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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 MAY 28, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-13873
----------------
STEELCASE INC.
MICHIGAN 38-0819050
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION
NO.)
901 44TH STREET GRAND 49508
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 June 30, 1999, the
Registrant had outstanding 24,859,830 shares of Class A Common Stock and
128,558,865 shares of Class B Common Stock.
Exhibit index located on page number 20.
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STEELCASE INC. FORM 10-Q
FOR THE QUARTER ENDED MAY 28, 1999
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the Three Months
Ended May 28, 1999 and May 29, 1998................................. 3
Condensed Consolidated Balance Sheets As of May 28, 1999 and February
26, 1999............................................................ 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended May 28, 1999 and May 29, 1998................................. 5
Notes to Condensed Consolidated Financial Statements................. 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 12-17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................... 18
Signatures............................................................. 19
Exhibit Index.......................................................... 20
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 28, MAY 29,
1999 1998
------- -------
Net sales..................................................... $691.8 $672.3
Cost of sales................................................. 438.4 419.1
------ ------
Gross profit.................................................. 253.4 253.2
Selling, general and administrative expenses.................. 170.7 174.9
------ ------
Operating income.............................................. 82.7 78.3
Other income, net............................................. 4.4 3.7
------ ------
Income before provision for income taxes and equity in net
income of joint ventures and dealer transitions.............. 87.1 82.0
Provision for income taxes.................................... 32.7 31.3
------ ------
Income before equity in net income of joint ventures and
dealer transitions........................................... 54.4 50.7
Equity in net income of joint ventures and dealer
transitions.................................................. 2.3 3.3
------ ------
Net income.................................................... $ 56.7 $ 54.0
====== ======
Earnings per share (basic and diluted)........................ $ 0.37 $ 0.35
====== ======
Dividends per share of common stock........................... $ 0.11 $ 0.10
====== ======
See accompanying notes to condensed consolidated financial statements.
3
STEELCASE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
MAY 28, FEB. 26,
ASSETS 1999 1999
------ ----------- --------
Current assets:
Cash and cash equivalents.............................. $ 47.7 $ 67.5
Accounts receivable, net............................... 539.1 348.9
Notes receivable and leased assets..................... 169.3 140.4
Inventories............................................ 141.7 96.5
Other current assets................................... 116.0 84.1
-------- --------
Total current assets................................. 1,013.8 737.4
Property and equipment, net.............................. 880.0 739.0
Notes receivable and leased assets....................... 222.6 209.1
Joint ventures and dealer transitions.................... 50.5 210.4
Goodwill and other intangible assets, net................ 405.3 99.6
Other assets............................................. 203.7 187.0
-------- --------
Total assets......................................... $2,775.9 $2,182.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts and notes payable............................. $ 251.9 $ 102.1
Short-term borrowings and current portion of long-term
debt.................................................. 239.2 --
Accrued expenses:
Employee compensation................................. 132.0 92.8
Employee benefit plan obligations..................... 42.5 51.8
Other................................................. 255.9 200.1
-------- --------
Total current liabilities............................ 921.5 446.8
-------- --------
Long-term liabilities:
Long-term debt......................................... 56.6 --
Employee benefit plan obligations...................... 222.2 222.8
Other long-term liabilities............................ 46.3 12.9
-------- --------
Total long-term liabilities.......................... 325.1 235.7
-------- --------
Total liabilities.................................... 1,246.6 682.5
-------- --------
Shareholders' equity:
Common stock........................................... 375.7 379.4
Accumulated other comprehensive income................. (21.8) (15.0)
Retained earnings...................................... 1,175.4 1,135.6
-------- --------
Total shareholders' equity........................... 1,529.3 1,500.0
-------- --------
Total liabilities and shareholders' equity........... $2,775.9 $2,182.5
======== ========
See accompanying notes to condensed consolidated financial statements.
4
STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS
ENDED
----------------
MAY 28, MAY 29,
1999 1998
------- -------
OPERATING ACTIVITIES
Net income................................................... $ 56.7 $ 54.0
Depreciation and amortization................................ 26.0 24.2
Changes in current assets and liabilities, net of corporate
acquisitions................................................ (85.7) (16.7)
Other, net................................................... 15.8 5.9
------ ------
Net cash provided by operating activities.................. 12.8 67.4
------ ------
INVESTING ACTIVITIES
Capital expenditures......................................... (33.3) (38.4)
Corporate acquisitions, net of cash acquired................. (177.8) --
Other, net................................................... (1.9) 0.9
------ ------
Net cash used in investing activities...................... (213.0) (37.5)
------ ------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt..................... 41.0 --
Short-term borrowings, net................................... 160.0 --
Common stock issuance........................................ -- 24.8
Common stock repurchase...................................... (3.7) --
Dividends paid............................................... (16.9) (15.4)
------ ------
Net cash provided by financing activities................... 180.4 9.4
------ ------
Net increase (decrease) in cash and cash equivalents........ (19.8) 39.3
Cash and cash equivalents, beginning of period............. 67.5 103.1
------ ------
Cash and cash equivalents, end of period................... $ 47.7 $142.4
====== ======
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
26, 1999 (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.
The May 28, 1999 condensed consolidated balance sheet includes, for the
first time, the accounts and balances of Steelcase Strafor S.A. and
subsidiaries ("Steelcase Strafor"), which became a wholly-owned subsidiary of
the Company effective March 31, 1999. However, due to the effective date of
the acquisition, and the fact that the Company accounts for Steelcase Strafor
on a two-month lag, the results of operations of Steelcase Strafor have not
been consolidated with the Company's results of operations. The Company's 50%
equity in net income of Steelcase Strafor for the three months ended March 31,
1999 and 1998 is included in equity in net income of joint ventures and dealer
transitions in the accompanying condensed consolidated statements of income.
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 28, MAY 29,
1999 1998
------- -------
NUMERATOR:
Net income numerator for both basic and diluted EPS..... $56.7 $54.0
===== =====
DENOMINATORS:
Denominator for basic EPS--Weighted average common
shares outstanding..................................... 153.6 153.7
Potentially dilutive shares resulting from stock
options................................................ 0.2 0.3
----- -----
Denominator for diluted EPS............................. 153.8 154.0
===== =====
6
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and all changes to
shareholders' equity, except those due to investments by owners and
distributions to owners. Comprehensive income and its components consist of
the following (in millions):
THREE MONTHS
ENDED
---------------
MAY 28, MAY 29,
1999 1998
------- -------
Net income............................................... $56.7 $54.0
Other comprehensive income:
Foreign currency translation adjustments............... (8.8) (5.0)
Unrealized gain on investments......................... 2.0 --
----- -----
Comprehensive income..................................... $49.9 $49.0
===== =====
Accumulated other comprehensive income totaled $(21.8) million and $(15.0)
million at May 28, 1999 and February 26, 1999, respectively. During the three-
month periods ended May 28, 1999 and May 29, 1998, translation adjustments of
$(8.8) million and $(5.0) million, respectively, resulting from foreign
currency denominated assets and liabilities of the Company's foreign
subsidiaries and joint ventures and related fluctuations in exchange rates,
were charged directly to a component of shareholder's equity in the
accompanying condensed consolidated balance sheets. Additionally, during the
three months ended May 28, 1999, $2.0 million of unrealized gains on
investments was charged directly to a component of shareholder's equity in the
accompanying condensed consolidated balance sheets.
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, which approximates the first-in, first-out method.
Inventories consist of (in millions):
MAY 28, FEB 26,
1999 1999
------- -------
Finished goods......................................... $ 66.5 $ 40.9
Work in process........................................ 33.6 32.3
Raw materials.......................................... 89.1 70.8
------ ------
189.2 144.0
LIFO reserve........................................... (47.5) (47.5)
------ ------
$141.7 $ 96.5
====== ======
At May 28, 1999, inventories determined by the LIFO inventory method
amounted to $140.9 million, or approximately 75% of the Company's inventories.
7
JOINT VENTURES AND DEALER TRANSITIONS
Joint ventures and dealer transitions on the accompanying condensed
consolidated balance sheets consist of investments in dealer transitions and
other joint ventures and alliances as of May 28, 1999 and February 26, 1999,
as well as a 50% equity interest in Steelcase Strafor as of February 26, 1999.
Summarized financial information for Steelcase Strafor, for the three months
ended March 31, 1999 and March 31, 1998, is as follows (in millions):
THREE MONTHS ENDED
-------------------
MARCH 31, MARCH 31,
1999 1998(1)
--------- ---------
Results of Operations:
Revenues............................................ $148.3 $121.8
Operating income.................................... 10.4 14.4
Net income.......................................... 5.3 5.6
- --------
(1) Steelcase Strafor net sales and operating income have been adjusted from
amounts previously reported in order to conform the classifications of
certain sales deductions and other charges with those reflected in the
Company's condensed consolidated financial statements.
On April 22, 1999, Steelcase Inc., through its wholly-owned French
subsidiary, Steelcase SAS, acquired the 50% equity interest in Steelcase
Strafor held by its joint venture partner, Strafor Facom S.A. The purchase was
effective as of March 31, 1999. As a part of this transaction, the Company
also acquired Strafor Facom S.A.'s 5% equity interest in Werndl BuroMobeL AG
("Werndl"), 3% equity interest in Pohlschroder GmbH, and 50% equity interest
in Details S.A. The purchase price paid to Strafor Facom S.A. for these equity
interests approximated $227 million including transaction costs of
approximately $2 million, and was funded by approximately $75 million of
existing cash balances, $111 million of short-term borrowings and $41 million
of long-term debt. For more information regarding the acquisition of Steelcase
Strafor, please refer to the Company's Current Report on Form 8-K dated May 7,
1999 and amended June 16, 1999.
As a result of this acquisition, which was accounted for under the purchase
method of accounting, Steelcase Strafor is now wholly-owned by the Company.
Accordingly, the accounts and balances of Steelcase Strafor have been included
in the accompanying condensed consolidated balance sheet as of May 28, 1999.
However, the accompanying condensed consolidated statement of income for the
three months ended May 28, 1999 continues to reflect the Company's 50% equity
interest in the net income of Steelcase Strafor under the caption equity in
net income of joint ventures and dealer transitions. Steelcase Strafor
maintains a calendar year end and the Company accounts for its results of
operations on a two month lag. Thus, the Company will begin to reflect
consolidated results of operations including Steelcase Strafor beginning in
the second quarter of fiscal 2000.
Management currently estimates that the excess of the aggregate cost of the
Steelcase Strafor acquisition over the historical book value of the net assets
acquired will be allocated and amortized as follows (in millions):
AMORTIZATION ANNUAL
PERIOD AMOUNT AMORTIZATION
------------ ------ ------------
Estimated fair value adjustment of property,
plant and equipment 10 years $25.0 $2.5
Estimated intangible assets, including
patents, trademarks and other identifiable 15 years to
intangible assets and goodwill 40 years $95.1 $3.7
8
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The following unaudited pro forma data summarizes the combined results of
operations of the Company and Steelcase Strafor as if the acquisition had
occurred at the beginning of the three month period ended May 29, 1998, and
include the effect of purchase accounting adjustments that are based upon
preliminary information and certain management estimates which are subject to
revision in future periods based on additional information, such as final
appraisals. In addition, the Steelcase Strafor results of operations include
the pro forma effects of the acquisition of Werndl, a business acquired by
Steelcase Strafor on December 16, 1998. No adjustment has been included in the
pro forma amounts for any anticipated cost savings or other synergies.
THREE MONTHS
ENDED
---------------
MAY 28, MAY 29,
1999 1998
------- -------
Results of Operations (in millions):
Revenues................................................ $840.1 $816.3
Gross profit............................................ 301.2 297.5
Operating income........................................ 91.6 93.4
Net income.............................................. 54.7 53.0
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings and long-term debt consist of the following (in
millions):
MAY 28, FEB 26,
1999 1999
------- -------
Revolving credit facilities, interest rates ranging from
5.35% to 5.6% (1)........................................... $160.0 $ --
Notes payable to Strafor Facom S.A., 3.518% fixed rate (2)... 61.9 --
Note payable to bank, 7% fixed rate (3)...................... 41.0 --
Other........................................................ 32.9 --
------- ----
Total short-term borrowings and long-term debt............ 295.8 --
Short-term borrowings and current portion of long-term debt.. (239.2) --
------- ----
Long-term debt............................................ $ 56.6 $ --
======= ====
- --------
(1) In April 1999, the Company established a 364-day unsecured committed
revolving credit facility with various financial institutions under which
it may borrow up to $200.0 million. Borrowings under the facility expire
at various dates throughout the year depending on the borrowing terms,
which range from one to six months. Interest, which is due at maturity, is
based on Libor plus a margin for the applicable borrowing term. The
agreement, which is renewable annually for additional 364-day periods,
contains certain covenants, which include, among others, net worth,
interest coverage and debt ratio provisions. Additionally, the Company has
entered into agreements with certain financial institutions, which provide
for borrowings on unsecured non-committed short-term credit facilities of
up to $70 million at variable interest rates determined by agreement at
the time of borrowing. These agreements expire during the course of the
fiscal year and are renewable annually.
9
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(2) The note payable to Strafor Facom S.A. represents unsecured borrowings
denominated in French francs maturing in July 1999, with interest due at
maturity.
(3) The note payable bank is a seven-year unsecured loan maturing in April
2006, with semi-annual interest and principal payments. The agreement
contains certain covenants, which include, among others, net worth,
interest coverage and debt ratio provisions.
Annual maturities on short-term borrowings and long-term debt for the next
five years subsequent to May 28, 1999 are as follows (in millions):
2000............................................................... $239.2
2001............................................................... 7.8
2002............................................................... 7.9
2003............................................................... 8.3
2004............................................................... 8.7
Thereafter......................................................... 23.9
------
$295.8
======
COMMON STOCK REPURCHASE PROGRAM
On June 17, 1998, the Company's Board of Directors approved a common stock
repurchase program authorizing the repurchase of up to three million shares of
common stock. During the first quarter of 2000, the Company repurchased
200,000 Class B common shares at a cost of $3.7 million. As of May 28, 1999,
total repurchases amounted to $18.7 million, and 2,005,700 shares remain
available for repurchase under the program.
OPERATING SEGMENTS
In accordance with Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information, the
Company operates on a worldwide basis within a single reportable segment, the
office furniture industry. The office furniture segment includes several
operating segments that manufacture an extensive range of steel and wood
office furniture products. The nature of the products, production processes,
types of customers and methods of distribution are consistent across segments
and therefore have been aggregated into one reported segment. The Company's
primary product lines include office furniture systems, seating, storage
solutions, desks and casegoods, and interior architectural products. Net sales
from services and other businesses primarily include marine accessories and
design, financial and consulting services.
The Company evaluates performance and allocates resources based on net
income or loss. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies in
the Company's 10-K report for the year ended February 26, 1999. Management
views interest income, interest expense, and certain other non-operating costs
as being associated with the office furniture segment since this segment is
the Company's primary activity and accounts for the majority of the Company's
net sales, assets and net income.
10
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The following sets forth reportable segment data reconciled to the
consolidated financial statements (in millions):
THREE MONTHS
ENDED
------------------
MAY 28, MAY 29,
1999 1998
-------- --------
NET SALES
Office furniture.......................................... $ 804.2 $ 758.9
Services and other businesses............................. 35.9 35.2
Eliminations.............................................. (148.3) (121.8)
-------- --------
Consolidated totals....................................... $ 691.8 $ 672.3
======== ========
THREE MONTHS
ENDED
------------------
MAY 28, MAY 29,
1999 1998
-------- --------
NET INCOME
Office furniture.......................................... $ 55.0 $ 50.8
Services and other businesses............................. 1.7 3.2
Eliminations.............................................. -- --
-------- --------
Consolidated totals....................................... $ 56.7 $ 54.0
======== ========
MAY 28, FEB 26,
1999 1999
-------- --------
TOTAL ASSETS
Office furniture.......................................... $2,137.5 $2,247.1
Services and other businesses............................. 638.4 595.1
Eliminations.............................................. -- (659.7)
-------- --------
Consolidated totals....................................... $2,775.9 $2,182.5
======== ========
Office furniture reflects the accounts of Steelcase Strafor, the Company's
50% joint venture through March 31, 1999, the effective date of the Company's
purchase of the remaining 50% equity interest in Steelcase Strafor from
Strafor Facom S.A. The segment information is presented here as if the balance
sheet and results of operations of Steelcase Strafor had been consolidated for
all periods presented. As indicated previously, the balance sheet of Steelcase
Strafor was consolidated with the Company's balance sheet for the first time
beginning May 28, 1999, but due to the effective date of the acquisition and
the fact that the Company accounts for Steelcase Strafor on a two-month lag,
the results of operations of Steelcase Strafor are not consolidated in the
Company's condensed consolidated results of operations for the three months
ended May 28, 1999 and May 29, 1998. Eliminations include the removal of
Steelcase Strafor data in order to reconcile to consolidated totals.
Total assets within services and other businesses include notes receivable
and leased assets of the Company's captive financing subsidiary.
11
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
The following table sets forth condensed consolidated statement of income
data for the three months ended May 28, 1999 and May 29, 1998.
THREE MONTHS
ENDED PERCENTAGE
--------------- CHANGE
MAY 28, MAY 29, INCREASE/
1999 1998 (DECREASE)
------- ------- ----------
Net sales........................................... 100.0% 100.0% 2.9%
Cost of sales....................................... 63.4 62.3 4.6%
----- ----- -----
Gross profit........................................ 36.6 37.7 0.1%
Selling, general and administrative expenses........ 24.6 26.0 (2.4)%
----- ----- -----
Operating income.................................... 12.0 11.7 5.6%
Other income, net................................... 0.6 0.5 18.9%
----- ----- -----
Income before provision for income taxes and equity
in net income of joint ventures and dealer
transitions........................................ 12.6 12.2 6.2%
Provision for income taxes.......................... 4.7 4.7 4.5%
----- ----- -----
Income before equity in net income of joint ventures
and dealer transitions............................. 7.9 7.5 7.3%
Equity in net income of joint ventures and dealer
transitions........................................ 0.3 0.5 (30.3)%
----- ----- -----
Net income.......................................... 8.2% 8.0% 5.0%
===== ===== =====
OVERVIEW
Consolidated net sales of $691.8 million for the first quarter of fiscal
2000 ("Q1 2000") increased 2.9% compared to the first quarter of fiscal 1999
("Q1 1999"). The Q1 2000 sales increase is primarily attributable to the
impact of acquisitions, along with a recent increase in demand and continued
strengthening in sales of new products. The Company posted earnings growth of
5.0% in Q1 2000 with net income of $56.7 million ($0.37 per share), compared
to net income of $54.0 million ($0.35 per share) in Q1 1999.
The Company completed the acquisition of the remaining 50% equity interest
in Steelcase Strafor S.A. and subsidiaries ("Steelcase Strafor"), effective as
of March 31, 1999, which has been accounted for pursuant to the purchase
method of accounting in the accompanying condensed consolidated balance sheet
as of May 28, 1999. The accompanying condensed consolidated statements of
income for Q1 2000 and Q1 1999 reflect the Company's 50% equity interest in
the net income of Steelcase Strafor for the three month periods ended March
31, 1999 and 1998, respectively. Steelcase Strafor maintains a calendar year
end and the Company accounts for its results of operations on a two-month lag.
Thus, the Company will reflect consolidated results of operations including
Steelcase Strafor beginning in the second quarter of fiscal 2000. For further
information regarding the Steelcase Strafor acquisition, the audited
consolidated financial statements of Steelcase Strafor, and certain pro forma
financial information related to the acquisition, reference should be made to
the Company's Form 8-K Report filed May 7, 1999, and its amended Form 8-K
Report filed June 16, 1999.
12
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED MAY 28, 1999 COMPARED TO THE THREE MONTHS ENDED MAY 29,
1998
The following table sets forth comparative sales information by segment (in
millions):
THREE MONTHS
ENDED PERCENTAGE
--------------- CHANGE
MAY 28, MAY 29, INCREASE/
1999 1998 (DECREASE)
------- ------- ----------
NET SALES
Office furniture-U.S. only................. $603.0 $583.3 3.4%
Office furniture-International & Canada.... 52.9 53.8 (1.7)%
Services & other businesses................ 35.9 35.2 2.0%
------ ------ ----
Consolidated net sales..................... $691.8 $672.3 2.9%
====== ====== ====
Steelcase Strafor.......................... 148.3 121.8(1) 21.8%
------ ------ ----
Pro forma worldwide net sales.............. $840.1 $794.1 5.8%
====== ====== ====
- --------
(1) Steelcase Strafor net sales has been adjusted from the amount previously
reported in order to conform the classifications of certain sales
deductions and other charges with those reflected in the Company's
condensed consolidated financial statements.
Q1 2000 consolidated net sales increased 2.9% primarily as a result of a
net increase in the Company's U.S. office furniture business. Pro forma
worldwide net sales, which include the Company's unconsolidated joint venture,
Steelcase Strafor, posted an increase of 5.8%. Steelcase Strafor net sales for
the three month period ended March 31, 1999 increased 21.8%, primarily
attributable to the acquisition of Werndl BuroMobeL AG ("Werndl") in December
1998. Excluding the Werndl acquisition, Steelcase Strafor net sales were
relatively flat with the comparable prior year first quarter. Decreases in
sales in France and the United Kingdom were offset by increased volume in most
other countries, particularly Spain, Italy and Switzerland.
The Company's U.S. office furniture net sales increased 3.4% in Q1 2000,
principally as a result of acquisitions and strong net sales growth in the
Company's Design Partnership, Wood and Revest businesses as a group. The
Company's acquisition of J.M. Lynne, effective January 4, 1999, along with the
ability of these entrepreneurial-spirited companies to produce innovative new
products have been the major contributors to the growth in the U.S. However,
the growth in these businesses was offset by a 3.2% decline in the Company's
Steel furniture operations, including the Turnstone brand. Pathways based
products, including the Turnstone Answer system, which is manufactured by the
Steel furniture operations, continue to penetrate the market demonstrating a
recent increase in demand, with sales in the first quarter of approximately
$38.0 million. Excluding sales from the Turnstone brand, which on a going
forward basis will be reported with the Company's Steel furniture operations
to better align the business, Steel furniture operations decreased 5.3%.
The Company's World Wide Accounts ("WWA"), which are principally comprised
of large multinational corporations, are lagging prior year levels and have
had a notable impact on the Company's Steel furniture operations. A number of
these accounts have delayed spending as a result of domestic merger and
acquisition activities. Overall, net sales to the WWA and the dealer channel
decreased by approximately 2.4% for Q1 2000, which was consistent with recent
industry trends.
The Business and Institutional Furniture Manufacturers' Association
("BIFMA") has decreased its growth forecast to 1% to 3% from 3% to 5% for
calendar year 1999. While the Company's goal is to grow in excess of overall
industry trends, management is uncertain regarding growth estimates for fiscal
year 2000 due to preliminary customer feedback that seems to indicate that
fourth quarter demand could be adversely impacted by Year 2000 concerns.
13
Non-domestic net sales decreased 1.7% in Q1 2000 primarily as a result of
continued softness in demand, particularly in Australia and Mexico. Services
and other businesses net sales increased 2.0%.
The decrease in gross profit margin of 1.1 percentage points for the
current quarter was driven primarily by the negative impact of continued
competitive pressure in the Steel furniture operations, offset by the
favorable impact of cost containment efforts and decreased incentive
compensation, which is linked to performance goals and varies accordingly.
Selling, general and administrative expenses decreased $4.2 million from Q1
1999 to Q1 2000 primarily as a result of decreased incentive compensation to
management. Additionally, management has implemented spending controls based
upon percentages of sales to help contain costs. The controls have been in
place for several months and have helped to maintain operating margins through
a period of slow growth. Management continues to emphasize these spending
controls as the Company strives to meet its fiscal 2003 target of a 14%
operating income margin.
Other income, net, increased $0.7 million compared to Q1 1999, after giving
effect to $1.0 million of interest expense incurred as a result of the
acquisition of Steelcase Strafor.
The effective income tax rate in Q1 2000 was 37.5% as compared to 38.2% for
Q1 1999. Management anticipates that the effective tax rate will increase to
approximately 40% beginning in Q2 2000 with the consolidation of Steelcase
Strafor, which experiences higher income tax rates in Europe.
Equity in net income from joint ventures and dealer transitions decreased
to $2.3 million in Q1 2000 from $3.3 million in Q1 1999, primarily as a result
of losses incurred on recently acquired equity interests. The Company's 50%
share in the earnings of Steelcase Strafor decreased from $2.8 million in Q1
1999 to $2.6 million in Q1 2000. This decrease is attributable to the dilutive
effects of goodwill amortization and financing costs related to the Werndl
acquisition.
For the reasons set forth above, net income increased 5.0% to $56.7 million
in Q1 2000 from $54.0 million in Q1 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company, as a result of the acquisition of Steelcase Strafor, the
largest acquisition the Company has undertaken, has incurred long-term debt.
Management intends to leverage the significant financial resources available
to the Company to fulfill its growth objectives. Cash and capital requirements
are primarily met with cash generated from operating activities. The Company's
financial position at May 28, 1999, includes cash and cash equivalents of
$47.7 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 future liquidity and capital needs of the
Company.
The principal change in cash generated from operating activities for Q1
2000 compared to Q1 1999 is attributable to the Company's finance subsidiary,
Steelcase Financial Services Inc. ("SFSI"). SFSI's asset base continues to
grow as SFSI increases its portfolio of leased assets, asset based lending and
project financing. SFSI's asset base increased a total of $70 million in Q1
2000.
14
On April 22, 1999, the Company completed the acquisition of the remaining
50% equity interest in Steelcase Strafor, resulting in cash outlays, net of
cash acquired, of approximately $178 million. The purchase price and
associated transaction costs of $227 million were paid principally from bank
financing aggregating $152 million and cash reserves of $75 million. The
financing was comprised of a long-term component of $41 million and short-term
financing of $111 million. The Company continued to draw on lines of credit
during the quarter resulting in $160 million of short-term financing as of May
28, 1999. Management intends to refinance these short-term borrowings with
more cost-effective credit facilities later in the year, and continues to
evaluate an optimal capital structure for the Company in light of its long-
term growth strategies.
Capital expenditures were $33.3 million in Q1 2000 compared to $38.4
million in Q1 1999. The Company continues to invest in corporate and showroom
facilities, new product development, SAP implementations, new manufacturing
equipment and a new Corporate Learning and Development Center in Grand Rapids.
The Company's investments are intended to improve productivity and safety,
increase capacity, decrease the impact on the environment and facilitate the
launch of new services and products. Management also anticipates investing
approximately $34.0 million in a new wood furniture manufacturing facility
beginning in fiscal 2000.
The Company paid common stock dividends of $0.11 per share, or $16.9
million, and $0.10 per share, or $15.4 million, during Q1 of 2000 and 1999,
respectively. During Q1 2000, the Company repurchased 200,000 Class B common
shares for $3.7 million, under a three million share repurchase program
authorized by the Board of Directors on June 17, 1998. 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 shares will continue
to convert into Class A common shares over time. During Q1 1999, eligible
employees purchased Class A common shares pursuant to the terms of the
Employee Discount Option Grant, resulting in proceeds to the Company of $24.8
million.
YEAR 2000
The Company is actively engaged in replacing or modifying all business
software applications as well as manufacturing and other equipment with
embedded technology that could fail or generate erroneous results by or at the
Year 2000 ("Year 2000 issues"), an issue affecting Steelcase Inc. and most
other companies. The Company has substantially completed the repair or
replacement of critical business applications, technical infrastructure
components and manufacturing equipment. However, management views the process
of assessing and remediating Year 2000 issues as an on-going process which
will require continued focus, testing and verification throughout calendar
year 1999.
The Company's Year 2000 readiness effort is comprised of five phases
defined below:
Awareness: Activities to ensure management and all affected employees are
aware that Year 2000 issues exist.
Assessment: Includes the inventory of all potentially affected hardware,
software and embedded technology equipment, along with a determination as to
whether or not they may be impacted by the Year 2000 issues.
Remediation: Repairs, replacement and/or modifications to eliminate the
Year 2000 issues in hardware, software or equipment.
Testing: Testing of the hardware, software or equipment to determine if the
remediation was successful.
Implementation: Moving the hardware, software or equipment from a test
status or test location to production usage.
Although the Company's individual business units, majority-owned
subsidiaries and unconsolidated joint ventures may be individually at
different stages of readiness, the following comments summarize Steelcase
Inc.'s state of readiness with respect to Year 2000 issues.
15
Since 1994, the Company has been selectively replacing business software
applications with SAP, a Year 2000 compliant comprehensive information
management system. This project is part of a strategic business plan to
upgrade the overall capabilities of the Company's business application
systems. Costs to date specifically to address Year 2000 issues, separate from
SAP implementations, have approximated $12.0 million. Future costs anticipated
to remedy Year 2000 issues have been budgeted and are not expected to exceed
an additional $8.0 million. Further, various individual business units,
majority-owned subsidiaries and unconsolidated joint ventures are engaged in
the implementation of Year 2000 compliant enterprise software systems.
In late 1995, the Company began its efforts to address those business
applications which might not be replaced in time with equivalent SAP systems,
by engaging a third party specializing in the modification of business
software applications. The engagement lasted through December 1997, at which
time the majority of remediation efforts related to those business software
applications were substantially complete. Since that time, the Company has
substantially completed the initial testing of those software applications.
In December 1997, the Company established a Program Management Office
("PMO"), reporting to the Chief Information Officer of the Company. The PMO
has the responsibility to provide oversight for the Company's Year 2000
readiness program that consists of the five phases noted above. These five
phases will be employed for the following areas: business application
software, manufacturing and other equipment with embedded chip technology, and
evaluation and due diligence with respect to the Company's supply chain and
distribution channel. The PMO is also responsible for periodic status
reporting to the Company's executive management and to the Board of Directors.
Additionally, the PMO is providing oversight for the development and execution
of contingency and business continuity planning efforts.
The Company has completed the assessment phase for the majority of its
manufacturing facilities having embedded technology. The assessment resulted
in minimal findings of non-compliance. The Company's manufacturing equipment
is generally Year 2000 ready and is not anticipated to require significant
reprogramming or replacement. Remediation and testing of the equipment
identified as needing some reprogramming or replacement is substantially
complete.
The Company initiated formal communications with production suppliers in
January 1998 and with its dealer network in May 1998, inquiring as to their
state of readiness. Over 4,000 suppliers have been contacted, and from the
responses received to date, the Company believes that its supply chain
partners are actively seeking to become Year 2000 ready. The Company has
initiated further in-depth analyses of the readiness of approximately 150 key
suppliers. In addition, a majority of the dealers, both international and
domestic, had responded, mostly with favorable self-assessment ratings. Many
governmental agencies, however, may not be Year 2000 compliant. It is
difficult for Steelcase Inc. and most other companies to assess the
likelihood, or the impact, if any, on their businesses, of such entities'
failure to be Year 2000 compliant.
Contingency and business continuity planning activities have been initiated
for critical business processes within the Company. The Company believes such
planning efforts to be ongoing activities, subject to frequent review
throughout the remainder of calendar year 1999, but intends to have them
substantially completed by the end of the second quarter of fiscal 2000.
The Company presently believes that, upon completion of its current plans
for remediation of its business software applications as well as manufacturing
and other equipment with embedded technology, Year 2000 issues will not
present a materially adverse risk to the Company's future consolidated results
of operations, liquidity or capital resources. However, if such planned
remediation is not completed in a timely manner, the level of timely
compliance by key suppliers or dealers is not sufficient, or if unforeseen
circumstances arise, Year 2000 issues could have a material impact on the
Company's operations including, but not limited to, delays in shipments of
products resulting in loss of revenues, increased operating costs, loss of
customers or suppliers, or other significant disruptions to the Company's
business. The Company believes that its Year 2000 readiness program, including
contingency and business continuity plans under development, should generally
reduce the extent of materially adverse effects that Year 2000 related
disruptions may have upon the Company.
16
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. 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 Company's primary exposure to the euro conversion is
concentrated in Steelcase Strafor.
In December 1997, Steelcase Strafor created an internal Euro Committee, a
pan-European multifunctional team whose goal was to determine the impact of
this currency change on products, markets, and information systems. At this
time, Steelcase Strafor is preparing an implementation of unified price lists
for dealers. The aim is to have three commercial zones in Europe within the
three year transition period but no change is expected in calendar 1999.
Steelcase Strafor is adapting and migrating its internal system in order to be
euro compliant by the end of calendar 1999. Steelcase Strafor is also
assisting and educating its dealers to become euro compliant. Training for
employees will begin during the transition period. The transition period is
anticipated to resolve difficulties in handling local currencies and the euro
simultaneously, while remaining flexible to the market. Steelcase Strafor sees
the primary financial impact of the euro conversion to be potential savings on
foreign exchange hedging and commissions. Based on the Euro Committee's work
to date, the Company does not expect the euro conversion to have a material
impact on Steelcase Strafor's financial position, or on the Company as a
whole.
SAFE HARBOR PROVISION
There are certain forward-looking statements under the Overview, Liquidity
and Capital Resources, Year 2000, and Euro Conversion sections, particularly
those with respect to future tax rates, product offerings, liquidity and
capital needs, the Company's intent to refinance short term debt, capital
expenditures and investments, conversion of Class B common shares to Class A
common shares, the expected ability of and costs to the Company and its key
customers, dealers and suppliers to successfully manage Year 2000 issues, and
the impact of the euro conversion on the financial position of Steelcase
Strafor and the Company. Such statements involve certain risks and
uncertainties that could cause actual results to vary from stated
expectations. 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, changes in customer
order patterns, the ability to refinance short term debt on favorable terms,
continued success in technological advances, including development and
implementation of new processes and strategic products for specific market
segments, the ability to grow new businesses and successfully integrate and
operate any acquired businesses, the impact on the Company's business due to
internal systems or systems of suppliers, key customers, dealers and other
third parties adversely affected by Year 2000 issues, costs, including claims,
due to Year 2000 issues and remediation efforts, the future success of new
products and their impact on our manufacturing processes, the impact of the
euro conversion, and other risks detailed in the Company's 10-K Report for the
year ended February 26, 1999, and its other filings with the Securities and
Exchange Commission.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, requiring
recognition of the fair value of all derivatives as assets or liabilities on
the balance sheet. Originally, this statement was to be effective for fiscal
years beginning after June 15, 1999. However, in June 1999, SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statement No. 133, deferred the effective date of SFAS
No. 133 for one year, thereby making the statement effective for fiscal years
beginning after June 15, 2000. Management intends to adopt the provisions of
SFAS No. 133 during the Company's fiscal year 2002. The impact of this
pronouncement on the Company's financial results is currently being evaluated.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. EXHIBITS
See Exhibit Index
2. REPORTS ON FORM 8-K
Current Report on Form 8-K dated May 7, 1999, reporting under Item 2,
Acquisition or Disposition of Assets, the Company's acquisition of
Steelcase Strafor S.A. and subsidiaries
Amended Current Report on Form 8-K dated June 16, 1999, reporting under
Item 7, Financial Statements and Exhibits, the audited financial statements
of businesses acquired and related pro forma financial information.
18
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.
Date: July 12, 1999
/s/ Alwyn Rougier-Chapman
-------------------------------------
Alwyn Rougier-Chapman
Senior Vice President--Finance,
Chief Financial Officer and
Treasurer (Duly Authorized Officer
and Principal Financial Officer)
19
EXHIBIT INDEX
DESIGNATION DESCRIPTION
----------- -----------
27.1 Financial Data Schedule, for the three months ended May 28, 1999.
20