------- -----
Operating income (loss).............................. (35.1) (5.4) 6.7 0.9 (60.4) (3.1) 67.7 2.8
Non-operating items, net................................ (12.0) (1.9) 0.7 0.1 (25.4) (1.3) (11.5) (0.5)
------ ----- ------ ----- -------- ----- -------- -----
Income (loss) before taxes.............................. (47.1) (7.3) 7.4 1.0 (85.8) (4.4) 56.2 2.3
Income tax provision (benefit).......................... (17.7) (2.7) 2.7 0.3 (32.2) (1.7) 20.8 0.8
Equity in net income (loss) of joint ventures and dealer
transitions............................................ (1.7) (0.2) 0.2 -- (0.2) -- (0.1) --
Cumulative effect of accounting change.................. -- -- -- -- (170.6) (8.7) -- --
------ ----- ------ ----- -------- ----- -------- -----
Net income (loss)....................................... $(31.1) (4.8)% $ 4.9 0.7% $ (224.4) (11.4)% $ 35.3 1.5%
====== ===== ====== ===== ======== ===== ======== =====
Third Quarter and Fiscal Year-to-Date Financial Review
Revenue in Q3 2003 was down 11.6% compared to the same period last year, and
down 1.9% from Q2 2003. For the first nine months of fiscal 2003, revenue was
down 19.8% compared with the same period last
15
year. In addition to the decrease in demand affecting revenues, over-capacity
in the industry continues to increase pricing pressure and competitive
discounting. Acquisitions completed in the last 12 months contributed revenue
of $36.3 million in the quarter and $121.5 for the first nine months of fiscal
2003. Revenue also included $18.5 million related to a dealer consolidation
that occurred in Q3 2003.
We reported a net loss of $31.1 million or $0.21 per share for the quarter
compared to net income of $4.9 million or $0.03 per share for the same period
last year. Net loss for Q2 2003 was $7.3 million or $0.05 per share. Excluding
non-recurring charges, the net loss was $11.5 million compared with net income
of $7.2 in Q3 2002. Fiscal year-to-date net loss was $224.4 million or $1.52
per share compared with net income of $35.3 million or $0.24 per share for the
same period of fiscal 2002. Excluding non-recurring charges and the cumulative
effect of accounting change, fiscal year-to-date net loss was $18.0 million
compared to net income of $48.9 million for the same period of the prior year.
Non-recurring charges totaled $31.3 million pre-tax or $19.6 million
after-tax in Q3 2003 and were substantially higher than our outlook at the end
of Q2 2003. Accelerated and additional restructuring activities were the
primary drivers behind the higher non-recurring charges. These restructuring
charges included $22.5 million related to previously announced North America
salaried workforce reductions of 500-800 positions. We were able to implement,
in the third quarter alone, the majority of the workforce reductions expected
to occur in the third and fourth quarters. We also incurred additional
restructuring charges of $5.7 million related to actions we expect will improve
the competitiveness of our International segment. In addition, we incurred a
net non-operating pre-tax loss of $2.3 million on the sale of real estate and
the write-down of property, plant and equipment relating to the relocation of
our Tustin, California manufacturing operation to a smaller facility in City of
Industry, California. Further discussion of non-recurring charges will take
place on a segment by segment basis below.
During Q3 2003, we completed a transaction to help transition a dealer to
new ownership. Because we own 100% of one class of stock, and control the Board
of Directors, we consolidated the dealer into our financial statements, which
added $18.5 million of revenue, $6.8 million of gross margin and $1.8 million
of operating income to our third quarter results. However, since earnings do
not accrue to our class of stock, we eliminated 100% of the operating profits
in the Equity in Net Income of Joint Ventures and Dealer Transitions line. As a
result, there was no effect on net income. Our net investment in this dealer is
$13.5 million, consisting of term debt and equity. Total assets of the dealer
included in our financial statements are $20.7 million, with the majority of
assets relating to working capital. It is not our intent to own dealers;
however, we sometimes become equity partners for dealers working through an
ownership change.
Beginning in fiscal 2003, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which requires that companies discontinue amortizing
goodwill and test goodwill annually to determine whether it is impaired. This
accounting change resulted in a charge of $170.6 million, or $1.16 per share,
for goodwill impairment in our International reporting unit. There was no cash
effect of this charge and there was no impact on income tax expense, so the
pretax and after tax effect was the same. Net income benefited by $2.2 million
and $6.6 million in Q3 2003 and the first nine months of fiscal 2003,
respectively, as a result of this accounting change.
Interest Expense; Other Income (Expense), Net; and Income Taxes
Three Months Ended Nine Months Ended
---------------- ----------------
Interest Expense; Other Income Nov. 22, Nov. 23, Nov. 22, Nov. 23,
(Expense), Net; and Income Taxes 2002 2001 2002 2001
-------------------------------- -------- -------- -------- --------
(in millions)
Interest expense..................................... $ 5.3 $ 3.9 $15.5 $13.9
----- ----- ----- -----
Other income (expense), net:
Interest income................................... $(0.6) $ 3.3 $ 2.8 $ 9.0
Loss on dealer transitions........................ (6.2) -- (7.6) (8.6)
Gain on sale of investments....................... 0.2 -- 1.6 --
Loss on sales of leased assets.................... -- -- (5.7) --
Gain (loss) on disposal of property and equipment. (0.7) 4.2 (1.2) 4.1
Miscellaneous, net................................ 0.6 (2.9) 0.2 (2.1)
----- ----- ----- -----
$(6.7) $ 4.6 $(9.9) $ 2.4
----- ----- ----- -----
Effective income tax rate............................ 37.5% 37.0% 37.5% 37.0%
16
Interest expense relates primarily to borrowings for corporate requirements.
Interest expense related to the Financial Services segment is included in
operating expense. Interest expense has been higher in fiscal 2003 due to an
increase in the average debt balance used for corporate requirements, as well
as an increase in the average interest rate on borrowings. The increase in the
average interest rates resulted from the conversion of a major portion of the
borrowings from commercial paper at lower interest rates to higher interest
rates under the senior note borrowings.
There has been a significant decline in interest income during the first
nine months of fiscal 2003 versus the same period in the prior year. This
change is due to approximately a 45% decrease in our average investments
outstanding due to our focus on reducing debt balances, as well as nearly a 200
basis point drop in our average rates of interest earned.
We maintain loss reserves related to debt and equity investments in dealers
in ownership transition. We carefully monitor the financial condition of these
dealers. These dealers have taken actions to reduce costs as they manage
through the downturn. There are some dealers in ownership transition that are
facing difficult financial challenges and the Company has term loans and equity
investments with these dealers. We believe our reserves adequately reflect our
credit risks. However, if these dealers experience a prolonged or deepening
reduction in revenues, the likelihood of losses would increase and we would
provide additional reserves, as necessary.
In Q3 2003, we incurred $6.2 million in charges for additional reserves
related to our debt and equity investments in dealer transitions. These charges
related primarily to certain International dealers that have been significantly
affected by the office furniture recession in their markets. In the first
quarter of fiscal 2002 ("Q1 2002"), we recognized losses of $8.6 million on
dealer transitions primarily related to loans to one dealer in North America.
This dealer's operating results deteriorated due to a significant decline in
business activity in their local market and a variety of performance issues.
The $1.6 million year-to-date gain on sale of investments related to a
non-recurring gain on the sale of a portion of our minority equity ownership in
Modernform (a publicly held company in Thailand) realized in Q3 2003 and Q2
2003.
In Q1 2003, we recorded a non-recurring loss of $5.7 million on the sale of
leased assets in a transaction that included a number of components. These
leased assets sold for $170.2 million, $4.4 million more than book value. We
incurred a loss of $7.7 million on interest rate swaps that were matched
against the portfolio and were settled during the transaction. Transaction
costs totaled $2.4 million. We do not retain any contingent liabilities, credit
risk, or risk related to lease residual values. However, we do have the right
to participate in a portion of gains on lease residual values, if any, as the
leases mature.
The loss on disposal of property and equipment in Q3 2003 included a $2.3
million loss on the relocation of our Tustin, California facility. The loss
consists of a write-off of assets of $9.5 million that was offset by a gain of
$7.2 million on the sale of a portion of the Tustin real estate.
Outlook
The economy has not seen any meaningful improvement in business capital
spending, which is key to our industry's recovery. Within the industry, it is
typical to see a seasonal reduction in fourth quarter shipments. For example,
although the amount varies from year to year, North America's fourth quarter
shipments historically track approximately 5% below third quarter shipments.
Recent order and quote activity in North America has been weaker than this
seasonality alone would explain. This could be an indication that overall
demand is continuing to contract, or it could simply reflect normal volatility
in order patterns. In some International markets, we have experienced some
strengthening in orders in recent weeks.
As the fiscal year ends, we believe our quarterly breakeven point will be
less than $625 million. In fiscal 2004, we believe we are well positioned for a
return to profitability as the Company more fully realizes the benefits of the
operational, organizational and financial restructuring actions taken during
these last two years.
17
Business Segment Review
North America
Three Months Ended Nine Months Ended
----------------- -------------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
Income Statement Data--North America 2002 2001 2002 2001
------------------------------------ -------- -------- -------- --------
(in millions, except data as a percentage)
Revenue............................................... $372.5 $460.4 $1,141.2 $1,549.1
Gross profit percentage............................... 21.1% 25.4% 23.2% 26.9%
Gross profit percentage, excluding non-recurring items 22.6% 26.8% 24.0% 27.5%
Operating expenses.................................... $106.7 $108.1 $ 301.7 $ 354.6
Operating expenses, excluding non-recurring items..... $ 89.8 $107.8 $ 279.6 $ 345.9
Operating expense percentage.......................... 28.6% 23.5% 26.4% 22.9%
Operating expense percentage, excluding non-recurring
items............................................... 24.1% 23.4% 24.5% 22.3%
Operating income (loss)............................... $(28.1) $ 8.8 $ (37.2) $ 61.8
Operating income (loss), excluding non-recurring items $ (5.6) $ 15.4 $ (5.9) $ 79.4
Operating income (loss) percentage.................... (7.5)% 1.9% (3.3)% 4.0%
Operating income (loss) percentage, excluding non-
recurring items..................................... (1.5)% 3.3% (0.5)% 5.1%
Sales in Q3 2003 decreased to their lowest level since the industry
recession started. Excluding the $18.5 million effect of the newly consolidated
dealer (discussed earlier), revenues were $354.0 million for Q3 2003, or a
23.1% decline compared with Q3 2002 and a 6.3% decline compared with Q2 2003.
Year-to-date, excluding the effect of consolidating the dealer, revenues were
$1,122.7 million, or a 27.5% decline compared with the same period in fiscal
2002.
The decline in gross margins is primarily due to four factors:
. Underabsorption of fixed overhead related to excess plant capacity.
. Inefficiencies resulting from operating individual plants at less than
half their capacity.
. Restructuring charges (further discussion follows).
. An increase in workers' compensation costs.
As volume declined, North America took several steps to reduce cost of goods
sold. North America reduced their hourly and salaried workforce, continued to
implement lean manufacturing, and captured purchasing savings from new
strategic sourcing initiatives. However, the benefits from these actions could
not fully offset the underabsorption of fixed manufacturing overhead. For
example, depreciation, utilities, maintenance and other fixed costs of
operating established plants do not vary directly with revenue, and cannot be
easily reduced. In addition, when plants operate far below their capacity,
direct and indirect labor activities such as material handling, inventory
management and general supervision may increase as a percentage of sales. North
America is taking steps to further consolidate operations to recapture the lost
efficiency. For example, they have announced the consolidation of two Grand
Rapids, Michigan plants which is expected to be completed in fiscal 2004.
Restructuring charges recorded during the quarter totaled $22.5 million,
$5.6 million included in cost of goods sold and $16.9 million included in
operating expenses. Year-to-date, North America has recorded pre-tax
restructuring charges of $31.3 million. The desire to not put their employees
through a long period of uncertainty and the changes in North America senior
leadership served as a catalyst for us to implement in Q3 2003 nearly all the
reductions that had been forecast in the last half of fiscal 2003. Of the
500-800 salaried workforce reductions expected to occur in the last half of
fiscal 2003, more than 600 of these reductions occurred in the third quarter.
During the fourth quarter, North America anticipates completing an additional
reduction of
18
approximately 200 positions and has announced they are moving ahead with
approximately 375 additional hourly layoffs. Since December 2000, North America
has reduced its workforce by more than 40% through layoffs, terminations with
severance, retirements and voluntary resignations.
In Q3 2003, North America gross margins were adversely affected by workers'
compensation expense that was approximately $5.0 million higher than normal.
Approximately 50% of this charge was a catch-up from earlier estimates based on
recent claim activity. North America is taking steps to manage these costs, but
anticipates elevated workers' compensation costs to continue into next year due
to the current level of hourly positions on layoff.
Operating expenses of $89.8 million, excluding non-recurring charges, were
down significantly from Q3 2002 and Q2 2003 due to reductions in force,
restructuring activities and reductions in external spending.
Steelcase Design Partnership
Three Months Ended Nine Months Ended
-------------------- -------------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
Income Statement Data--Steelcase Design Partnership 2002 2001 2002 2001
--------------------------------------------------- -------- -------- -------- --------
(in millions, except data as a percentage)
Revenue.................................................... $79.3 $ 80.5 $223.1 $264.6
Gross profit percentage.................................... 37.7% 40.0% 38.8% 39.9%
Gross profit percentage, excluding non-recurring items..... 37.7% 40.0% 38.8% 39.9%
Operating expenses......................................... $22.7 $ 25.4 $ 70.6 $ 79.9
Operating expenses, excluding non-recurring items.......... $22.4 $ 25.4 $ 69.9 $ 79.9
Operating expense percentage............................... 28.6% 31.6% 31.6% 30.2%
Operating expense percentage, excluding non-recurring items 28.2% 31.6% 31.3% 30.2%
Operating income........................................... $ 7.2 $ 6.8 $ 15.9 $ 25.7
Operating income, excluding non recurring items............ $ 7.5 $ 6.8 $ 16.6 $ 25.7
Operating income percentage................................ 9.1% 8.4% 7.1% 9.7%
Operating income percentage, excluding non-recurring items. 9.5% 8.4% 7.4% 9.7%
The Steelcase Design Partnership ("SDP") includes five separate companies:
Brayton, The Designtex Group, Details, Metro and Vecta. These companies 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 distribution of surface materials and ergonomic
tools for the workplace.
SDP delivered its third sequential quarter of sales growth during Q3 2003 (a
5.6% increase over Q2 2003 and a 15.4% increase over Q1 2003). Compared with
the prior year, revenue was down 1.5% and 15.7% for the quarter and nine month
period, respectively. SDP sales are generally less dependent on large project
orders than the North America segment.
SDP continues to generate relatively strong gross margins. SDP earns higher
margins because it offers a differentiated, design-oriented product portfolio,
and can focus on profitable niche applications and customer segments.
SDP has seen less deterioration in gross margins during the industry
recession for two main reasons. First, there has been a less severe decline in
revenues because these customer segments have been less affected by declines in
business capital spending. Second, SDP operations generally have higher
variable costs and lower fixed costs than our other manufacturing segments, so
the cost structure adjusts more quickly to changes in demand.
A cumulative freight reclassification totaling approximately $3 million was
recorded at one of the SDP companies during Q3 2003. This reclassification was
between revenue and cost of sales and had no impact on gross profit dollars;
however, it negatively impacted the gross profit percentage in the quarter by
1.5 percentage points.
19
Operating expenses for Q3 2003 were down significantly from the prior year
both in total and as a percentage of sales. SDP operating expenses are higher
as a percent of sales than our other segments because of the added focus on
product development, and the higher cost of selling and servicing these markets.
Operating income in the quarter was higher than the prior year, both in
total and as a percentage of sales. Operating income was also relatively higher
as a percentage of total assets, which were $165.8 million, including goodwill
of 63.2 million, at the end of the quarter.
International
Three Months Ended Nine Months Ended
----------------- -----------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
Income Statement Data--International 2002 2001 2002 2001
------------------------------------ -------- -------- -------- --------
(in millions, except data as a percentage)
Revenue.................................................... $123.9 $144.4 $348.8 $463.3
Gross profit percentage.................................... 29.9% 30.3% 28.8% 30.3%
Gross profit percentage, excluding non-recurring items..... 30.0% 30.3% 29.0% 30.3%
Operating expenses......................................... $ 43.8 $ 44.0 $121.7 $144.8
Operating expenses, excluding non-recurring items.......... $ 38.2 $ 44.0 $114.6 $144.8
Operating expense percentage............................... 35.4% 30.5% 34.9% 31.3%
Operating expense percentage, excluding non-recurring items 30.8% 30.5% 32.9% 31.3%
Operating loss............................................. $ (6.7) $ (0.2) $(21.4) $ (4.4)
Operating loss, excluding non-recurring items.............. $ (1.0) $ (0.2) $(13.3) $ (4.4)
Operating loss percentage.................................. (5.4)% (0.1)% (6.1)% (0.9)%
Operating loss percentage, excluding non-recurring items... (0.8)% (0.1)% (3.8)% (0.9)%
Our International segment delivered its second sequential quarter of sales
growth during Q3 2003 (a 5.6% increase over Q2 2003 and a 15.1% increase over
Q1 2003). A portion of the quarterly increase was due to a gradually
strengthening Euro versus the U.S. Dollar. Revenues continued to track well
below prior year levels for both the quarter and year-to-date.
Gross margins improved from Q2 2003 margins of 29.2% as a result of improved
overhead absorption due to the increased revenue and the realized benefits of
restructuring activities implemented in prior quarters. Gross margins were
slightly lower than the prior year, reflecting the challenge of underabsorption
associated with lower volume and a continued competitive pricing environment.
Operating expenses included restructuring charges of $5.6 million and an
additional $1.2 million in charges related to trade receivable reserves.
Restructuring charges included $2.8 million in severance charges for workforce
reductions. Additionally, restructuring charges included $2.3 million for the
acceleration of future lease costs related to a facility that is no longer
fully utilized. Operating expenses in the quarter, excluding non-recurring
items, decreased 13% versus one year ago reflecting the impact of restructuring
activities completed and a reduction in goodwill amortization due to the
adoption of SFAS No. 142.
Last quarter, we indicated that economic conditions in certain countries
were putting pressure on some of our dealers. This quarter, International saw
the situation deteriorate further and took charges to reflect the increased
risk associated with receivables for certain dealers. They continue to
carefully monitor the financial condition of their dealers for changes in
credit quality. They believe their reserves adequately reflect these credit
risks. However, if these dealers experience a prolonged or deepening reduction
in revenues, the likelihood of losses would increase and additional reserves
would be required.
As we enter the next fiscal year, we believe International is positioned to
be profitable with a slight increase in volume. International has seen some
improvement in recent order rates, but they remain concerned regarding
20
economic weakness in Germany and other key markets, as well as the economic
uncertainty relating to general instability in the Middle East.
Additionally, we continue to evaluate opportunities to improve the
competiveness of the International business, including facility consolidation
and other market-specific restructuring activities. As we decide to take
additional strategic actions, we may incur additional restructuring charges.
Financial Services
Three Months Ended Nine Months Ended
----------------- -----------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
Income Statement Data--Financial Services 2002 2001 2002 2001
----------------------------------------- -------- -------- -------- --------
(in millions)
Revenue............................... $ 6.5 $19.1 $23.7 $61.1
Net financing margin (loss)........... (1.5) 4.0 7.1 13.9
General and administrative expenses... 2.0 1.8 5.7 5.1
Restructuring costs................... 0.5 -- 0.5 --
Operating income (loss)............... (4.0) 2.2 0.9 8.8
Revenue decreased significantly compared to prior year primarily as a result
of these events:
. The sale of $185 million of leased assets during fiscal 2003 ($165 million
were sold at the end of the first quarter). The leases sold would have
generated quarterly revenue of $7 million and approximately $2 million of
pre-tax operating profit.
. During fiscal 2003, Financial Services converted some operating leases to
direct financing leases to facilitate the sale of leases. The conversion
of these leases effectively reversed $11 million of operating lease
revenue in Q1 2003 and $3 million of operating lease revenue in Q3 2003.
. The overall decrease in sales in the North America segment has resulted in
lower lease fundings in fiscal 2003 compared to fiscal 2002.
Net financing margin for fiscal 2003 is not comparable to fiscal 2002
because of an increase in credit reserves in Q3 2003 as well as the leased
asset sales and the conversion of the operating leases (as discussed above).
Financial Services monitors and regularly updates loss reserves in
accordance with SAB 102 based on the credit quality of the lease portfolio, and
their historical experience. In recent quarters, because of the economic
downturn, they have seen a decline in overall credit quality of their existing
portfolio and have increased reserves to reflect the increased risk. During Q3
2003, credit provisions of $6.5 million were significantly higher than recent
quarters. Approximately $5.0 million of the provisions recorded were due to the
deterioration of the credit quality of two of Financial Services largest lease
customers. One of the customers defaulted on their lease payments during the
quarter and Financial Services began procedures to accelerate payments in
connection with a guarantee from the customer's parent company. The other
significant customer is current on their lease payments, but was downgraded by
the credit agencies during the quarter. Accordingly, Financial Services
increased loss reserves to reflect the credit decline of this customer.
The top five leasing customers have an aggregate net receivable balance of
$59 million. The largest of these customers represents approximately 1% of
Steelcase Inc. total consolidated assets. As Financial Services has reduced the
size of the lease portfolio, each of these individual leases represents a
larger percentage of Financial Services remaining lease portfolio. As noted
above, certain of these larger customers experienced defaults or declines in
credit quality, and Financial Services increased their reserves in response. If
Financial Services was to experience further defaults related to these larger
leases, it is likely, because of their relative size, significant increases in
reserves would be necessary.
Financial Services continues to believe by offering lease funding, they
broaden their relationship with a segment of their customers and provide them
with an attractive alternative to ownership. However, Financial Services is
exploring alternative funding structures for their leasing business. They
intend to finance their leasing business through outside funding. This new
model is expected to be put in place in Q1 2004. They believe this
21
will reduce their overall credit and residual risk related to their leasing
business. In Q4 2003, Financial Services anticipates selling additional leased
assets, with the proceeds being used to pay down corporate borrowings or build
cash balances.
Other
Three Months Ended Nine Months Ended
----------------- -----------------
Nov. 22, Nov. 23, Nov. 22, Nov. 23,
Income Statement Data--Other 2002 2001 2002 2001
---------------------------- -------- -------- -------- --------
(in millions, except data as a percentage)
Revenue................................................. $64.5 $ 27.0 $212.3 $ 91.0
Gross profit percentage................................. 37.2% 35.2% 37.1% 36.7%
Gross profit percentage, excluding non-recurring items.. 37.2% 35.2% 37.3% 36.7%
Operating expenses...................................... $27.5 $ 20.4 $ 97.3 $ 57.6
Operating expenses, excluding non-recurring items....... $27.5 $ 19.6 $ 87.7 $ 56.8
Operating expense percentage............................ 42.6% 75.6% 45.8% 63.3%
Operating expense percentage, excluding non-recurring...
items.................................................. 42.6% 72.6% 41.3% 62.4%
Operating loss.......................................... $(3.5) $(10.9) $(18.6) $(24.2)
Operating loss, excluding non-recurring items........... $(3.5) $(10.1) $ (8.5) $(23.4)
Operating loss percentage............................... (5.4)% (40.4)% (8.8)% (26.6)%
Operating loss percentage, excluding non-recurring items (5.4)% (37.4)% (4.0)% (25.7)%
The Other category includes our PolyVision, IDEO and Attwood subsidiaries,
ventures and unallocated corporate expenses. This category will typically
reflect an operating loss because unallocated corporate expenses and venture
losses exceed the income of the subsidiary businesses.
Revenue for Q3 2003 includes the acquisition of PolyVision (completed at the
end of Q3 2002). Excluding PolyVision, revenues were relatively flat quarter on
quarter and year on year.
Year-to-date, non-recurring charges included in operating expenses totaled
$9.6 million and primarily related to business exit costs.
Liquidity and Capital Resources
Excluding acquisitions, our cash and operating capital requirements have
been primarily satisfied through cash generated from operating activities. As
of November 22, 2002, our financial position included cash, cash equivalents
and short-term investments of $52.1 million. 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.
Total consolidated debt at November 22, 2002 was $361.4 million, a decrease
of $68.4 million since the end of Q2 2003. $245.6 million of the total debt is
related to our Financial Services segment, which operates using a six-to-one
debt-to-equity ratio. The $115.8 million of debt related to the other business
segments represents an aggregated debt to total capitalization ratio of 8.7%
for those segments. $328.0 million of our total consolidated debt is structured
as term debt. We also hold $319.5 million of interest bearing assets, of which
$286.5 million is held by our Financial Services segment.
The aggregate amounts of maturities of consolidated debt as of November 22,
2002, including that due within one year and classified as current are expected
to be:
Year ending (in millions)
----------- -------------
2004....... $ 57.8
2005....... 25.4
2006....... 17.3
2007....... 258.0
2008....... 2.8
After 2008. 0.1
------
Total... $361.4
======
22
Of the $57.8 million due in 2004, $33.9 million relates to revolving
short-term borrowings and $23.9 million relates to current maturities of
long-term debt due within one year. The $23.9 million of current maturities of
long-term debt includes $16.3 million related to our Financial Services segment
and is expected to be serviced by the repayment of related lease assets and
amounts due from dealers. Our long-term debt rating is BBB+ from Standard &
Poor's and Baa3 from Moody's Investor Services.
Our total credit facilities as of November 22, 2002 were:
(in millions)
Credit Lines -------------
Global................... $400.0
Other lines.............. 122.6
------
Total credit lines available 522.6
Less: borrowings outstanding (33.4)
------
Available credit............ $489.2
======
Our facilities include a $400 million global multi-currency committed credit
facility, which supports a multi-currency commercial paper program. Our
commercial paper program is rated A-2 from Standard & Poor's and Prime-3 from
Moody's Investor Services. Our access to commercial paper markets in the United
States and Europe may be limited because of our short-term debt ratings.
However, our global multi-currency committed credit facility is available for
use in the event commercial paper is unavailable. As of November 22, 2002, we
had $10 million in borrowings under the global multi-currency committed credit
facility and no borrowings under the commercial paper program.
The global multi-currency committed credit facility requires us to satisfy
certain financial and other covenants including a minimum net worth covenant, a
maximum debt ratio covenant and a minimum interest coverage ratio covenant. We
are in compliance with all three covenants as of the end of Q3 2003 and expect
to remain in compliance going forward.
During Q3 2003, the Company amended the minimum interest coverage covenant
for the global multi-currency committed credit facility and two other
structured financing arrangements. The calculation is based on a 4-quarter
rolling average, and therefore, still includes interest expense on $161.7
million of debt retired shortly after related lease assets were sold during Q1
2003. The amended covenant allows for a lower ratio in Q3 2003 and gradually
steps back up to the original ratio over the following three quarters.
Of the $122.6 million of short-term facilities, $23.4 million was
outstanding and $99.2 million was available at the end of Q3 2003.
The company has commitments related to operating lease agreements. Minimum
payments for operating leases having initial or remaining non-cancelable terms
in excess of one year are expected to be:
Year ending (in millions)
----------- -------------
2004............. 40.2
2005............. 37.1
2006............. 29.3
2007............. 19.0
2008............. 19.0
After 2008....... 80.1
-----
Total..... 224.7
=====
We believe we will be able to meet all future liquidity needs through
generated cash and existing borrowing arrangements.
23
Cash Flow
Operating activities
Nine Months Ended
-----------------
Nov. 22, Nov. 23,
Cash Flow Data--Operating Activities 2002 2001
------------------------------------ -------- --------
(in millions)
Net income (loss)............................ $(224.4) $ 35.3
Depreciation and amortization................ 115.9 128.5
Cumulative effect of accounting change....... 170.6 --
Loss on sales of leased assets............... 6.2 --
Restructuring charges, net................... 5.9 6.2
Changes in operating assets and liabilities.. (12.0) 57.4
Other, net................................... (6.6) 23.2
------- ------
Net cash provided by operating activities.... $ 55.6 $250.6
======= ======
During Q3 2003, net cash generated by operations increased approximately $75
million compared to Q2 2003 primarily due to a decrease in accounts receivable.
The decrease from Q2 2003 was due to lower shipments in November compared to
August.
The cash provided by operating activities for the first nine months of
fiscal 2003 declined compared to the same period of fiscal 2002 primarily
because of the decline in net income.
Investing activities
Nine Months Ended
----------------
Nov. 22, Nov. 23,
Cash Flow Data--Investing Activities 2002 2001
------------------------------------ -------- --------
(in millions)
Capital expenditures......................................... $(63.8) $ (91.4)
Proceeds from the sales of leased assets..................... 185.7 --
Proceeds from the disposal of fixed assets................... 23.2 16.4
Net decrease in notes receivable and leased assets........... 20.4 39.1
Acquisitions, net of cash acquired, and business divestitures (3.1) (203.9)
Other, net................................................... 17.4 (2.6)
------ -------
Net cash provided by (used in) investing activities.......... $179.8 $(242.4)
====== =======
Proceeds from the sales of leased assets were used to pay down Financial
Services segment borrowings. We view the sale of leased assets as an
alternative funding option available to us when we wish to reduce the amount of
capital used by the Financial Services segment.
We continued to be very disciplined with capital expenditures and expect
2003 capital expenditures to be less than $100 million, our lowest level in
over five years and significantly less than depreciation expense. Capital
spending reflects an increased emphasis on projects that deliver short-payback
cost savings or support critical strategic initiatives such as product
development, while meeting key EVA milestones.
We generated $23 million in cash during Q3 2003 through the sale of
non-strategic real estate and other assets. We expect to generate cash of
approximately $31 million in Q4 2003 from the sale of the remaining portions of
the Tustin, California facility and related property. During Q3 2003 and Q2
2003, we sold a portion of our minority equity ownership in Modernform, which
provided cash of $10 million. This is reflected in the "Other, net" component
of the investing activities.
24
Financing activities
Nine Months Ended
----------------
Nov. 22, Nov. 23,
Cash Flow Data--Financing Activities 2002 2001
------------------------------------ -------- --------
(in millions)
Short-term and long-term debt, net................. $(231.4) $146.4
Common stock issuance (repurchase), net............ 3.7 (4.1)
Dividends paid..................................... (26.6) (48.6)
------- ------
Net cash provided by (used in) financing activities $(254.3) $ 93.7
======= ======
We used the cash generated by the sales of leased assets to pay down
borrowings. We expect to use operating cash flow, and the proceeds from
additional leased asset sales and the sale of our Tustin, California facility
to continue to reduce short-term debt and increase cash balances.
We paid common stock dividends of $0.06 per share, or $8.8 million, and
$0.11 per share, or $16.2 million, during each of the first three quarters of
fiscal 2003 and 2002, respectively. The exercise of employee stock options
during Q1 2003 generated $3.7 million.
The Board of Directors authorized a share repurchase program for up to 11
million shares. We did not repurchase any common shares during the first nine
months of 2003. As of November 22, 2002, total repurchases since the inception
of our repurchase program amounted to $112.7 million; 3,824,593 shares remain
available for repurchase under the program and we have no outstanding share
repurchase commitments. We do not expect share repurchases to reduce our
tradable share float in the long run since we anticipate Class B Common Stock
to gradually convert to Class A Common Stock over time. Currently, about 27% of
our common shares are Class A (tradable) compared to 9% at the time of our IPO
in February 1998. We have no immediate plans to repurchase additional shares.
Forward Looking Statements
From time to time, in written reports and oral statements, the Company
discusses its expectations regarding future performance. Statements that are
not historical facts are "forward-looking statements" for purposes of the safe
harbor provided by Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as
amended. Such statements include those relating to anticipated revenue,
earnings/losses, restructuring activities and charges anticipated for the
remainder of the current fiscal year, anticipated breakeven points and
improvements in our breakeven point, adequacy of reserves, and fulfillment of
our future liquidity and capital needs. Such statements involve certain known
and unknown risks and uncertainties that could cause actual results to vary.
The Company's performance may differ materially from that contemplated by
forward-looking statements for a variety of reasons, including, but not limited
to: competitive and general economic conditions domestically and
internationally; delayed or lost sales and other impacts related to acts of
terrorism, acts of war and government action; changes in domestic and
international government laws and regulations; major disruptions at our key
facilities or in the supply of any key raw materials; competitive pricing
pressure; pricing changes by the Company or its competitors; currency
fluctuations; changes in customer demand and order patterns; changes in
relationships with customers, suppliers, employees and dealers; product (sales)
mix; the success (including product performance and customer acceptance) of new
products, current product innovations and platform simplification, and their
impact on the Company's manufacturing processes; possible acquisitions or
divestitures by the Company; the Company's ability to reduce costs, including
ramp-up costs associated with new products and to improve margins on new
products; the impact of workforce reductions (including elimination of
temporary workers, hourly layoffs, early retirement programs and salaried
workforce reductions); the Company's success in integrating acquired
businesses, initiating and managing alliances and global sourcing,
transitioning production of its products to other manufacturing facilities as a
result of production rationalization and implementing technology initiatives;
changes in business strategies and decisions; the Company's ability to fund
liquidity and capital needs; and other
25
risks detailed in the Company's Form 10-K for the year ended February 22, 2002.
Recently Issued Accounting Standards
See Note 2 of the unaudited Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risks
During Q3 2003, no material change in foreign exchange risks occurred.
Interest Rates
During Q3 2003, no material change in interest rate risks occurred.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation
of the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as such term is
defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date
within 90 days before the filing date of this quarterly report. Based on that
evaluation, the Company's management, including the CEO and CFO, concluded that
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information regarding the Company required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act. Subsequent to the date of this evaluation, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to their evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
26
Item 6. Exhibits and Reports on Form 8-K
1. EXHIBITS
See Exhibit Index.
2. REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed September 9, 2002 reporting under
Item 5, Other Events, Steelcase Inc. announced it named Frank Merlotti Jr. as
President of Steelcase North America.
A Current Report on Form 8-K was filed October 29, 2002 reporting under Item
5, Other Events, Steelcase Inc. currently has long-term debt ratings of BBB+
from Standard & Poor's ("S&P") and Baa3 from Moody's Investors Service
("Moody's"). The Company's US$400,000,000 multicurrency commercial paper
program is rated A-2 from S&P and Prime-3 from Moody's.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STEELCASE INC.
/S/ JAMES P. KEANE
By: __________________________________
James P. Keane
Senior Vice President,
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: January 6, 2003
28
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Sarbanes-Oxley Act Section 302
I, James P. Hackett, President and Chief Executive Officer of Steelcase
Inc., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Steelcase Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/S/ JAMES P. HACKETT
______________________________________
Name: James P. Hackett
Title: President and Chief Executive
Officer
Date: January 6, 2003
29
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Sarbanes-Oxley Act Section 302
I, James P. Keane, Senior Vice President, Chief Financial Officer of
Steelcase Inc., certify that
(1) I have reviewed this quarterly report on Form 10-Q of Steelcase Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filinNetg date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/S/__James P. Keane
----------------------------------------
Name: James P. Keane
Title: Senior Vice President,
Chief Financial Officer
Date: January 6, 2003
30
EXHIBIT INDEX
Exhibit
No.
--- Description
4.31 Second Amendment to Credit Agreement dated October 3, 2002, Long Term Multicurrency
Revolving Credit Facility
4.32 Second Amendment to Credit Agreement dated October 3, 2002, Short Term Multicurrency
Revolving Credit Facility
4.33 Amendment to the Credit Facility Agreement dated October 3, 2002 between Steelcase Financial
Services Ltd. and Royal Bank of Canada, dated April 5, 2000, and the Guarantee by Steelcase Inc. in
favor of Royal Bank of Canada, pursuant to the Credit Facility Agreement dated April 5, 2000
4.34 Amendment to the Guarantee dated October 3, 2002 between Steelcase Financial Services Ltd. and
Royal Bank of Canada, dated April 5, 2000, and the Guarantee by Steelcase Inc. in favor of Royal
Bank of Canada, pursuant to the Credit Facility Agreement dated April 5, 2000
4.35 Amendment to the Credit Facility Agreement dated October 3, 2002 between Steelcase Financial
Services Ltd. and Royal Bank of Canada, dated May 24, 2001, and the Guarantee by Steelcase Inc. in
favor of Royal Bank of Canada, pursuant to the Credit Facility Agreement dated May 24, 2001
4.36 Amendment to the Guarantee dated October 3, 2002 between Steelcase Financial Services Ltd. and
Royal Bank of Canada, dated May 24, 2001, and the Guarantee by Steelcase Inc. in favor of Royal
Bank of Canada, pursuant to the Credit Facility Agreement dated May 24, 2001
4.37 Third Amendment to Loan Agreement dated November 5, 2002, by and among Steelcase SAS,
Steelcase Inc. and Societe Generale
10.32 Resignation Agreement between Steelcase Inc. and James R. Stelter dated September 27, 2002
99.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
31