Steelcase - 10-Q quarterly report FY

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As of June 28, 2011, Steelcase Inc. had 87,062,524 shares of Class A Common Stock and 44,188,960 shares of Class B Common Stock outstanding.

The accompanying 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 ofRegulation S-X.Accordingly, they do not include all 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 and notes thereto contained in our Annual Report onForm 10-Kfor the fiscal year ended February 25, 2011(“Form 10-K”).The Condensed Consolidated Balance Sheet as of February 25, 2011 was derived from the audited Consolidated Balance Sheet included in ourForm 10-K.

As used in this Quarterly Report onForm 10-Q(“Report”), unless otherwise expressly stated or the context otherwise requires, all references to “Steelcase,” “we,” “our,” “Company” and similar references are to Steelcase Inc. and its subsidiaries in which a controlling interest is maintained. Unless the context otherwise indicates, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than a calendar year. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.

As of the end of the first quarter of fiscal year 2012, we realigned our reportable segments for financial reporting purposes primarily as a result of organizational changes to strengthen our position as a globally integrated enterprise. The accompanying segment data for all prior periods has been reclassified to reflect these realignments. See Note 7 for additional information regarding our reportable segments.

Earnings per share is computed using the two-class method. The two-class method determines earnings per share of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Participating securities include performance units and restricted stock units in which the participants have non-forfeitable rights to dividends or dividend equivalents during the performance period. Basic earnings per share of participating securities is the same as basic earnings per share of common stock for all periods presented. Diluted earnings per share includes the effects of options and certain performance shares and performance units in which the participants have forfeitable rights to dividends or dividend equivalents during the performance period. However, for the three months ended May 27, 2011 and May 28, 2010, diluted earnings per share does not reflect the effect of options, performance shares and

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

Foreign currency translation adjustments reflect the impact of the changes in certain foreign currency values (principally the euro, pound sterling and Canadian dollar) relative to the U.S. dollar. As of May 27, 2011, approximately 35% of our assets were denominated in currencies other than the U.S. dollar, the majority of which were denominated in euros.

The carrying amounts for many of our financial instruments, including cash and cash equivalents, accounts and notes receivable, accounts and notes payable, short-term borrowings and certain other liabilities, approximate their fair value due to their relatively short maturities. Our short-term investments, foreign exchange forward contracts and long-term investments are measured at fair value on the Condensed Consolidated Balance Sheets.

Our total debt is carried at cost and was $543.5 and $546.8 as of May 27, 2011 and February 25, 2011, respectively. The fair value of our total debt is measured using a discounted cash flow analysis based on current market interest rates for similar types of instruments and was approximately $558 and $555 as of May 27, 2011 and February 25, 2011, respectively.

We periodically use derivative financial instruments to manage exposures to movements in interest rates and foreign exchange rates. The use of these financial instruments modifies the exposure of these risks with the intention to reduce our risk of short-term volatility. We do not use derivatives for speculative or trading purposes.

There were no transfers between Level 1 and Level 2 of the fair value hierarchy for any period presented. Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for the three months ended May 27, 2011:

The portion of inventories determined by the LIFO method aggregated $51.6 as of May 27, 2011 and $45.5 as of February 25, 2011.

In Q1 2012, we awarded a target of 485,845 performance units to our executive officers. These performance units are earned after a three-year performance period, from 2012 through 2014, based on our total shareholder return relative to a comparison group of companies. The number of units that may be earned can range from 0% to 200% of the target amount, therefore the maximum number of performance units that can be issued under the award is 971,690. For this award, a dividend equivalent is calculated based on the actual number of units earned at the end of the performance period, equal to the dividends that would have been payable on the earned units had they been held during the entire performance period as Class A Common Stock. At the end of the performance period, the dividend equivalents are paid in the form of cash or Class A Common Stock at the discretion of the Board of Directors. The award will be forfeited if a participant leaves our company for reasons other than retirement, disability or death or if the participant engages in any competition with us, as defined in the plan and determined by the Administrative Committee in its discretion. If a change in control occurs at least six months following the award date, the target award will be deemed to be earned and a pro rata number of units will be vested and paid based upon the length of time within the performance period which has elapsed prior to the effective date of the change in control. The fair value of the performance

The total performance units expense and associated tax benefit for all outstanding awards for the three months ended May 27, 2011 and May 28, 2010 are as follows:

The performance units activity for the three months ended May 27, 2011 is as follows:

As of May 27, 2011, there is $6.8 of remaining unrecognized compensation cost related to nonvested performance units. That cost is expected to be recognized over a remaining weighted-average period of 2.2 years.

In Q1 2012, we awarded 260,155 restricted stock units (“RSUs”), of which 252,655 were to our executive officers. These RSUs have restrictions on transfer which lapse approximately three years after the date of grant awarded, at which time RSUs are issued as unrestricted shares of Class A Common Stock. These awards are subject to forfeiture if a participant leaves our company for reasons other than retirement, disability, death or termination by us without cause prior to the vesting date.

The total restricted stock and RSUs expense and associated tax benefit for all outstanding awards for the three months ended May 27, 2011 and May 28, 2010 are as follows:

The restricted stock and RSUs activity for the three months ended May 27, 2011 is as follows:

As of May 27, 2011, there is $3.7 of remaining unrecognized compensation cost related to nonvested RSUs. That cost is expected to be recognized over a weighted-average period of 2.6 years.

As of the end of the first quarter of fiscal year 2012, we realigned our reportable segments for financial reporting purposes primarily as a result of organizational changes to strengthen our position as a globally integrated enterprise. The organizational changes consisted of the realignment of the reporting structure for the Steelcase brand in North America, Latin America and the region of Europe, the Middle East and Africa (“EMEA”).

As a result of these changes, our reportable segments were realigned to reflect the organizational structure used by the Chief Executive Officer for making operating and investment decisions and assessing performance. Our reportable segments now consist of (1) the Americas segment, (2) the EMEA segment and (3) the Other category. Unallocated corporate expenses are reported as Corporate.

The Americas segment serves customers in the U.S., Canada and Latin America with a portfolio of integrated architecture, furniture and technology products marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Turnstone, Details and Nurture by Steelcase brands. In addition, the Coalesse operating segment has been aggregated with the Americas.

The EMEA segment serves customers in Europe, the Middle East and Africa primarily under the Steelcase brand, with an emphasis on freestanding furniture systems, storage and seating solutions.

The Other category includes Asia Pacific, PolyVision and Designtex. IDEO was included in the Other category through Q3 2011, but due to the ownership transition, our remaining 20% share of IDEO income has been recorded as a non-operating item since Q4 2011. Asia Pacific serves customers in Asia and Australia primarily under the Steelcase brand with an emphasis on freestanding furniture

Revenue and operating income (loss) for the three months ended May 27, 2011 and May 28, 2010 and total assets as of May 27, 2011 and February 25, 2011 by segment are presented below:

On December 14, 2010, certain members of the management of IDEO purchased an additional 60% equity interest in IDEO pursuant to an agreement entered into during 2008. We retained a 20% equity interest in IDEO, and we expect to continue our collaborative relationship after this transition. In Q4 2011, we deconsolidated the operations of IDEO and recorded our share of IDEO’s earnings as equity in earnings of unconsolidated affiliates in Other income, net on the Condensed Consolidated Statements of Operations.

For the year ended February 25, 2011 and the interim periods therein, our Condensed Consolidated Statements of Operations included the following related to IDEO:

In Q1 2012, Office Environments of New England, LLC (“OENE”), a wholly-owned subsidiary of Steelcase Inc., acquired substantially all the assets of bkm Total Office (“BKM”) for cash consideration of approximately $17.9. OENE and BKM, both authorized Steelcase dealers, have combined to create a regional enterprise supporting workplace needs that will offer a broadened portfolio of products and services and expanded geographical coverage in New England. As a result of the preliminary purchase price allocation, we recorded goodwill of $2.3. The combined dealers are included in the Americas segment. We expect to finalize the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed when we obtain information sufficient to complete the formal valuation of intangible assets and working capital adjustments, but in any case, within one year after acquisition. The purchase of BKM did not have a material impact on our condensed consolidated financial statements.

In Q2 2012, we initiated a formal procedure of discussions with the work council in Morocco regarding the closure of our local manufacturing facility within our EMEA segment. We expect to move production to other Steelcase locations in EMEA over the next three months. In addition, PolyVision signed a letter of intent to transfer its remaining low margin whiteboard fabrication business in Europe to a third party, and the transaction is expected to close in Q2 2012. In conjunction with both these actions, we expect to incur approximately $10 of restructuring costs. The majority of the charges in EMEA will relate to workforce reductions and some additional non-cash costs for manufacturing consolidation while the charges at PolyVision are a result of a non-cash loss on sale. No restructuring costs were recorded for these projects in Q1 2012.

In Q4 2011, we announced the planned closure of three additional manufacturing facilities in North America as part of our ongoing efforts to improve the fitness of our business and strengthen the Company’s long-term competitiveness. We are in the process of moving production within these facilities to other Steelcase locations in North America and expect the manufacturing consolidation to continue through the first half of fiscal year 2013. We currently estimate the cash restructuring costs associated with these actions will be approximately $40, with approximately $30 related to workforce reductions and approximately $10 related to costs associated with manufacturing consolidation and production moves. During Q1 2012 and Q4 2011, we accrued restructuring costs of $7.2 and $10.1, respectively. These costs primarily related to workforce reductions and were recorded within the Americas segment.

In Q1 2011, we announced a project to reorganize our European manufacturing operations on the basis of specialized competencies. During Q1 2012, we incurred restructuring costs of $1.4. This project is now substantially complete, and total restructuring costs approximated $20. The majority of these costs related to workforce reductions and some additional costs for manufacturing consolidation and production moves within the EMEA segment. The remaining restructuring costs recorded in Q1 2012 were related to contingencies associated with a former plant in France, which was sold in Q4 2010.

Restructuring costs are summarized in the following table:

Below is a summary of the net additions, payments and adjustments to the restructuring reserve balance for the three months ended May 27, 2011:

The workforce reductions reserve balance as of May 27, 2011 primarily relates to employee termination costs associated with the Q1 2011 and Q4 2011 announcements.

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our Annual Report onForm 10-Kfor the fiscal year ended February 25, 2011. Reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year, unless indicated by a specific date. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.

This item contains certain non-GAAP financial measures. A “non-GAAP financial measure” is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the consolidated statements of operations, balance sheets or statements of cash flows of the company. Pursuant to the requirements of Regulation G, we have provided a reconciliation below of non-GAAP financial measures to the most directly comparable GAAP financial measure.

The non-GAAP financial measures used are: (1) organic revenue growth, which represents the change in revenue over the prior year excluding estimated currency translation effects and the impacts of the IDEO ownership transition and a recent dealer acquisition, and (2) adjusted operating income (loss), which represents operating income (loss) excluding restructuring costs. These measures are presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors.

As of the end of the first quarter of fiscal year 2012, we realigned our reportable segments for financial reporting purposes primarily as a result of organizational changes to strengthen our position as a globally integrated enterprise. Thus, our reportable segments now consist of (1) the Americas segment, (2) the EMEA segment and (3) the Other category. The accompanying segment data for all prior periods has been reclassified to reflect these realignments. See Note 7 to the condensed consolidated financial statements and “Business Segment Review” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information on our reportable business segments.

We experienced organic revenue growth across all of our segments in Q1 2012. The growth is generally consistent with or better than global trends in our industry. Companies have been increasing corporate spending thus far in the economic recovery, leveraging the strength of their cash positions, even though white collar employment and new construction (traditional industry drivers) have been slow to regain momentum. While the broader economic recovery remains challenged by a variety of headwinds, many of our customers have deferred spending during a decade in which various forces have had exponential consequences on their work environments. We have been conducting research and launching new products, applications and experiences over the past several years to address these forces, some of which include globalization trends, miniaturization of technology, mobility of workers, increased collaboration and multi-generations at work. We believe staying invested in these growth initiatives during the worst of the recession helped us establish a strong foundation for revenue growth as our customers begin to increase spending.

We reported net income of $7.5 in Q1 2012 compared to a net loss of $11.1 in Q1 2011. The increase in net income was driven by higher operating income across all of our segments and lower income tax expense, offset by increased interest expense associated with the issuance of senior notes in Q4 2011. Income tax expense in the prior year included a charge of $11.4 from the recently enacted U.S. healthcare reform legislation specifically related to the Medicare Part D subsidy.

Revenue increased $97.6 or 18.0% in Q1 2012 compared to Q1 2011. The revenue comparison over prior year was negatively impacted by $35 from the IDEO ownership transition offset by $10 of favorable currency translation effects and $5 of sales related to a dealer acquired in May 2011. After adjusting for these impacts, organic revenue growth was $118 or 23% in Q1 2012. All segments posted organic revenue growth compared to Q1 2011.

Operating income grew to $15.0 in Q1 2012, compared to an operating loss of $1.4 in Q1 2011, which included $4.8 of operating income from IDEO, which has since been deconsolidated. Adjusted operating income of $24.9 increased $23.8 compared to Q1 2011, primarily due to operating leverage from organic revenue growth, offset in part by approximately $9 of higher commodity costs and the impact of deconsolidating IDEO.

Cost of sales decreased by 10 basis points to 69.8% of revenue in Q1 2012 compared to Q1 2011. Excluding the impact of deconsolidating IDEO, cost of sales decreased 130 basis points. Higher commodity costs were more than offset by higher absorption of fixed costs associated with the organic revenue growth in the quarter and benefits from previous restructuring activities.

Operating expenses increased $6.3 compared to the same period last year. Prior year operating expenses included $12.1 related to IDEO, which has since been deconsolidated. Aside from this item, the increase was primarily due to:

Interest expense in Q1 2012 included $4 of expense associated with the February 2011 issuance of senior notes. Investment income decreased due to lower income from variable life company-owned life insurance policies.

See Note 7 to the condensed consolidated financial statements for additional information regarding our business segments.

The Americas segment serves customers in the U.S., Canada and Latin America with a portfolio of integrated architecture, furniture and technology products marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Coalesse, Turnstone, Details and Nurture by Steelcase brands.

Current quarter operating income of $21.1 represents an increase of $9.8 compared to $11.3 of operating income in Q1 2011. Adjusted operating income increased $15.7 due to operating leverage from organic revenue growth, offset in part by $7 of higher commodity costs.

The Americas revenue represented 63.9% of consolidated revenue in Q1 2012. Revenue increased $76.3 or 23.0% in Q1 2012 compared to Q1 2011, representing organic revenue growth of 21% after