UNITED STATES
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended | ||
May 28, 2004 | ||
Commission File No. 1-13873 |
STEELCASE INC.
Michigan | 38-0819050 | |
(State of | ( | |
901 44th Street SE Grand Rapids, Michigan | 49508 | |
(Address of principal executive offices) | (Zip |
(616) 247-2710
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
As of SeptemberJune 25, 2003,2004, Steelcase Inc. had 44,573,85851,374,113 shares of Class A Common Stock and 103,274,53396,884,347 shares of Class B Common Stock outstanding.
STEELCASE INC.
FOR THE QUARTER ENDED AUGUST 29, 2003MAY 28, 2004
INDEX
Page No. | ||||||||
Financial Information | ||||||||
Financial Statements (Unaudited) | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6-15 | ||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
Quantitative and Qualitative Disclosures About Market Risk | ||||||||
Controls and Procedures | ||||||||
Other Information | ||||||||
Legal Proceedings | ||||||||
Exhibits and Reports on Form 8-K | ||||||||
26 | ||||||||
27 | ||||||||
Exhibit Index | 28 | |||||||
Amended By-laws, as Amended March 27, 2004 | ||||||||
2005-1 Amendment to Benefit Plan for Outside Dir. | ||||||||
Certification of CEO to Section 302 | ||||||||
Certification of CFO to Section 302 | ||||||||
Certification of CEO and CFO to Section 1350 |
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
STEELCASE INC.
Three Months Ended | ||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||
August 29, | August 23, | August 29, | August 23, | May 28, | May 30, | |||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2004 | 2003 | |||||||||||||||||||||||
Revenue | Revenue | $ | 612.1 | $ | 644.2 | $ | 1,167.7 | $ | 1,270.5 | Revenue | $ | 597.7 | $ | 555.6 | ||||||||||||||
Cost of sales | Cost of sales | 437.1 | 451.7 | 836.2 | 898.0 | Cost of sales | 426.8 | 399.1 | ||||||||||||||||||||
Restructuring costs | Restructuring costs | 7.3 | 1.6 | 17.5 | 5.2 | Restructuring costs | 3.6 | 10.2 | ||||||||||||||||||||
Gross profit | 167.7 | 190.9 | 314.0 | 367.3 | Gross profit | 167.3 | 146.3 | |||||||||||||||||||||
Operating expenses | Operating expenses | 169.4 | 191.4 | 336.3 | 380.7 | Operating expenses | 170.9 | 166.9 | ||||||||||||||||||||
Restructuring costs | Restructuring costs | 0.1 | 12.3 | 4.8 | 16.5 | Restructuring costs | 1.5 | 4.7 | ||||||||||||||||||||
Operating loss | (1.8 | ) | (12.8 | ) | (27.1 | ) | (29.9 | ) | Operating loss | (5.1 | ) | (25.3 | ) | |||||||||||||||
Interest expense | Interest expense | (5.1 | ) | (5.2 | ) | (9.9 | ) | (10.3 | ) | Interest expense | (5.2 | ) | (4.8 | ) | ||||||||||||||
Other income (expense), net | Other income (expense), net | 1.7 | 3.5 | 8.2 | (1.3 | ) | Other income (expense), net | 0.7 | 6.5 | |||||||||||||||||||
Loss from continuing operations before income tax benefit | (5.2 | ) | (14.5 | ) | (28.8 | ) | (41.5 | ) | ||||||||||||||||||||
Loss from continuing operations before income tax benefit | (9.6 | ) | (23.6 | ) | ||||||||||||||||||||||||
Income tax benefit | Income tax benefit | (2.0 | ) | (6.0 | ) | (10.8 | ) | (16.1 | ) | Income tax benefit | (2.9 | ) | (8.8 | ) | ||||||||||||||
Loss from continuing operations | (3.2 | ) | (8.5 | ) | (18.0 | ) | (25.4 | ) | Loss from continuing operations | (6.7 | ) | (14.8 | ) | |||||||||||||||
Income from discontinued operations, net of applicable taxes | 1.3 | 1.2 | 2.7 | 2.7 | ||||||||||||||||||||||||
Gain on sale of net assets of discontinued operations, net of applicable taxes of $11.9. | 20.0 | — | 20.0 | — | ||||||||||||||||||||||||
Income (loss) before cumulative effect of accounting change | 18.1 | (7.3 | ) | 4.7 | (22.7 | ) | ||||||||||||||||||||||
Cumulative effect of accounting change | — | — | — | (229.9 | ) | |||||||||||||||||||||||
Income and gain from discontinued operations, net of applicable income taxes | Income and gain from discontinued operations, net of applicable income taxes | 1.0 | 1.4 | |||||||||||||||||||||||||
Net income (loss) | $ | 18.1 | $ | (7.3 | ) | $ | 4.7 | $ | (252.6 | ) | Net loss | $ | (5.7 | ) | $ | (13.4 | ) | |||||||||||
Basic and diluted per share data: | Basic and diluted per share data: | Basic and diluted per share data: | ||||||||||||||||||||||||||
Loss from continuing operations | $ | (0.02 | ) | $ | (0.06 | ) | $ | (0.12 | ) | $ | (0.17 | ) | Loss from continuing operations | $ | (0.05 | ) | $ | (0.10 | ) | |||||||||
Income from discontinued operations | 0.14 | 0.01 | 0.15 | 0.02 | Income and gain from discontinued operations | 0.01 | 0.01 | |||||||||||||||||||||
Cumulative effect of accounting change | — | — | — | (1.56 | ) | |||||||||||||||||||||||
Earnings (loss) | $ | (0.04 | ) | $ | (0.09 | ) | ||||||||||||||||||||||
Earnings (loss) | $ | 0.12 | $ | (0.05 | ) | $ | 0.03 | $ | (1.71 | ) | ||||||||||||||||||
Dividends declared per common share | Dividends declared per common share | $ | 0.06 | $ | 0.06 | $ | 0.12 | $ | 0.12 | Dividends declared per common share | $ | 0.06 | $ | 0.06 | ||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
3
STEELCASE INC.
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
August 29, | February 28, | May 28, | February 27, | |||||||||||||||||||||
2003 | 2003 | 2004 | 2004 | |||||||||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 172.6 | $ | 128.9 | ||||||||||||||||||||
Accounts receivable: | ||||||||||||||||||||||||
Third party, net | 379.7 | 345.7 | ||||||||||||||||||||||
Affiliate, net | 19.0 | 21.5 | ||||||||||||||||||||||
Notes receivable: | ||||||||||||||||||||||||
Third party, net | 49.2 | 37.7 | ||||||||||||||||||||||
Affiliate, net | 13.3 | 9.4 | ||||||||||||||||||||||
Net investment in leases | 25.7 | 37.8 | ||||||||||||||||||||||
Inventories | 121.0 | 129.8 | ||||||||||||||||||||||
Deferred income taxes | 82.1 | 71.7 | Current assets: | |||||||||||||||||||||
Other current assets | 34.0 | 31.6 | Cash and cash equivalents | $ | 206.0 | $ | 262.2 | |||||||||||||||||
Accounts receivable, net | 376.4 | 362.2 | ||||||||||||||||||||||
Total current assets | 896.6 | 814.1 | Notes receivable and investment in leases, net | 60.8 | 75.4 | |||||||||||||||||||
Property and equipment, net | 713.0 | 774.0 | Inventories | 123.2 | 114.4 | |||||||||||||||||||
Notes receivable: | Other current assets | 130.6 | 127.8 | |||||||||||||||||||||
Third party, net | 24.0 | 18.1 | ||||||||||||||||||||||
Affiliate, net | 5.6 | 5.9 | Total current assets | 897.0 | 942.0 | |||||||||||||||||||
Net investment in leases | 72.0 | 101.9 | Property and equipment, net | 692.1 | 713.8 | |||||||||||||||||||
Equity investment in dealer transitions | 18.2 | 21.2 | Notes receivable and investment in leases, net | 56.0 | 65.8 | |||||||||||||||||||
Deferred income taxes | 103.1 | 101.7 | Company owned life insurance | 177.1 | 177.9 | |||||||||||||||||||
Goodwill | 210.8 | 209.8 | Goodwill and other intangible assets, net | 296.0 | 298.3 | |||||||||||||||||||
Other intangible assets, net | 91.2 | 96.2 | Other assets | 167.3 | 152.6 | |||||||||||||||||||
Other assets | 193.4 | 199.3 | ||||||||||||||||||||||
Total assets | $ | 2,285.5 | $ | 2,350.4 | ||||||||||||||||||||
Total assets | $ | 2,327.9 | $ | 2,342.2 | ||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||
Current liabilities: | Current liabilities: | |||||||||||||||||||||||
Accounts payable | $ | 139.4 | $ | 145.4 | Accounts payable | $ | 161.2 | $ | 161.8 | |||||||||||||||
Short-term borrowings and current portion of long-term debt | 29.8 | 30.0 | Short-term borrowings and current portion of long-term debt | 16.1 | 34.4 | |||||||||||||||||||
Accrued expenses: | Accrued expenses: | |||||||||||||||||||||||
Employee compensation | 76.3 | 90.9 | Employee compensation | 90.7 | 94.0 | |||||||||||||||||||
Employee benefit plan obligations | 30.7 | 39.6 | Employee benefit plan obligations | 22.8 | 33.9 | |||||||||||||||||||
Product warranties | 20.6 | 26.0 | Other | 217.8 | 219.2 | |||||||||||||||||||
Workers’ compensation claims | 26.7 | 25.8 | ||||||||||||||||||||||
Income taxes payable | 46.7 | 23.6 | Total current liabilities | 508.6 | 543.3 | |||||||||||||||||||
Other | 145.5 | 121.2 | ||||||||||||||||||||||
Long-term liabilities: | ||||||||||||||||||||||||
Total current liabilities | 515.7 | 502.5 | Long-term debt | 315.3 | 319.6 | |||||||||||||||||||
Employee benefit plan obligations | 236.3 | 241.0 | ||||||||||||||||||||||
Long-term liabilities: | Other long-term liabilities | 36.6 | 41.2 | |||||||||||||||||||||
Long-term debt | 286.2 | 294.2 | ||||||||||||||||||||||
Employee benefit plan obligations | 233.2 | 237.8 | Total long-term liabilities | 588.2 | 601.8 | |||||||||||||||||||
Other long-term liabilities | 41.4 | 52.6 | ||||||||||||||||||||||
Total liabilities | 1,096.8 | 1,145.1 | ||||||||||||||||||||||
Total long-term liabilities | 560.8 | 584.6 | ||||||||||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||||||
Total liabilities | 1,076.5 | 1,087.1 | Common stock | 293.7 | 289.8 | |||||||||||||||||||
Accumulated other comprehensive loss | (46.4 | ) | (43.5 | ) | ||||||||||||||||||||
Shareholders’ equity: | Deferred compensation—restricted stock | (4.4 | ) | (1.4 | ) | |||||||||||||||||||
Common stock | 288.4 | 286.1 | Retained earnings | 945.8 | 960.4 | |||||||||||||||||||
Accumulated other comprehensive loss | (41.5 | ) | (50.1 | ) | ||||||||||||||||||||
Deferred compensation— restricted stock | (1.6 | ) | — | Total shareholders’ equity | 1,188.7 | 1,205.3 | ||||||||||||||||||
Retained earnings | 1,006.1 | 1,019.1 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,285.5 | $ | 2,350.4 | ||||||||||||||||||||
Total shareholders’ equity | 1,251.4 | 1,255.1 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,327.9 | $ | 2,342.2 | ||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
STEELCASE INC.
Six Months Ended | ||||||||||||||||
Three Months Ended | ||||||||||||||||
August 29, | August 23, | May 28, | May 30, | |||||||||||||
2003 | 2002 | 2004 | 2003 | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net income (loss) | $ | 4.7 | $ | (252.6 | ) | |||||||||||
Net loss | $ | (5.7 | ) | $ | (13.4 | ) | ||||||||||
Depreciation and amortization | 71.9 | 76.7 | 32.1 | 35.5 | ||||||||||||
Cumulative effect of accounting change | — | 229.9 | ||||||||||||||
Gain on sale of discontinued operations | (31.9 | ) | — | |||||||||||||
(Gain) loss on sales of leased assets | (2.8 | ) | 6.1 | |||||||||||||
Restructuring charges (payments), net | (3.1 | ) | 2.9 | |||||||||||||
Changes in operating assets and liabilities, net of corporate acquisitions | (27.9 | ) | (58.2 | ) | ||||||||||||
Changes in operating assets and liabilities | (61.6 | ) | (76.6 | ) | ||||||||||||
Other, net | (12.0 | ) | (6.3 | ) | (6.0 | ) | (7.5 | ) | ||||||||
Net cash used in operating activities | (1.1 | ) | (1.5 | ) | (41.2 | ) | (62.0 | ) | ||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Capital expenditures | (19.3 | ) | (44.7 | ) | (14.6 | ) | (11.2 | ) | ||||||||
Proceeds from the disposal of fixed assets | 17.2 | 0.9 | 3.4 | 4.6 | ||||||||||||
Proceeds on sale of discontinued operations | 47.9 | — | ||||||||||||||
Proceeds from the sales of leased assets | 39.8 | 178.0 | — | 38.0 | ||||||||||||
Net (increase) decrease in notes receivable and leased assets | (16.2 | ) | 3.7 | |||||||||||||
Net proceeds from repayments (fundings) of leases | 17.6 | (5.6 | ) | |||||||||||||
Net decrease in notes receivable | 6.3 | 2.1 | ||||||||||||||
Other, net | 1.6 | 17.1 | 3.9 | 0.8 | ||||||||||||
Net cash provided by investing activities | 71.0 | 155.0 | 16.6 | 28.7 | ||||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Long-term debt issuances (repayments), net | (9.4 | ) | (117.1 | ) | ||||||||||||
Long-term debt repayments, net | (7.3 | ) | (4.9 | ) | ||||||||||||
Short-term borrowings (repayments), net | 0.3 | (48.8 | ) | (15.2 | ) | 8.5 | ||||||||||
Common stock issuance | 0.3 | 3.6 | 0.3 | — | ||||||||||||
Dividends paid | (17.7 | ) | (17.7 | ) | (8.9 | ) | (8.9 | ) | ||||||||
Net cash used in financing activities | (26.5 | ) | (180.0 | ) | (31.1 | ) | (5.3 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | 0.3 | 1.3 | (0.5 | ) | 1.5 | |||||||||||
Net increase (decrease) in cash and cash equivalents | 43.7 | (25.2 | ) | |||||||||||||
Net decrease in cash and cash equivalents | (56.2 | ) | (37.1 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | 128.9 | 69.4 | 262.2 | 128.9 | ||||||||||||
Cash and cash equivalents, end of period | $ | 172.6 | $ | 44.2 | $ | 206.0 | $ | 91.8 | ||||||||
See accompanying notes to the condensed consolidated financial statements.
5
STEELCASE INC.
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended February 28, 200327, 2004 (“Form 10-K”). As used in this Report, unless otherwise expressly stated or the content otherwise requires, all references to “Steelcase,” “we,” “our,” “Company” and similar references are to Steelcase Inc. and its majority owned subsidiaries.
Unless the context otherwise indicates, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year. Additionally, Q1 2005 references the first quarter of fiscal 2005. All amounts are in millions, except per share data, data presented as a percentage or unless otherwise indicated.
Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation.
UnlessAs discussed in Form 10-K, we consolidated the context otherwise indicates, referencebalance sheets of certain North America and International dealers as of February 27, 2004. In Q1 2005, we consolidated the balance sheets of two additional International dealers. The consolidation of all these dealers had the effect of increasing Q1 2005 revenue by $15.9, cost of sales by $9.2 and operating expenses by $7.0. There was no material effect on operating loss or net loss as either earnings do not accrue to a year relates to a fiscal year, ended in Februarythe class of stock we own or these dealers were previously accounted for under the year indicated, rather than a calendar year. Additionally, references to quarters are as follows: Q2 2004 references the second quarterequity method of fiscal 2004. All amounts are in millions, except per share data, data presented as a percentage or unless otherwise indicated.accounting.
2. NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46 requires that if a business enterprise has a controlling financial interest46(R) is effective in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity shall be included in the consolidated financial statements of the business enterprise. At its Board meeting on October 8, 2003, the FASB voted to defer the implementation date of FIN 46 relating to potentialQ1 2005 for variable interest entities (“VIEs”) that existed priorare not defined as special-purpose entities. We completed our evaluation of our unconsolidated dealers where we have provided either equity or debt financing to February 1, 2003. As such, this statement is effective for us beginning 04 2004. Wedetermine whether those dealers are currently evaluating how the provisions of this Interpretation may apply to our aircraft lease and our equity interests in dealers.
In May 2000, we began leasing aircraft through a synthetic lease structure that is currently accounted forVIEs as an operating lease. Beginning in Q4 2004, the aircraft will be capitalizeddefined by FIN 46(R). Based on our balance sheet and the related obligation will be recorded as debt as required by the provisions of this Interpretation. The impact of this accounting change on the consolidated statements of operations will be an increase in depreciation and interest expense, partially offset by the fact that the recording of rent expense will no longer be required.
From time to time, we obtain equity interests in dealers that we intend to resell as soon as practicable (“dealer transitions”). We use the equity method of accounting for majority-owned dealers with a transition plan in place and where the nature of the relationship is one in whichevaluation, we do not exercise participative control. These unconsolidatedbelieve any of the dealers are included inEquity Investment in Dealer Transitionsin the accompanying Condensed Consolidated Balance Sheets (see Note 7 in our Form 10-K for the year ended February 28, 2003 for additional information). There are also other dealers in ownership transition to which we have provided transitionprovide financing require consolidation pursuant to FIN 46(R).
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003—FSP 106-2 |
In December 2003, the Medicare Prescription Drug, Improvement and where we do not hold an equity interest. We are currently evaluating whether anyModernization Act of these transition dealers would2003 (the “Act”) was signed into law. The Act entitles employers who provide certain prescription drug benefits for retirees to receive a federal subsidy beginning in calendar 2006, thereby creating the potential for significant benefit cost savings. FASB Staff Position (“FSP”) 106-2 requires companies to record the amount expected to be defined as variable interest entitiesreceived under the provisions of this Interpretation and, if so, whetherAct as an actuarial gain, to the Company wouldextent the related post-retirement medical plan’s (the “plan”) total unrecognized actuarial gains or losses exceed certain thresholds, to be deemed the primary beneficiary of the entity.amortized into income over time. FSP 106-2 is effective beginning
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
StatementQ3 2005. We are a sponsor of Financial Accounting Standards (“SFAS”) No. 149 amendsa plan that provides prescription drug benefits. We are currently evaluating any effects the Act may have on the plan and clarifiesour financial accounting and reporting for derivative instruments, including certain derivative instruments embeddedstatements. Accordingly, any measures of the accumulated post-retirement benefit obligation or net periodic post-retirement benefit cost in other contracts and for hedging activities under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. It is effective for contracts entered intothe financial statements or modified after June 30, 2003, except as stated within the statement, and should be applied prospectively. Weaccompanying notes do not expect this statement will have a material effect on our financial statements.
SFAS No. 150 modifiesreflect the traditional definition of liabilities to encompass certain obligations that must be settled through the issuance of equity shares. These obligations are considered liabilities as opposed to equity or mezzanine financing under the provisions of SFAS No. 150. This statement does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety. It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of Q3 2004. We do not have anyeffects of the instruments covered by this statement; therefore, we do not expect this statement to have a material effectAct on our financial statements.the plan.
3. EARNINGS (LOSS) PER SHARE
Three Months Ended | Six Months Ended | Three Months | ||||||||||||||||||||||
Ended | ||||||||||||||||||||||||
August 29, | August 23, | August 29, | August 23, | May 28, | May 30, | |||||||||||||||||||
Components of Earnings (Loss) Per Share | 2003 | 2002 | 2003 | 2002 | 2004 | 2003 | ||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Loss from continuing operations | $ | (6.7 | ) | $ | (14.8 | ) | ||||||||||||||||||
Income and gain from discontinued operations | 1.0 | 1.4 | ||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Loss before discontinued operations and cumulative effect of accounting change | $ | (3.2 | ) | $ | (8.5 | ) | $ | (18.0 | ) | $ | (25.4 | ) | ||||||||||||
Income from discontinued operations | 21.3 | 1.2 | 22.7 | 2.7 | ||||||||||||||||||||
Cumulative effect of accounting change | — | — | — | (229.9 | ) | |||||||||||||||||||
Net income (loss) numerator for both basic and diluted EPS | $ | 18.1 | $ | (7.3 | ) | $ | 4.7 | $ | (252.6 | ) | ||||||||||||||
Net loss numerator for both basic and diluted EPS | $ | (5.7 | ) | $ | (13.4 | ) | ||||||||||||||||||
Denominators: | ||||||||||||||||||||||||
Denominator for basic EPS—weighted average common shares outstanding | 147.8 | 147.6 | 147.8 | 147.5 | 147.8 | 147.6 | ||||||||||||||||||
Potentially dilutive shares resulting from stock options(1) | 0.1 | 0.4 | — | 0.6 | ||||||||||||||||||||
Potentially dilutive shares resulting from stock incentive plan awards(1) | 0.2 | — | ||||||||||||||||||||||
Denominator for diluted EPS(1) | 147.9 | 148.0 | 147.8 | 148.1 | 148.0 | 147.6 | ||||||||||||||||||
(1) | The denominator for basic EPS is used for calculating EPS for |
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 Plansstock incentive plans had been issued and the dilutive effect of outstanding restricted shares to the extent those shares have not vested.
Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. However, diluted earnings per share does not reflect the effects of 8.7 million shares related to outstanding stock incentive plan awards as of Q1 2005 and 10.7 million as of Q1 2004 because those shares or potential shares were not dilutive.
4. STOCK-BASED COMPENSATION
We account for stock-based compensation issued prior to March 1, 2003 under the recognition and measurement principles of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations.
For all awards granted, modified or settled on or after March 1, 2003, our policy is to expense stock-based compensation under SFAS No. 123,Accounting for Stock-Based Compensation, using the fair value based method of accounting. Fair value is measured on the grant date of the related equity instrument using the Black-Scholes option-pricing model and is recognized as compensation expense over the applicable vesting period. After-tax compensation expense related to restricted stock and restricted stock units was $0.5 in Q1 2005 and $0.2 in Q1 2004.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Diluted earnings per share includes effects of shares issued under our Stock Incentive Plans. Because they were not dilutive, our calculation of diluted earnings per share do not reflect the effects of 8.9 million and 7.4 million options for the quarter and first six months ended August 29, 2003 and August 23, 2002, respectively.
4. STOCK-BASED COMPENSATION
Prior to 2004, we accounted for our stock incentive plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations. Given the terms of the Company’s plans, no stock-based employee compensation cost was recognized in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
Effective at the beginning of 2004, it is the Company’s policy to expense stock-based compensation using the fair value based method of accounting. Fair value is measured on the grant date of the related equity instrument and is recognized as compensation expense over the applicable vesting period. We estimate the fair value of stock options using the Black-Scholes option-pricing model. As permitted by SFAS No. 148,Accounting for Stock-Based Compensation— Transition and Disclosure, we adopted the prospective transition method, under which compensation cost will be recognized for all awards granted, modified or settled on or after March 1, 2003. Since there have been no stock options granted in 2004, no compensation expense has been recognized.
The following table illustrates the effect on net income (loss) and earnings (loss) per share as if we had applied the fair value recognition provisions of SFAS No. 123 to all outstanding and unvested awards:awards. Further information regarding our stock incentive plans is presented in Note 10.
Three Months Ended | Six Months Ended | ||||||||||||||||
August 29, | August 23, | August 29, | August 23, | ||||||||||||||
SFAS No. 123 Pro Forma Data | 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income (loss), as reported | $ | 18.1 | $ | (7.3 | ) | $ | 4.7 | $ | (252.6 | ) | |||||||
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | (1.4 | ) | (3.0 | ) | (3.0 | ) | (5.9 | ) | |||||||||
Pro forma net income (loss) | $ | 16.7 | $ | (10.3 | ) | $ | 1.7 | $ | (258.5 | ) | |||||||
Earnings (loss) per share: | |||||||||||||||||
Basic and diluted— as reported | $ | 0.12 | $ | (0.05 | ) | $ | 0.03 | $ | (1.71 | ) | |||||||
Basic and diluted— pro forma | $ | 0.11 | $ | (0.07 | ) | $ | 0.01 | $ | (1.75 | ) | |||||||
Three Months | |||||||||
Ended | |||||||||
May 28, | May 30, | ||||||||
Pro Forma Data | 2004 | 2003 | |||||||
Net loss, as reported | $ | (5.7 | ) | $ | (13.4 | ) | |||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 0.5 | 0.2 | |||||||
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | (1.6 | ) | (1.8 | ) | |||||
Pro forma loss | $ | (6.8 | ) | $ | (15.0 | ) | |||
Earnings (loss) per share: | |||||||||
Basic and diluted—as reported | $ | (0.04 | ) | $ | (0.09 | ) | |||
Basic and diluted—pro forma | $ | (0.05 | ) | $ | (0.10 | ) | |||
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
5. COMPREHENSIVE INCOME (LOSS)LOSS
Comprehensive income (loss)loss is comprised of net income (loss)loss and all changes to shareholders’ equity except those due to investments by, and distributions to, shareholders.
Three Months Ended | Six Months Ended | |||||||||||||||||
August 29, | August 23, | August 29, | August 23, | |||||||||||||||
Components of Comprehensive Income (Loss) | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income (loss) | $ | 18.1 | $ | (7.3 | ) | $ | 4.7 | $ | (252.6 | ) | ||||||||
Other comprehensive income (loss): | ||||||||||||||||||
Foreign currency translation adjustments | 0.3 | (5.7 | ) | 8.1 | 3.9 | |||||||||||||
Derivative adjustments, net of tax | 0.4 | (0.9 | ) | 0.5 | 4.7 | |||||||||||||
Minimum pension liability | 0.2 | — | — | — | ||||||||||||||
Total | 0.9 | (6.6 | ) | 8.6 | 8.6 | |||||||||||||
Comprehensive income (loss) | $ | 19.0 | $ | (13.9 | ) | $ | 13.3 | $ | (244.0 | ) | ||||||||
Three Months | ||||||||||
Ended | ||||||||||
May 28, | May 30, | |||||||||
Components of Comprehensive Loss | 2004 | 2003 | ||||||||
Net loss | $ | (5.7 | ) | $ | (13.4 | ) | ||||
Other comprehensive income (loss): | ||||||||||
Foreign currency translation | (5.8 | ) | 7.8 | |||||||
Derivative adjustments, net of tax | 2.7 | 0.1 | ||||||||
Minimum pension liability | 0.2 | (0.2 | ) | |||||||
Total | (2.9 | ) | 7.7 | |||||||
Comprehensive loss | $ | (8.6 | ) | $ | (5.7 | ) | ||||
We incurred unrealized foreign currency translation losses of $5.8 in Q1 2005. Foreign currency translation adjustments of $8.1$7.8 during the first two quarters ofQ1 2004 included the realization of $4.1 of currency translation losses in Q1 2004 related to our Brazilian operations, which accumulated over many years. In accordance with GAAP, we previously recorded these unrealized currency translation losses as a reduction in shareholders’ equity through theAccumulated Other Comprehensive Lossline. Upon disposition of our Brazilian operations, we recognized the losslosses through the Condensed Consolidated Statements of Operations. Since the unrealized currency translation losses were previously recognized as reductions of shareholders’ equity, the current realization of these losses through the Condensed Consolidated Statements of Operations had no effect on shareholders’ equity as of August 29, 2003.equity. The remaining $4.0$3.7 of the $8.1$7.8, related to other current unrealized foreign currency translation adjustments and is reported within stockholders’ equity in Accumulated Other Comprehensive Loss.gains.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
6. INVENTORIES
Inventories are stated at the lower of cost or market and are valued based upon the last-in, first-out (“LIFO”) method, the first-in, first-out (“FIFO”) method or the average cost method.market. The North America segment primarily uses the LIFOlast in, first out (“LIFO”) method to value its inventory. The companiesinventories. Companies in the Steelcase Design Partnership (“SDP”) segment primarily use the first in, first out (“FIFO”) or the average cost inventory valuation methods that were in place at the time we acquired them. The subsidiariesmethods. Companies in the International segment value their inventoryinventories using the FIFO method.
August 29, | February 28, | May 28, | February 27, | |||||||||||||
Inventories | 2003 | 2003 | 2004 | 2004 | ||||||||||||
Finished goods | $ | 56.6 | $ | 63.1 | $ | 62.1 | $ | 58.3 | ||||||||
Work in process | 25.3 | 27.4 | 31.1 | 29.7 | ||||||||||||
Raw materials | 70.0 | 72.9 | 55.3 | 51.7 | ||||||||||||
151.9 | 163.4 | 148.5 | 139.7 | |||||||||||||
LIFO reserve | (30.9 | ) | (33.6 | ) | (25.3 | ) | (25.3 | ) | ||||||||
$ | 121.0 | $ | 129.8 | $ | 123.2 | $ | 114.4 | |||||||||
The portion of inventories determined by the LIFO method aggregated $50.6$46.6 as of August 29, 2003May 28, 2004 and $61.6$46.3 as of February 28, 2003.27, 2004.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
There were no acquisitions, dispositions, adjustments or impairments of goodwill during Q1 2005. A summary of goodwill, by business segment and category, is as follows:
May 28, | |||||
Goodwill by Business Segment and Category | 2004 | ||||
North America | $ | 45.1 | |||
Steelcase Design Partnership | 63.2 | ||||
International | 42.5 | ||||
Other | 59.4 | ||||
Total | $ | 210.2 | |||
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
7. GOODWILL AND OTHER INTANGIBLE ASSETS
There were no impairments of goodwill or reallocations of goodwill between operating segments during Q2 2004. A summary of changes in goodwill during 2004, by business segment, is as follows:
Goodwill, net | |||||||||||||||||
February 28, | August 29, | ||||||||||||||||
Business Segment | 2003 | Acquisitions | Dispositions | 2003 | |||||||||||||
North America | $ | 41.3 | $ | 1.6 | $ | — | $ | 42.9 | |||||||||
Steelcase Design Partnership | 63.2 | — | — | 63.2 | |||||||||||||
International | 42.0 | — | — | 42.0 | |||||||||||||
Other | 63.3 | — | (0.6 | ) | 62.7 | ||||||||||||
Total | $ | 209.8 | $ | 1.6 | $ | (0.6 | ) | $ | 210.8 | ||||||||
In Q2 2004, we acquired certain assets of a dealer through one of the dealers we currently consolidate. The purchase price of $2.2 included goodwill and other intangibles of $1.6. A final purchase price allocation will be completed by the end of 2004.
As of August 29, 2003May 28, 2004 and February 28, 2003,27, 2004, our other intangible assets and related accumulated amortization consisted of the following:
August 29, 2003 | February 28, 2003 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
May 28, 2004 | February 27, 2004 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Estimated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | Useful Lives | Accumulated | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Intangible Assets | Other Intangible Assets | Gross | Amortization | Net | Gross | Amortization | Net | Other Intangible Assets | (Years) | Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||||||||||||||||||||||||
Intangible assets subject to amortization: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Proprietary technology | $ | 48.5 | $ | 6.9 | $ | 41.6 | $ | 48.5 | $ | 4.6 | $ | 43.9 | ||||||||||||||||||||||||||||||||||||||||||||
Intangible assets subject to amortization: | Intangible assets subject to amortization: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trademarks | 32.5 | 19.7 | 12.8 | 32.5 | 17.8 | 14.7 | Proprietary technology | 9–14 | $ | 48.7 | $ | 10.5 | $ | 38.2 | $ | 48.7 | $ | 9.3 | $ | 39.4 | ||||||||||||||||||||||||||||||||||||
Non-compete agreements | 1.9 | 1.4 | 0.5 | 1.9 | 1.1 | 0.8 | Trademarks | 5–10 | 32.5 | 22.2 | 10.3 | 32.5 | 21.5 | 11.0 | ||||||||||||||||||||||||||||||||||||||||||
Other | 7.1 | 3.0 | 4.1 | 7.1 | 2.5 | 4.6 | Non-compete agreements | 3 | 1.9 | 1.8 | 0.1 | 1.9 | 1.6 | 0.3 | ||||||||||||||||||||||||||||||||||||||||||
Other | 5–7 | 8.8 | 3.8 | 5.0 | 8.8 | 3.6 | 5.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | 90.0 | 31.0 | 59.0 | 90.0 | 26.0 | 64.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 91.9 | 38.3 | 53.6 | 91.9 | 36.0 | 55.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets not subject to amortization: | Intangible assets not subject to amortization: | Intangible assets not subject to amortization: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trademarks | 32.2 | — | 32.2 | 32.2 | — | 32.2 | Trademarks | n/a | 32.2 | — | 32.2 | 32.2 | — | 32.2 | ||||||||||||||||||||||||||||||||||||||||||
Total Intangible Assets | $ | 122.2 | $ | 31.0 | $ | 91.2 | $ | 122.2 | $ | 26.0 | $ | 96.2 | Total Intangible Assets | $ | 124.1 | $ | 38.3 | $ | 85.8 | $ | 124.1 | $ | 36.0 | $ | 88.1 | |||||||||||||||||||||||||||||||
In Q2 2004,Q1 2005, we recorded amortization expense of $2.6$2.3 on intangible assets subject to amortization compared to $3.3$2.4 in Q2 2003. For the six months ended August 29, 2003 we recorded amortization expense of $5.0 compared to $7.8 for the six months ended August 23, 2002.Q1 2004. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the following five fiscal years is as follows: 2004: $8.5; 2005: $7.2; 2006: $6.9; 2007: $6.9; and 2008: $6.9.
Estimated Amortization Expense | ||||
Year Ending February | Amount | |||
2005 | $ | 7.8 | ||
2006 | 7.4 | |||
2007 | 7.4 | |||
2008 | 7.4 | |||
2009 | 7.2 |
As events, such as acquisitions, and dispositions or impairments, occur in the future, these amounts may vary.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
8. EMPLOYEE BENEFIT PLAN OBLIGATIONS
Three Months Ended | ||||||||||||||||
Post-retirement | ||||||||||||||||
Pension Plans | Plans | |||||||||||||||
May 28, | May 30, | May 28, | May 30, | |||||||||||||
Components of Expense | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Components of expense: | ||||||||||||||||
Service cost | $ | 0.7 | $ | 0.5 | $ | 1.0 | $ | 1.1 | ||||||||
Interest cost | 1.1 | 1.0 | 3.4 | 3.6 | ||||||||||||
Amortization of prior year service cost (gain) | 0.1 | 0.2 | (1.4 | ) | (1.0 | ) | ||||||||||
Expected return on plan assets | (0.7 | ) | (0.6 | ) | — | — | ||||||||||
Adjustment due to plan curtailment | — | — | — | (1.0 | ) | |||||||||||
Adjustment due to plan settlement | — | (0.1 | ) | — | — | |||||||||||
Amortization of unrecognized net actuarial loss | 0.2 | 0.1 | 1.1 | 0.9 | ||||||||||||
Net expense | $ | 1.4 | $ | 1.1 | $ | 4.1 | $ | 3.6 | ||||||||
As of February 27, 2004, we expected to contribute approximately $13.0 to our pension and post-retirement medical plans during 2005. As of May 28, 2004, contributions of approximately $6.5 have been made. Based upon updated actuarial information, we anticipate contributing an additional $9.4 in 2005, for a total of $15.9, to fund our pension and post-retirement medical plans.
9. RESTRUCTURING CHARGES
During Q2 2004,Q1 2005, we continued efforts to reduce costsour cost structure by restructuring certain areas of our business. SeveranceRestructuring activities can include, but are not limited to, workforce reductions, facility consolidations, relocation of production lines and impairmentthe exit of certain businesses. Costs associated with these activities include, but are not limited to, severance, asset impairments and lease impairments. Restructuring costs related to business exit and restructuring activities are summarized in the following table:
Fiscal 2005 | |||||||||||||||||||
Restructuring Charges | Restructuring Charges | Q1 | |||||||||||||||||
Cost of sales: | Cost of sales: | ||||||||||||||||||
North America | North America | $ | 3.6 | ||||||||||||||||
International | International | (0.8 | ) | ||||||||||||||||
Other | Other | 0.8 | |||||||||||||||||
3.6 | |||||||||||||||||||
Operating expenses: | Operating expenses: | ||||||||||||||||||
North America | North America | 1.0 | |||||||||||||||||
International | International | 0.5 | |||||||||||||||||
1.5 | |||||||||||||||||||
Total | $ | 5.1 | |||||||||||||||||
Fiscal 2004 | |||||||||||||||||||
Restructuring Charges | Q1 | Q2 | Total | ||||||||||||||||
Cost of sales: | |||||||||||||||||||
North America | $ | 2.9 | $ | 2.4 | $ | 5.3 | |||||||||||||
International | 7.3 | 4.9 | 12.2 | ||||||||||||||||
10.2 | 7.3 | 17.5 | |||||||||||||||||
Operating expenses: | |||||||||||||||||||
North America | 2.4 | 0.1 | 2.5 | ||||||||||||||||
International | 0.3 | — | 0.3 | ||||||||||||||||
Other | 2.0 | — | 2.0 | ||||||||||||||||
4.7 | 0.1 | 4.8 | |||||||||||||||||
Total | $ | 14.9 | $ | 7.4 | $ | 22.3 | |||||||||||||
Below is a reconciliationSeeItem 2. Management’s Discussion and Analysis of theFinancial Condition and Results of Operationsfor explanations of Q1 2005 restructuring reserve for activity during 2004:charges.
Business | |||||||||||||
Workforce | Exit and | ||||||||||||
Restructuring Reserve | Reductions | Other Costs | Total | ||||||||||
Reserve balance as of February 28, 2003 | $ | 11.2 | $ | 7.2 | $ | 18.4 | |||||||
Additions | 9.9 | 12.4 | 22.3 | ||||||||||
Payments | (16.5 | ) | (8.9 | ) | (25.4 | ) | |||||||
Reserve balance as of August 29, 2003 | $ | 4.6 | $ | 10.7 | $ | 15.3 | |||||||
During 2003, our severance charges for workforce reductions related to 1,425 positions, 1,360 of which occurred as of August 29, 2003. During the first two quarters of 2004, we reserved for additional workforce reductions of approximately 525 positions, of which 430 have already occurred. The remaining 160 previously announced workforce reductions related to International plant consolidations will occur during the balance of 2004.
During 2004, business exit and other costs related to International plant rationalization, and North America and International asset impairments.
9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
During Q2 2004, we finalized a new $250 million 3-year global committed bank facility. Our obligations under this facility are unsecured and unsubordinated. As of August 29, 2003, we had no borrowings against the facility. This facility replaced our $200 million 3-year global committed bank facility that was originally scheduled to expire in April 2004. Maturities under the new facility range from overnight to six months depending on our needs, subject to certain limitations. Interest on borrowings of a term of one month or greater is based on LIBOR plus a margin or a base rate, as selected by us. Interest on borrowings of a term of less than one month is based on the higher of the prime rate or the federal funds rate plus 0.5% and a margin. The Company may, at its option, and
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
subjectBelow is a reconciliation of the restructuring reserve for activity during 2005:
Workforce | |||||||||||||
Restructuring Reserve | Reductions | Other Costs | Total | ||||||||||
Reserve balance as of February 27, 2004 | $ | 12.2 | $ | 9.9 | $ | 22.1 | |||||||
Additions | 3.5 | 1.6 | 5.1 | ||||||||||
Payments and adjustments | (4.8 | ) | (0.4 | ) | (5.2 | ) | |||||||
Reserve balance as of May 28, 2004 | $ | 10.9 | $ | 11.1 | $ | 22.0 | |||||||
At the beginning of 2005, approximately 820 positions remained to customary conditions, requestbe eliminated primarily relating to increaseNorth America wood manufacturing and International rationalization activities announced prior to February 28, 2004. As of May 28, 2004, approximately 790 of these positions remain to be eliminated and are expected to occur during the aggregate commitment by upremainder of 2005 with additional reserves recorded as appropriate. Additions, payments and adjustments to $100 million by obtaining at least one commitment from onethe workforce reductions reserve related to these activities are recorded in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or more lenders.Disposal Activities.No new workforce reduction activities were announced during Q1 2005.
The new facility requires usreserve balance as of May 28, 2004 for other costs primarily relates to satisfy financial covenants including a minimum net worth covenant, a maximum debt ratio covenant and a minimum interest coverage ratio covenant. As of August 29, 2003, we are in compliance with all covenants under this facility andrestructuring efforts within our other financing and lease facilities.International segment.
10. COMMON STOCK
Repurchase Program |
The Board of Directors has authorized share repurchases of up to 11 million shares. We did not repurchase any common shares during Q2 2004.Q1 2005. Approximately 3.8 million shares remain available for repurchase under the programBoard’s authorization and we have no outstanding share repurchase commitments.
Under the Steelcase Inc. Incentive Compensation Plan (the “Compensation Plan”), the Compensation Committee of the Board of Directors approved and granted 200,000259,000 restricted shares of stock and 36,500 restricted stock units (“RSUs”) during 2005. During 2004, 220,000 restricted shares of stock and 48,000 restricted stock units (“RSUs”) in March 2003 to certain members of management.were issued. These restricted stock shares and RSUs vest in March 2006over a three year period and may be forfeited if a participant leaves the Company for reasons other than retirement, disability or death prior to the vesting date. The restrictedWhen the RSUs vest, they will be converted to unrestricted common stock grants are expensed ratably over the vesting period based on the valueshares. As of the restricted stock grant on the date of the grant. The RSUs are expensed over the 3-year vesting period based on the current market value of theMay 28, 2004, shares to be granted.forfeited totaled 6,250. The aggregate market value of the restricted stock shares at the date of issuance of $1.9$3.5 in 2005 and $2.1 in 2004 was recorded as deferred compensation, a separate component of shareholders’ equity, and is being amortized over the three-year vesting period of the grants.
11. DISCONTINUED OPERATIONS
On August 29, 2003, The RSUs are expensed over the Company sold substantially allthree-year vesting period based on the current market value of the net assetsshares to be issued.
In Q1 2005, the Compensation Committee of its marine hardware and accessories business (previously reportedthe Board of Directors established a program to provide performance share unit awards (“PSUs”) under the Other category)Compensation Plan. The performance measure for these awards is based on a cumulative three-year cash proceedsflow calculation as defined by the Compensation Plan. After completion of $47.9the performance period, the number of PSUs earned under the agreement will be converted to common stock shares. One-third of the shares vest at the time of conversion and a pre-tax net gainone-third vest at the end of $31.9 or $20.0 after-tax. In accordance with SFAS No. 144,Accounting foreach of the Impairment or Disposal of Long-Lived Assets, the operating results of this business have been segregated as discontinued operations for all periods presented and include the amounts indicatednext two years. The target award granted in the following table:
Three Months Ended | Six Months Ended | |||||||||||||||
August 29, | August 23, | August 29, | August 23, | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Revenue | $ | 14.9 | $ | 15.1 | $ | 31.2 | $ | 31.9 | ||||||||
Income before income taxes | $ | 2.0 | $ | 1.8 | $ | 4.2 | $ | 4.2 | ||||||||
Income, net of applicable taxes | $ | 1.3 | $ | 1.2 | $ | 2.7 | $ | 2.7 |
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Q1 2005 was 188,000 PSUs. The actual number of common shares that ultimately may be issued ranges from zero to 376,000 shares based on actual performance levels.
12.11. OPERATING SEGMENTS
We operate on a worldwide basis within three reportable segments: North America, SDP and International, plus an “Other” category. We evaluate performance and allocate resources based on operating income.
Our North America segment consists of manufacturing operations, sales operationsactivities and consolidated dealers in the United States and Canada, and includes the Company’s Steelcase and Turnstone brands.
The SDP includes the following companies and their brands: Brayton International, The Designtex Group, Office Details Inc., Metropolitan Furniture Corporation and Vecta and their brands. These companies operate autonomously and report to the president of the SDP.Vecta. They focus on higher-end design furniture products and niche applications for lobby and reception areas, conference rooms, private offices, healthcarehealth care and learning environments, as well as the design and distribution of surface materials and ergonomic tools for the workplace.
Our International segment includes allconsists of manufacturing operations, sales activities and manufacturing operationsconsolidated dealers outside the United States and Canada, and includes the Company’s Steelcase and Werndl brands.
Within the “Other”The Other category are the Company’sincludes Financial Services, PolyVision and IDEO subsidiaries, ventures and unallocated corporate expenses. Steelcase Financial Services Inc. provides leasing services to customers primarily in North America to facilitate the purchase of our products and provides selected financing services to our dealers. PolyVision Corporation designs and manufactures visual communications products, such as static and electronic whiteboards.whiteboards, for learning environments and office settings. IDEO Inc. provides product design and innovation services. Approximately 85% of corporate expenses, which represent shared services, are charged to the operating segments as part of a corporationcorporate allocation.
Three Months Ended | Six Months Ended | ||||||||||||||||
August 29, | August 23, | August 29, | August 23, | ||||||||||||||
Operating Segment Income Statement Data | 2003 | 2002 | 2003 | 2002 | |||||||||||||
Revenue | |||||||||||||||||
North America | $ | 346.0 | $ | 377.7 | $ | 642.2 | $ | 768.7 | |||||||||
Steelcase Design Partnership | 73.4 | 75.1 | 140.4 | 143.8 | |||||||||||||
International | 120.5 | 117.3 | 250.3 | 224.9 | |||||||||||||
Other | 72.2 | 74.1 | 134.8 | 133.1 | |||||||||||||
Consolidated revenue | $ | 612.1 | $ | 644.2 | $ | 1,167.7 | $ | 1,270.5 | |||||||||
Operating income (loss) | |||||||||||||||||
North America | $ | 3.4 | $ | (2.8 | ) | $ | (15.9 | ) | $ | (9.1 | ) | ||||||
Steelcase Design Partnership | 4.6 | 5.1 | 7.5 | 8.7 | |||||||||||||
International | (11.2 | ) | (4.9 | ) | (16.4 | ) | (14.7 | ) | |||||||||
Other | 1.4 | (10.2 | ) | (2.3 | ) | (14.8 | ) | ||||||||||
Consolidated operating loss | $ | (1.8 | ) | $ | (12.8 | ) | $ | (27.1 | ) | $ | (29.9 | ) | |||||
During 2004, we sold substantially all of the net assets of our marine hardware and accessories business, Attwood Corporation. The operating results of this business, formerly included within the
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Other category, have been segregated and reported as discontinued operations for all periods presented.
August 29, | February 28, | ||||||||
Operating Segment Balance Sheet Data | 2003 | 2003 | |||||||
Total assets | |||||||||
North America | $ | 1,057.6 | $ | 1,072.1 | |||||
Steelcase Design Partnership | 147.2 | 152.6 | |||||||
International | 457.2 | 445.2 | |||||||
Other | 665.9 | 672.3 | |||||||
Consolidated total assets | $ | 2,327.9 | $ | 2,342.2 | |||||
Three Months | |||||||||
Ended | |||||||||
May 28, | May 30, | ||||||||
Operating Segment Income Statement Data | 2004 | 2003 | |||||||
Revenue | |||||||||
North America | $ | 328.1 | $ | 296.2 | |||||
Steelcase Design Partnership | 70.4 | 67.0 | |||||||
International | 134.2 | 129.8 | |||||||
Other | 65.0 | 62.6 | |||||||
Consolidated revenue | $ | 597.7 | $ | 555.6 | |||||
Operating income (loss) | |||||||||
North America | $ | (6.4 | ) | $ | (19.3 | ) | |||
Steelcase Design Partnership | 3.4 | 2.9 | |||||||
International | (1.8 | ) | (5.2 | ) | |||||
Other | (0.3 | ) | (3.7 | ) | |||||
Consolidated operating loss | $ | (5.1 | ) | $ | (25.3 | ) | |||
12. GUARANTEES, PERFORMANCE BONDS AND PRODUCT WARRANTY |
Guarantees and Performance Bonds |
We are contingently liable under loan guarantees for certain Steelcase dealers and joint ventures in the event of default or non-performance of the financial repayment of the liability. The guarantees generally have terms ranging from one to ten years. No loss haslosses have been experienced and no materialexperienced; however, reserves totaling $0.6 are recorded as of May 28, 2004 to cover potential losses are anticipated under these agreements. Reserves for loan guarantees totaled $0.7 as of August 29, 2003.entered into subsequent to December 31, 2002, in accordance with GAAP.
We are also party to performance bonds for certain installation or construction activities of certain Steelcase dealers and a joint venture. Under these agreements, we are liable to make financial payments if the installation or construction activities are not completed under their specified guidelines and claims are filed. Projects with performance bonds have completion dates ranging from one to three years. Approximately $60.0 in performance bonds relate to a construction project that is completed and being used as intended, however, we have not received final approval from the customer. We estimate that our maximum exposure from these performance bonds is less than $1.0.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Where we have supplied performance bonds related to a joint venture, we require any significant subcontractors to supply us with performance bonds to provide coverage in the event they cause a performance failure or delay. Performance bonds supplied by subcontractors totaled $40.0 as of August 29, 2003,May 28, 2004, which reduces our risk of exposure. Additionally, our joint venture agreement requires our partner to share in any losses related to these performance bonds. Where we have supplied performance bonds for dealers, we have the ability to step in and cure performance failures by the dealers thereby mitigating our potential losses. No loss has been experienced under these performance bonds; however, reserves totaling $1.1$0.3 are recorded as of August 29, 2003May 28, 2004 to cover potential losses.
The maximum amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions)from third parties) we could be required to make under the guarantees and performance bonds are as follows:
August 29, | February 28, | ||||||||
2003 | 2003 | ||||||||
Performance bonds— joint ventures | $ | 65.2 | $ | 53.6 | |||||
Performance bonds— dealers | 16.9 | 10.8 | |||||||
Guarantees with dealers and joint ventures | 22.0 | 25.7 | |||||||
Guarantees— other | 4.8 | 1.5 | |||||||
Total | $ | 108.9 | $ | 91.6 | |||||
May 28, | February 27, | ||||||||
2004 | 2004 | ||||||||
Performance bonds—joint ventures | $ | 65.5 | $ | 65.5 | |||||
Performance bonds—dealers | 8.2 | 5.4 | |||||||
Guarantees with dealers and joint ventures | 19.5 | 19.3 | |||||||
Guarantees—other | 2.8 | 4.2 | |||||||
Total | $ | 96.0 | $ | 94.4 | |||||
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Product Warranty |
The accrued liability for warranty costs, included within other accrued expenses on the Condensed Consolidated Balance Sheets, is based on an estimated amount needed to cover future warranty obligations for products sold. This estimated amountsold as of the balance sheet date and is determined by historical product data and management’s knowledge of current events and actions.
August 29, | ||||
Product Warranty | 2003 | |||
Balance at beginning of quarter | $ | 22.5 | ||
Accruals for warranties | — | |||
Settlements/ adjustments made during the quarter | (1.9 | ) | ||
Balance at end of quarter | $ | 20.6 | ||
Product Warranty | Amount | ||||
Balance as of February 27, 2004 | $ | 20.9 | |||
Accruals for warranty charges | 4.7 | ||||
Settlements and adjustments | (2.9 | ) | |||
Balance as of May 28, 2004. | $ | 22.7 | |||
15
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following review of our financial condition and results of operations should be read in conjunction with our fiscal year 2003 Form 10-K. Unless the context otherwise indicates, reference to a year relates to a fiscal year, ended in February of the year indicated, rather than a calendar year. Additionally, references to quarters are as follows: Q2 2004 references the second quarter of fiscal 2004. All amounts are in millions, except per share data, data presented as a percentage or unless otherwise indicated.
Financial Summary
Results of Operations (Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
August 29, 2003 | August 23, 2002 | August 29, 2003 | August 23, 2002 | |||||||||||||||||||||||||||||||||||||||||||||
Income Statement Data | May 28, 2004 | |||||||||||||||||||||||||||||||||||||||||||||||
May 30, 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 612.1 | 100.0 | % | $ | 644.2 | 100.0 | % | $ | 1,167.7 | 100.0 | % | $ | 1,270.5 | 100.0 | % | $ | 597.7 | 100.0% | $ | 555.6 | 100.0% | ||||||||||||||||||||||||||
Cost of sales | 437.1 | 71.4 | 451.7 | 70.1 | 836.2 | 71.6 | 898.0 | 70.7 | 426.8 | 71.4 | 399.1 | 71.8 | ||||||||||||||||||||||||||||||||||||
Restructuring costs | 7.3 | 1.2 | 1.6 | 0.2 | 17.5 | 1.5 | 5.2 | 0.4 | 3.6 | 0.6 | 10.2 | 1.9 | ||||||||||||||||||||||||||||||||||||
Gross profit | 167.7 | 27.4 | 190.9 | 29.7 | 314.0 | 26.9 | 367.3 | 28.9 | 167.3 | 28.0 | 146.3 | 26.3 | ||||||||||||||||||||||||||||||||||||
Operating expenses | 169.4 | 27.7 | 191.4 | 29.7 | 336.3 | 28.8 | 380.7 | 30.0 | 170.9 | 28.6 | 166.9 | 30.0 | ||||||||||||||||||||||||||||||||||||
Restructuring costs | 0.1 | — | 12.3 | 1.9 | 4.8 | 0.4 | 16.5 | 1.3 | 1.5 | 0.3 | 4.7 | 0.8 | ||||||||||||||||||||||||||||||||||||
Operating loss | (1.8 | ) | (0.3 | ) | (12.8 | ) | (1.9 | ) | (27.1 | ) | (2.3 | ) | (29.9 | ) | (2.4 | ) | (5.1 | ) | (0.9 | ) | (25.3 | ) | (4.5 | ) | ||||||||||||||||||||||||
Non-operating items, net | (3.4 | ) | (0.5 | ) | (1.7 | ) | (0.3 | ) | (1.7 | ) | (0.1 | ) | (11.6 | ) | (0.9 | ) | (4.5 | ) | (0.7 | ) | 1.7 | 0.3 | ||||||||||||||||||||||||||
Loss from continuing operations before income tax benefit | (5.2 | ) | (0.8 | ) | (14.5 | ) | (2.2 | ) | (28.8 | ) | (2.4 | ) | (41.5 | ) | (3.3 | ) | (9.6 | ) | (1.6 | ) | (23.6 | ) | (4.2 | ) | ||||||||||||||||||||||||
Income tax benefit | (2.0 | ) | (0.3 | ) | (6.0 | ) | (0.9 | ) | (10.8 | ) | (0.9 | ) | (16.1 | ) | (1.3 | ) | (2.9 | ) | (0.5 | ) | (8.8 | ) | (1.6 | ) | ||||||||||||||||||||||||
Loss before discontinued operations and cumulative effect of accounting change | (3.2 | ) | (0.5 | ) | (8.5 | ) | (1.3 | ) | (18.0 | ) | (1.5 | ) | (25.4 | ) | (2.0 | ) | ||||||||||||||||||||||||||||||||
Loss from continuing operations | (6.7 | ) | (1.1 | ) | (14.8 | ) | (2.6 | ) | ||||||||||||||||||||||||||||||||||||||||
Discontinued operations, net | 21.3 | 3.5 | 1.2 | 0.2 | 22.7 | 1.9 | 2.7 | 0.2 | 1.0 | 0.2 | 1.4 | 0.2 | ||||||||||||||||||||||||||||||||||||
Income (loss) before cumulative effect of accounting change | 18.1 | 3.0 | (7.3 | ) | (1.1 | ) | 4.7 | 0.4 | (22.7 | ) | (1.8 | ) | ||||||||||||||||||||||||||||||||||||
Cumulative effect of accounting change | — | — | — | — | — | — | (229.9 | ) | (18.1 | ) | ||||||||||||||||||||||||||||||||||||||
Net loss | $ | (5.7 | ) | (0.9 | )% | $ | (13.4 | ) | (2.4 | )% | ||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 18.1 | 3.0 | % | $ | (7.3 | ) | (1.1 | )% | $ | 4.7 | 0.4 | % | $ | (252.6 | ) | (19.9 | )% | ||||||||||||||||||||||||||||||
Second Quarter and Fiscal Year-to-Date Financial ReviewOverview
Revenue increased 7.6% in Q1 2005 compared to the same period last year and benefited by $15.9 from the consolidation of two North America dealers and eight International dealers. Revenue in Q1 2005 also benefited by approximately $11.0 from favorable currency translation effects in our International segment. This is the first quarter of year over year revenue growth in over three years as general business conditions improved in North America. There was job growth during the quarter and an increase in large project orders. However, we are not yet seeing similar signs in key International markets. Competition remains intense in all major markets.
Cost of sales of 71.4% in Q1 2005 was a modest improvement over 71.8% in the prior year. North America had a 1.8 percentage point decrease in cost of sales while SDP and International increased by a combined 0.1 percentage point. North America cost of sales improved because of better overhead absorption on higher volume, higher labor productivity and benefits from previous restructuring activities. These benefits were partially offset by higher steel prices and relatively high price discounting. The newly consolidated dealers added $9.2 of cost of sales in Q1 2005.
Gross profit of 28.0% in Q1 2005 was up from 26.3% in Q1 2004 primarily due to lower restructuring costs in the current quarter. Restructuring costs included in gross profit for Q1 2005 related to previously announced plant consolidation activities in our North America and International segments and a lease impairment charge related to one of our PolyVision facilities that is no longer in use. These charges were partially offset by reductions of asset impairment reserves upon the sales of the related assets in our International segment. Restructuring costs in the prior year included severance charges for workforce reductions in North America and plant consolidation and closing costs in our International segment.
Operating expenses in Q1 2005 included $3.5 in unfavorable currency translation effects and $7.0 related to the newly consolidated dealers. The improvement in operating expenses as a percent of revenue over the prior year is a result of higher volume, continued cost controls, savings from previous restructuring activities and higher productivity. Restructuring costs related to operating expenses in Q1 2005 decreased versus the prior year and included severance charges for workforce
16
Our second quarter net income reflectsloss for Q1 2005 was $5.7, a significant improvement compared to Q1 2004. However, there were a number of items that positively impacted our operating performance during the quarter. The impact of these items represented an aggregate pre-tax total of approximately $8.4, or $5.9 after-tax, and about equally impacted cost of sales and operating expenses. Some of these items included favorable property tax settlements, reduction of credit reserves to specific customers and a gain from a customer’s prepayment of a large furniture lease, partially offset by a decrease in the cash surrender value of company owned life insurance as a result of changes in the stock and bond market. Items similar to these occur every quarter, however, they usually offset each other. We do not expect these items to recur in the future. The net loss in Q1 2004 was also positively impacted by items totaling approximately $3.5 pre-tax, or $2.2 after-tax, including an increase in the cash surrender value of company owned life insurance, savings from a week’s shutdown in North America, partially offset by additional credit reserves and additional workers’ compensation costs.
While we anticipate our long-term effective tax rate to be approximately 37% to 38%, it can vary from year to year, particularly in years with lower absolute profitability. When profits are low, the permanent tax items have a greater effect on sale of discontinued operations.a percentage basis. Based on preliminary estimates for the year, we used a 30% effective tax rate for Q1 2005.
As disclosedmentioned in Note 11 of1 to the condensed consolidated financial statements, the consolidation of two North America dealers and eight International dealers had no material effect on our Q1 2005 operating loss and net loss.
During Q1 2005, we sold ourresolved open matters related to the disposition of Attwood, marine business during the quarter for cash proceeds of $47.9 and anwhich resulted in a net after-tax gain from discontinued operations of $20.0. The results of Attwood and$1.0. These matters primarily included the gain on the sale are presented as discontinued operations. Thus, sales and net loss from continuing operations for the periods presented have been restated to exclude the results of Attwood.
We incurred an operating loss of $1.8, which includes $7.4 of restructuring costs in the quarter. The operating loss is an improvement over the prior year quarter, despite lower sales, due to better operating expense control and lower restructuring costs.
16
Revenue decreased 5.0% compared to Q2 2003 primarily due to the continued global industry downturn. However, revenue increased 10.2% over Q1 2004 primarily becausefavorable resolution of a 16.8% increaselawsuit (see further details in North America shipments.
Gross profit percent declined 2.3 points in Q2 2004 compared to Q2 2003 and 2.0 points on a year-to-date basis due to increased restructuring costs and increased underabsorption of fixed manufacturing costs due to lower revenue.
Operating expenses in the quarter were significantly lower than the prior year quarter in total dollars and declined 2.0 points as a percent of revenue. All business units have been focused on cost control, have reduced headcount and deferred or eliminated non-critical discretionary and project spending.
We incurred pre-tax restructuring costs, including severance and impairment charges, of $7.4 during the quarter including $4.9 of restructuring and impairment charges in International and $2.5 of restructuring, severance and impairment charges in North America. We have reduced our global workforce by more than 3,600 positions since Q2 2003 and by nearly 10,500 positions, or 43%, since Q3 2001.Part II, Item 1. Legal Proceedings).
Interest Expense; Other Income (Expense), Net; and Income Taxes
Three Months | ||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | Ended | ||||||||||||||||||||||||
May 28, | May 30, | |||||||||||||||||||||||||
Interest Expense; Other Income (Expense), Net; and Income | August 29, | August 23, | August 29, | August 23, | ||||||||||||||||||||||
Taxes | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||||
Interest Expense; Other Income (Expense), Net; and Income Taxes | Interest Expense; Other Income (Expense), Net; and Income Taxes | 2004 | 2003 | |||||||||||||||||||||||
Interest expense | Interest expense | $ | 5.1 | $ | 5.2 | $ | 9.9 | $ | 10.3 | Interest expense | $ | (5.2 | ) | $ | (4.8 | ) | ||||||||||
Other income (expense), net: | Other income (expense), net: | Other income (expense), net: | ||||||||||||||||||||||||
Interest income | $ | 1.0 | $ | 1.2 | $ | 1.9 | $ | 3.4 | Interest income | $ | 1.2 | $ | 0.9 | |||||||||||||
Gain (loss) on sales of leased assets | 0.1 | (0.4 | ) | 2.8 | (6.1 | ) | Gain on sales of leased assets | — | 2.7 | |||||||||||||||||
Loss on dealer transitions | (6.1 | ) | (0.1 | ) | (6.1 | ) | (1.4 | ) | Gain on disposal of property and equipment | — | 2.9 | |||||||||||||||
Gain (loss) on disposal of property and equipment | 7.1 | (0.5 | ) | 9.9 | (0.5 | ) | Miscellaneous, net | (0.5 | ) | — | ||||||||||||||||
Equity in net income of joint ventures and dealer transitions | 0.4 | 1.6 | 0.3 | 1.5 | ||||||||||||||||||||||
Miscellaneous, net | (0.8 | ) | 1.7 | (0.6 | ) | 1.8 | Total other income (expense), net | $ | 0.7 | $ | 6.5 | |||||||||||||||
Total other income (expense), net | $ | 1.7 | $ | 3.5 | $ | 8.2 | $ | (1.3 | ) | |||||||||||||||||
Total non-operating items, net | Total non-operating items, net | $ | (3.4 | ) | $ | (1.7 | ) | $ | (1.7 | ) | $ | (11.6 | ) | Total non-operating items, net | $ | (4.5 | ) | $ | 1.7 | |||||||
Effective income tax rate | Effective income tax rate | 37.5 | % | 37.5 | % | 37.5 | % | 37.5 | % | Effective income tax rate | 30.0 | % | 37.5 | % |
Average debt outstanding remained relatively stable in Q2 2004 andNon-operating items for the year-to-date period then ended compared to the same periods in the prior year. Thus,Q1 2005 primarily included normal interest expense remained stable during these periods.
and interest income. During 2003,Q1 2004, in addition to normal interest expense and interest income, we begansold a portion of our lease portfolio with a book value of $35.3 for proceeds of $38.0, netting a gain of $2.7. This sale was in connection with the implementation of a new leasing strategy for our Financial Services business. We will continue to originate leases for customers, but use a third party to provide lease funding. This relationship allows us to retain control over customer relationships without bearing the credit or residual riskThe net gain on disposal of property and equipment in Q1 2004 primarily related to those leases. In connection with this strategy, we have sold substantial portions of our lease portfolio since Q1 2003 resulting in a gain on the sale of leased assetsthe final portion of $2.8our Tustin, California property. This property was available for sale because we relocated the six months ended August 29, 2003. We continuemanufacturing operations to explore options to sell the remaining lease portfolio.
The loss on dealer transitions during Q2 2004 related to an International dealer transition investment originally made in 1999. We took over full ownership of this dealer during the quarter and reduced the carrying value of the investment to the net book value of the underlying tangible assets, which approximates its fair value.a smaller, more efficient facility.
17
During Q2 2004, we sold property in the United Kingdom for net cash proceeds of about $11.5 and a pre-tax non-operating gain of $7.0. The facility was idle for about 3 years as a result of prior restructuring work.
Business Segment Review
See additional information regarding our business segments in Note 1211 of the condensed consolidated financial statements.
North America
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
Income Statement Data— | ||||||||||||||||||||||||||||||||||||||||||||||||
North America | August 29, 2003 | August 23, 2002 | August 29, 2003 | August 23, 2002 | ||||||||||||||||||||||||||||||||||||||||||||
Income Statement Data—North America | May 28, 2004 | |||||||||||||||||||||||||||||||||||||||||||||||
May 30, 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 346.0 | 100.0 | % | $ | 377.7 | 100.0 | % | $ | 642.2 | 100.0 | % | $ | 768.7 | 100.0 | % | $ | 328.1 | 100.0% | $ | 296.2 | 100.0% | ||||||||||||||||||||||||||
Cost of sales | 259.8 | 75.1 | 285.3 | 75.6 | 490.8 | 76.4 | 579.2 | 75.3 | 250.0 | 76.2 | 230.9 | 78.0 | ||||||||||||||||||||||||||||||||||||
Restructuring costs | 2.4 | 0.7 | 0.9 | 0.2 | 5.3 | 0.8 | 3.6 | 0.5 | 3.6 | 1.1 | 2.9 | 1.0 | ||||||||||||||||||||||||||||||||||||
Gross profit | 83.8 | 24.2 | 91.5 | 24.2 | 146.1 | 22.8 | 185.9 | 24.2 | 74.5 | 22.7 | 62.4 | 21.0 | ||||||||||||||||||||||||||||||||||||
Operating expenses | 80.3 | 23.2 | 91.8 | 24.2 | 159.5 | 24.9 | 189.8 | 24.7 | 79.9 | 24.3 | 79.3 | 26.7 | ||||||||||||||||||||||||||||||||||||
Restructuring costs | 0.1 | — | 2.5 | 0.7 | 2.5 | 0.4 | 5.2 | 0.7 | 1.0 | 0.3 | 2.4 | 0.8 | ||||||||||||||||||||||||||||||||||||
Operating income (loss) | $ | 3.4 | 1.0 | % | $ | (2.8 | ) | (0.7 | )% | $ | (15.9 | ) | (2.5 | )% | $ | (9.1 | ) | (1.2 | )% | |||||||||||||||||||||||||||||
Operating loss | $ | (6.4 | ) | (1.9 | )% | $ | (19.3 | ) | (6.5 | )% | ||||||||||||||||||||||||||||||||||||||
North America revenue accounted for 56.5%54.9% of consolidated revenue in Q2 2004. Revenue decreased 8.4%Q1 2005 and increased 10.8% versus the prior year quarter. The increase in revenue was due to $13.4 of additional revenue from the consolidation of two dealers and an increase in furniture demand in the United States. Orders were significantly higher in Q1 2005 versus Q4 2004 due to normal seasonality and higher volume from large global customers who had significantly decreased their order rates during the last three fiscal years. During Q1 2005, North America enacted a surcharge on orders placed after April 25, 2004 in response to rapidly rising steel prices. This surcharge did not materially affect revenue during the quarter but increased 16.8% from Q1 2004. The decreasedid cause some customers to place orders earlier than they would have otherwise. Discounts and dealer incentives remained relatively high during the quarter and are indicative of intense competition in revenue compared to Q2 2003 was a result of the continued industry downturn. The increase from Q1 2004 reflects strong backlog at the end of Q1 2004, which shipped in Q2 2004. Orders increased slightly compared to Q1 2004, but were volatile throughout Q2 2004.marketplace.
Gross profit percentage was flatimproved 1.7 percentage points in the quarter versus Q1 2004 primarily as a result of plant rationalization and productivity improvements that more than offset higher discounting and higher steel prices.
Restructuring costs related to cost of sales recorded in the same period last year. Productivity improvementsquarter included asset impairment and cost reductions offset increasedseverance charges due to the previously announced consolidation of our wood manufacturing plants. The prior year quarter’s restructuring costs and underabsorption of fixed overhead. Also affecting gross profits were increased discounts, rebates and incentives which are subtracted from gross revenuerelated to calculate revenue. The increase in these items reduced gross profit by almost 1.0% of revenue versus the prior year quarter.severance for workforce reductions.
Operating expenses versusin Q1 2005 were 24.3% of revenue, a significant improvement over 26.7% in the prior year quarter declined significantly in total dollars andprimarily as a percentresult of revenue dueincreased volume and savings from previous workforce reductions. Operating expenses included $4.7 related to previous cost reduction activities and ongoing spending control. Total headcount as of August 29, 2003 was approximately 8,300,the newly consolidated dealers. Prior year operating expenses benefited from a reduction of about 21% compared to Q2 2003, or a reductionone-week shutdown during the quarter resulting in savings of approximately 47% since Q3 2001.$3.5.
Restructuring costs related to operating expenses included severance charges for workforce reductions in both Q1 2005 and Q1 2004.
We maintain loss reserves related to dealer trade receivables, and we closely monitor the financial condition of theseour dealers. Generally, Steelcase dealers in North America have successfully reduced costs and taken other steps to manage through the industry downturn. We have processes that allow us to monitor and react quickly to changes in the credit quality of our dealers. We believe our reserves adequately reflect thesethe credit risks.risks associated with the dealer trade receivables. However, if theseindividual dealers experience a prolonged or deeper reduction in revenues, the likelihood of losses would increase and additional charges or reserves would be necessary.
18
Steelcase Design Partnership
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
Income Statement Data— | ||||||||||||||||||||||||||||||||||||||||||||||||
Steelcase Design | August 29, 2003 | August 23, 2002 | August 29, 2003 | August 23, 2002 | ||||||||||||||||||||||||||||||||||||||||||||
Partnership | ||||||||||||||||||||||||||||||||||||||||||||||||
Income Statement Data — Steelcase Design Partnership | May 28, 2004 | |||||||||||||||||||||||||||||||||||||||||||||||
May 30, 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 73.4 | 100.0 | % | $ | 75.1 | 100.0 | % | $ | 140.4 | 100.0 | % | $ | 143.8 | 100.0 | % | $ | 70.4 | 100.0 | % | $ | 67.0 | 100.0 | % | ||||||||||||||||||||||||
Cost of sales | 45.8 | 62.4 | 45.5 | 60.6 | 87.3 | 62.2 | 87.2 | 60.6 | 44.0 | 62.5 | 41.5 | 62.0 | ||||||||||||||||||||||||||||||||||||
Gross profit | 27.6 | 37.6 | 29.6 | 39.4 | 53.1 | 37.8 | 56.6 | 39.4 | 26.4 | 37.5 | 25.5 | 38.0 | ||||||||||||||||||||||||||||||||||||
Operating expenses | 23.0 | 31.3 | 24.1 | 32.1 | 45.6 | 32.5 | 47.5 | 33.0 | 23.0 | 32.7 | 22.6 | 33.7 | ||||||||||||||||||||||||||||||||||||
Restructuring costs | — | — | 0.4 | 0.5 | — | — | 0.4 | 0.3 | ||||||||||||||||||||||||||||||||||||||||
Operating income | $ | 4.6 | 6.3 | % | $ | 5.1 | 6.8 | % | $ | 7.5 | 5.3 | % | $ | 8.7 | 6.1 | % | $ | 3.4 | 4.8 | % | $ | 2.9 | 4.3 | % | ||||||||||||||||||||||||
SDP revenue decreased 2.3%increased 5.1% compared to Q2 2003Q1 2004 and accounted for 12.0%11.8% of consolidated revenue in Q2 2004. Order rates have remained relatively stable withinQ1 2005. Higher volume during the SDP companies. Year-to-date SDP revenue has not declinedquarter was primarily driven by strong demand for new products in the ergonomic worktools business, as significantlywell as increases in daily demand in the North America segmentfabric and wall covering business.
Gross profit was down 0.5 percentage points, primarily due to less dependency on projectunfavorable product mix in the ergonomic worktools business and greater penetration outside commercial office furnitureincreases in inventory reserves in the fabric and wall covering business.
Operating expenses were 32.7% of revenue in the quarter, a 1.0 percentage point improvement over the prior year quarter. However, operating expenses were higher in absolute dollars due to increases in product development and showroom spending.
International
Three Months Ended | ||||||||||||||||
Income Statement Data—International | May 28, 2004 | |||||||||||||||
May 30, 2003 | ||||||||||||||||
Revenue | $ | 134.2 | 100.0 | % | $ | 129.8 | 100.0 | % | ||||||||
Cost of sales | 94.1 | 70.1 | 91.5 | 70.5 | ||||||||||||
Restructuring costs | (0.8 | ) | (0.6 | ) | 7.3 | 5.6 | ||||||||||
Gross profit | 40.9 | 30.5 | 31.0 | 23.9 | ||||||||||||
Operating expenses | 42.2 | 31.4 | 35.9 | 27.7 | ||||||||||||
Restructuring costs | 0.5 | 0.4 | 0.3 | 0.2 | ||||||||||||
Operating loss | $ | (1.8 | ) | (1.3 | )% | $ | (5.2 | ) | (4.0 | )% | ||||||
International revenue represented 22.5% of consolidated revenue in Q1 2005 and increased 3.4% compared to the same period in the prior year. Revenue in Q1 2005 included $11.0 of favorable currency translation benefits and included $2.5 of additional revenue from the consolidation of eight dealers. Many of the major European markets, such as healthcare, educationparticularly France and hospitality.Germany, are not yet showing the same signs of economic growth seen in the United States markets.
Gross profit droppedwas 30.5% of revenue in Q2the quarter, a 6.6 percentage point improvement versus Q1 2004. Lower restructuring costs in the quarter accounted for the majority of the gross profit percentage improvement.
Restructuring costs related to cost of sales in Q1 2005 included charges of $0.6 for facility rationalization initiatives in France, which were more than offset by reductions of $1.4 of asset impairment reserves upon the sales of idled assets in Brazil and the United Kingdom. Restructuring costs in Q1 2004 comparedincluded a $6.3 charge related to a change in our business model in Brazil. Included in this charge was a $4.1 non-cash currency translation loss, which had previously been reflected as a reduction in shareholders’ equity as a component ofAccumulated Other Comprehensive Loss. In addition, in Q1 2004 we recorded severance and facility rationalization charges of $1.0 for the shutdown of manufacturing operations in Portugal.
19
Cost of sales improved to 70.1% of revenue versus 70.5% in Q1 2004. The benefits from prior restructuring efforts were partially offset by continued pricing pressure across International markets, disruptions due to ongoing restructuring activities and implementation of a new logistics system.
Operating expenses in the quarter increased versus the prior year, primarily due to operational inefficiencies at some$3.5 of the companies, which ledunfavorable currency translation effects, $2.3 due to the underabsorption of fixed costs. There were nonew dealers consolidated and costs related to new product development and launch activities partially offset by savings from previous restructuring and impairmentactivities. Restructuring costs recorded in the quarter or year-to-date for 2004 or 2003.
The decrease inrelated to operating expenses in the quarter andQ1 2005 consisted of severance costs for the year was due to cost reductions implemented in the past year. There were no restructuring charges to operating expenses during the quarter. Restructuring costs recorded in the prior year related to severance charges.
International
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Income Statement Data— | ||||||||||||||||||||||||||||||||
International | August 29, 2003 | August 23, 2002 | August 29, 2003 | August 23, 2002 | ||||||||||||||||||||||||||||
Revenue | $ | 120.5 | 100.0 | % | $ | 117.3 | 100.0 | % | $ | 250.3 | 100.0 | % | $ | 224.9 | 100.0 | % | ||||||||||||||||
Cost of sales | 87.7 | 72.8 | 83.1 | 70.8 | 179.2 | 71.6 | 160.8 | 71.5 | ||||||||||||||||||||||||
Restructuring costs | 4.9 | 4.0 | — | — | 12.2 | 4.9 | 0.9 | 0.4 | ||||||||||||||||||||||||
Gross profit | 27.9 | 23.2 | 34.2 | 29.2 | 58.9 | 23.5 | 63.2 | 28.1 | ||||||||||||||||||||||||
Operating expenses | 39.1 | 32.5 | 39.1 | 33.4 | 75.1 | 30.0 | 76.4 | 34.0 | ||||||||||||||||||||||||
Restructuring costs | — | — | — | — | 0.2 | 0.1 | 1.5 | 0.6 | ||||||||||||||||||||||||
Operating loss | $ | (11.2 | ) | (9.3) | % | $ | (4.9) | (4.2) | % | $ | (16.4 | ) | (6.6) | % | $ | (14.7 | ) | (6.5) | % | |||||||||||||
International revenue represented 19.7% of consolidated revenue in Q2 2004. Revenue increased 2.7% compared to Q2 2003 and 11.3% on a year-to-date basis. This increase includes a $16.1 and a $15.3 currency translation benefit for the quarter and six month period ended August 29, 2003, respectively. Had currency exchange rates remained constant in the current year, revenue in Q2 2004 would have been about 11% lower than Q2 2003 and about 7% lower on a year-to-date basis. International markets are not yet showing consistent signs of recovery.
Restructuring charges in the quarter caused a 4.0 point decrease in margins versus one year ago, and 4.5 points of the 4.6-point decrease in the year-to-date margins. The remaining 2.0 decrease in Q2 2004 margins versus Q2 2003 was primarily due to underabsorption of fixed manufacturing costs, salary and wage increases in the current year and shipment of large projects with lower margins.
There were no restructuring or related charges recorded in Q2 2004 or Q2 2003 in operating expenses. Operating expenses as reported remained relatively stable for both the quarter and year-to-date periods, but declined significantly in constant dollars. Operating expenses as a percent of
19
Weak economic conditions in certain countries continue to put pressure on some of our dealers. We continue to monitor the financial condition of dealers for changes in credit quality. We believe our reserves adequately reflect these credit risks. However, if individual dealers experience a deeper reduction in revenues, the likelihood of losses would increase and additional charges or reserves would be necessary.
Other
Three Months Ended | Six Months Ended | |||||||||||||||
August 29, | August 23, | August 29, | August 23, | |||||||||||||
Income Statement Data— Other | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Revenue | $ | 72.2 | $ | 74.1 | $ | 134.8 | $ | 133.1 | ||||||||
Operating income (loss) | $ | 1.4 | $ | (10.2 | ) | $ | (2.3 | ) | $ | (14.8 | ) |
Three Months Ended | ||||||||
May 28, | May 30, | |||||||
Income Statement Data—Other | 2004 | 2003 | ||||||
Revenue | $ | 65.0 | $ | 62.6 | ||||
Restructuring costs | 0.8 | 2.0 | ||||||
Operating loss | (0.3 | ) | (3.7 | ) |
As mentionedOther revenue represented 10.8% of consolidated revenue in Note 12 of the condensed consolidated financial statements, the Other category includes the operating companies of Financial Services,Q1 2005 and increased in 3.8% versus Q1 2004 primarily due to new product sales in our PolyVision and IDEO and miscellaneous revenue and expenses from ventures and unallocated corporate expenses. The revenues and expenses generated from the businesses comprising the Other category are not directly tied to the office furniture manufacturing industry, thus have not been materially affected by the industry downturn.
As mentioned earlier, we sold substantially all the assets of the Attwood marine business during the quarter and are reporting it as a discontinued operation. As such, revenue and operating profit information was restated to exclude Attwood both for this quarter and prior periods. Attwood was previously included in the Other category.subsidiary.
The significant improvement in operating income (loss) for Q2loss in Q1 2005 compared to Q1 2004 was primarily due to reductions of credit reserves and the six month period ended August 29, 2003 versus the corresponding periodsa gain on early termination of the prior year is primarily attributed to the divestiture of an unprofitable business venturea customer lease in the prior fiscal year.
Theour Financial Services businessbusiness.
Restructuring costs included in Q1 2005 operating results were lease impairment costs associated with the shutdown of a facility. In Q1 2004, restructuring costs represented severance costs for workforce reductions.
Our Financial Services subsidiary provides lease financing to end customers and dealer financing.various forms of financing to our dealers. Our underlying net investment in leases represents multiple salesleases to individual end customers and there are some concentrations of credit risk with certain customers. We have processes that allow us to monitor and react quickly to changes in the credit quality of our lease customers. While the overall credit quality of our portfolio remained stable in Q1 2005, our risk of exposure decreased as customers became more financially stable. We closely monitor our receivable exposure and the overall financial condition of the dealers with whichin North America to whom we extend financing. We have processes that allow us to monitor and react quickly to changes in credit quality of our lease customers and dealers. We maintain loss reserves related to lease and dealer finance receivables andAlthough we believe our reserves adequately reflect the credit risks associated with the customers and dealers. However, aare adequate in total, deterioration in the financial stability of certain larger lease customers and dealers would likely require us to record additional charges and reserves. During Q1 2004, we outsourced lease fundings to a third party; therefore we no longer carry credit or residual risk for new leases.
20
Liquidity and Capital Resources
Payments Due by Period | ||||||||||||||||||||
Less than | 1-3 | 3-5 | After 5 | |||||||||||||||||
Contractual Obligations | Total | 1 year | years | years | years | |||||||||||||||
Long-term debt and short-term borrowings | $ | 316.0 | $ | 29.8 | $ | 32.5 | $ | 253.7 | $ | — | ||||||||||
Operating leases | $ | 267.6 | $ | 46.9 | $ | 72.9 | $ | 43.1 | $ | 104.7 |
20
Our total liquidity facilities asThe following table summarizes our statement of August 29, 2003 were:cash flows for the three months ended May 28, 2004 and May 30, 2003:
Amount | |||||
Global bank facility | $ | 250.0 | |||
Various uncommitted lines | 118.5 | ||||
Total credit lines available | 368.5 | ||||
Less: borrowings outstanding | 9.8 | ||||
Available capacity | $ | 358.7 | |||
Three Months Ended | |||||||||||||
May 28, | May 30, | Increase | |||||||||||
2004 | 2003 | (Decrease) | |||||||||||
Net cash flow provided by (used in): | |||||||||||||
Operating activities | $ | (41.2 | ) | $ | (62.0 | ) | $ | 20.8 | |||||
Investing activities | 16.6 | 28.7 | (12.1 | ) | |||||||||
Financing activities | (31.1 | ) | (5.3 | ) | (25.8 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | (0.5 | ) | 1.5 | (2.0 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | (56.2 | ) | (37.1 | ) | (19.1 | ) | |||||||
Cash and cash equivalents, beginning of period | 262.2 | 128.9 | 133.3 | ||||||||||
Cash and cash equivalents, end of period | $ | 206.0 | $ | 91.8 | $ | 114.2 | |||||||
As of August 29, 2003, our financial position includedFor the three months ended May 28, 2004, we decreased cash and cash equivalents of $172.6. Total consolidated debt as of August 29, 2003 was $316.0 consistingby $56.2 primarily of 5-year term notes and term financings from banks. Our consolidated debtdue to capitalization ratio was 20.3% at the end of the quarter compared to 20.8% at the end of Q4 2003. 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.
Of the $29.8 of debt payments due in less than one year, $19.6 relates to various United States and foreign term obligations with interest rates ranging from 5.96% to 8.21%. The remaining $10.2 relates to various foreign revolving credit facilities with interest rates ranging from 2.65% to 3.15%.
During Q2 2004, we finalized a new $250 million 3-year global committed bank facility. Our obligations under this facility are unsecured and unsubordinated. As of August 29, 2003, we had no borrowings against the facility. This facility replaced our $200 million 3-year global committed bank facility that was originally scheduled to expire in April 2004. The Company may, at its option, and subject to customary conditions, request to increase the aggregate commitment by up to $100 million by obtaining at least one commitment from one or more lenders. The new facility requires us to satisfy financial covenants including a minimum net worth covenant, a maximum debt ratio covenant and a minimum interest coverage ratio covenant. As of August 29, 2003, we are in compliance with all covenants under this facility and our other financing and lease facilities.
Our long-term debt rating is BBB from Standard & Poor’s and Baa3 from Moody’s Investor Services. Both agencies currently have the Company under review for possible downgrade. Any downgrade in our long-term debt rating by either agency could increase our facility fee and our cost of borrowing, should we choose to borrow under the facility. However, we do not believe anyseasonal increase in our facility fee or costworking capital requirements and the pay down of borrowing would be material to our financial statements. Additionally, a downgrade in our rating by one of the rating agencies below investment grade would trigger an asset coverage test covenant.
Cash Flowdebt.
Cash used in operating activities
Six Months Ended | ||||||||||||||||||
Three Months Ended | ||||||||||||||||||
August 29, | August 23, | May 28, | May 30, | |||||||||||||||
Cash Flow Data—Operating Activities | Cash Flow Data—Operating Activities | 2003 | 2002 | Cash Flow Data—Operating Activities | 2004 | 2003 | ||||||||||||
Net income (loss) | $ | 4.7 | $ | (252.6 | ) | |||||||||||||
Net loss | Net loss | $ | (5.7 | ) | $ | (13.4 | ) | |||||||||||
Depreciation and amortization | Depreciation and amortization | 71.9 | 76.7 | Depreciation and amortization | 32.1 | 35.5 | ||||||||||||
Cumulative effect of accounting change | — | 229.9 | ||||||||||||||||
Gain on sale of discontinued operations | (31.9 | ) | — | |||||||||||||||
Changes in operating assets and liabilities | Changes in operating assets and liabilities | (27.9 | ) | (58.2 | ) | Changes in operating assets and liabilities | (61.6 | ) | (76.6 | ) | ||||||||
Other, net | Other, net | (17.9 | ) | 2.7 | Other, net | (6.0 | ) | (7.5 | ) | |||||||||
Net cash used in operating activities | $ | (1.1 | ) | $ | (1.5 | ) | Net cash used in operating activities | $ | (41.2 | ) | $ | (62.0 | ) | |||||
21
Over Cash was used in operating activities through increases in net operating assets during the last six months,quarter. Working capital needs increased as revenue increased. We made a number of normal first quarter disbursements including approximately $30.0 for annual retirement contributions and long-term bonus payments, prepayments of insurance and semi-annual bond interest payments. These payments had the effect of either increasing prepaid assets or decreasing liabilities, which represented a use of cash from operating activities. In the prior year quarter, cash was used in operating activities due to similar payments in that period. Although operating activities did not generate enough cash for our capital expenditures, we had a slight use ofsufficient cash in operations duebalance during the quarter to the following:
The use of cash recorded as “Other, net” for the six months ended August 29, 2003 was primarily driven by gains on the sales of leased assets of $2.8 versus a loss of $6.1 for the same period last year and restructuring payments/ settlements of $3.1 compared to accruals of $2.9 in the prior year. See further explanation of the sales of leased assets in theInterest Expense; Other Income (Expense), Net; and Income Taxessection above.fund these needs.
Cash provided by investing activities
Six Months Ended | Three Months Ended | |||||||||||||||||
May 28, | May 30, | |||||||||||||||||
August 29, | August 23, | |||||||||||||||||
Cash Flow Data— Investing Activities | 2003 | 2002 | ||||||||||||||||
Cash Flow Data—Investing Activities | Cash Flow Data—Investing Activities | 2004 | 2003 | |||||||||||||||
Capital expenditures | Capital expenditures | $ | (19.3 | ) | $ | (44.7 | ) | Capital expenditures | $ | (14.6 | ) | $ | (11.2 | ) | ||||
Proceeds from the disposal of fixed assets | Proceeds from the disposal of fixed assets | 17.2 | 0.9 | Proceeds from the disposal of fixed assets | 3.4 | 4.6 | ||||||||||||
Proceeds on sale of discontinued operations | 47.9 | — | ||||||||||||||||
Proceeds from the sales of leased assets | Proceeds from the sales of leased assets | 39.8 | 178.0 | Proceeds from the sales of leased assets | — | 38.0 | ||||||||||||
Net (increase) decrease in notes receivable and leased assets | (16.2 | ) | 3.7 | |||||||||||||||
Net proceeds from repayments (fundings) of leases | Net proceeds from repayments (fundings) of leases | 17.6 | (5.6 | ) | ||||||||||||||
Net decrease in notes receivable | Net decrease in notes receivable | 6.3 | 2.1 | |||||||||||||||
Other, net | Other, net | 1.6 | 17.1 | Other, net | 3.9 | 0.8 | ||||||||||||
Net cash provided by investing activities | $ | 71.0 | $ | 155.0 | Net cash provided by investing activities | $ | 16.6 | $ | 28.7 | |||||||||
Capital expenditures were $8.1 in21
We generated cash from investing activities for the quarter for a total year-to-date amount that is more than 50% lower thanthree months ended May 28, 2004 primarily through the prior year. The economic downturn has reduced the need for expenditures relatednegotiated early repayment of customer leases.
We continue to additional capacity; as a result, capital expenditures are $47.6 less than depreciation on a year-to-date basis. Ourclosely scrutinize capital spending is focused on sustainingto ensure we are making the right investments to sustain the business and preservingto preserve our ability to introduce innovative, new innovative products. For the quarter, capital expenditures were about 50% of depreciation, which represented a source of cash.
During Q2In Q1 2004, we recorded proceedsgenerated cash from the disposal of fixed assets of $12.6. These included net proceeds of $11.5investing activities primarily from the sale of property in the United Kingdom, as discussed under theInterest Expense; Other Income (Expense), Net; and Income Taxessection above. The remainder of the proceeds from the disposal of fixed assets relates to various other properties sold in connection with our restructuring activities.
Proceeds on sale of discontinued operations were from the sale of our Attwood subsidiary. See additional information regarding the sale in Note 11 to the condensed consolidated financial statements and in theSecond Quarter and Fiscal Year to Date Financial Reviewsection above.
Sales of leased assets continued in Q2 2004 as our Financial Services business appliedsubsidiary continued the implementation of its new funding strategy. During the current quarter, leased assets were sold for proceeds of $1.8. The current year increase in notes receivable and leased assets is primarily due to increases in Financial Services project financing and asset-based lending to our North America dealers.
During Q2 2003, we sold a portion of our minority equity ownership in Modernform, which provided cash of $9.5. This is included in the “Other, net” component of the investing activities.
22
Cash used in financing activities
Three Months Ended | |||||||||||||||||
Six Months Ended | |||||||||||||||||
August 29, | August 23, | May 28, | May 30, | ||||||||||||||
Cash Flow Data—Financing Activities | Cash Flow Data—Financing Activities | 2003 | 2002 | 2004 | 2003 | ||||||||||||
Long-term debt issuances (repayments), net | $ | (9.4 | ) | $ | (117.1 | ) | |||||||||||
Long-term debt repayments, net | $ | (7.3 | ) | $ | (4.9 | ) | |||||||||||
Short-term borrowings (repayments), net | Short-term borrowings (repayments), net | 0.3 | (48.8 | ) | (15.2 | ) | 8.5 | ||||||||||
Common stock issuance | Common stock issuance | 0.3 | 3.6 | 0.3 | — | ||||||||||||
Dividends paid | Dividends paid | (17.7 | ) | (17.7 | ) | (8.9 | ) | (8.9 | ) | ||||||||
Net cash used in financing activities | $ | (31.1 | ) | $ | (5.3 | ) | |||||||||||
Net cash used in financing activities | $ | (26.5 | ) | $ | (180.0 | ) | |||||||||||
For the six months ended August 29, 2003, no significant or unusualThe primary use of cash in financing activities used or generated cash. In 2003,during Q1 2005 related to the retirement of about $23.0 in debt. The decrease in debt included the pay off of about $15.0 in debt established several years ago to help fund Financial Services leases in Canada. As we used cash generated by the saleschanged strategies within Financial Services, we no longer needed this debt. The remaining $8.0 of leased assetsdebt reduction related to pay down borrowings.normal scheduled net repayments across several facilities.
We paid common stock dividends of $0.06 per share during each of the first two quarters of 2004in Q1 2005 and 2003.Q1 2004. The exercise of employee stock options during Q1 2005 generated $0.3 and $3.6 of cash in Q2 2004 and Q1 2003, respectively.cash.
The Board of Directors has authorized share repurchases of up to 11 million shares. We did not repurchase any common shares for the sixthree months ended August 29, 2003May 28, 2004 or August May 30, 2003. Approximately 3.8 million shares remain available for repurchase under the Board’s authorization and we have no outstanding share repurchase commitments.
Off-Balance Sheet Arrangements
We are contingently liable under loan guarantees for certain Steelcase dealers and joint ventures in the event of default or non-performance of the financial repayment of the liability. We are also party to performance bonds for certain installation or construction activities of certain Steelcase dealers and a joint venture. Due to the contingent nature of guarantees and performance bonds, the full value of the guarantees and performance bonds are not recorded on our consolidated balance sheets; however, we have reserves recorded to cover potential losses. See Note 12 to the condensed consolidated financial statements for more information regarding guarantees and performance bonds.
22
Contractual Obligations
Our contractual obligations as of May 28, 2004 were as follows:
Payments Due by Period | ||||||||||||||||||||
Less than | 1-3 | 3-5 | After 5 | |||||||||||||||||
Contractual Obligations | Total | 1 year | years | years | years | |||||||||||||||
Long-term debt and short-term borrowings | $ | 331.4 | $ | 16.1 | $ | 311.8 | $ | 3.5 | $ | — | ||||||||||
Operating leases | 292.6 | 52.0 | 78.1 | 50.3 | 112.2 | |||||||||||||||
Committed capital expenditures | 19.9 | 9.7 | 10.2 | — | — | |||||||||||||||
Purchase obligations | 11.4 | 9.6 | 1.8 | — | — | |||||||||||||||
Other long-term liabilities | 244.5 | 40.7 | 43.5 | 43.7 | 116.6 | |||||||||||||||
Total | $ | 899.8 | $ | 128.1 | $ | 445.4 | $ | 97.5 | $ | 228.8 | ||||||||||
Total consolidated debt as of May 28, 2004 was $331.4 consisting primarily of term notes due November 2006. Our consolidated debt to capitalization ratio was 21.8% at the end of the quarter compared to 21.0% at the end of Q1 2004. The change in the debt to capitalization ratio was primarily due to $47.7 related to our synthetic lease structure included in debt in compliance with FIN 46(R), partially offset by the retirement of about $23.0 in debt during Q1 2005. These funds, in addition to the current cash and cash equivalents balance, cash generated from future operations and available credit facilities, are expected to be sufficient to finance our known or foreseeable liquidity and capital needs. Included in long-term debt and short-term borrowings are capital lease obligations totaling $2.1.
Of the $16.1 of debt payments due in less than one year (as presented in the contractual obligations table above), $7.6 relates to foreign currency notes payable and revolving credit facility obligations with interest rates ranging from 2.33% to 7.25%. The remaining $8.5 balance relates to United States dollar notes payable obligations with interest rates ranging from 5.96% to 8.00%.
The Company has commitments related to certain sales offices, showrooms, and equipment under non-cancelable operating leases that expire at various dates through 2020. Minimum payments for operating leases having initial or remaining non-cancelable terms less than one year and beyond are presented in the contractual obligation table above.
Committed capital expenditures represent obligations we have related to property, plant, equipment and software projects. We expect existing cash balances, as well as future cash flows from operating activities, will provide funds to fulfill these commitments.
We define purchase obligations as non-cancelable signed contracts to purchase goods or services beyond the needs of meeting current backlog or production.
Other long-term liabilities primarily represent contribution and benefit payments expected to be made for our defined contribution, deferred compensation, pension and post-retirement medical benefit plans. It should be noted our obligations related to post-retirement medical benefit plans are not contractual and the plans could be amended at the discretion of the Compensation Committee of the Board of Directors. We limited our disclosure of contributions and benefit payments to 10 years as information beyond this time period was not available. See Note 8 to the condensed consolidated financial statements for further discussion regarding these plans.
The contractual obligations table above is current as of May 28, 2004. The amounts of these obligations could change materially over time as new contracts or obligations are initiated and existing contracts or obligations are terminated or modified.
Cash and cash equivalents includes $24.4 invested in a money market fund, the use of which is restricted as collateral for our accrued liability related to our workers’ compensation program. If this restricted cash is needed for liquidity purposes, we can replace the collateral for our workers’
23 2002.
Our total liquidity facilities as of May 28, 2004 were:
Amount | |||||
Global committed bank facility | $ | 250.0 | |||
Various uncommitted lines | 124.0 | ||||
Total credit lines available | 374.0 | ||||
Less: borrowings outstanding | 6.1 | ||||
Available capacity (subject to covenant constraints) | $ | 367.9 | |||
Our obligations under the $250.0 3-year global committed bank facility are unsecured and unsubordinated. As of May 28, 2004, we had no borrowings against this facility. The Company may, at its option, and subject to customary conditions, request to increase the aggregate commitment by up to $100.0 by obtaining at least one commitment from one or more lenders. This facility and certain of our other financing and lease facilities require us to satisfy financial covenants including a minimum net worth covenant, a maximum debt ratio covenant, a minimum interest coverage ratio covenant and an asset coverage ratio covenant. Although we have $367.9 of available capacity, our maximum debt ratio covenant would limit additional borrowings to approximately $115.0 as of May 28, 2004. We were in compliance with all covenants under this facility and our other financing and lease facilities as of the end of Q1 2005. The amounts available to us under the various uncommitted lines are subject to change or cancellation by the banks at any time. Our long-term debt rating is BBB- from Standard & Poor’s and Ba1 from Moody’s Investor Services.
Recently Issued Accounting Standards
See Note 2 of the unaudited condensed consolidated financial statements.
Forward LookingForward-Looking Statements
From time to time, in written reports and oral statements, the Companycompany discusses its expectations regarding future performance. For example, certain portions ofevents. Statements and financial discussion and analysis contained in this report contain various “forward-lookingthat are not historical facts are forward-looking statements. These statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to the company, based on current beliefs of management as well as assumptions made by, and information currently available to, Steelcase. Forward-looking statements generally will be accompanied by words such as “anticipate,” Such“believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. Although Steelcase believes these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve certaina number of risks and uncertainties that could cause actual results to vary. The Company’s performance mayImportant factors that could cause actual results to differ materially from that contemplated bythe forward-looking statements for a variety of reasons, including, but not limited to:include, without limitation: competitive and general economic conditions/conditions and uncertainty domestically and internationally; delayed or lost sales and other impacts related to acts of terrorism, acts of war or governmental action; changes in domestic or international laws, rules and regulations, including the impact of changed environmental laws, rules or regulations; major disruptions at our key facilities or in the supply of any key raw materials;materials, components or finished goods; competitive pricing pressure; pricing changes by the Companycompany, its competitors or its competitors;suppliers; currency fluctuations; changes in customer demand and order patterns; changes in the financial stability of customers, or dealers (including changes in their ability to pay for product and services, dealer financing and other amounts owed to the Company);company) or suppliers; changes in relationships with customers, suppliers, employees and dealers; product (sales) mix;dealers, the mix of products sold
24
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange RisksRisk
During Q2 2004,Q1 2005, no material change in foreign exchange risksrisk occurred.
Interest RatesRate Risk
During Q2 2004,Q1 2005, no material change in interest rate risksrisk occurred.
Equity Price Risk
During Q1 2005, no material change in equity price risk occurred.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and its Chief Financial Officer, after evaluatingevaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act)Act of 1934, as amended (the “Exchange Act”)), haveas of May 28, 2004. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of August 29, 2003,May 28, 2004, the Company’s disclosure controls and procedures were adequateeffective in recording, processing, summarizing and effectivereporting, on a timely basis, information required to ensure that material information relating tobe disclosed by the Company would be made known to them by others within those entities.in the reports that it files or submits under the Exchange Act.
(b) Internal Controls. During the period covered by this report, thereControl Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in litigation from time to timeOn May 26, 2004, the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”) filed its decision in the ordinary course of our business. Based on known information, we believe we are not a party to any lawsuit or proceeding that is likely to have a material adverse effect on the Company.
Notwithstanding the above, in connection with the stack tests at the Grand Rapids energy center, the Company has completed modeling to access the potential impactappeal of the variancejudgment rendered in the stack diameter. The Michigan Departmentfavor of Environment Quality (“MDEQ”) has concurred with our conclusion that the modeling demonstrates no adverse emission impact arising from the stack diameter variance. Although these preliminary communications are positive, the MDEQ and/or the Environmental Protection Agency (“EPA”) could seek to impose penalties or other costs in connection with the notice of violation issued on April 24, 2003. Any potential penalties or costs cannot be estimated at this time.Propulsion Technologies, Inc. d/b/a
2425
On June 8, 2004, PowerTech filed a Petition for Panel Rehearing, requesting that the Fifth Circuit grant a rehearing and uphold the judgment or, in the alternative, order that the case be retried. On June 25, 2004, the Fifth Circuit entered an order denying the Petition for Rehearing.
None
None
The Company held its annual meeting of shareholders on June 26, 2003. At this meeting, shareholders voted on one proposal presented in the Company’s definitive proxy statement. The results of the votes follow:
1. Proposal to elect three Directors to serve three-year terms expiring at the 2006 annual meeting.
For | Withheld | |||||||
William P. Crawford | 962,769,383 | 16,078,346 | ||||||
Elizabeth Valk Long | 968,558,058 | 10,289,671 | ||||||
Robert C. Pew III | 962,941,798 | 15,905,931 |
There were no votes cast against, abstentions or broker non-votes with respect to any nominee named above. Directors continuing in office: James P. Hackett, Earl D. Holton, Michael J. Jandernoa, David W. Joos, Peter M. Wege II, P. Craig Welch, Jr. and Kate Pew Wolters.
None
Item 6. Exhibits and Reports on Form 8-K
a. EXHIBITS
See Exhibit Index. |
b. REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed June 24, 2003 reportingMarch 30, 2004 under Item 12, Results of Operations and Financial Condition, regarding Steelcase Inc.’s firstfourth quarter fiscal 2004 earnings release.
A Current Report on Form 8-K was filed June 24, 2003 reporting under Item 9, Regulation FD Disclosure, Steelcase Inc. held a public webcast regarding its first quarter 2004 results, which were announced on June 23, 2003.
A Current Report on Form 8-K was filed June 26 2003 reporting under Item 5, Other Events, Steelcase Inc. announced that its Board of Directors named Robert C. Pew III as non-executive board chair and announced the re-election of Mr. Pew III, Lisa Valk Long and William P. Crawford to serve additional three-year terms as directors.
A Current Report on Form 8-K was filed August 7, 2003 reporting under Item 5, Other Events and Regulation FD Disclosure, Steelcase Inc. completed a new $250 million syndicated bank facility on July 29, 2003. The new Credit Agreement was attached as Exhibit 10.1 under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits.
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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. |
By: | /s/ JAMES P. KEANE |
James P. Keane | |
Senior Vice President, | |
Chief Financial Officer | |
(Duly Authorized Officer and | |
Principal Financial Officer) |
Date: October 10, 2003July 7, 2004
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EXHIBIT INDEX
Exhibit | ||||
No. | Description | |||
31.1 | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
31.2 | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
32.1 | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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