UNITED STATES

FORM 10-Q

STEELCASE INC.

(616) 247-2710

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x          No o

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

     As of 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

2

STEELCASE INC.

See accompanying notes to the condensed consolidated financial statements.

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STEELCASE INC.

See accompanying notes to the condensed consolidated financial statements.

4

STEELCASE INC.

See accompanying notes to the condensed consolidated financial statements.

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STEELCASE INC.

(Unaudited)

1.     BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended February 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).

     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

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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

     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.

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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.

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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.

     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.

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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.

     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:

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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:

     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:

     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.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

8.     EMPLOYEE BENEFIT PLAN OBLIGATIONS

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

9.     RESTRUCTURING CHARGES

     During 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:

     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.

     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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

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

     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:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

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.