STEELCASE INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 27, 2005

Commission File No. 1-13873

STEELCASE INC.


Michigan		38-0819050
(State of Incorporation)		(IRS employer identification number)
901 44th Street SE Grand Rapids, Michigan		49508
(Address of principal executive offices)		(Zip code)

(616) 247-2710

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

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

As of June 23, 2005, Steelcase Inc. had 64,336,011 shares of Class A Common Stock and 84,563,291 shares of Class B Common Stock outstanding.

________________________________________________________________________________

STEELCASE INC.

FORM 10-Q

FOR THE QUARTER ENDED MAY 27, 2005

INDEX



		Page No.

Part I.	Financial Information

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Operations for the Three Months Ended May 27, 2005 and May 28, 2004		3

	Condensed Consolidated Balance Sheets as of May 27, 2005 and February 25, 2005		4

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 27, 2005 and May 28, 2004		5

	Notes to Condensed Consolidated Financial Statements		6-13

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21

Item 4.	Controls and Procedures		21-22

Part II.	Other Information

Item 6.	Exhibits		22

Signatures			23

Exhibit Index			24

PART I—FINANCIAL INFORMATION


Item 1.	Financial Statements

STEELCASE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in millions, except per share data)



			Three Months Ended

			May 27,			May 28,
			2005			2004

Revenue			$	676.0		$	597.7
Cost of sales				467.6			426.8
Restructuring costs				8.5			3.6

		Gross profit		199.9			167.3
Operating expenses				182.4			170.9
Restructuring costs				2.3			1.5

		Operating income (loss)		15.2			(5.1	)
Interest expense				(5.2	)		(5.2	)
Other income, net				0.8			0.7

		Income (loss) from continuing operations before income tax expense (benefit)		10.8			(9.6	)
Income tax expense (benefit)				4.1			(2.9	)

		Income (loss) from continuing operations		6.7			(6.7	)
Income and gain on sale of net assets of discontinued operations, net of income taxes				—			1.0

		Net income (loss)	$	6.7		$	(5.7	)

Basic and diluted per share data:
	Income (loss) from continuing operations		$	0.05		$	(0.05	)
	Income and gain on sale of net assets of discontinued operations			—			0.01

	Earnings (loss)		$	0.05		$	(0.04	)

Dividends declared per common share			$	0.06		$	0.06

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)



					(Unaudited)
					May 27,			February 25,
					2005			2005

ASSETS
	Current assets:
		Cash and cash equivalents			$	238.0		$	216.6
		Short-term investments				—			131.6
		Accounts receivable, net				382.4			378.1
		Inventories				135.1			132.9
		Other current assets				206.4			198.1

				Total current assets		961.9			1,057.3
	Property and equipment, net					586.3			606.0
	Company owned life insurance					187.2			186.1
	Goodwill and other intangible assets, net					285.8			290.0
	Other assets					217.6			225.2

				Total assets	$	2,238.8		$	2,364.6

LIABILITIES AND SHAREHOLDERS’ EQUITY
	Current liabilities:
		Accounts payable			$	166.3		$	175.9
		Short-term borrowings and current portion of long-term debt				19.1			67.6
		Accrued expenses:
			Employee compensation			88.2			123.3
			Employee benefit plan obligations			21.6			31.7
			Other			213.6			211.0

				Total current liabilities		508.8			609.5

	Long-term liabilities:
		Long-term debt				254.0			258.1
		Employee benefit plan obligations				244.6			249.7
		Other long-term liabilities				44.0			50.7

				Total long-term liabilities		542.6			558.5

				Total liabilities		1,051.4			1,168.0

	Shareholders’ equity:
		Common stock				301.6			297.4
		Additional paid in capital				1.8			1.3
		Accumulated other comprehensive loss				(42.5	)		(33.1	)
		Deferred compensation— restricted stock				(5.4	)		(3.1	)
		Retained earnings				931.9			934.1

				Total shareholders’ equity		1,187.4			1,196.6

				Total liabilities and shareholders’ equity	$	2,238.8		$	2,364.6

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)



	Three Months Ended

	May 27,			May 28,
	2005			2004

OPERATING ACTIVITIES
Net income (loss)	$	6.7		$	(5.7	)
Depreciation and amortization		30.6			32.1
Changes in operating assets and liabilities		(67.4	)		(61.6	)
Other, net		(1.7	)		(6.0	)

Net cash used in operating activities		(31.8	)		(41.2	)

INVESTING ACTIVITIES
Capital expenditures		(18.3	)		(14.6	)
Short-term investments, acquisitions		—			(95.6	)
Short-term investments, liquidations		131.6			161.9
Proceeds from repayments of lease fundings		3.6			17.6
Proceeds from the disposal of fixed assets		2.2			3.4
Other, net		(3.5	)		10.2

Net cash provided by investing activities		115.6			82.9

FINANCING ACTIVITIES
Repayments of long-term debt, net		(51.5	)		(7.3	)
Repayments of short-term debt, net		(0.1	)		(15.2	)
Dividends paid		(8.9	)		(8.9	)
Common stock issuance		1.2			0.3

Net cash used in financing activities		(59.3	)		(31.1	)

Effect of exchange rate changes on cash and cash equivalents		(3.1	)		(0.5	)

Net increase in cash and cash equivalents		21.4			10.1
Cash and cash equivalents, beginning of period		216.6			182.2

Cash and cash equivalents, end of period	$	238.0		$	192.3

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended February 25, 2005 (“Form 10-K”). As used in this Report, unless otherwise expressly stated or the content otherwise requires, all references to “Steelcase,” “we,” “our,” “Company” and similar references are to Steelcase Inc. and its majority owned subsidiaries.

Unless the context otherwise indicates, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year. Additionally, Q1 2006 references the first quarter of fiscal 2006. All amounts are in millions, except per share data, data presented as a percentage or unless otherwise indicated.

In Q1 2006, we began reporting the operating results from our North America segment service activity on a gross basis in our income statement. Previously, this activity was reported on a net cost recovery basis in operating expenses since activities like asset management and related consulting were viewed as an extension of product sales support. These activities have gradually evolved into revenue generating businesses and are expected to grow in the future as additional resources are dedicated to these and other service activities. Accordingly, we believe it is now appropriate to report revenues and related costs from service activities on a gross basis. The impact in Q1 2006 of this reporting change was an increase in revenue of $11.2, an increase in cost of sales of $10.2 and an increase in operating expenses of $1.0. There was no impact on operating income from the reporting change.

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation.

STEELCASE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


2.	EARNINGS (LOSS) PER SHARE



	Three Months Ended

	May 27,		May 28,
Components of Earnings (Loss) Per Share	2005		2004

Numerator:
Income (loss) from continuing operations	$	6.7	$	(6.7	)
Income and gain on sale of net assets of discontinued operations		—		1.0

Net income (loss) numerator for both basic and diluted EPS	$	6.7	$	(5.7	)

Denominators:
Denominator for basic EPS— weighted average common shares outstanding		148.2		147.8
Potentially dilutive shares resulting from stock incentive plan awards(1)		0.3		0.2
Denominator for diluted EPS(1)		148.5		148.0


(1)	The denominator for basic earnings per share (“EPS”) is used for calculating EPS for Q1 2005 because potentially dilutive shares and diluted EPS are not applicable when a loss from continuing operations is reported.

Basic earnings per share is based on the weighted average number of shares of common stock outstanding during each period. It excludes the dilutive effects of additional common shares that would have been outstanding if the shares under our stock incentive plans had been issued and the dilutive effect of outstanding restricted shares to the extent those shares have not vested.

Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. However, diluted earnings per share does not reflect the effects of 8.0 million shares related to outstanding stock incentive plan awards as of Q1 2006 and 8.7 million shares as of Q1 2005 because those shares or potential shares were anti-dilutive.


3.	STOCK-BASED COMPENSATION

We account for stock-based compensation issued prior to March 1, 2003 under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Our stock-based compensation consists of performance shares, performance share units (“PSUs”), restricted stock, restricted stock units (“RSUs”) and non-qualified stock options.

For all awards granted, modified or settled on or after March 1, 2003, our policy is to expense stock-based compensation under SFAS No. 123, Accounting for Stock-Based Compensation, using the fair value based method of accounting. Fair value is measured on the grant date based on the market price of the related equity instrument or by using the Black-Scholes option-pricing model for stock options. Compensation expense is recognized over the applicable vesting period. However, no compensation expense has been recognized regarding stock options since no options have been issued subsequent to March 1, 2003.

Under the Steelcase Inc. Incentive Compensation Plan (the “Compensation Plan”), the Company granted 219,850 restricted stock shares in Q1 2006. The aggregate market value of $3.0 of these

STEELCASE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

restricted stock shares at the date of issuance was recorded as deferred compensation, a separate component of shareholders’ equity, and is amortized over the three-year vesting period of the grants.

RSUs, performance shares, and PSUs are credited to equity as they are expensed over their vesting periods based on the market value of the shares on the grant date. Under the Compensation Plan, the Company granted 31,000 RSUs in Q1 2006. Additionally, the Company granted 138,000 performance shares and PSUs in Q1 2006. The actual number of Class A Common Stock shares that ultimately may be issued from the performance shares and PSUs granted to date is dependant on performance levels and ranges from zero to 652,000 based on actual performance levels.

The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 to all outstanding awards.



		Three Months Ended

		May 27,			May 28,
SFAS No. 123 Pro Forma Data		2005			2004

Net income (loss), as reported		$	6.7		$	(5.7	)
	Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		0.8			0.5
	Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(1.0	)		(1.6	)

Pro forma net income (loss)		$	6.5		$	(6.8	)

Earnings per share:
	Basic and diluted— as reported	$	0.05		$	(0.04	)

	Basic and diluted— pro forma	$	0.04		$	(0.05	)


4.	COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of net income and all changes to shareholders’ equity except those due to investments by, and distributions to, shareholders.



			Three Months Ended

			May 27,			May 28,
Components of Comprehensive Income (Loss)			2005			2004

Net income (loss)			$	6.7		$	(5.7	)
Other comprehensive income (loss):
	Foreign currency translation			(12.3	)		(5.8	)
	Derivative adjustments, net of tax			2.8			2.7
	Minimum pension liability, net of tax			0.1			0.2

		Total		(9.4	)		(2.9	)

Comprehensive (loss)			$	(2.7	)	$	(8.6	)

In Q1 2006 and 2005, foreign currency translation losses were primarily due to the strengthening of the U.S. dollar against the euro.

STEELCASE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


5.	INVENTORIES

Inventories are stated at the lower of cost or market. The North America segment primarily uses the last in, first out (“LIFO”) method to value its inventories. Companies in the Steelcase Design Partnership (“SDP”) segment primarily use the first in, first out (“FIFO”) or the average cost inventory valuation methods. Companies in the International segment value their inventories using the FIFO method.



	May 27,			February 25,
Inventories	2005			2005

Finished goods	$	71.0		$	67.3
Work in process		30.4			29.7
Raw materials		62.7			64.9

		164.1			161.9
LIFO reserve		(29.0	)		(29.0	)

	$	135.1		$	132.9

The portion of inventories determined by the LIFO method aggregated $51.2 as of May 27, 2005 and $52.6 as of February 25, 2005.


6.	GOODWILL AND OTHER INTANGIBLE ASSETS

There were no acquisitions, dispositions, adjustments or impairments of goodwill during Q1 2006. A summary of goodwill, by business segment and category, is as follows:



				Currency
		February 25,		Translation			May 27,
Goodwill by Business Segment and Category		2005		Adjustment			2005

North America		$	45.1	$	—		$	45.1
Steelcase Design Partnership			63.2		—			63.2
International			42.5		(2.2	)		40.3
Other			59.4		—			59.4

	Total	$	210.2	$	(2.2	)	$	208.0

STEELCASE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

As of May 27, 2005 and February 25, 2005, our other intangible assets and related accumulated amortization consisted of the following:



					May 27, 2005						February 25, 2005
			Weighted
			Average
			Useful
			Lives				Accumulated						Accumulated
Other Intangible Assets			(Years)		Gross		Amortization		Net		Gross		Amortization		Net

Intangible assets subject to amortization:
	Proprietary technology			13.2	$	48.7	$	15.3	$	33.4	$	48.7	$	14.1	$	34.6
	Trademarks			8.4		30.2		22.1		8.1		30.2		21.5		8.7
	Other			7.2		8.8		4.7		4.1		8.8		4.5		4.3

		Total