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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 24, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-13873
----------------
STEELCASE INC.
Michigan 38-0819050
(State of incorporation) (I.R.S. Employer Identification No.)
901 44th Street 49508
Grand Rapids, Michigan (Zip Code)
(Address of principal executive
offices)
(616) 247-2710
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common stock, as of the latest practicable date: As of September 28, 2001, the
Registrant had outstanding 33,207,507 shares of Class A Common Stock and
114,087,992 shares of Class B Common Stock.
Exhibit index located on page 24.
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STEELCASE INC.
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 24, 2001
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
for the Three and Six Months Ended August 24, 2001 and August 25,
2000............................................................... 3
Condensed Consolidated Balance Sheets
as of August 24, 2001 and August 25, 2000.......................... 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended August 24, 2001 and August 25, 2000....... 5
Notes to Condensed Consolidated Financial Statements................ 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 13-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 21
Part II. Other Information
Item 1. Legal Proceedings............................................. 22
Item 2. Changes in Securities......................................... 22
Item 3. Defaults upon Senior Securities............................... 22
Item 4. Submission of Matters to a Vote of Security Holders........... 22
Item 5. Other Information............................................. 22
Item 6. Exhibits and Reports on Form 8-K.............................. 22
Signatures............................................................ 23
Exhibit Index......................................................... 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in millions, except per share data)
Three Months
Ended Six Months Ended
----------------- ------------------
Aug.
24, Aug. 25, Aug. 24, Aug. 25,
2001 2000 2001 2000
------- -------- -------- --------
Furniture revenue...................... $ 771.6 $1,016.4 $1,655.7 $1,993.1
Finance revenue........................ 20.9 19.3 42.0 35.8
------- -------- -------- --------
Total revenue........................ 792.5 1,035.7 1,697.7 2,028.9
Cost of sales.......................... 543.2 692.2 1,162.3 1,351.5
------- -------- -------- --------
Gross profit........................... 249.3 343.5 535.4 677.4
Operating expenses..................... 236.9 250.8 474.4 487.3
------- -------- -------- --------
Operating income....................... 12.4 92.7 61.0 190.1
Interest expense....................... (4.4) (7.0) (10.0) (11.6)
Other income (expense), net............ 2.3 1.8 (2.2) 12.5
------- -------- -------- --------
Income before provision for income
taxes and equity in net income (loss)
of joint ventures and dealer
transitions........................... 10.3 87.5 48.8 191.0
Provision for income taxes............. 3.9 33.2 18.1 73.6
------- -------- -------- --------
Income before equity in net income
(loss) of joint ventures and dealer
transitions........................... 6.4 54.3 30.7 117.4
Equity in net income (loss) of joint
ventures and dealer transitions....... 0.1 (0.6) (0.3) (1.1)
------- -------- -------- --------
Net income............................. $ 6.5 $ 53.7 $ 30.4 $ 116.3
======= ======== ======== ========
Earnings per share (basic and
diluted).............................. $ 0.04 $ 0.36 $ 0.21 $ 0.77
======= ======== ======== ========
Dividends per share of common stock.... $ 0.11 $ 0.11 $ 0.22 $ 0.22
======= ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
STEELCASE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(Unaudited)
Aug. 24, Feb. 23,
ASSETS 2001 2001
------ ----------- --------
Current assets:
Cash and cash equivalents................................... $ 43.5 $ 25.3
Accounts receivable, net.................................... 489.1 603.2
Notes receivable and leased assets.......................... 224.0 270.4
Inventories................................................. 155.1 184.7
Other current assets........................................ 157.1 122.1
--------- --------
Total current assets.................................. 1,068.8 1,205.7
Property and equipment, net................................... 917.0 933.8
Notes receivable and leased assets............................ 347.8 341.9
Joint ventures and dealer transitions......................... 43.9 45.2
Goodwill and other intangible assets, net..................... 391.8 405.1
Other assets.................................................. 257.3 225.3
--------- --------
Total assets.................................................. $ 3,026.6 $3,157.0
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................................ $ 198.5 $ 254.1
Short-term borrowings and current portion of long-term
debt....................................................... 303.1 209.7
Accrued expenses:
Employee compensation..................................... 112.4 119.6
Employee benefit plan obligations......................... 59.9 84.8
Other..................................................... 225.9 217.7
--------- --------
Total current liabilities............................. 899.8 885.9
--------- --------
Long-term liabilities:
Long-term debt.............................................. 207.4 327.5
Employee benefit plan obligations........................... 239.9 247.7
Other long-term liabilities................................. 60.6 59.4
--------- --------
Total long-term liabilities........................... 507.9 634.6
--------- --------
Total liabilities..................................... 1,407.7 1,520.5
--------- --------
Shareholders' equity:
Common stock................................................ 282.0 286.2
Accumulated other comprehensive income (loss)............... (38.2) (30.0)
Retained earnings........................................... 1,375.1 1,380.3
--------- --------
Total shareholders' equity............................ 1,618.9 1,636.5
--------- --------
Total liabilities and shareholders' equity............ $ 3,026.6 $3,157.0
========= ========
See accompanying notes to condensed consolidated financial statements.
4
STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Six Months Ended
-----------------
Aug. 24, Aug. 25,
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income.................................................. $ 30.4 $116.3
Depreciation and amortization............................... 85.8 78.1
Changes in current assets and liabilities................... (11.3) (107.3)
Other, net.................................................. 22.0 6.3
------ ------
Net cash provided by operating activities................. 126.9 93.4
------ ------
INVESTING ACTIVITIES
Capital expenditures........................................ (67.3) (130.6)
Proceeds from the disposal of assets........................ -- 80.2
Net decrease (increase) in notes receivable and leased
assets..................................................... 36.8 (104.3)
Other, net.................................................. (25.8) (12.6)
------ ------
Net cash used in investing activities..................... (56.3) (167.3)
------ ------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.................... 257.2 94.2
Repayments of debt.......................................... (343.1) (42.6)
Short-term borrowings (repayments), net..................... 70.5 51.4
Common stock issuance....................................... 0.2 --
Common stock repurchase..................................... (4.4) (21.9)
Dividends paid.............................................. (32.4) (33.1)
------ ------
Net cash provided by (used in) financing activities....... (52.0) 48.0
------ ------
Effect of exchange rate changes on cash and cash
equivalents.............................................. (0.4) (1.7)
------ ------
Net increase (decrease) in cash and cash equivalents.... 18.2 (27.6)
Cash and cash equivalents, beginning of period........ 25.3 73.7
------ ------
Cash and cash equivalents, end of period.............. $ 43.5 $ 46.1
====== ======
See accompanying notes to condensed consolidated financial statements.
5
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles 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
the registrant's Annual Report on Form 10-K for the fiscal year ended February
23, 2001 (the "10-K Report"). For purposes hereof, "Steelcase Inc." or the
"Company" means Steelcase Inc. and its majority owned subsidiaries unless the
context requires otherwise.
In prior years, the results for the Company's European operations,
Steelcase S.A., (formerly known as Steelcase Strafor), were reported on a two-
month lag. Effective February 24, 2001, Steelcase S.A. is reported consistent
with the Company's fiscal year in the accompanying financial statements.
Therefore, the year-over-year comparison for the Steelcase S.A. portion of the
International segment is based on different calendar months. The first six
months of fiscal 2002 includes Steelcase S.A.'s income statement and statement
of cash flows for the six months ended August 24, 2001 and its balance sheet
as of August 24, 2001. The first six months of fiscal 2001 includes Steelcase
S.A.'s income statement and statement of cash flows for the six months ended
June 30, 2000 and its balance sheet as of June 30, 2000. The reporting change
does not have a material effect on the Company's results of operations and
financial position.
Reclassification
The Company has reclassified certain amounts from fiscal 2001 ("2001")
related to the Operating Segments footnote to conform to the fiscal 2002
("2002") presentation.
Effective for the periods ended August 24, 2001, per the guidance from
Emerging Issues Task Force ("EITF") Issue 00-10 Accounting for Shipping and
Handling Fees and Costs, the Company changed the classification of certain
shipping and handling costs. This change had the effect of increasing both
revenue and cost of sales by equal amounts, and therefore, does not impact
gross profit, operating income or net income in terms of dollars (all
calculations as a percentage of revenue are affected). Restated quarterly and
annual data below reflects this reclassification.
6
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following table provides data restated for EITF Issue 00-10 (in
millions):
Q1 Q2 Q3 Q4 Year to date
--------------- --------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Fiscal 2002
Revenue................. $ 905.2 100.0% $ 792.5 100.0% $ 1,697.7 100.0%
Cost of sales........... 619.1 68.4% 543.2 68.5% 1,162.3 68.5%
Gross profit............ 286.1 31.6% 249.3 31.5% 535.4 31.5%
Operating expense....... 237.5 26.2% 236.9 29.9% 474.4 27.9%
Operating income........ 48.6 5.4% 12.4 1.6% 61.0 3.6%
Net income.............. 23.9 2.6% 6.5 0.8% 30.4 1.8%
Fiscal 2001
Revenue................. $ 993.2 100.0% $ 1,035.7 100.0% $ 1,034.4 100.0% $ 985.7 100.0% $ 4,049.0 100.0%
Cost of sales........... 659.3 66.4% 692.2 66.8% 696.5 67.3% 692.3 70.2% 2,740.3 67.7%
Gross profit............ 333.9 33.6% 343.5 33.2% 337.9 32.7% 293.4 29.8% 1,308.7 32.3%
Operating expense....... 236.5 23.8% 250.8 24.2% 258.7 25.0% 256.3 26.0% 1,002.3 24.7%
Operating income........ 97.4 9.8% 92.7 9.0% 79.2 7.7% 37.1 3.8% 306.4 7.6%
Net income.............. 62.6 6.3% 53.7 5.2% 51.7 5.0% 25.7 2.6% 193.7 4.8%
Fiscal 2000
Revenue................. $ 724.7 100.0% $ 872.9 100.0% $ 923.8 100.0% $ 953.4 100.0% $ 3,474.8 100.0%
Cost of sales........... 465.5 64.2% 584.4 66.9% 622.2 67.4% 671.8 70.5% 2,343.9 67.5%
Gross profit............ 259.2 35.8% 288.5 33.1% 301.6 32.6% 281.6 29.5% 1,130.9 32.5%
Operating expense....... 174.8 24.2% 219.6 25.2% 223.2 24.1% 238.8 25.0% 856.4 24.6%
Operating income........ 84.4 11.6% 68.9 7.9% 78.4 8.5% 42.8 4.5% 274.5 7.9%
Net income.............. 56.7 7.8% 38.2 4.4% 45.3 4.9% 44.0 4.6% 184.2 5.3%
2001 2000 1999 1998 1997
--------------- --------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Revenue................. $ 4,049.0 100.0% $ 3,474.8 100.0% $ 2,873.3 100.0% $ 2,884.1 100.0% $ 2,516.3 100.0%
Cost of sales........... 2,740.3 67.7% 2,343.9 67.5% 1,864.9 64.9% 1,865.1 64.7% 1,647.3 65.5%
Gross profit............ 1,308.7 32.3% 1,130.9 32.5% 1,008.4 35.1% 1,019.0 35.3% 869.0 34.5%
Operating expense....... 1,002.3 24.7% 856.4 24.6% 682.5 23.8% 691.3 23.9% 718.2 28.5%
Operating income........ 306.4 7.6% 274.5 7.9% 325.9 11.3% 327.7 11.4% 150.8 6.0%
Net income.............. 193.7 4.8% 184.2 5.3% 221.4 7.7% 217.0 7.5% 27.7 1.1%
Retained Earnings Roll-forward
The following table reconciles the roll-forward of retained earnings (in
millions):
Retained earnings as of February 23, 2001........................... $1,380.3
Dividends paid...................................................... (32.4)
Net income.......................................................... 30.4
Steelcase S.A. net income (loss).................................... (3.2)
--------
Retained earnings as of August 24, 2001............................. $1,375.1
========
Steelcase S.A. net loss for the two-month period ("stub period") ended
February 23, 2001 was $3.2 million. Steelcase S.A. revenue generated for the
stub period was $102.0 million.
7
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
New Accounting Standards
Effective February 24, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments
and Hedging Activities as amended by SFAS No. 137 and SFAS No. 138. These
statements require the Company to recognize all derivative instruments on the
balance sheet at fair value and establish criteria for designation and
effectiveness of hedging relationships. A fair value hedge requires that the
effective portion of the change in the fair value of a derivative instrument
be offset against the change in the fair value of the underlying asset,
liability, or firm commitment being hedged through earnings. A cash flow hedge
requires that the effective portion of the change in the fair value of a
derivative instrument be recognized in Other Comprehensive Income (OCI), a
component of Shareholders' Equity, and reclassified into earnings in the
period or periods during which the hedged transaction affects earnings. Any
ineffective portion of a derivative instrument's change in fair value is
immediately recognized in earnings. As disclosed in further detail below, the
2002 unaudited condensed consolidated financial statements include the
provisions required by SFAS No. 133, as amended, while the 2001 unaudited
condensed consolidated financial statements were prepared in accordance with
the applicable professional literature for derivatives and hedging instruments
in effect at that time.
Steelcase Inc. uses derivative financial instruments to principally manage
two types of risk. First, the risk that interest rate changes will affect
either the fair value of its debt obligations or the amount of its future
interest payments. Second, the Company uses foreign exchange contracts to
hedge the risk that unremitted or future cash flows owed to the Company for
the sale or anticipated sale of products abroad and other cash inflows; and
the risk that future payments by the Company for the purchase or anticipated
purchase of products abroad and other cash outflows may be adversely affected
by changes in the foreign currency rates.
The Company formally documents the relationship between hedging instruments
and hedged items, as well as the risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivative instruments that are designated as fair value or cash flow hedges
to specific assets and liabilities on the balance sheet or to specific
forecasted transactions. The Company also formally assesses, both at the
inception of the hedge and on an ongoing basis, whether the derivative
instruments used are highly effective in offsetting changes in fair values or
cash flows of hedged items. If it is determined that the derivative instrument
is not highly effective as a hedge, hedge accounting is discontinued.
The adoption of SFAS No. 133, as amended, resulted in the Company recording
transition adjustments as of February 24, 2001 to its derivative instruments
at fair value and to recognize the ineffective portion of the change in fair
value of its derivatives. The cumulative effect of these transition
adjustments was an after-tax reduction to net income of approximately $0.1
million and an after-tax decrease to OCI of approximately $5.1 million. Due to
immateriality, the transition adjustments and subsequent changes in fair
values of the derivatives for the first quarter ended May 25, 2001 were
recorded as a net adjustment for the quarter and the initial impact on income
was not reported as a cumulative effect adjustment. The impact for the six
months ended August 24, 2001 resulting from subsequent changes in fair value
of the derivatives was a $2.5 million reduction to OCI, net of tax. The total
adjustment resulted in an after-tax reduction to net income of $0.5 million
and a net decrease to OCI of $7.6 million. The decrease in OCI is primarily
related to net losses on interest rate swap cash flow hedges.
8
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Earnings Per Share
The following table reconciles the numerator and denominators used in the
calculations of basic and diluted earnings per share ("EPS") (in millions):
Three Months Six Months
Ended Ended
----------------- -----------------
Aug. 24, Aug. 25, Aug. 24, Aug. 25,
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Net income numerator for both basic
and diluted EPS...................... $ 6.5 $ 53.7 $ 30.4 $116.3
====== ====== ====== ======
Denominators:
Denominator for basic EPS-weighted
average common shares outstanding.... 147.3 150.1 147.4 150.5
Potentially dilutive shares resulting
from stock options................... 0.3 0.5 0.2 0.3
------ ------ ------ ------
Denominator for diluted EPS........... 147.6 150.6 147.6 150.8
====== ====== ====== ======
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 the Company's Stock Incentive Plans, had been issued. Diluted
earnings per share includes effects of the Company's Stock Incentive Plans.
Due to their anti-dilutive effect, the Company has not included the effects of
3.9 million and 2.7 million options in its calculation of diluted earnings per
share for the periods ended August 24, 2001 and August 25, 2000, respectively.
Comprehensive Income
Comprehensive income is comprised of net income and all changes to
shareholders' equity, except those due to investments by shareholders and
distributions to shareholders. Comprehensive income and its components consist
of the following (in millions):
Three Months Six Months
Ended Ended
----------------- -----------------
Aug. 24, Aug. 25, Aug. 24, Aug. 25,
2001 2000 2001 2000
-------- -------- -------- --------
Net income............................. $ 6.5 $53.7 $30.4 $116.3
Other comprehensive income:
Minimum pension liabilities, net of
tax................................. -- (0.3) -- (0.3)
Foreign currency translation loss.... (4.3) (3.4) (0.6) (14.3)
Unrealized loss on investments....... -- -- -- (0.4)
Unrealized loss on derivative
instruments, net of tax............. (1.1) -- (7.6) --
----- ----- ----- ------
Comprehensive income............... $ 1.1 $50.0 $22.2 $101.3
===== ===== ===== ======
9
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued based upon the last-in, first-out ("LIFO") method and the average cost
method. Inventories determined by the LIFO method aggregated $106.7 million
and $127.2 million at August 24, 2001 and February 23, 2001, respectively.
Inventories consist of (in millions):
Feb.
Aug. 24, 23,
2001 2001
-------- ------
Finished goods.............................................. $ 72.5 $ 84.0
Work in process............................................. 35.7 42.1
Raw materials............................................... 89.6 102.3
------ ------
197.8 228.4
LIFO reserve................................................ (42.7) (43.7)
------ ------
$155.1 $184.7
====== ======
Short-Term Borrowings and Long-Term Debt
During the first quarter of fiscal 2002, the Company established
commitments for two unsecured multi-currency revolving credit facilities with
various financial institutions under which it may borrow up to a U.S. dollar
equivalent of $200.0 million under each facility for a total U.S. dollar
equivalent of up to $400.0 million. One facility has a 364-day term and the
other facility has a three-year term. These facilities replaced both the
$200.0 million 364-day unsecured committed revolving credit facility entered
into in April 1999 and the EUR 200.0 million unsecured committed multi-
currency revolving credit facility entered into in August 1999. Borrowings
under the new facilities mature at various dates throughout the year depending
upon the borrowing terms, which range from one day to six months as selected
by the Company, subject to certain limitations. Interest on committed
borrowings with a term of one month or greater, which is due no later than the
maturity of such borrowings, is based on LIBOR plus a margin or a base rate,
as selected by the Company. Interest on committed borrowings with a term of
less than one month is based on prime rate plus a margin or a base rate. The
agreements may be renewed, subject to certain conditions and they contain
certain covenants which include, among others, requirements for a minimum
level of tangible net worth, a minimum interest coverage ratio and a maximum
ratio of debt to earnings. As of August 24, 2001, these facilities had no
borrowings against them.
The Company also implemented a $400.0 million global commercial paper
("CP") program on June 20, 2001. The CP program replaced the borrowings under
the new aggregate $400.0 million global facilities, leaving such facilities
available to backstop the CP program. The notes may be denominated in U.S.
Dollars, euro and/or Japanese Yen, subject to compliance with any applicable
legal and regulatory requirements, with maturities ranging from 1 to 365 days.
The notes may be issued at a discount or may bear fixed or floating rate
interest or coupon calculated by reference to an index or formula. As of
August 24, 2001, the Company had issued $184.9 million of euro commercial
paper with an effective interest rate of 4.63%. All of the outstanding notes
bear a fixed interest rate based on LIBOR.
During the first quarter, the Company also entered into additional
borrowing arrangements of $16.4 million, which mature in 2008 and had a
weighted average interest rate of 6.18% as of August 24, 2001.
10
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Common Stock Repurchase Program
On June 17, 1998, the Company's Board of Directors ("Board") approved a
common stock repurchase program authorizing the repurchase of up to three
million shares of Class A and Class B common stock. On September 22, 1999 and
September 20, 2000, the Board authorized common stock repurchases of up to an
additional three million and five million shares, respectively. The total
share repurchase authorization is 11 million shares.
During the second quarter of 2002, the Company repurchased 35,800 Class B
common shares at a cost of $0.4 million. Year to date in 2002, the Company
repurchased 200,000 shares of Class A Common Stock for $2.6 million and
143,200 shares of Class B Common Stock for $1.8 million. As of August 24,
2001, total repurchases since the inception of the program amounted to $112.6
million; 3,824,593 shares remain available for repurchase under the program
and the Company has no outstanding share repurchase commitments.
Operating Segments
The Company is actively pursuing a user-centered product and services
strategy, which seeks to integrate the three key components of the office
environment--architecture, furniture and technology. The Company's principle
revenue is currently derived from the manufacture of an extensive range of
steel and wood office furniture products. Primary product lines include office
furniture systems, seating, storage solutions, desk and casegoods and interior
architectural products. The Company also provides services and is engaged in
non-furniture businesses, which include marine accessories, design services,
financial services and consulting services. The Company operates on a
worldwide basis and has three reportable segments: two geographic
manufacturing and sales segments, North America and International and a
Financial Services segment. The Company evaluates performance and allocates
resources based on operating income.
The following sets forth reportable segment data reconciled to the
condensed consolidated financial statements (in millions):
Three Months Ended Six Months Ended
--------------------- ------------------
Aug. 24, Aug. 25, Aug. 24, Aug. 25,
2001 2000 2001 2000
--------- ---------- -------- --------
Revenue
North America..................... $ 620.7 $ 822.3 $1,336.8 $1,625.4
International..................... 150.9 194.1 318.9 367.7
Financial Services................ 20.9 19.3 42.0 35.8
-------- ---------- -------- --------
Consolidated revenue.............. $ 792.5 $ 1,035.7 $1,697.7 $2,028.9
======== ========== ======== ========
Operating income
North America..................... $ 13.8 $ 73.8 $ 54.4 $ 158.8
International..................... (5.6) 13.6 (4.2) 22.4
Financial Services................ 2.5 1.9 6.6 2.6
Eliminations (1).................. 1.7 3.4 4.2 6.3
-------- ---------- -------- --------
Consolidated operating income..... $ 12.4 $ 92.7 $ 61.0 $ 190.1
======== ========== ======== ========
11
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Aug. 24, Feb. 23,
2001 2001
-------- --------
Total assets
North America............................................ $2,015.5 $1,874.3
International............................................ 465.1 695.7
Financial Services....................................... 546.0 587.0
-------- --------
Consolidated total assets................................ $3,026.6 $3,157.0
======== ========
--------
(1) Represents the elimination of intercompany interest expense reported as
operating expense in the Financial Services segment and as non-operating
income in the North America segment.
Merger Agreement to Acquire PolyVision Corporation
On August 27, 2001, the Company announced it had signed a merger agreement
to acquire PolyVision Corporation for $2.25 in cash per share of common stock.
The total purchase price of approximately $176 million, includes all of the
common stock and preferred stock of PolyVision Corporation and the assumption
of approximately $103 million of PolyVision debt. The proposed transaction is
subject to the approval of the shareholders of PolyVision Corporation and is
expected to be completed in the fourth quarter of calendar year 2001. For more
information regarding the acquisition of PolyVision Corporation, please refer
to the Company's Current Report on Form 8-K filed August 28, 2001.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the accompanying Condensed
Consolidated Financial Statements of the Company and Management's Discussion
and Analysis of Financial Condition and Results of Operations set forth in the
10-K Report.
Results of Operations:
Three and Six Months Ended August 24, 2001 Compared to the Three and Six
Months Ended August 25, 2000
The following table sets forth condensed consolidated statement of income
data as a percentage of revenue for the three and six months ended August 24,
2001 and August 25, 2000.
Three Months Ended Six Months Ended
---------------------- -----------------
Aug. 24, Aug. 25, Aug. 24, Aug. 25,
2001 2000 2001 2000
--------- --------- -------- --------
Revenue............................ 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 68.5 66.8 68.5 66.6
--------- --------- ----- -----
Gross profit....................... 31.5 33.2 31.5 33.4
Operating expenses................. 29.9 24.2 27.9 24.0
--------- --------- ----- -----
Operating income................... 1.6 9.0 3.6 9.4
Non-operating items, net........... (0.3) (0.5) (0.7) --
--------- --------- ----- -----
Income before taxes................ 1.3 8.5 2.9 9.4
Provision for income taxes......... 0.5 3.2 1.1 3.6
Equity in net income (loss) of
joint ventures and dealer
transitions....................... -- (0.1) -- (0.1)
--------- --------- ----- -----
Net income......................... 0.8% 5.2% 1.8% 5.7%
========= ========= ===== =====
Overview--Steelcase Inc.
Revenue. Consolidated revenue of $792.5 for the second quarter of fiscal
2002 ("Q2 2002") and $1,697.7 million for the first six months of fiscal 2002
("2002") decreased 23.5% and 16.3%, respectively, compared to the second
quarter of fiscal 2001 ("Q2 2001") and the first half of fiscal 2001 ("2001").
The downturn in the furniture industry that began in North America during the
fourth quarter of fiscal 2001 has progressively deepened in each of the
following quarters. The industry downturn began affecting European and other
international markets in Q1 2002, with further deterioration experienced
through Q2 2002. Overall, the significant and sustained general economic
slowdown has reduced capital spending, resulting in revenue declines for most
of the Company's product lines.
During Q2 2002 and continuing into Q3 2002, incoming order rates have been
less than revenue. This decline in orders reflects both delayed and cancelled
customer orders, which the Company believes is attributable to the weakness in
the overall economy, which has resulted in a reduced white collar workforce
and significantly reduced capital expenditures by both large and small
companies. These trends have been industry wide, as reflected in the most
recent report from the Business and Institutional Furniture Manufacturer's
Association ("BIFMA"), which stated that the declines in North American
furniture shipments over the past three quarters are the worst in the last 30
years.
Accordingly, the Company anticipates that weakness in furniture demand will
continue until overall business conditions improve and capital expenditures
rebound. As a result, the Company believes that revenue for the remainder of
fiscal year 2002 will remain weak, and could fall by as much as 25% for the
full year versus the
13
prior year. This estimated decrease in revenues was based on conditions prior
to the terrorist attacks occurring within the United States on September 11,
2001. The Company anticipates that the events of that day will likely result
in continued deterioration of the overall economy and further decreases in
revenue for the Company.
The decline in revenue is the primary reason for the comparable decline in
consolidated operating income. Consolidated operating income decreased to
$12.4 million in Q2 2002 and $61.0 million for the first half of 2002,
compared to $92.7 million in Q2 2001 and $190.1 million for the first half of
2001. Excluding an $11.0 million non-recurring charge related to workforce
reductions, operating income was $23.4 million in Q2 2002 and $72.0 million
for the first half of 2002. The Company's operating income as a percentage of
revenue ("operating margin") was 1.6% for Q2 2002, a 7.4 percentage point
decrease from 9.0% in Q2 2001. Operating margin for the first six months of
2002 was 3.6%; a 5.8 percentage point decrease compared to 9.4% for the first
half of 2001. Excluding non-recurring items, the Company's operating margin
was 3.0% for Q2 2002, a 6.0 percentage point decrease from Q2 2001 and 4.2%
for the first six months of 2002, a 5.2 percentage point decrease from the
first half of 2001. The operating margin declines were primarily due to the
continued decline in revenue, which led to lower manufacturing overhead and
operating expense absorption. The decreases in operating margin for Q2 2002
and the first half of 2002 were partially offset by lower variable
compensation, as well as continued cost-reduction efforts, including the
elimination of over 3,500 temporary and full-time positions since the
beginning of calendar year 2001. The Company continues to accelerate profit
improvement projects across the entire business in an effort to alleviate some
of the margin deterioration experienced in recent months.
The Company expects operating income and margin to be impacted by a
sustained decrease in revenue throughout the remainder of the fiscal year. The
Company anticipates taking non-recurring, pre-tax charges of at least $7.5
million in the third quarter of 2002 related to voluntary early retirement
packages and other restructuring activities.
Interest expense; Other income (expense), net; and Income taxes
Three Months Ended Six Months Ended
------------------ -----------------
Aug. 24, Aug. 25, Aug. 24, Aug. 25,
2001 2000 2001 2000
--------- --------- -------- --------
Interest expense................... $ 4.4 $ 7.0 $10.0 $11.6
======== ========= ===== =====
Other income (expense), net:
Interest income.................. $ 1.6 $ 2.6 $ 5.8 $ 4.9
Gain (loss) on dealer
transitions..................... -- (3.2) (8.6) (3.2)
Gain on disposal of property and
equipment....................... -- (0.2) -- 8.6
Miscellaneous, net............... 0.7 2.6 0.6 2.2
-------- --------- ----- -----
$ 2.3 $ 1.8 $(2.2) $12.5
======== ========= ===== =====
Effective income tax rate.......... 37.0% 38.0% 37.0% 38.5%
Interest expense for Q2 2002 decreased to $4.4 million from $7.0 million in
Q2 2001. Interest expense for the first six months of 2002 decreased to $10.0
million from $11.6 million in the first half of 2001. The decrease was a
result of improved cashflow due to lower capital expenditures and reduced
share repurchases during the second quarter and the first half of 2002.
Other income (expense), net, for Q2 2002 increased to $2.3 million, from
$1.8 million in Q1 2001. Other income (expense), net, decreased from $12.5
million in the first six months of 2001 to $(2.2) million in the first six
months of 2002. Both 2002 and 2001 were impacted by non-recurring items. The
non-recurring item in Q1 2002 was a $4.4 million after-tax charge for reserves
related to dealer transition financing. The non-recurring item in Q1 2001
related to a $5.6 million after-tax gain on the sale of a non-operating
facility.
14
Income tax expense as a percentage of income before taxes ("the effective
tax rate") approximated 37.0% in Q2 2002 and 38.0% in Q2 2001. The effective
tax rate approximated 37.0% and 38.5% in the first six months of 2002 and
2001, respectively. The effective tax rate has decreased due to the
implementation of international tax planning strategies in Europe, Japan and
the United States.
Net Income. For the reasons set forth above, the Company's earnings
decreased 87.9% for Q2 2002 and 73.9% for the first half of 2002, compared to
the same periods for 2001. Net income in Q2 2002 of $6.5 million, ($0.04 basic
and diluted earnings per share) included a $6.9 million ($0.05 per share)
after-tax charge related to workforce reductions. Excluding non-recurring
charges, net income decreased 75.0% in Q2 2002 compared to Q2 2001.
Net income of $30.4 million, ($0.21 basic and diluted earnings per share)
in the first half of 2002 included a $4.4 million ($0.03 per share) Q1 2002
after-tax charge for reserves related to dealer transition financing, in
addition to the Q2 2002 $6.9 million ($0.05 per share) after-tax charge
related to workforce reductions. Net income in the first half of 2001 of
$116.3 million ($0.77 basic and diluted earnings per share) included a $5.6
million ($0.04 per share) after-tax gain on the sale of a non-operating
facility. Excluding all non-recurring charges in both years, net income
decreased 62.3% in the first half of 2002 compared to the same period during
2001. The Company expects earnings for the full year to be significantly
impacted by the sustained decrease in revenue and, as such, anticipates that
earnings could decline by over 80% as compared to the prior year. This
estimated decrease in earnings was based on conditions prior to the terrorist
attacks occurring within the United States on September 11, 2001. The Company
anticipates that the events of that day will likely result in continued
deterioration of the overall economy and further decreases in revenue and
earnings for the Company.
Segment Disclosure
The Company operates on a worldwide basis within three reportable segments:
two geographic manufacturing and sales segments--North America and
International and a Financial Services segment. The North America segment
includes the U.S., Canada, the Steelcase Design Partnership and the Company's
IDEO and Attwood subsidiaries. The International segment includes the rest of
the world, with the majority of the operations in Europe.
North America
The following table sets forth condensed consolidated statement of income
data, and data as a percentage of revenue for the Company's North America
segment for the three and six months ended August 24, 2001 and August 25, 2000
(in millions).
Three Months Ended Six Months Ended
--------------------- ------------------
Aug. 24, Aug. 25, Aug. 24, Aug. 25,
2001 2000 2001 2000
--------- --------- -------- --------
Revenue........................... $ 620.7 $ 822.3 $1,336.8 $1,625.4
Gross profit percentage........... 29.3% 31.5% 29.7% 32.1%
Operating expense percentage...... 27.1% 22.5% 25.6% 22.3%
Operating income.................. $ 13.8 $ 73.8 $ 54.4 $ 158.8
Operating income percentage....... 2.2% 9.0% 4.1% 9.8%
Revenue. North America revenue for Q2 2002 and the first half of 2002
decreased 24.5% and 17.8%, respectively, compared to Q2 2001 and the first
half of 2001. These decreases were primarily the result of the reduced volume
related to our large project jobs, which has been driven by industry-wide
reductions in facilities spending due to the sustained general economic
downturn in North America. The downturn has continued to intensify over the
past several quarters. This decline has been felt across most product lines,
as well as within the Steelcase Design Partnership ("SDP"), whose revenue
decreased by 20.2% in Q2 2002 and 15.2% in the first half of 2002, compared to
the same periods of the prior year. New products (defined as products
introduced
15
in the past five years) , however, continued to gain traction in 2002, within
the segment, and now comprise 25% of total North America revenue compared to
19% for the first half of 2001. Despite new product growth during the first
half of 2002, the Company estimates segment revenue could decrease by as much
as 25% for fiscal 2002 compared to the prior year. This estimate was based on
conditions prior to the terrorist attacks on September 11, 2001. The Company
anticipates that the events of that day will likely result in continued
deterioration of the overall economy and further decreases in revenue for the
Company.
Gross Profit. North America gross margin was 29.3% for Q2 2002, a 2.2
percentage point decrease from 31.5% in Q2 2001. Gross margin for the first
six months of 2002 was 29.7%, a 2.4 percentage point decrease compared to
32.1% for the first half of 2001. The gross margin performance for Q2 2002 and
the first half of 2002 were impacted by non-recurring charges totaling $2.6
million related to workforce reductions. Excluding non-recurring charges,
North America gross margin was 29.7% for Q2 2002 and 29.9% for the first six
months of 2002. The gross margin declines were primarily due to the continued
decline in revenue, which led to a decline in manufacturing overhead
absorption. Additionally, gross margin performance has been negatively
impacted by start-up production issues associated with the transfer of wood
production to the recently completed, new wood manufacturing facility in Grand
Rapids, Michigan and, to a lesser extent, the continuation of the shift in
product mix toward new products, which have lower initial margins. The overall
decrease in gross margin for Q2 2002 and the first half of 2002 were partially
offset by lower variable compensation, as well as continued cost-reduction
efforts including the elimination of over 3,000 temporary and full-time
manufacturing related positions within the business unit since the beginning
of calendar year 2001.
Operating Expenses. The North America segment's operating expense dollars
for Q2 2002 decreased 9.1% compared to Q2 2001 as a result of cost reduction
initiatives, including recent workforce reductions, lower variable
compensation and increased scrutiny associated with all types of discretionary
spending, including the elimination of over 500 temporary and full-time
positions. Operating expenses for Q2 2002 and the first half of 2002 included
a non-recurring charge of $8.4 million related to workforce reductions.
Excluding the non-recurring charge, the Company's operating expense ratio was
25.7% for Q2 2002 and 25.0% for the first six months of 2002, although
operating expense dollars decreased 13.7% for Q2 2002 as compared to Q2 2001.
The Company's operating expenses as a percentage of revenue was 27.1% for Q2
2002, a 4.6 percentage point increase from 22.5% in Q2 2001, excluding the
non-recurring charge the increase was 3.2 percentage points. Operating
expenses as a percentage of revenue for the first six months of 2002 was
25.6%, a 3.3 percentage point increase compared to 22.3% for the first half of
2001, excluding the non-recurring charge the increase was 2.7 percentage
points. The operating expense ratio increased for the quarter and year to
date, primarily because revenue declines continued to outpace the reduction of
operating expenses. The Company is focused on efforts to further reduce
operating expenses for the remainder of 2002; however, given the economic
uncertainty and the outlook for the remainder of the calendar year for the
office furniture industry, operating expenses as a percentage of revenue are
anticipated to be consistent with the first half of 2002.
Operating Income. For the reasons set forth above, North America operating
income decreased to $13.8 million in Q2 2002 and $54.4 million for the first
half of 2002, compared to $73.8 million in Q2 2001 and $158.8 million for the
first half of 2001. Excluding the non-recurring charge, operating income was
$24.8 million in Q2 2002 and $65.4 million for the first half of 2002. The
segment's operating margin was 2.2% for Q2 2002, a 6.8 percentage point
decrease from 9.0% in Q2 2001. Operating margin for the first six months of
2002 was 4.1%; a 5.7 percentage point decrease compared to 9.8% for the first
half of 2001. Excluding non-recurring items, the segment's operating margin
was 4.0% for Q2 2002, a 5.0 percentage point decrease from Q2 2001 and 4.9%
for the first six months of 2002, a 4.9 percentage point decrease from the
first half of 2001. The Company anticipates North America operating income to
reflect the sustained decrease in revenue expected for the remainder of the
fiscal year. The Company also anticipates taking non-recurring, pre-tax
charges of at least $7.5 million in the third quarter related to voluntary
early retirement packages and other restructuring activities.
16
International
The following table sets forth condensed consolidated statement of income
data, and data as a percentage of revenues for the Company's International
segment for the three and six months ended August 24, 2001 and August 25, 2000
(in millions).
Three Months Ended Six Months Ended
---------------------- ------------------
Aug. 24, Aug. 25, Aug. 24, Aug. 25,
2001 2000 2001 2000
--------- --------- -------- --------
Revenue.......................... $ 150.9 $ 194.1 $318.9 $367.7
Gross profit percentage.......... 30.7% 33.7% 30.3% 32.7%
Operating expense percentage..... 34.4% 26.7% 31.6% 26.6%
Operating income (loss).......... $ (5.6) $ 13.6 $ (4.2) $ 22.4
Operating income (loss)
percentage...................... (3.7)% 7.0% (1.3)% 6.1%
Revenue. International revenue for Q2 2002 and the first half of 2002
decreased 22.3% and 13.3%, respectively compared to Q2 2001 and the first half
of 2001. Because of the change in the fiscal year end for the European portion
of International, the prior year information is not aligned with the
comparable calendar month in the prior year. Comparing revenue for Q2 2002 to
the same calendar months of last year, the decrease is 17% in U.S. dollars, or
14% in local currency. The decline in order rates in the quarter approximates
the decline in sales. These decreases were primarily the result of expansion
of the economic slowdown to international markets during the quarter and the
Company anticipates revenue will soften through the remainder of the fiscal
year. Although new products continued to perform well, making up nearly half
of International revenue for the first six months of 2002, the Company
estimates International revenue could decrease up to 25% for fiscal 2002
compared to the prior year, assuming constant currency exchange rates.
Gross Profit. International gross margin was 30.7% for Q2 2002, a 3.0
percentage point decrease from 33.7% in Q2 2001. Gross margin for the first
six months of 2002 was 30.3%, a 2.4 percentage point decrease compared to
32.7% for the first half of 2001. These declines were primarily due to lower
volume in Germany and the United Kingdom which, reduced fixed overhead
absorption. Additionally, unfavorable product mix also reduced gross margins
in France.
Operating Expenses. International operating expenses as a percentage of
revenue was 34.4% for Q2 2002, a 7.7 percentage point increase from 26.7% in
Q2 2001. Operating expenses as a percentage of revenue for the first six
months of 2002 was 31.6%, a 5.0 percentage point increase compared to 26.6%
for the first half of 2001. These increases were primarily related to a $5.0
million reserve taken in Q2 2002 for credit and dealer issues, as well as
reduced absorption of operating expenses because of the significant decrease
in revenue. The International business segment will continue to focus on
reducing operating expenses for the remainder of 2002.
Operating Income (Loss). For the reasons set forth above, International had
an operating loss of $(5.6) million for Q2 2002 and $(4.2) million for the
first half of 2002, compared to operating income of $13.6 million in Q2 2001
and $22.4 million for the first half of 2001. The segment's operating margin
was (3.7)% for Q2 2002, a 10.7 percentage point decrease from 7.0% in Q2 2001.
Operating margin for the first six months of 2002 was (1.3)%, a 7.4 percentage
point decrease compared to 6.1% for the first half of 2001. The Company
anticipates International operating income to reflect the sustained decrease
in revenue expected for the remainder of the fiscal year.
17
Financial Services
The following table sets forth condensed consolidated statement of income
data, and data as a percentage of revenue for the Company's Financial Services
segment for the three and six months ended August 24, 2001 and August 25, 2000
(in millions).
Three Months
Ended Six Months Ended
----------------- -----------------
Aug. 24, Aug. 25, Aug. 24, Aug. 25,
2001 2000 2001 2000
-------- -------- -------- --------
Revenue.................................. $20.9 $19.3 $42.0 $35.8
Net financing margin percentage.......... 19.6% 21.2% 23.6% 19.0%
General and administrative expense
percentage.............................. 7.6% 11.4% 7.9% 11.7%
Operating income......................... $ 2.5 $ 1.9 $ 6.6 $ 2.6
Operating income percentage.............. 12.0% 9.8% 15.7% 7.3%
Return on equity percentage.............. 8.8% 7.6% 10.5% 5.4%
Revenue. Financial Services revenue for Q2 2002 and the first half of 2002
increased 8.3% and 17.3%, respectively, compared to Q2 2001 and the first half
of 2001. These increases were primarily the result of increased lease finance
revenue. The long-term contractual nature of the Financial Services segment
makes it less subject to short-term fluctuations in the economy.
Net Financing Margin. Financial Services operating expenses are split into
two separate components--financing expenses and general and administrative
expenses (these costs are classified as operating expenses in the consolidated
income statement). Finance revenue less financing expenses equals net
financing margin; net financing margin less general and administrative
expenses equals operating income. Net financing margin was 19.6% for Q2 2002,
a 1.6 percentage point decrease from 21.2% in Q2 2001. Net financing margin
for the first six months of 2002 was 23.6%, a 4.6 percentage point increase
compared to 19.0% for the first half of 2001. The decrease for Q2 2002 is
primarily due to credit reserves associated with specific customer leases in
the quarter. The increase in these expenses also partially offset the net
financing margin percentage increase of the first half of 2002, which was
primarily due to increased lease finance revenue, lower interest costs, which
increased the margin spreads associated with the lease portfolio and gains on
residual values of expiring leases.
General and Administrative Expenses. General and administrative expenses as
a percentage of revenue were 7.6% for Q2 2002, a 3.8 percentage point decrease
from 11.4% in Q2 2001. General and administrative expenses as a percentage of
revenue for the first six months of 2002 were 7.9%, a 3.8 percentage point
decrease compared to 11.7% for the first half of 2001. General and
administrative expense dollars decreased 27.2% for Q2 2002 and 21.4% for the
first half of 2002, primarily due to improved operating leverage associated
with increased revenue and increased cost reduction initiatives.
Operating Income. For the reasons set forth above, Financial Services
operating income increased to $2.5 million in Q2 2002 and $6.6 million for the
first half of 2002, compared to $1.9 million in Q2 2001 and $2.6 million for
the first half of 2001. The Financial Services segment is managed with a
target of a net income return on equity of 12% or greater. The segment has
achieved this level of financial performance in the first half of 2002. The
segment's operating margin was 12.0% for Q2 2002, a 2.2 percentage point
increase from 9.8% in Q2 2001. Operating margin for the first six months of
2002 was 15.7%, a 8.4 percentage point increase compared to 7.3% for the first
half of 2001.
Liquidity and Capital Resources
Historically, the Company's cash and capital requirements have been
satisfied through cash generated from operating activities. The Company's
financial position at August 24, 2001 included cash, cash equivalents and
short-term investments of $74.5 million. These funds, in addition to cash
generated from future operations and available credit facilities, are expected
to be sufficient to finance the known or foreseeable liquidity and capital
needs of the Company.
18
The Company intends to finance the anticipated Polyvision acquisition
through a combination of cash from operations and long-term debt through a
public debt offering. The purchase price is approximately $176 million.
During 2001, the Company received ratings of its long-term debt from both
Moody's (A3) and Standard & Poor's (A-). These ratings were reconfirmed at the
end of Q2 2002. In April 2001, the Company established a $400.0 million global
credit facility that replaces the North American and European credit
facilities that were previously utilized. The Company's global credit facility
is available to support the commercial paper program that was implemented June
20, 2001. The Company began issuing euro-commercial paper during Q2 2002 and
at the end of the quarter had approximately $184.9 million outstanding under
the commercial paper program.
Total consolidated debt at August 24, 2001 aggregated $510.5 million.
Approximately $458 million of the total debt is attributed to the Financial
Services business segment, representing a six to one debt-to-equity ratio for
the segment.
Cash provided by operating activities
The following table sets forth condensed consolidated statement of cash
flow data for the six months ended August 24, 2001 and August 25, 2000 (in
millions).
Six Months Ended
-----------------
Aug. 24, Aug. 25,
2001 2000
-------- --------
Net income.................................................. $ 30.4 $116.3
Depreciation and amortization............................... 85.8 78.1
Changes in operating assets and liabilities................. (11.3) (107.3)
Other, net.................................................. 22.0 6.3
------ ------
Net cash provided by operating activities................... $126.9 $ 93.4
====== ======
Cash provided by operating activities totaled $126.9 million for the first
half of 2002, compared to $93.4 million in the first six months of 2001. The
cash provided by operations resulted primarily from net income excluding non-
cash charges such as depreciation and amortization, net of changes in
operating working capital. The increase in the first half of 2002 is
attributable primarily to the Company's net change in operating assets and
liabilities which included substantial reductions in accounts receivable and
inventories due to decreased sales volume; however this was partially offset
by a significant decrease in net income.
Cash used in investing activities
The following table sets forth condensed consolidated statement of cash
flow data for the six months ended August 24, 2001 and August 25, 2000 (in
millions).
Six Months Ended
----------------
Aug.
Aug. 24, 25,
2001 2000
-------- -------
Capital expenditures....................................... $(67.3) $(130.6)
Proceeds from the disposal of assets....................... -- 80.2
Net (increase) decrease in notes receivable and leased
assets.................................................... 36.8 (104.3)
Other, net................................................. (25.8) (12.6)
------ -------
Net cash used in investing activities...................... $(56.3) $(167.3)
====== =======
Cash used in investing activities totaled $56.3 million in the first half
of 2002 and $167.3 million in the first six months of 2001. The decrease is
primarily due to lower capital expenditures and the net decrease in
19
notes receivable and leased assets. This effect was partially offset by the
fact that Q1 2001 contained $80.2 million in proceeds from the disposal of
assets.
The decline in capital expenditures reflects a focus on cancellation or
deferral of substantially all capital spending not targeted to short payback
cost savings or critical strategic initiatives such as product development.
The Company will continue to closely manage and limit capital expenditures
throughout 2002, the total for the year is expected to be under $150 million.
The Company expects to fund these capital expenditures primarily through cash
generated from operations.
The Company continues to invest in its leasing portfolio, which includes
both direct financing and operating leases of office furniture products. As a
result of the current economic environment, lease fundings were less than
lease maturations for the first six months of 2002. Additionally, the Company
experienced a decrease in dealer finance loans. The Company's net investment
in leased assets increased to $450.2 as of August 24, 2001, compared to $440.6
million as of February 23, 2001. The Company expects to fund future
investments in leased assets primarily through its lease receivables transfer
facility.
Cash provided by (used in) financing activities
The following table sets forth condensed consolidated statement of cash
flow data for the six months ended August 24, 2001 and August 25, 2000 (in
millions).
Six Months Ended
-----------------
Aug. 24, Aug. 25,
2001 2000
-------- --------
Short-term and long-term debt, net.......................... $(15.4) $103.0
Common stock issuance (repurchase), net..................... (4.2) (21.9)
Dividends paid.............................................. (32.4) (33.1)
------ ------
Net cash provided by (used in) financing activities......... $(52.0) $ 48.0
====== ======
Cash provided by (used in) financing activities totaled $(52.1) million in
the first six months of 2002 and $48.0 million in the first half of 2001. The
Company made significant cash payments related to the funding of the employee
retirement trust fund and the payment of year-end bonuses. These payments,
along with the decrease in cash generated from operating activities, were
responsible for the decrease in borrowings during the first half of 2002.
The Company paid common stock dividends of $0.22 per share, or $32.4
million, and $0.22 per share, or $33.1 million, during the first six months of
2002 and 2001, respectively.
On June 17, 1998, the Board of Directors authorized a share repurchase
program for up to three million shares, which has since been expanded to 11
million shares authorized for repurchase. During the first half of 2002, the
Company repurchased 200,000 shares of Class A Common Stock for $2.6 million
and 143,200 shares of Class B Common Stock for $1.8 million. Management
anticipates that the stock repurchase program will not reduce the Company's
tradable share float in the long run as it expects that Class B Common Stock
will continue to convert to Class A Common Stock over time.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. On January 1, 2001, Greece became the twelfth member
country to establish a fixed conversion rate between their existing sovereign
currency and the euro. There will be a transition period from January 1, 1999
through January 1, 2002, at which time all legal tender will convert to the
euro. The transition period is anticipated to resolve difficulties in handling
local currencies and the euro simultaneously, while remaining flexible to the
market. The Company's primary exposure to the euro conversion is concentrated
in Steelcase S.A. Steelcase S.A. has created an internal Euro Committee,
20
a pan-European multifunctional team whose goal is to determine the impact of
this currency change on products, markets and information systems. Based on
the Euro Committee's work to date, the Company does not expect the euro
conversion to have a material impact on Steelcase S.A.'s financial position,
or on the Company as a whole.
Forward Looking Statements
From time to time, in written reports and oral statements, the Company
discusses its expectations regarding future performance. For example, certain
portions of Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations section contain various "forward-looking
statements", including those relating to anticipated revenue, income, margins
earnings, liquidity and capital resource needs and expenditures, as well as
anticipated impacts of the terrorist attacks occurring within the United
States on September 11, 2001 and various recently issued accounting standards.
Such statements involve certain risks and uncertainties that could cause
actual results to vary. The Company's performance may differ materially from
that contemplated by such statements for a variety of reasons, including, but
not limited to: competitive and general economic conditions domestically and
internationally; delayed or lost sales and other impacts related to the
commercial and economic disruption caused by recent terrorist attacks on the
United States; changes in domestic and international government laws and
regulations; competitive pricing pressure; pricing changes by the Company or
its competitors; currency fluctuations; changes in customer demand and order
patterns; changes in relationships with customers, suppliers, employees and
dealers; product (sales) mix; the success (including product performance and
customer acceptance) of new products, current product innovations and platform
simplification, and their impact on the Company's manufacturing processes;
possible acquisitions or divestitures by the Company; the Company's ability to
reduce costs, including ramp-up costs associated with new products and to
improve margins on new products; the impact of work force reductions
(including elimination of temporary workers, hourly layoffs and salaried
workforce reduction); the Company's success in integrating acquired
businesses, initiating and managing alliances and global sourcing,
transitioning production of its products to other manufacturing facilities as
a result of production rationalization and implementing technology
initiatives; the sufficiency of the reserve established with regard to
material and installations costs associated with Pathways product line
improvements; changes in future business strategies and decisions; and other
risks detailed in the Company's Form 10-K for the year ended February 23,
2001and other filings with the Securities and Exchange Commission.
Recently Issued Accounting Standards
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, became effective for the Company beginning in the first quarter of
fiscal year 2002. The adoption of SFAS No. 133 did not have a material effect
on the Company's financial results; the related disclosure is included in the
Notes to the Condensed Consolidated Financial Statements elsewhere in this
document.
On June 29, 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 establishes accounting and reporting standards for
business combinations. SFAS No. 141 is not anticipated to have a material
effect on the Company's financial results. SFAS No. 142 establishes accounting
and reporting standards for goodwill and intangible assets, requiring
impairment testing for goodwill and intangible assets, and the elimination of
periodic amortization of goodwill and certain intangibles. Management intends
to adopt the provisions of SFAS No. 142 during the Company's fiscal year 2003.
The impact of this pronouncement on the Company's financial results is
currently being evaluated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risks
During the second quarter of fiscal 2002, no material change in foreign
exchange risks occurred.
Interest Rate Risks
During the second quarter of fiscal 2002, no material change in interest
rate risks occurred.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on June 25, 2001. At
this meeting, shareholders voted on one proposal presented in the Company's
definitive proxy statement. Represented at the meeting, either in person or by
proxy, were shares entitled to cast 843,644,592 votes of a total 1,181,797,743
votes possible (71%). The results of the votes follow:
Proposal to elect four (4) directors to serve three-year terms expiring at
the 2004 annual meeting.
For Withheld
--- --------
James P. Hackett...................................... 832,245,399 11,399,193
David W. Joos......................................... 841,779,864 1,864,738
Elizabeth Valk Long................................... 841,783,981 1,860,611
P. Craig Welch, Jr. .................................. 841,977,637 1,666,955
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1. EXHIBITS
See Exhibit Index
2. REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed August 28, 2001 reporting under Item
5, Other Events, the Company's merger agreement to acquire PolyVision
Corporation.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Steelcase Inc.
/s/ James P. Keane
By: _________________________________
James P. Keane
Senior Vice President
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: October 9, 2001
23
EXHIBIT INDEX
Designation Description
----------- -----------
4.4 Global Commercial Paper Programme--ECP Issuing and Paying Agency
Agreement dated June 20, 2001
4.5 Global Commercial Paper Programme--USCP Issuing and Paying Agency
Agreement dated June 20, 2001
10.25 Fourth Amendment to the Steelcase Inc. Incentive Compensation Plan
24