Steelcase - 10-Q quarterly report FY

 

 

 

 

 

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2of the Exchange Act. (Check one):

 

Large accelerated filer x     Accelerated filer o     Non-accelerated filer o     

 

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2of the Exchange Act). Yes o     No x

 

As of December 29, 2006, Steelcase Inc. had 78,212,942 shares of Class A Common Stock and 70,277,233 shares of Class B Common Stock outstanding.

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

See accompanying notes to the condensed consolidated financial statements.

See accompanying notes to the condensed consolidated financial statements.

 

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 ofRegulation 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 onForm 10-Kfor the fiscal year ended February 24, 2006(“Form 10-K”)as amended by theForm 10-K/A,filed with the U.S. Securities and Exchange Commission on July 12, 2006. 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 consolidated 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, Q3, Q2 and Q1 reference the third, second, and first quarter, respectively, of the fiscal year indicated. All amounts are in millions, except per share data, data presented as a percentage or unless otherwise indicated.

 

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

 

 

In July 2006, the Financial Accounting Standards Board (“FASB”) adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition of positions taken or expected to be taken in income tax returns. Only tax positions meeting a “more-likely-than-not” threshold of being sustained are recognized under FIN 48. FIN 48 also provides guidance on derecognition, classification of interest and penalties and accounting and disclosures for annual and interim financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect of the changes arising from the initial application of FIN 48 is required to be reported as an adjustment to the opening balance of retained earnings in the period of adoption. We are currently evaluating the impact, if any, of the adoption of FIN 48 on our financial statements, and we expect to adopt FIN 48 in 2008.

 

In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF IssueNo. 04-5,“Investor’s Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights” (“EITF04-5”),which states that the general partner in a limited partnership should presume that it controls and, thus, should consolidate the limited partnership, unless the limited partners have either (a) substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (b) substantive participating rights. EITF04-5 was effective for the first reporting period in fiscal years beginning after December 15, 2005. As a result of adopting EITF 04-5,during Q2 2007 we began consolidating certain non-furniture partnerships related to one of our consolidated dealers that were not previously

consolidated. The impact of the consolidation increased ouryear-to-date2007 revenue by $12.5 and operating income by $1.2. The equity interest we hold does not share in the net income of the subsidiary, per the subsidiary’s operating agreement. The impact of consolidating these businesses did not have a material impact on our financial statements.

 

At the beginning of 2007, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (revised 2004),using the modified prospective transition method. The adoption of SFAS No. 123(R) had the followingyear-to-dateimpact in 2007: Income before income tax expense was reduced by $1.1, Net income was reduced by $0.7, Net cash provided by operating activities was reduced by $2.2 and Net cash used in financing activities was increased by $2.2. There was no impact on basic or diluted earnings per share.

 

On November 10, 2005, the FASB issued FASB Staff Position (“FSP”) 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards,that provides a practical transition election related to accounting for the tax effects of share-based payment awards to employees. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS No. 123(R). We are in the process of evaluating whether to adopt the provisions of FSP 123(R)-3 and will make our election before the end of 2007.

 

Prior to the adoption of SFAS No. 123(R), our policy was to expense stock-based compensation using the fair-value based method of accounting for all awards granted, modified or settled in accordance with SFAS No. 123, Accounting for Stock-Based Compensation.  Prior to 2004, our stock-based compensation consisted only of stock options, and we accounted for them under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Given the terms of the plans, no stock-based employee compensation cost was recognized, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

The following table details the effect on net income and earnings per share had stock-based compensation expense been recorded for the three and nine months ended November 24, 2005 based on the fair-value method under SFAS No. 123, Accounting for Stock-Based Compensation:

 

 

The reported and pro forma net income and earnings per share for the three and nine month periods ended November 24, 2006 are the same because stock-based compensation expense was calculated and recorded in the financial statements in accordance with the provisions of SFAS No. 123(R).

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We have not determined the effect, if any, the adoption of this statement will have on our results of operations or financial position.

 

In September 2006, the FASB adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 106, and 132^®.” SFAS No. 158 requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. Additionally, SFAS No. 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. We plan to adopt this statement at the end of 2007.

 

Based on our funded status of plan obligations disclosed in Note 8 of our Annual Report onForm 10-K,as amended, for the year ended February 24, 2006, the estimated impact of adopting SFAS No. 158 would have been an increase to accumulated other comprehensive income within stockholders’ equity of approximately $10 million. In addition, during Q3 2007, we reduced our survivor benefit coverage under the Steelcase Inc. Employee Benefit Plan, which would have an additional impact of increasing accumulated other comprehensive income by approximately $12 million (see Note 8).

 

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 is effective for our fiscal year ending February 23, 2007. We do not expect the adoption of SAB 108 to have a material impact on our financial statements.

 

In September 2006, we acquired 100% of the common stock of Softcare Innovations, Inc., and its sister company, DJRT Manufacturing, Inc. (collectively “Softcare”), for $13.6 in cash. As a result of the purchase price allocation, we recorded intangible assets of $5.5 and goodwill of $6.6. The acquisition of these companies is part of our strategy to grow our healthcare division, Nurture by Steelcase. Softcare has a portfolio of patient room casegoods and healthcare seating products that will expand Nurture’s ability to provide holistic solutions for its customers. We expect to finalize the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed in Q1 2008 when we obtain information sufficient to complete the working capital adjustments, but in any case, within one year after acquisition. The purchase of Softcare did not have a material impact on our financial statements.

 

During Q3 2007, a consolidated variable interest dealer paid off its transition financing and equity balances, resulting in a non-operating gain of $3.6. The payoff required us to reconsider the consolidation of this dealer under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities.As a result, we determined that we were no longer the primary beneficiary, and we deconsolidated the dealer. Ouryear-to-dateconsolidated financial statements include $13.1 of revenue, $7.6 of gross profit, $5.2 of operating expenses, $2.4 of operating income, and ($2.4) of other income, net, related to the consolidated dealer. There was no impact on net income because the equity interest we held did not share in the net income of the subsidiary, per the subsidiary’s operating agreement.

 

 

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 1.1 million shares related to outstanding stock incentive plan awards as of November 24, 2006 and 5.8 million shares as of November 25, 2005 because those shares or potential shares were anti-dilutive.

 

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

 

 

In Q3 2007, the foreign currency translation loss was primarily due to a loss from the weakening of the Canadian dollar to the U.S. dollar, partially offset by the strengthening of the euro to the U.S. dollar. For the nine months ended November 24, 2006, the foreign currency translation income was primarily due to the strengthening of the Canadian dollar and euro to the U.S. dollar. Foreign currency translation losses in Q3 2006 and for the nine months ended November 25, 2005 were primarily due to the strengthening of the U.S. dollar against the euro.

 

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 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.

 

The portion of inventories determined by the LIFO method aggregated $70.4 as of November 24, 2006 and $61.9 as of February 24, 2006.

 

A summary of goodwill, by business segment and category, is as follows:

 

 

The addition to goodwill in North America relates to the acquisition of Softcare, which was completed during Q3 2007 (See Note 3).

 

As of November 24, 2006 and February 24, 2006, our other intangible assets and related accumulated amortization consisted of the following:

 

 

The increase in other intangible assets relates primarily to the acquisition of Softcare, which was completed during Q3 2007 (See Note 3).

 

In Q3 2007 and Q3 2006, we recorded amortization expense of $2.8 and $2.2, respectively, on intangible assets subject to amortization. Through Q3 2007, we recorded amortization expense of $7.2 as compared to $6.5 through November 2005. Based on the current amount of intangible assets

subject to amortization, the estimated amortization expense for each of the following five fiscal years is as follows:

 

 

As events such as potential acquisitions, dispositions or impairments occur in the future, these amounts may change.

 

In connection with an amendment to the Steelcase Inc. Employee Benefit Plan, which reduced certain surviving spouse benefits, we remeasured our accumulated post-retirement benefit obligation (“APBO”) as of November 24, 2006. As a result of the remeasurement, the APBO decreased by $18.6. In addition, the discount assumption was revised based on trends and recent experience from 5.7% in the February 24, 2006 valuation to 5.9% in the November 24, 2006 valuation.

 

During Q3, 2007, we received $0.4 in Medicare Part D subsidy reimbursements. We do not have sufficient information to estimate the amount of any future proceeds for the remainder of 2007.

 

 

We expect to contribute $3.6 to our pension plans and $10.1 to our post-retirement medical plans during 2007. As of November 24, 2006, contributions of $3.2 and $7.2 have been made to our pension and post-retirement plans, respectively.

 

 

In August 2006, we issued $250.0 of unsecured unsubordinated senior notes, due in August 2011 (“2011 Notes”). The 2011 Notes were priced at 99.715% of par value. The bond discount of $0.7 and direct debt issue costs of $1.9 were deferred and will be amortized over the life of the notes. Although the coupon rate of the 2011 Notes is 6.5%, the effective interest rate is 6.3% after taking into account the impact of the discount, offset by the deferred gain on interest rate locks related to the debt issuance. The 2011 Notes rank equally with all of our other unsecured unsubordinated indebtedness.

 

In September 2006, we redeemed $250.0 of senior subordinated notes which were due in November 2006 at face value, plus $4.9 of accrued interest and a $0.4 make-whole premium.

 

 

During 2007, we incurred restructuring costs of $10.8 in our North America segment as we continued the initiative to consolidate our North America manufacturing operations. We incurred restructuring costs of $3.4 in our International segment which included an impairment related to our Strasbourg campus, which we exited in connection with previous restructuring activities, and severance charges related to the exit of certain other operations in Morocco and France.

Restructuring costs are summarized in the following table:

 

 

Below is a reconciliation of the restructuring reserve for activity during 2007:

 

 

Non-cash and other adjustments incurred during 2007 primarily relate to asset impairment charges within our International and North America segments. The reserve balance as of November 24, 2006 for business exit and related costs primarily relates to lease termination costs within our International segment.

 

 

The accrued liability for warranty costs, included within other accrued expenses on the Condensed Consolidated Balance Sheets, is based on an estimated amount needed to cover future warranty obligations for products sold as of the balance sheet date and is determined by historical product data and management’s knowledge of current events and actions.

 

 

The maximum amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered from third parties) we could be required to make under guarantees and performance bonds are as follows:

 

 

We are party to performance bonds for certain installation or construction activities of certain Steelcase dealers and joint ventures. Under these agreements, we are liable to make financial payments if the installation or construction activities are not completed under their specified guidelines and claims are filed. Projects with performance bonds have completion dates ranging from one to five years. Where we have supplied performance bonds, we have the ability to step in and cure performance failures thereby mitigating our potential losses. No loss has been experienced under these performance bonds; however, reserves totaling $0.2 are recorded as of November 24, 2006 to cover potential losses for performance bonds entered into subsequent to December 31, 2002.

 

We are contingently liable under guarantees to third parties for the benefit of certain Steelcase dealers and joint ventures in the event of default of a financial obligation. The guarantees generally have terms ranging from one to ten years. During Q3 2007, we paid $0.1 under one guarantee. Reserves totaling $0.3 are recorded as of November 24, 2006 to cover potential losses for loan and lease guarantees.

 

We occasionally provide guarantees of the performance of certain of our dealers to third parties. These performance guarantees typically relate to dealer services such as delivery and installation of products. In the event that a dealer cannot complete these services in a timely manner, we guarantee the completion of these activities. It is not possible to estimate a potential liability under these types of guarantees because of the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement.

 

We operate under three reportable segments: North America, Steelcase Design Partnership and International, plus an “Other” category. Revenue and operating income for 2007 and 2006 by segment is presented below.

 

 

Balance sheet data by reporting segment is presented below:

 

 

 

 

Under the Steelcase Inc. Incentive Compensation Plan (the “Incentive Compensation Plan”), the Compensation Committee approved the granting of restricted shares of Class A Common Stock and restricted stock units (“RSUs”) to key employees. Restricted shares and RSUs will be forfeited if a participant leaves the Company for reasons other than retirement, disability or death prior to the vesting date. These restrictions lapse when the restricted shares and RSUs vest three years after the date of grant. When RSUs vest, they are converted to unrestricted shares of Class A Common Stock.

 

Prior to adopting SFAS 123(R), the aggregate market value on the grant date of the restricted shares was recorded as common stock and deferred compensation, a separate component of shareholders’ equity. Upon adopting SFAS 123(R), the deferred compensation account was netted against common stock. Restricted shares are now expensed and recorded in common stock over the three-year vesting period based on the value of the shares on the grant date. RSUs are expensed and recorded inAdditional paid in capital within the Condensed Consolidated Balance Sheets over the three-year vesting period based on the value of the shares on the grant date.

The restricted stock and RSU expense and associated tax benefit in 2007 and 2006 were as follows:

 

 

Holders of restricted stock receive cash dividends equal to the dividends that the Company declares and pays on the Class A Common Stock, which is included in Dividends paid in the Condensed Consolidated Statements of Cash Flows. Holders of RSUs receive quarterly cash payments equal to the dividend that the Company declares and pays on its Class A Common Stock, which are expensed as paid.

 

Additionally, the Board of Directors and the Compensation Committee have delegated to the Chief Executive Officer the administrative authority to award restricted shares and RSUs to employees in amounts considered immaterial to the Incentive Compensation Plan. The awards are subject to limitations and the provisions of the Incentive Compensation Plan and are reviewed by the Compensation Committee. The limitations include, but are not limited to, the number of shares of restricted stock and RSUs that may be awarded in any plan year and the number of shares of restricted stock and RSUs that may be awarded to any individual in one plan year.

 

The 2007 activity for restricted shares of stock and RSUs is as follows: