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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 May 25, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-13873
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STEELCASE INC.
Michigan 38-0819050
(State of incorporation) (I.R.S. Employer Identification No.)
901 44th Street Grand Rapids, Michigan 49508
(Address of principal executive (Zip Code)
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 June 29, 2001, the
Registrant had outstanding 32,533,640 shares of Class A Common Stock and
114,793,215 shares of Class B Common Stock.
Exhibit index located on page number 21.
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STEELCASE INC. FORM 10-Q
FOR THE QUARTER ENDED MAY 25, 2001
INDEX
Page
No.
-----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
for the Three Months Ended May 25, 2001 and May 26, 2000 ............. 3
Condensed Consolidated Balance Sheets
as of May 25, 2001 and February 23, 2001.............................. 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended May 25, 2001 and May 26, 2000.............. 5
Notes to Condensed Consolidated Financial Statements................... 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 18
Part II. Other Information
Item 1. Legal Proceedings................................................ 19
Item 2. Changes in Securities............................................ 19
Item 3. Defaults upon Senior Securities.................................. 19
Item 4. Submission of Matters to a Vote of Security Holders.............. 19
Item 5. Other Information................................................ 19
Item 6. Exhibits and Reports on Form 8-K................................. 19
Signatures............................................................... 20
Exhibit Index............................................................ 21
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
---------------------
May 25, May 26,
2001 2000
--------- ---------
Furniture revenues..................................... $ 847.2 $ 937.2
Finance revenues....................................... 21.1 16.5
--------- ---------
Total revenues....................................... 868.3 953.7
Cost of sales.......................................... 582.2 619.8
--------- ---------
Gross profit........................................... 286.1 333.9
Operating expenses..................................... 237.5 236.5
--------- ---------
Operating income....................................... 48.6 97.4
Interest expense....................................... (5.6) (4.6)
Other income (expense), net............................ (4.5) 10.7
--------- ---------
Income before provision for income taxes and equity in
net loss
of joint ventures and dealer transitions.............. 38.5 103.5
Provision for income taxes............................. 14.2 40.4
--------- ---------
Income before equity in net loss of joint ventures and
dealer transitions.................................... 24.3 63.1
Equity in net loss of joint ventures and dealer
transitions........................................... (0.4) (0.5)
--------- ---------
Net income............................................. $ 23.9 $ 62.6
========= =========
Earnings per share (basic and diluted)................. $ 0.16 $ 0.41
========= =========
Dividends per share of common stock.................... $ 0.11 $ 0.11
========= =========
See accompanying notes to condensed consolidated financial statements.
3
STEELCASE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(Unaudited)
May 25, Feb. 23,
2001 2001
----------- --------
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 104.3 $ 25.3
Accounts receivable, net............................... 554.2 603.2
Notes receivable and leased assets..................... 227.3 270.4
Inventories............................................ 169.4 184.7
Other current assets................................... 154.0 122.1
-------- --------
Total current assets............................. 1,209.2 1,205.7
Property and equipment, net.............................. 923.8 933.8
Notes receivable and leased assets....................... 358.0 341.9
Joint ventures and dealer transitions.................... 43.5 45.2
Goodwill and other intangible assets, net................ 398.9 405.1
Other assets............................................. 261.3 225.3
-------- --------
Total assets..................................... $3,194.7 $3,157.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable....................................... $ 212.5 $ 254.1
Short-term borrowings and current portion of long-term
debt.................................................. 204.1 209.7
Accrued expenses:
Employee compensation................................ 113.1 119.6
Employee benefit plan obligations.................... 54.6 84.8
Other................................................ 224.8 217.7
-------- --------
Total current liabilities........................ 809.1 885.9
-------- --------
Long-term liabilities:
Long-term debt......................................... 449.9 327.5
Employee benefit plan obligations...................... 235.8 247.7
Other long-term liabilities............................ 65.5 59.4
-------- --------
Total long-term liabilities...................... 751.2 634.6
-------- --------
Total liabilities................................ 1,560.3 1,520.5
-------- --------
Shareholders' equity:
Common stock........................................... 282.4 286.2
Accumulated other comprehensive income (loss).......... (32.8) (30.0)
Retained earnings...................................... 1,384.8 1,380.3
-------- --------
Total shareholders' equity....................... 1,634.4 1,636.5
-------- --------
Total liabilities and shareholders' equity....... $3,194.7 $3,157.0
======== ========
See accompanying notes to condensed consolidated financial statements.
4
STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Three Months Ended
--------------------
May 25, May 26,
2001 2000
--------- ---------
OPERATING ACTIVITIES
Net income............................................... $ 23.9 $ 62.6
Depreciation and amortization............................ 41.9 37.5
Changes in current assets and liabilities................ (51.6) (70.2)
Other, net............................................... 5.2 0.1
--------- --------
Net cash provided by operating activities.............. 19.4 30.0
--------- --------
INVESTING ACTIVITIES
Capital expenditures..................................... (30.2) (60.2)
Proceeds from the disposal of assets..................... -- 47.9
Net decrease (increase) in notes receivable and leased
assets.................................................. 22.0 (53.4)
Other, net............................................... (26.2) (19.1)
--------- --------
Net cash used in investing activities.................. (34.4) (84.8)
--------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt................. 256.1 41.5
Repayments of debt....................................... (132.4) (30.0)
Short-term borrowings (repayments), net.................. (13.5) 52.9
Common stock issuance.................................... 0.1 --
Common stock repurchase.................................. (4.0) (7.2)
Dividends paid........................................... (16.2) (16.6)
--------- --------
Net cash provided by financing activities.............. 90.1 40.6
--------- --------
Effect of exchange rate changes on cash and cash
equivalents........................................... 3.9 (2.2)
--------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 79.0 (16.4)
Cash and cash equivalents, beginning of period..... 25.3 73.7
--------- --------
Cash and cash equivalents, end of period........... $ 104.3 $ 57.3
========= ========
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 the three months ended May 25, 2001, Steelcase S.A. is
reported consistent with the Company's fiscal year. This reporting change
results in a year-over-year comparison for the Steelcase S.A. portion of the
International segment that is based on different calendar months. The first
quarter of fiscal 2002 includes Steelcase S.A.'s income statement and
statement of cash flows for the three months ended May 25, 2001 and the
balance sheet as of May 25, 2001. The first quarter of fiscal 2001 includes
Steelcase S.A.'s income statement and statement of cash flows for the three
months ended March 31, 2000 and the reported balance sheet disclosure as of
March 31, 2000. The reporting change did not have a material effect on the
Company's financial results.
Freight Expense
Freight costs are included in the invoice price to customers and the
associated expenses are netted with furniture revenues. Freight costs
approximated $36.9 million for the first quarter of fiscal 2002 ("Q1 2002")
and $39.4 million for the first quarter of fiscal 2001 ("Q1 2001").
Reclassification
The Company has reclassified certain amounts from fiscal 2001 related to
the Operating Segments footnote to conform to the fiscal 2002 ("2002")
presentation.
Retained Earnings Roll-forward
The following table reconciles the roll-forward of retained earnings (in
millions):
Three Months
Ended
------------
May 25, 2001
------------
Retained earnings as of February 23, 2001....................... $1,380.3
Dividends paid.................................................. (16.2)
Net income...................................................... 23.9
Steelcase S.A. net income (loss)................................ (3.2)
--------
Retained earnings as of May 25, 2001............................ $1,384.8
========
Steelcase S.A. net loss for the two-month period ("stub period") ended
February 23, 2001 was $3.2 million. Steelcase S.A. revenues generated for the
stub period were $102.0 million.
6
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
first quarter fiscal 2002 unaudited condensed consolidated financial
statements include the provisions required by SFAS No. 133, while the first
quarter fiscal 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 sales, forecasted sales or 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 resulted in the Company recording transition
adjustments as of February 23, 2001 to its derivative instruments at fair
value and recognizing 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. The impact for the quarter
resulting from subsequent changes in fair value of the derivatives was a $1.4
million reduction to OCI, net of tax. Due to immateriality, the transition
adjustments and subsequent changes in fair values of the derivatives for the
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 net adjustment resulted in an after-tax reduction to net
income of $0.1 million and a net decrease to OCI of $6.5 million. The decrease
in OCI is primarily related to net losses on interest rate swap cash flow
hedges. The effects of the adoption of the new standards on the Company's
financial position and net income were not material.
7
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Ended
---------------
May 25, May 26,
2001 2000
------- -------
Numerator:
Net income numerator for both basic and diluted EPS.......... $ 23.9 $ 62.6
====== ======
Denominators:
Denominator for basic EPS--Weighted average common shares
outstanding................................................. 147.5 150.9
Potentially dilutive shares resulting from stock options..... 0.2 0.1
------ ------
Denominator for diluted EPS.................................. 147.7 151.0
====== ======
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 4.1 million options in its calculation of diluted earnings per
share for Q1 2002 and Q1 2001, 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
Ended
---------------
May 25, May 26,
2001 2000
------- -------
Net income................................................. $23.9 $ 62.6
Other comprehensive income:
Foreign currency translation gain (loss)................. 3.7 (10.9)
Unrealized loss on investments........................... -- (0.4)
Unrealized loss on derivative instruments, net of tax.... (6.5) --
----- ------
Comprehensive income....................................... $21.1 $ 51.3
===== ======
8
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $115.7 million
and $127.2 million at May 25, 2001 and February 23, 2001, respectively.
Inventories consist of (in millions):
May 25, 2001 Feb 23, 2001
------------ ------------
Finished goods..................................... $ 82.8 $ 84.0
Work in process.................................... 38.3 42.1
Raw materials...................................... 92.0 102.3
------ ------
213.1 228.4
LIFO reserve....................................... (43.7) (43.7)
------ ------
$169.4 $184.7
====== ======
Short-Term Borrowings and Long-Term Debt
During the first quarter of fiscal 2002, the Company established two
unsecured committed 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 of 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 of 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 May 25, 2001 the new 364-day term facility
had no borrowings against it and the effective interest rate was 4.85%. The
new three-year term facility borrowings were $99.9 million with an effective
interest rate of 5.35% as of May 25, 2001.
During the 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 May 25, 2001.
The Company also initiated a $400.0 million global commercial paper ("CP")
program that was implemented on June 20, 2001. Notes may be in the form of
euro-commercial paper or U.S. commercial paper. The CP program is intended to
replace 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 Japanese Yen 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.
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
shares authorized for repurchase is now 11 million shares.
9
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the first quarter of fiscal 2002, the Company repurchased 200,000
Class A common shares at a cost of $2.6 million and 107,400 Class B common
shares at a cost of $1.4 million. As of May 25, 2001, total repurchases
amounted to $112.2 million; 3,860,393 shares remain available for repurchase
under the program and the Company has outstanding commitments to repurchase
35,800 of those remaining shares.
Operating Segments
The Company's principal business is 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. In addition, 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 within three reportable segments: two
geographic furniture segments 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
-------------------------
May 25, 2001 May 26, 2000
------------ ------------
Revenues
North America....................................... $ 687.4 $ 769.4
International....................................... 159.8 167.8
Financial Services.................................. 21.1 16.5
-------- --------
Consolidated revenues............................... $ 868.3 $ 953.7
======== ========
Three Months Ended
-------------------------
May 25, 2001 May 26, 2000
------------ ------------
Operating income
North America....................................... $ 40.6 $ 85.0
International....................................... 1.4 8.8
Financial Services.................................. 4.1 0.7
Eliminations (1).................................... 2.5 2.9
-------- --------
Consolidated operating income....................... $ 48.6 $ 97.4
======== ========
May 25, 2001 Feb 23, 2001
------------ ------------
Total assets
North America....................................... $1,937.3 $1,874.3
International....................................... 699.7 695.7
Financial Services.................................. 557.7 587.0
-------- --------
Consolidated total assets........................... $3,194.7 $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.
10
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 Months Ended May 25, 2001 Compared to the Three Months Ended May 26,
2000
The following table sets forth condensed consolidated statement of income
data as a percentage of revenues for the three months ended May 25, 2001 and
May 26, 2000.
Three Months
Ended
---------------
May 25, May 26,
2001 2000
------- -------
Revenues..................................................... 100.0% 100.0%
Cost of sales................................................ 67.1 65.0
----- -----
Gross profit................................................. 32.9 35.0
Operating expenses........................................... 27.3 24.8
----- -----
Operating income............................................. 5.6 10.2
Non-operating items, net..................................... (1.2) 0.6
----- -----
Income before taxes.......................................... 4.4 10.8
Provision for income taxes................................... 1.6 4.2
----- -----
Net income................................................... 2.8% 6.6%
===== =====
- --------
Overview--Steelcase Inc.
Revenues. Consolidated revenues of $868.3 million for Q1 2002 decreased
9.0% compared to Q1 2001 revenues of $953.7 million. The downturn in the
furniture industry that began in North America during the fourth quarter of
fiscal 2001 has deepened and during Q1 2002 it spread to significant European
and other international markets. The general economic slowdown resulted in a
significant slowing of business activity which led to declines in most of the
Company's product lines. However, revenues from new products, defined as
products introduced in the past five years, increased, making up 28% of the Q1
2002 revenues, compared to 25% in fiscal 2001 ("2001").
The Company believes that revenues for the remainder of fiscal 2002 could
fall by as much as 15% versus the prior year. We continue to make efforts at
accelerating profit improvement projects across the entire business to help
alleviate some of the margin deterioration we have seen in recent months.
Gross Profit. The Company's gross profit as a percentage of revenues
decreased in Q1 2002 to 32.9%, down from 35.0% in Q1 2001. The gross margin
decline in Q1 2002 was primarily due to factors discussed in recent quarters,
including the shift in product mix toward new products, which have lower
initial margins. Additionally, the significant decline in revenues led to a
decline in manufacturing overhead absorption. The overall decrease in gross
margin for Q1 2002 was partially offset by lower variable compensation, as
well as continued cost-reduction efforts including the elimination of over
1,700 temporary and full-time positions.
11
Operating Expenses. The Company's operating expense dollars for Q1 2002
remained flat with Q1 2001 as the company remained focused on cost reduction
initiatives, including recent workforce reductions, as well as lower variable
compensation. The Company's operating expenses as a percentage of revenues
increased to 27.3% in Q1 2002, from 24.8% in Q1 2001. This increase was
primarily due to the Company's inability to leverage operating expenses
because of the significant decrease in revenues. The Company is focused on
reducing operating expenses for the remainder of 2002; however, with continued
uncertainty regarding growth throughout the office furniture industry,
significant improvement as a percentage of revenues is not anticipated.
Operating Income. For the reasons set forth above, operating income
decreased to $48.6 million in Q1 2002, compared to $97.4 million in Q1 2001.
The Company's operating income as a percentage of revenues decreased in Q1
2002 to 5.6%, from 10.2% in Q1 2001. The Company expects operating income to
be impacted by a sustained decrease in revenues throughout the remainder of
the fiscal year.
Interest expense; Other income (expense), net; and Income taxes
Three Months
Ended
---------------
May 25, May 26,
2001 2000
------- -------
Interest expense............................................. $ 5.6 $ 4.6
===== =====
Other income (expense), net:
Interest income............................................ $ 4.2 $ 2.3
Gain (loss) on dealer transitions.......................... (8.6) --
Gain on disposal of property and equipment................. -- 8.8
Miscellaneous, net......................................... (0.1) (0.4)
----- -----
$(4.5) $10.7
===== =====
Effective income tax rate.................................... 37.0% 39.0%
Interest expense for Q1 2002 increased to $5.6 million, from $4.6 million
in Q1 2001. The increase was a result of increased borrowings related to
significant year-end payouts, including contributions to the employee trust
fund and year-end bonus payouts.
Other income (expense), net, for Q1 2002 decreased to $(4.5) million, from
$10.7 million in Q1 2001. Both Q1 2002 and Q1 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.
Income tax expense as a percentage of income before taxes ("the effective
tax rate") approximated 37.0% in Q1 2002 and 39.0% in Q1 2001. 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 reported an
earnings decrease of 61.8% for Q1 2002. Net income in Q1 2002 of $23.9
million, ($0.16 basic and diluted earnings per share) included the
aforementioned $4.4 million ($0.03 per share) after-tax charge for reserves
related to dealer transition financing. Net income in Q1 2001 of $62.6 million
($0.41 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
non-recurring charges in both years, net income decreased 50.4% in Q1 2002
compared to Q1 2001. The Company expects earnings for the full year to be
impacted by the decrease in revenues and, as such, anticipates earnings in the
range of $0.65 - $0.75 per share for 2002.
12
Segment Disclosure
The Company operates on a worldwide basis within three reportable segments:
two geographic furniture segments and a Financial Services segment. The North
America furniture segment includes the U.S., Canada, the Steelcase Design
Partnership and the Company's IDEO and Attwood subsidiaries. The International
furniture segment includes the rest of the world, with the majority of
operations in Europe.
North America
The following table sets forth condensed consolidated statement of income
data, and data as a percentage of revenues for the Company's North America
segment for the three months ended May 25, 2001 and May 26, 2000 (in
millions).
Three Months Ended
---------------------
May 25, May 26,
2001 2000
--------- ---------
Revenues............................................. $ 687.4 $ 769.4
Gross profit percentage.............................. 31.2% 34.1%
Operating expense percentage......................... 25.3% 23.1%
Operating income..................................... $ 40.6 $ 85.0
Operating income percentage.......................... 5.9% 11.0%
Revenues. North America revenues in Q1 2002 decreased by 10.7% compared to
Q1 2001 revenues. This decrease is primarily the result of the reduced volume
of large facilities projects, which has been driven by industry-wide
reductions in facilities spending due to the general economic downturn in
North America over the past several months. This decline has been felt across
most product lines, as well as within the Steelcase Design Partnership
("SDP"), whose revenues decreased by 10.3% compared to the same period in the
prior year. New products, however, continued to gain traction in Q1 2002,
within the segment, and now comprise nearly 26% of total North America
revenues compared to 18% for Q1 2001. Despite new product growth during Q1
2002, the Company estimates segment revenues could decrease up to 15% for
fiscal 2002 as compared to the prior year.
Gross Profit. North America gross profit as a percentage of revenues
decreased in Q1 2002 to 31.2%, from 34.1% in Q1 2001, a decline of 2.9
percentage points. The gross margin decline in Q1 2002 was primarily due to
factors discussed in recent quarters, including the shift in product mix
toward newer products, which have lower initial margins. Additionally, the
significant decline in revenues led to a decline in manufacturing overhead
absorption. The overall decrease in gross margin for Q1 2002 was partially
offset by lower variable compensation, as well as continued cost-reduction
efforts including the elimination of over 1,700 temporary and full-time
positions within the business unit.
Operating Expenses. North America operating expenses as a percentage of
revenues increased in Q1 2002 to 25.3%, from 23.1% in Q1 2001, an increase of
2.2 percentage points. Operating expenses in dollars actually decreased
slightly; however, this was not proportionate to the decrease in revenues. The
overall decrease in operating expenses was the result of lower variable
compensation and the elimination of over 400 temporary and full-time positions
during Q1 2002. The Company is focused on reducing operating expenses for the
remainder of 2002; however, with continued uncertainty regarding growth
throughout the office furniture industry, significant improvement as a
percentage of revenues is not anticipated.
Operating Income. For the reasons set forth above, North America operating
income decreased to $40.6 million in Q1 2002, down from $85.0 million in Q1
2001, a decrease of 52.2%. The segment's operating income as a percentage of
revenues decreased in Q1 2002 to 5.9%, from 11.0% in Q1 2001, a decrease of
5.1 percentage points.
13
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 months ended May 25, 2001 and May 26, 2000 (in
millions).
Three Months Ended
---------------------
May 25, May 26,
2001 2000
--------- ---------
Revenues............................................. $ 159.8 $ 167.8
Gross profit percentage.............................. 31.4% 32.7%
Operating expense percentage......................... 30.5% 27.5%
Operating income..................................... $ 1.4 $ 8.8
Operating income percentage.......................... 0.9% 5.2%
Revenues. International revenues in Q1 2002 decreased by 4.8% compared to
Q1 2001 revenues; however, in local currency Q1 2002 revenues increased 1.7%
compared to Q1 2001. The revenue growth is a result of the delay in major
European markets experiencing some degree of economic slowdown. However, the
economic slowdown seems to have moved to major European markets during the
quarter and we anticipate revenues to soften as we progress through the fiscal
year. Although new products continued to perform well, making up more than
half of International revenues for Q1 2002, the Company estimates
International revenues could decrease up to 15% for fiscal 2002 as compared to
the prior year, assuming constant currency levels.
Gross Profit. International gross profit as a percentage of revenues
decreased in Q1 2002 to 31.4%, from 32.7% in Q1 2001, a decline of 1.3
percentage points. The decrease was attributable to lower volume in Germany
and the UK which impacted the ability to absorb fixed overhead costs in these
units. Additionally, unfavorable product mix also dampened gross margins in
France.
Operating Expenses. International operating expenses as a percentage of
revenues increased in Q1 2002 to 30.5%, from 27.5% in Q1 2001, an increase of
3.0 percentage points. This increase is primarily due to higher infrastructure
and operational spending which was based on higher anticipated levels of
revenue. In light of the extension of the economic downturn into major
European markets, the International business segment has begun to focus on
reducing operating expenses for the remainder of 2002.
Operating Income. For the reasons set forth above, International operating
income decreased to $1.4 million in Q1 2002, down from $8.8 million in Q1
2001, a decrease of 84.1%. The segment's operating income as a percentage of
revenues decreased in Q1 2002 to 0.9%, from 5.2% in Q1 2001, a decrease of 4.3
percentage points.
Financial Services
The following table sets forth condensed consolidated statement of income
data, and data as a percentage of revenues for the Company's Financial
Services segment for the three months ended May 25, 2001 and May 26, 2000 (in
millions).
Three Months Ended
---------------------
May 25, May 26,
2001 2000
--------- ---------
Revenues............................................. $ 21.1 $ 16.5
Net financing margin percentage...................... 27.5% 16.4%
General and administrative expense percentage........ 8.1% 12.2%
Operating income..................................... $ 4.1 $ 0.7
Operating income percentage.......................... 19.4% 4.2%
Return on equity percentage.......................... 12.3% 2.4%
14
Revenues. Financial Services revenues in Q1 2002 increased by 27.9%
compared to Q1 2001 revenues, primarily as a result of increased lease finance
revenues. The long-term contractual nature of the Financial Services segment
makes it less volatile and 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. Finance revenues less financing expenses equals net financing
margin; net financing margin less general and administrative expenses equals
operating income. Net financing margin increased in Q1 2002 to 27.5%, from
16.4% in Q1 2001, an increase of 11.1 percentage points. Margin improvement
was primarily due to increased lease finance revenues, and lower interest
costs, which increased the margin spreads associated with the lease portfolio.
General and Administrative Expenses. General and administrative expenses as
a percentage of revenues decreased in Q1 2002 to 8.1%, from 12.2% in Q1 2001,
a decrease of 4.1 percentage points. General and administrative expense
dollars decreased slightly, while financing revenue increased, resulting in
improved operating leverage of the segment.
Operating Income. For the reasons set forth above, Financial Services
operating income increased more than five-fold, to $4.1 million in Q1 2002,
from $0.7 million in Q1 2001. The segment's operating income as a percentage
of revenues increased in Q1 2002 to 19.4%, from 4.2% in Q1 2001, an increase
of 15.2 percentage points.
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 May 25, 2001 included cash, cash equivalents and short-
term investments of $135.8 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.
During 2001, the Company received ratings of its long-term debt from both
Moody's (A3) and Standard & Poor's (A-). 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 intends to use the global credit facility as a backstop for the
commercial paper program that was implemented June 20, 2001.
Total debt at May 25, 2001 aggregated $654.0 million, which was
approximately 29% of total capitalization of the Company. Approximately 92% of
total debt relates to the Financial Services business segment. The Company
also holds $585.3 million of interest bearing assets, of which $551.0 is held
through its Financial Services business segment.
Cash provided by operating activities
The following table sets forth condensed consolidated statement of cash
flow data for the three months ended May 25, 2001 and May 26, 2000 (in
millions).
Three Months
Ended
----------------
May 25, May 26,
2001 2000
------- -------
Net income................................................. $ 23.9 $ 62.6
Depreciation and amortization.............................. 41.9 37.5
Changes in operating assets and liabilities................ (51.6) (70.2)
Other, net................................................. 5.2 0.1
------ ------
Net cash provided by operating activities.................. $ 19.4 $ 30.0
====== ======
15
Cash provided by operating activities totaled $19.4 million in Q1 2002,
compared to $30.0 million in Q1 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 decrease in Q1
2002 is attributable primarily to the Company's lower net income.
Cash used in investing activities
The following table sets forth condensed consolidated statement of cash
flow data for the three months ended May 25, 2001 and May 26, 2000 (in
millions).
Three Months
Ended
----------------
May 25, May 26,
2001 2000
------- -------
Capital expenditures...................................... $(30.2) $(60.2)
Proceeds from the disposal of assets...................... -- 47.9
Net decrease (increase) in notes receivable and leased
assets................................................... 22.0 (53.4)
Other, net................................................ (26.2) (19.1)
------ ------
Net cash used in investing activities..................... $(34.4) $(84.8)
====== ======
Cash used in investing activities totaled $34.4 million in Q1 2002 and
$84.8 million in Q1 2001. The decrease is primarily due to lower capital
expenditures and the net decrease in notes receivable and leased assets. This
effect was partially offset by the fact that Q1 2001 contained $47.9 million
in proceeds from the disposal of assets.
The Company's capital expenditures were $30.2 million in Q1 2002 compared
to $60.2 million in Q1 2001, reflecting the Company's effort to focus on
tightly controlling capital spending, and shifting dollars to investments that
can drive short-term paybacks. The Company will continue to control capital
expenditures throughout 2002, expecting the total for the year 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. The
Company's net investment in leased assets increased to $450.1 as of May 25,
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 financing activities
The following table sets forth condensed consolidated statement of cash
flow data for the three months ended May 25, 2001 and May 26, 2000 (in
millions).
Three Months
Ended
---------------
May 25 May 26,
2001 2000
------ -------
Short-term and long-term debt, net.......................... $110.2 $ 64.4
Common stock issuance (repurchase), net..................... (3.9) (7.2)
Dividends paid.............................................. (16.2) (16.6)
------ ------
Net cash provided by financing activities................... $ 90.1 $ 40.6
====== ======
Cash provided by financing activities totaled $90.1 million in Q1 2002 and
$40.6 million in Q1 2001. The Company made significant cash payments related
to the funding of the employee trust fund and the payment of
16
year-end bonuses. These payments, along with the decrease in cash generated
from operating activities, were responsible for the increase in borrowings
during Q1 2002.
The Company paid common stock dividends of $0.11 per share, or $16.2
million, and $0.11 per share, or $16.6 million, during the first three 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 three months of
2002, the Company repurchased 200,000 shares of Class A Common Stock for $2.6
million and 107,400 shares of Class B Common Stock for $1.4 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, 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 revenues, earnings,
liquidity and capital resource needs and expenditures for the current fiscal
year, as well as anticipated impacts of 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; changes in domestic and international government laws and
regulations; competitive pricing pressure; pricing changes by the Company or
its competitors; currency fluctuations (including the euro); 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.
17
Recently Issued Accounting Standards
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
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 first quarter of fiscal 2002, no material change in foreign
exchange risks occurred.
Interest Rate Risks
During the first quarter of fiscal 2002, no material change in interest
rate risks occurred.
18
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
None
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
No reports on Form 8-K were filed during the three months ended May 25,
2001.
19
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--Finance
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: July 9, 2001
20
EXHIBIT INDEX
Designation Description
----------- -----------
4.2 Credit Agreement dated April 5, 2001, Long Term Multicurrency
Revolving Credit Facility
4.3 Credit Agreement dated April 5, 2001, Short Term Multicurrency
Revolving Credit Facility
10.21 Steelcase Inc. Benefit Plan for Outside Directors
10.22 First Amendment to the Steelcase Inc. Restoration Retirement Plan
10.23 First Amendment to the Steelcase Inc. Deferred Compensation Plan
10.24 2002-1 Amendment to the Steelcase Inc. Deferred Compensation Plan
21