UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

For the transition period from          to          

 

Commission File Number 1-13873

 

 

 

 

STEELCASE INC.

(Exact name of registrant as specified in its charter)

 

 

(Registrant’s telephone number, including area code) (616) 247-2710
None
(Former name, former address and former fiscal year, if changed since last report)

 

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 þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

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

 

As of January 3, 2011, Steelcase Inc. had 86,715,083 shares of Class A Common Stock and 46,351,204 shares of Class B Common Stock outstanding.

 

 

STEELCASE INC.
FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED NOVEMBER 26, 2010

INDEX

 

 

 

STEELCASE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except per share data)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 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 and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended February 26, 2010 (“Form 10-K”). The Condensed Consolidated Balance Sheet as of February 26, 2010 was derived from the audited Consolidated Balance Sheet included in our Form 10-K.

 

As used in this Quarterly Report on Form 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.

 

Certain amounts in the prior year’s financial statements have been reclassified and corrected to conform to the current year presentation. The long-term portions of the accrued liabilities for product warranties and self-insured losses related to workers’ compensation of $7.1 and $14.0, respectively, as of February 26, 2010, previously classified as current liabilities on the Condensed Consolidated Balance Sheet, have been reclassified to long-term liabilities. The non-current portions of deferred income taxes related to these liabilities of $8.1 have also been reclassified from current to non-current deferred income taxes in the Condensed Consolidated Balance Sheet. We did not amend our Form 10-K or any other prior period filing, as the corrections of these amounts were not considered material to the Condensed Consolidated Balance Sheet and they had no impact on the Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows for any of the periods presented.

 

 

 

We offer a 5-year, 10-year or lifetime warranty for most products, subject to certain exceptions. These warranties provide for the free repair or replacement of any covered product, part or component that fails during normal use because of a defect in materials or workmanship. The accrued liability for product warranties is based on an estimated amount needed to cover product warranty costs, including product recall and retrofit costs incurred as of the balance sheet date determined by historical claims experience and our knowledge of current events and actions.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

In Q2 2011, we increased the estimate of our general reserve for warranty claims by $6.0. The increase in our general warranty reserve was linked to implementation of new software supporting our claims management processes, which allowed us to more deeply understand our historical experience as a foundation for estimating future claims. In addition, during Q2 2011, we recorded a specific product warranty charge of $4.7 for estimated expenses related to a pending retrofit project. Our reserve for estimated settlements expected to be paid within one year as of November 26, 2010 and February 26, 2010 was $16.5 and $15.0, respectively, and is included in Accrued expenses: Other on the Condensed Consolidated Balance Sheets, while our reserve for estimated settlements expected to be paid beyond one year is included in Other long-term liabilities on the Condensed Consolidated Balance Sheets.

 

 

We are self-insured for certain losses relating to domestic workers’ compensation and product liability claims. We purchase insurance coverage to reduce our exposure to significant levels of these claims. Self-insured losses are accrued based upon estimates of the aggregate liability for uninsured claims incurred as of the balance sheet date using current and historical claims experience and certain actuarial assumptions. These estimates are subject to uncertainty due to a variety of factors, including extended lag times in the reporting and resolution of claims, and trends or changes in claim settlement patterns, insurance industry practices and legal interpretations. As a result, actual costs could differ significantly from the estimated amounts. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.

 

Our total reserve for estimated domestic workers’ compensation claim costs incurred as of November 26, 2010 and February 26, 2010 was $16.6 and $20.0, respectively. Our reserve for estimated domestic workers’ compensation claims expected to be paid within one year as of November 26, 2010 and February 26, 2010 was $6.3 and $6.0, respectively, and is included in Accrued expenses: Other on the Condensed Consolidated Balance Sheets, while our reserve for estimated domestic workers’ compensation claims expected to be paid beyond one year is included in Other long-term liabilities on the Condensed Consolidated Balance Sheets. During Q2 2011, we recognized a change in estimate, decreasing the reserve for estimated domestic workers’ compensation claim costs by $3.7. The change in estimate was mainly due to the continuation of favorable trends in past experience.

 

Our reserve for estimated product liability claim costs incurred as of November 26, 2010 and February 26, 2010 was $5.1 and $7.1, respectively, and is included in Accrued expenses: Other on the Condensed Consolidated Balance Sheets. During Q2 2011, we recognized a change in estimate, decreasing the reserve for estimated product liability claim costs by $3.0. The change in estimate was due to the continuation of favorable trends in past experience.

 

 

 

In Q4 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to add new requirements regarding fair value disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. We adopted the new guidance in Q1 2011. See Note 6 for additional information.

 

 

In Q2 2010, the FASB issued a new accounting statement which changed the consolidation guidance for variable interest entities. This statement requires companies to qualitatively assess the

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the beneficiary (1) has the power to direct matters that most significantly impact the activities of the VIE and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. We adopted the new guidance in Q1 2011.

 

Based on this statement, we deconsolidated a variable interest dealer in Q1 2011 which had no effect on net income. In addition, we deconsolidated a variable interest dealer in Q3 2010 after it was purchased by an independent third party. For the year ended February 26, 2010 and the interim periods therein, our Condensed Consolidated Statements of Operations included the following related to the consolidation of these dealers:

 

 

 

In Q2 2011, the FASB issued new guidance expanding disclosures about the credit quality of financing receivables and the allowance for credit losses. Financing receivables include loans and notes receivable, long-term trade accounts receivable and certain other contractual rights to receive money on demand or on fixed or determinable dates. Trade accounts receivable with contractual maturities of one year or less that arose from the sales of goods or services are excluded from the new guidance. The new guidance requires enhanced disclosures regarding the nature of credit risk inherent in an entity’s portfolio of financing receivables, how that risk is analyzed and the changes and reasons for those changes in the allowance for credit losses. The new disclosures will require information for both the financing receivables and the related allowance for credit losses at more disaggregated levels. The disclosure requirements will be effective in Q4 2011.

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

 

Earnings per share is computed using the two-class method. The two-class method determines earnings per share for each class 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. In the nine months ended November 26, 2010, the two-class method changes the basic earnings per share from $0.08 to $0.07. Basic earnings per share of participating securities is the same as basic earnings per share of common shares 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 and nine months ended November 26, 2010 and November 27, 2009, diluted earnings per share does not reflect the effect of options, performance shares and certain performance units totaling 3.3 million and 3.8 million, respectively, because their effect would have been anti-dilutive.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

 

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

 

 

 

As of November 26, 2010, we remeasured our accumulated post-retirement benefit obligation, which resulted in a change in the minimum pension liability of $11.7, net of tax. See Note 9 for additional information.

 

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 November 26, 2010, approximately 29% 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.

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

Our total debt is carried at cost and was $298.6 and $300.8 as of November 26, 2010 and February 26, 2010, 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 $307 and $309 as of November 26, 2010 and February 26, 2010, 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.

 

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

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 nine months ended November 26, 2010:

 

 

 

 

The portion of inventories determined by the LIFO method aggregated $49.6 as of November 26, 2010 and $39.0 as of February 26, 2010.

 

 

 

Our investments in company-owned life insurance (“COLI”) policies are recorded at their net cash surrender value. Our investments in COLI policies, while an available source of liquidity, were made with the intention of utilizing them as a long-term funding source for post-retirement medical benefits, deferred compensation and supplemental retirement plan obligations. The net cash surrender value of our COLI investments exceeds these employee benefit obligations on a tax-adjusted basis, and therefore, to more efficiently manage our balance sheet and liquidity position, in Q1 2011, we began considering our

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

investments in variable life COLI policies to be primarily a source of corporate liquidity. As a result of this change, we adjusted the target asset allocation of the investments in variable life COLI policies to more heavily weight the portfolio to fixed income securities; and beginning in Q1 2011, net returns in cash surrender value, normal insurance expenses and any death benefit gains (“COLI income”) related to our investments in variable life COLI policies have been recorded in Other income (expense), net on the Condensed Consolidated Statements of Operations.

 

We continue our intention to utilize our investments in whole life COLI policies as a funding source for post-retirement medical benefits and other employee benefit obligations. We believe the investments in whole life COLI policies represent a stable source for these long-term benefit obligations. Consequently, we continue to allocate COLI income related to our investments in whole life COLI policies between Cost of sales and Operating expenses on the Condensed Consolidated Statements of Operations consistent with the costs associated with the long-term employee benefit obligations that the investments in whole life policies are intended to fund.

 

These designations do not result in our investments in COLI policies representing a committed funding source for liquidity or employee benefit obligations. They are subject to claims from creditors, and we can designate them to another purpose at any time.

 

Following is a summary of the allocation of COLI income for the three and nine months ended November 26, 2010 and November 27, 2009:

 

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

 

 

In Q3 2011, we changed the cost sharing provisions of the post-retirement benefit plan that provides medical benefits to certain North American-based retirees and eligible dependents, which increased the required contributions for certain retirees. Accordingly, we remeasured our accumulated post-retirement benefit obligation (“APBO”) as of November 26, 2010. In connection with the remeasurement, other assumptions were revised, including the discount rate assumption, which decreased from 5.9% as of February 26, 2010 to 5.3% as of November 26, 2010. The remeasurement resulted in an $18.9 decrease in the APBO as of November 26, 2010 and these changes will reduce net expense for post-retirement plans by $1.2 in Q4 2011.

 

 

 

We expect to contribute approximately $4 to our pension plans and $10 to our post-retirement plans in 2011. As of November 26, 2010, contributions of approximately $3 and $6 have been made to the respective plans.

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

 

The provision for income taxes for the nine months ended November 26, 2010 includes a discrete item of $11.4 to recognize a reduction in deferred tax assets. In Q1 2011, the U.S. enacted significant healthcare reform legislation which changed the tax treatment of the federal subsidies received by employers who provide certain prescription drug benefits for retirees (the “Medicare Part D subsidy”) for fiscal years beginning after December 31, 2012. We had previously recorded deferred tax assets based on the liability for post-retirement benefit obligations related to prescription drug benefits for retirees. As a result of the law change during Q1 2011, deferred tax assets were reduced as these obligations will no longer be deductible for purposes of determining taxable income to the extent they are reimbursed by the Medicare Part D subsidy.

 

In addition, for the three and nine months ended November 26, 2010 we recorded ($0.6) and $0.5 of other miscellaneous discrete items. Excluding discrete items, income tax expense recorded for the three and nine months ended November 26, 2010 reflects an estimated annual effective tax rate of approximately 32%. The estimated annual effective tax rate, excluding discrete items, decreased from our Q2 2011 estimate of 37% primarily due to benefits associated with the IDEO ownership transition described in Note 14 and higher non-taxable COLI income.

 

On December 17, 2010, the U.S. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. The bill includes a two-year retroactive extension of the U.S. research tax credit, and therefore we will record the benefit associated with this change in the law, which we estimate will reduce our income tax expense by $1.8 in Q4 2011.

 

 

In Q3 2011, we awarded a total of 212,000 restricted stock units (“RSUs”) under the Steelcase Inc. Incentive Compensation Plan (the “Incentive Compensation Plan”) to certain employees who are not executive officers. These RSUs will vest at the end of a three-year period or at the time the participant becomes a qualified retiree.

 

Restricted stock and RSUs are expensed and recorded in Additional paid-in capital on the Condensed Consolidated Balance Sheets over the vesting period based on the value of the shares on the grant date. The total expense and associated tax benefit related to all restricted stock and RSUs for the three and nine months ended November 26, 2010 and November 27, 2009 were as follows:

 

 

As of November 26, 2010, there was $2.4 of remaining unrecognized compensation cost related to nonvested restricted stock and RSUs. That cost is expected to be recognized over a remaining weighted-average period of 2.5 years.

 

In Q1 2011, we awarded a target of 779,000 performance units under the Incentive Compensation Plan to our executive officers. The performance units are earned after a three-year performance period, from 2011 through 2013, based on our total shareholder return relative to a comparison group of companies. The number of shares that may be earned can range from 25% to 200% of the target amount. A number of units equal to 25% of the target level of each award will be earned if the participant remains employed through the end of 2013 or retires, becomes disabled, dies or is terminated without cause, or a change in control occurs during the performance period, whether or not the minimum performance level is achieved. The minimum award will be forfeited if a participant leaves our company for reasons other than retirement, disability, death or termination without cause prior to the end of the

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

 

performance period. The remainder of the award will be forfeited if a participant leaves our company for reasons other than retirement, disability or death prior to the end of the performance period. During the performance period, participants receive a cash dividend equivalent based on the underlying target award equal to the dividends we declare and pay on our Class A Common Stock. The fair value of the performance units awarded during Q1 2011 was calculated on the grant date using the Monte Carlo simulation model with the following assumptions:

 

 

 

 

The total expense and associated tax benefit related to all performance shares and performance units for the three and nine months ended November 26, 2010 and November 27, 2009 were as follows:

 

 

The performance shares and performance units activity for the nine months ended November 26, 2010 was as follows: