- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 August 27, 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 RAPIDS, 49508 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 September 30, 1999, the Registrant had outstanding 25,001,917 shares of Class A Common Stock and 127,481,808 shares of Class B Common Stock. Exhibit index located on page 20. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
STEELCASE INC. FORM 10-Q FOR THE QUARTER ENDED AUGUST 27, 1999 INDEX <TABLE> <CAPTION> PAGE NO. -------- <S> <C> Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Income Three and Six Months Ended August 27, 1999 and August 28, 1998..... 3 Condensed Consolidated Balance Sheets As of August 27, 1999 and February 26, 1999........................ 4 Condensed Consolidated Statements of Cash Flows Six Months Ended August 27, 1999 and August 28, 1998............... 5 Notes to Condensed Consolidated Financial Statements................ 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 11-17 Part II. Other Information Item 5. Other Information............................................. 18 Item 6. Exhibits and Reports on Form 8-K.............................. 18 Signatures............................................................ 19 Exhibit Index......................................................... 20 </TABLE> 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED --------------------- ------------------ AUG. 27, AUG. 28, AUG. 27, AUG. 28, 1999 1998 1999 1998 --------- --------- -------- -------- <S> <C> <C> <C> <C> Net sales............................ $ 831.9 $ 704.0 $1,523.7 $1,376.3 Cost of sales........................ 550.3 438.8 988.7 857.9 --------- --------- -------- -------- Gross profit......................... 281.6 265.2 535.0 518.4 Selling, general and administrative expenses............................ 214.9 173.4 385.6 348.3 --------- --------- -------- -------- Operating income..................... 66.7 91.8 149.4 170.1 Interest expense..................... (5.2) -- (6.2) -- Other income, net.................... 2.5 5.0 7.9 8.7 --------- --------- -------- -------- Income before provision for income taxes and equity in net income of joint ventures and dealers.......... 64.0 96.8 151.1 178.8 Provision for income taxes........... 26.2 36.6 58.9 67.9 --------- --------- -------- -------- Income before equity in net income of joint ventures and dealer transitions......................... 37.8 60.2 92.2 110.9 Equity in net income of joint ventures and dealer transitions..... 0.4 2.5 2.7 5.8 --------- --------- -------- -------- Net income........................... $ 38.2 $ 62.7 $ 94.9 $ 116.7 ========= ========= ======== ======== Earnings per share (basic and diluted)............................ $ 0.25 $ 0.41 $ 0.62 $ 0.76 ========= ========= ======== ======== Dividends per share of common stock.. $ 0.11 $ 0.10 $ 0.22 $ 0.20 ========= ========= ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 3
STEELCASE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS) <TABLE> <CAPTION> (UNAUDITED) AUG. 27, FEB. 26, ASSETS 1999 1999 ------ ----------- -------- <S> <C> <C> Current assets: Cash and cash equivalents................................... $ 23.4 $ 67.5 Accounts receivable, net.................................... 542.8 348.9 Notes receivable and leased assets.......................... 165.4 140.4 Inventories................................................. 150.4 96.5 Other current assets........................................ 120.6 84.1 -------- -------- Total current assets.................................... 1,002.6 737.4 Property and equipment, net................................... 874.7 739.0 Notes receivable and leased assets............................ 240.0 209.1 Joint ventures and dealer transitions......................... 45.6 210.4 Goodwill and other intangible assets, net..................... 392.3 99.6 Other assets.................................................. 213.4 187.0 -------- -------- Total assets............................................ $2,768.6 $2,182.5 ======== ======== <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ <S> <C> <C> Current liabilities: Accounts and notes payable.................................. $ 254.1 $ 102.1 Short-term borrowings and current portion of long-term debt. 220.1 -- Accrued expenses: Employee compensation..................................... 141.7 92.8 Employee benefit plan obligations......................... 45.5 51.8 Other..................................................... 255.7 200.1 -------- -------- Total current liabilities............................... 917.1 446.8 -------- -------- Long-term liabilities: Long-term debt.............................................. 54.9 -- Employee benefit plan obligations........................... 227.3 222.8 Other long-term liabilities................................. 43.6 12.9 -------- -------- Total long-term liabilities............................. 325.8 235.7 -------- -------- Total liabilities....................................... 1,242.9 682.5 -------- -------- Shareholders' equity: Common stock................................................ 358.6 379.4 Accumulated other comprehensive income...................... (29.6) (15.0) Retained earnings........................................... 1,196.7 1,135.6 -------- -------- Total shareholders' equity.............................. 1,525.7 1,500.0 -------- -------- Total liabilities and shareholders' equity.............. $2,768.6 $2,182.5 ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 4
STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS) <TABLE> <CAPTION> SIX MONTHS ENDED ------------------ AUG. 27, AUG. 28, 1999 1998 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net income................................................. $ 94.9 $116.7 Depreciation and amortization.............................. 62.9 51.3 Changes in current assets and liabilities, net of corporate acquisitions.............................................. (92.0) 2.9 Other, net................................................. 15.7 8.2 ------- ------ Net cash provided by operating activities.............. 81.5 179.1 ------- ------ INVESTING ACTIVITIES Capital expenditures....................................... (62.3) (75.0) Corporate acquisitions, net of cash acquired............... (177.8) -- Other, net................................................. (14.9) (0.5) ------- ------ Net cash used in investing activities.................. (255.0) (75.5) ------- ------ FINANCING ACTIVITIES Proceeds from issuance of long-term debt................... 41.0 -- Repayments of debt......................................... (7.5) -- Short-term borrowings, net................................. 150.5 -- Common stock issuance...................................... -- 24.8 Common stock repurchase.................................... (20.8) (8.0) Dividends paid............................................. (33.8) (30.8) ------- ------ Net cash provided by (used in) financing activities...... 129.4 (14.0) ------- ------ Net increase (decrease) in cash and cash equivalents..... (44.1) 89.6 Cash and cash equivalents, beginning of period......... 67.5 103.1 ------- ------ Cash and cash equivalents, end of period............... $ 23.4 $192.7 ======= ====== </TABLE> 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 August 27, 1999 condensed consolidated balance sheet includes 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. Additionally, the results of operations of Steelcase Strafor for the three months ended June 30, 1999 have been consolidated with the Company's results of operations for the three months ended August 27, 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 for the three months ended March 31, 1999 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 for the six months ended June 30, 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): <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED ----------------- ----------------- AUG. 27, AUG. 28, AUG. 27, AUG. 28, 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> NUMERATOR: Net income numerator for both basic and diluted EPS..................... $ 38.2 $ 62.7 $ 94.9 $116.7 ====== ====== ====== ====== DENOMINATORS: Denominator for basic EPS-Weighted average common shares outstanding... 153.1 154.3 153.3 153.8 Potentially dilutive shares resulting from stock options.................. 0.1 -- 0.1 -- ------ ------ ------ ------ Denominator for diluted EPS.......... 153.2 154.3 153.4 153.8 ====== ====== ====== ====== </TABLE> 6
STEELCASE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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): <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED ----------------- ----------------- AUG. 27, AUG. 28, AUG. 27, AUG. 28, 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income........................... $38.2 $62.7 $ 94.9 $116.7 Other comprehensive income: Foreign currency translation adjustments....................... (7.5) (3.6) (16.3) (8.6) Unrealized gain (loss) on investments....................... -- (0.6) 2.0 (0.6) Minimum pension liabilities........ (0.3) -- (0.3) -- ----- ----- ------ ------ Comprehensive income................. $30.4 $58.5 $ 80.3 $107.5 ===== ===== ====== ====== </TABLE> 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): <TABLE> <CAPTION> AUG. 27, FEB. 26, 1999 1999 -------- -------- <S> <C> <C> Finished goods.......................................... $ 73.9 $ 40.9 Work in process......................................... 36.5 32.3 Raw materials........................................... 87.5 70.8 ------ ------ 197.9 144.0 LIFO reserve............................................ (47.5) (47.5) ------ ------ $150.4 $ 96.5 ====== ====== </TABLE> At Aug. 27, 1999, inventories determined by the LIFO inventory method amounted to $147.0 million, or approximately 74% of the Company's inventories. ACQUISITION OF STEELCASE STRAFOR 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 7
STEELCASE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 August 27, 1999 condensed consolidated balance sheet includes the accounts and balances of Steelcase Strafor. Additionally, the results of operations of Steelcase Strafor for the three months ended June 30, 1999 have been consolidated with the Company's results of operations for the three months ended August 27, 1999. 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): <TABLE> <CAPTION> AMORTIZATION ANNUAL PERIOD AMOUNT AMORTIZATION ------------ ------ ------------ <S> <C> <C> <C> Estimated fair value adjustment of property, plant and equipment.......... 10 years $25.0 $2.5 Estimated intangible assets, including patents, trademarks and other identifiable intangible assets and 15 years to goodwill............................... 40 years $95.1 $3.7 </TABLE> 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 six month period ended August 28, 1998, and includes 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. <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED ----------------- ----------------- AUG. 27, AUG. 28, AUG. 27, AUG. 28, 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Results of Operations (in millions): Revenues......................... $831.9 $852.4 $1,672.0 $1,668.7 Gross profit..................... 281.6 313.5 582.8 611.0 Operating income................. 66.7 102.6 158.3 196.0 Net income....................... 38.2 61.7 92.9 114.7 </TABLE> 8
STEELCASE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings and long-term debt consist of the following (in millions): <TABLE> <CAPTION> AUG. 27, FEB. 26, 1999 1999 -------- -------- <S> <C> <C> Revolving credit facilities, interest rates ranging from 4.97% to 6.70% (1).............................. $150.5 $ -- Notes payable to Strafor Facom S.A., 3.52% fixed rate (2).................................................. 59.5 -- Note payable to bank, 7.00% fixed rate (3)............ 41.0 -- Other................................................. 24.0 -- ------ ----- Total short-term borrowings and long-term debt...... 275.0 -- Short-term borrowings and current portion of long-term debt................................................. (220.1) -- ------ ----- Long-term debt...................................... $ 54.9 $ -- ====== ===== </TABLE> - -------- (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. In August 1999, the Company established an unsecured committed multicurrency revolving credit facility with various financial institutions under which it may borrow up to Euro ("EUR") 200.0 million or its equivalent in optional currencies. The agreement is comprised of two tranches; tranche A is a EUR 75.0 million, 364 day term facility and tranche B is a EUR 125.0 million five year term facility. Borrowings under these facilities expire at various dates throughout the year depending on the borrowing terms. Interest, which is due at maturity, is based on EURIBOR or LIBOR plus a margin for the applicable borrowing term. The agreement 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 and French francs 405.0 million at variable interest rates determined by agreement at the time of borrowing. These agreements expire within one year and are renewable annually. (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. This note was refinanced in July, 1999 with short-term borrowings. (3) The note payable to 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. 9
STEELCASE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) Annual maturities on short-term borrowings and long-term debt for the next five years subsequent to Aug. 27, 1999 are as follows (in millions): <TABLE> <S> <C> 2000............................................................... $220.1 2001............................................................... 7.3 2002............................................................... 7.8 2003............................................................... 8.2 2004............................................................... 8.7 Thereafter......................................................... 22.9 ------ $275.0 ====== </TABLE> COMMON STOCK REPURCHASE PROGRAM On June 17, 1998, the Company's Board of Directors ("Board") approved a common stock repurchase program authorizing the repurchase of up to three million shares of common stock. During the second quarter of fiscal 2000 ("Q2 2000"), the Company repurchased 327,570 shares of Class A common shares at a cost of $6.2 million and 571,600 Class B common shares at a cost of $10.9 million. As of August 27, 1999, total repurchases amounted to $35.8 million, and 1,106,530 shares remain available for repurchase under the program. The Board authorized additional common stock repurchases of up to three million shares on September 22, 1999. 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. 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 10-K Report. 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
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 and six-month periods ended August 27, 1999 and August 28, 1998. <TABLE> <CAPTION> THREE MONTHS ENDED PERCENTAGE SIX MONTHS ENDED PERCENTAGE ---------------------- CHANGE ----------------- CHANGE AUG. 27, AUG. 28, INCREASE/ AUG. 27, AUG. 28, INCREASE/ 1999 1998 (DECREASE) 1999 1998 (DECREASE) --------- --------- ---------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Net sales............... 100.0% 100.0% 18.2% 100.0% 100.0% 10.7% Cost of sales........... 66.2 62.3 25.4% 64.9 62.3 15.2% --------- --------- ----- ----- Gross profit............ 33.8 37.7 6.2% 35.1 37.7 3.2% Selling, general and administrative expenses............... 25.8 24.7 23.9% 25.3 25.3 10.7% --------- --------- ----- ----- Operating income........ 8.0 13.0 (27.3)% 9.8 12.4 (12.2)% Interest expense........ (0.6) -- n/m (0.4) -- n/m Other income, net....... 0.3 0.8 (50.0)% 0.5 0.6 (9.2)% --------- --------- ----- ----- Income before provision for income taxes and equity in net income of joint ventures and dealer transitions..... 7.7 13.8 (33.9)% 9.9 13.0 (15.5)% Provision for income taxes.................. 3.1 5.2 (28.4)% 3.9 4.9 (13.3)% --------- --------- ----- ----- Income before equity in net income of joint ventures and dealer transitions............ 4.6 8.6 (37.2)% 6.0 8.1 (16.9)% Equity in net income of joint ventures and dealer transitions..... 0.0 0.3 (84.0)% 0.2 0.4 (53.4)% --------- --------- ----- ----- Net income.............. 4.6% 8.9% (39.1)% 6.2% 8.5% (18.7)% ========= ========= ===== ===== </TABLE> - -------- n/m = not meaningful OVERVIEW Consolidated net sales of $831.9 million for the second quarter of fiscal 2000 ("Q2 2000") increased 18.2% as compared to the same year ago period, attributable primarily to the impact of the acquisition of Steelcase Strafor S.A. and subsidiaries ("Steelcase Strafor"). This is the first quarter that the Company is presenting consolidated results of operations including Steelcase Strafor's results of operations since the date of acquisition. The Company posted an earnings decrease of 39.1% for Q2 2000, with net income of $38.2 million and basic and diluted earnings per share of $0.25, compared to net income of $62.7 million and basic and diluted earnings per share of $0.41 in the prior year's second quarter. The decrease in profitability is primarily attributable to the impact of the following factors: . Increased competitive pricing pressures . Disruptions to the manufacturing process from new product ramp up costs, increased order levels and process changes 11
. Charges for writedowns of certain assets aggregating $5.4 million, net of tax effects, or $0.04 per share . Amortization of Steelcase Strafor acquisition financing costs and related intangibles The Company completed and announced the acquisition of the remaining 50% equity interest in Steelcase Strafor on April 22, 1999. The acquisition was effective as of March 31, 1999 and has been accounted for pursuant to the purchase method of accounting in the accompanying condensed consolidated financial statements as of August 27, 1999. The Company accounts for the results of operations of Steelcase Strafor on a two month lag. THREE AND SIX MONTHS ENDED AUGUST 27, 1999 COMPARED TO THREE AND SIX MONTHS ENDED AUGUST 28, 1998 The following table sets forth comparative sales information by segment (in millions): <TABLE> <CAPTION> THREE MONTHS ENDED PERCENTAGE SIX MONTHS ENDED PERCENTAGE ----------------- CHANGE ----------------- CHANGE AUG. 27, AUG. 28, INCREASE/ AUG. 27, AUG. 28, INCREASE/ 1999 1998 (DECREASE) 1999 1998 (DECREASE) -------- -------- ---------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> NET SALES Office furniture--U.S. only................... $614.5 $620.7 (1.0)% $1,217.5 $1,204.0 1.1% Office furniture--Europe (1).................... 136.2 -- n/m 136.2 -- n/m Office furniture-- International (excluding Europe) & Canada................. 45.5 51.7 (12.0)% 98.4 105.5 (6.7)% Services & other businesses............. 35.7 31.6 13.0% 71.6 66.8 7.2% ------ ------ ----- -------- -------- ---- Consolidated net sales.. $831.9 $704.0 18.2% $1,523.7 $1,376.3 10.7% ====== ====== ===== ======== ======== ==== </TABLE> - -------- (1) Steelcase Strafor recorded net sales of $136.2 million in Q2 2000, an increase of 8.1% over second quarter fiscal 1999 net sales of $126.0 million. Steelcase Strafor fiscal 1999 net sales have been adjusted from amounts previously reported in order to conform the classification of certain sales deductions and other charges with those reflected in the Company's condensed consolidated financial statements. Steelcase Inc. posted record net sales, increasing 18.2% and 10.7% over the comparable prior year three and six-month periods, primarily attributable to the Steelcase Strafor acquisition. Excluding the effects of the Steelcase Strafor acquisition, Q2 2000 consolidated net sales decreased 1.2% as a result of decreases in the Company's U.S. and international office furniture businesses. The Company's U.S. office furniture net sales decreased 1.0% for Q2 2000, principally as a result of competitive pricing pressures in the Company's Steel furniture operations, which decreased 5.6% for Q2 2000. The decreases were partially offset by the positive effects of the J.M. Lynne acquisition and double-digit net sales growth for the quarter in the Company's Design Partnership (R) , Wood, and Revest (R) operations, as a group. The Steel operations are the Company's largest business unit and represent approximately 70% of annualized U.S. revenues. The Company has experienced favorable order trends and increased backlog in its Steel operations as a result of a high influx of competitively priced orders which are expected to ship in the third quarter of fiscal 2000. 12
The Business and Institutional Furniture Manufacturers' Association reported a sales growth forecast of 1% to 3% for calendar year 1999. Management estimates the Company's sales growth for fiscal 2000 will keep pace with industry growth rates, excluding the affects of Steelcase Strafor. Steelcase Strafor net sales for the three month period ended June 30, 1999 increased 8.1%, primarily attributable to the acquisition of Werndl BuroMobeL ("Werndl") in December 1998. Steelcase Strafor net sales excluding the Werndl acquisition decreased 11.8% versus the prior year second quarter due to softening in sales in France and the United Kingdom and the negative impact of French franc and German mark exchange rates versus the United States dollar. France's decreased sales are attributable to a slow-down in large corporate account activity and the effects of a seven-day strike in May at the Strasbourg facility related to wage negotiations. These decreases are partially offset by increased volume in most other countries, particularly Spain, Italy and the Netherlands. The Company's international net sales, excluding Europe, decreased 12.0% for Q2 2000 primarily as a result of continued softness in demand, particularly in South America, Canada, and Australia. Services and other businesses net sales increased 13.0% primarily from increasing demand for design services and product financing. The positive impacts of cost containment efforts and decreased incentive compensation, which is linked to performance goals, were offset by several factors this quarter. The current gross margin of 33.8% reflected a significant decrease from the 37.7% gross margin in Q2 1999. The decreases of 3.9% and 2.6% in gross profit percentage points for Q2 2000 and the six months ended August 27, 1999, respectively, were driven primarily by the impact of competitive pricing pressures on gross margins in the Steel furniture operations, disruptions to the manufacturing process from new products and process changes, and the impact of historically lower gross margins from Steelcase Strafor. The Company has experienced a recent strengthening in demand for its Steel furniture products. However, in the short-term, the immediate effects of competitive discounting practices are eroding the Company's margins. Management believes the competitive pricing situation is a result of excess capacity in the industry and low industry growth rates projected for the current calendar year. Ramp up costs associated with new products such as the Answer (R) system, the expanded portfolio of Pathways (R) architectural interior products, and Leap(TM) chair have placed additional demands on the manufacturing process. Sales of these new products has increased during the first half of fiscal 2000, resulting in increased pressure on margins for the quarter. Disruptions from new process changes and increased order levels are also negatively affecting the short-term gross margins. The Company is currently changing production processes to better leverage its investment in technology, including enterprise management and plant scheduling software. These investments are intended to reduce inventory levels, reduce material handling costs and increase visibility to the Company's cost structure. Management expects gross margins will improve from the current quarter's level over the balance of fiscal 2000 as the necessary shifts in manufacturing capabilities are implemented. However, the margins for the full year are not expected to reach prior year levels. Selling, general and administrative expenses increased from 24.7% in Q2 1999 to 25.8% in Q2 2000 as a result of the Steelcase Strafor consolidation, the related impact of amortization of intangible assets, and increased reserves for doubtful receivables in Europe. The Company recorded a charge in the amount of $6.0 million ($3.7 million net of tax) related to the valuation of accounts receivable in Europe. Selling, general and administrative expenses remained flat at approximately 25.3% for the first half of fiscal 2000. Excluding the affects of the Steelcase Strafor acquisition and the reserve increase for doubtful receivables SG&A as a percentage of sales has actually decreased slightly compared to the prior year, primarily attributable to cost controlling measures and decreased incentive compensation to management which is linked to growth. Beginning in fiscal 1999, management implemented several spending reduction targets to better align costs with sales growth. Management continues to emphasize these spending controls as the Company strives to meet its fiscal 2003 target of a 14% operating income margin. 13
Other income, net of interest expense, decreased $7.7 million and $7.0 million compared to Q2 1999 and the first half of fiscal 1999, respectively, as a result of an increase in investment valuation reserves and interest expense related to the Steelcase Strafor acquisition. The Company recorded a valuation reserve in the amount of $2.8 million ($1.7 million net of tax) to record a permanent impairment on an investment in a "high tech" company. Income tax expense for Q2 2000 was 40.9% of income before taxes, as compared to 37.8% for Q2 1999. Income tax expense has increased to 39.0% of income before taxes for the first half of fiscal 2000 versus 38.0% for the first half of fiscal 1999. The increase is a result of higher income tax rates in Europe. Management expects the full year tax rate for fiscal 2000 to be 39% compared to a tax rate of 37% for fiscal 1999.. Equity in net income from joint ventures and dealer transitions decreased to $0.4 million and $2.7 million for Q2 2000 and the first half of fiscal 2000, respectively, from $2.5 million and $5.8 million for Q2 1999 and the first half of fiscal 1999, respectively, primarily as a result of the acquisition of Steelcase Strafor, which had previously been accounted for under the equity method of accounting. For the reasons set forth above, net income decreased 39.1% to $38.2 million in Q2 2000, from $62.7 million in Q2 1999, and decreased 18.7% to $94.9 million for the six months ended August 27, 1999, from $116.7 million for the six months ended August 28, 1998. LIQUIDITY AND CAPITAL RESOURCES 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, which aggregated $81.5 million for the six months ended August 27, 1999. The Company's financial position at August 27, 1999 includes cash and cash equivalents of $23.4 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 working capital for the six months ended August 27, 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 $55 million for the six month period ended August 27, 1999. Additionally, accounts receivable, inventories and prepaid expenses have all slightly increased during the first half of fiscal 2000. 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 $178 million. The purchase price and associated transaction costs of $227 million were paid principally from bank financing aggregating $152 million at April 22, 1999, 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 down on lines of credit during the quarter resulting in $150.5 million, net of repayments, in short-term financing as of August 27, 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. The Company has secured a credit facility of EUR 200 million to provide liquidity and finance capital expenditures in Europe. The euro facility will serve as a natural hedge against currency translation exposures. As of August 27, 1999, the Company has not drawn any funds against this credit facility. However, on September 3, 1999, the Company secured an advance in the amount of EUR 57.5 million to refinance short-term borrowings. Capital expenditures were $62.3 million for the six months ended August 27, 1999, compared to $75.0 million for the six months ended August 28, 1998. 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 anticipates investing $34.0 million on a new wood furniture facility beginning in the second half of fiscal 2000. Management expects capital expenditures to increase in the second half of fiscal 2000 and to total approximately $200 million for the year. 14
The Company paid a common stock dividend of $0.22 per share, or $33.8 million, and $0.20 per share, or $30.8 million, during the first half of fiscal 2000 and 1999, respectively. 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. During the first half of fiscal 2000, the Company repurchased 327,570 Class A common shares for $6.2 million and 771,600 Class B shares for $14.6 million, under a three million share repurchase program authorized by the Board on June 17, 1998. Effective September 22, 1999, the Board authorized additional common stock repurchases of up to three million shares. 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. 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. 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 $14 million. Future costs anticipated to remedy Year 2000 issues have been budgeted and are not expected to exceed an additional $6 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. 15
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 completed 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. 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, dealers, providers of utilities or governmental services 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, should generally reduce the extent of materially adverse effects that Year 2000 related disruptions may have upon the Company. 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. Steelcase Strafor has 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 16
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 Results of Operations for the Three and Six Months Ended August 27, 1999 Compared to Three and Six Months Ended August 28, 1998, Liquidity and Capital Resources, Year 2000, and Euro Conversion sections, particularly those with respect to shipment expectations for the third quarter of fiscal 2000, the Company's sales growth and gross margin levels for fiscal 2000, the Company's gross margins for the balance of fiscal 2000, future tax rates, product offerings, liquidity and capital needs, the Company's intent to refinance short term debt, capital expenditures for the second half of fiscal 2000 and full fiscal 2000 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 costs associated with remediating 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, competitive pricing pressures, the ability to decrease disruptions to the manufacturing process from new products and process changes, the ability to decrease, over time, ramp up costs associated with new products, 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 Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, 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. Gains and losses resulting from changes in fair value would be included in income, or in comprehensive income, depending on whether the instrument qualifies for hedge accounting and the type of hedging instrument involved. This statement is 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 5. OTHER INFORMATION The Company must receive notice of any proposals of shareholders that are intended to be presented at the Company's 2000 Annual Meeting of Shareholders, but that are not intended to be considered for inclusion in the Company's Proxy Statement and Proxy related to that meeting, no later than April 2, 2000 to be considered timely. Such proposals should be sent to the Company's Secretary at the Company's principal executive offices, 901 44th Street SE, Grand Rapids, MI 49508, by certified mail, return receipt requested. If the Company does not have notice of the matter by that date, the Company's form of proxy in connection with that meeting may confer discretionary authority to vote on that matter, and the persons named in the Company's form of proxy will vote the shares represented by such proxies in accordance with their best judgment. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 1. EXHIBITS See Exhibit Index 2. REPORTS ON FORM 8-K 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. /s/ Alwyn Rougier-Chapman _____________________________________ Alwyn Rougier-Chapman Senior Vice President--Finance, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) Date: October 12, 1999 19
EXHIBIT INDEX <TABLE> <CAPTION> DESIGNATION DESCRIPTION ----------- ----------- <C> <S> <C> 10.10 Steelcase Inc. Non-Employee Director Deferred Compensation Plan 27.1 Financial Data Schedule, for the six months ended August 27, 1999. </TABLE> 20