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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended May 24, 2019
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to
Commission File Number 1-13873
___________________________________________________________
STEELCASE INC.
(Exact name of registrant as specified in its charter)
Michigan
 
38-0819050
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
901 44th Street SE
Grand Rapids, Michigan
(Address of principal executive offices)
 
49508
(Zip Code) 
(616) 247-2710
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Class A Common Stock
SCS
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 such files).  Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
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 June 18, 2019, Steelcase Inc. had 88,789,627 shares of Class A Common Stock and 28,535,960 shares of Class B Common Stock outstanding.
 


Table of Contents

STEELCASE INC.
FORM 10-Q


FOR THE QUARTERLY PERIOD ENDED May 24, 2019

INDEX

 
 
Page No. 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements:

STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in millions, except per share data)

 
Three Months Ended
 
May 24,
2019
May 25,
2018
Revenue
$
824.3

 
$
754.0

 
Cost of sales
565.9

 
516.1

 
Gross profit
258.4

 
237.9

 
Operating expenses
230.8

 
214.6

 
Operating income
27.6

 
23.3

 
Interest expense
(6.7
)
 
(4.4
)
 
Investment income
1.0

 
1.0

 
Other income, net
2.2

 
3.3

 
Income before income tax expense
24.1

 
23.2

 
Income tax expense
6.3

 
6.2

 
Net income
$
17.8

 
$
17.0

 
Earnings per share:
 

 
 

 
Basic
$
0.15

 
$
0.14

 
Diluted
$
0.15

 
$
0.14

 
Dividends declared and paid per common share
$
0.1450

 
$
0.1350

 
    

See accompanying notes to the condensed consolidated financial statements.

1

Table of Contents

STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)

 
Three Months Ended
 
May 24,
2019
May 25,
2018
Net income
$
17.8

 
$
17.0

 
Other comprehensive income (loss), net:
 
 
 
 
Unrealized gain on investments
0.1

 
0.1

 
Pension and other post-retirement liability adjustments
(0.2
)
 
(0.8
)
 
Derivative adjustments
0.2

 

 
Foreign currency translation adjustments
(7.9
)
 
(12.2
)
 
Total other comprehensive income (loss), net
(7.8
)
 
(12.9
)
 
Comprehensive income
$
10.0

 
$
4.1

 

See accompanying notes to the condensed consolidated financial statements.


2

Table of Contents

STEELCASE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
 
(Unaudited)
 
 
May 24,
2019
February 22,
2019
ASSETS
 
Current assets:
 

 
 

 
Cash and cash equivalents
$
152.7

 
$
261.3

 
Accounts receivable, net of allowances of $8.5 and $8.7
402.5

 
390.3

 
Inventories
241.3

 
224.8

 
Prepaid expenses
22.1

 
19.5

 
Other current assets
47.8

 
52.7

 
Total current assets
866.4

 
948.6

 
Property, plant and equipment, net of accumulated depreciation of $1,016.0 and $1,009.3
450.2

 
455.5

 
Company-owned life insurance ("COLI")
156.7

 
156.1

 
Deferred income taxes
133.9

 
135.8

 
Goodwill
240.1

 
240.8

 
Other intangible assets, net of accumulated amortization of $58.5 and $55.8
115.2

 
119.3

 
Investments in unconsolidated affiliates
53.7

 
56.9

 
Right-of-use operating lease assets
207.2

 

 
Other assets
32.3

 
29.4

 
Total assets
$
2,255.7

 
$
2,142.4

 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current liabilities:
 

 
 

 
Accounts payable
$
263.1

 
$
241.2

 
Short-term borrowings and current portion of long-term debt
4.2

 
4.1

 
Current operating lease obligations
36.4

 

 
Accrued expenses:
 

 
 

 
Employee compensation
79.4

 
168.1

 
Employee benefit plan obligations
23.9

 
37.1

 
Accrued promotions
28.6

 
27.7

 
Customer deposits
22.3

 
20.0

 
Product warranties
14.5

 
16.4

 
Other
78.6

 
80.6

 
Total current liabilities
551.0

 
595.2

 
Long-term liabilities:
 

 
 

 
Long-term debt less current maturities
482.4

 
482.9

 
Employee benefit plan obligations
131.3

 
141.6

 
Long-term operating lease obligations
182.2

 

 
Other long-term liabilities
56.8

 
72.9

 
Total long-term liabilities
852.7

 
697.4

 
Total liabilities
1,403.7

 
1,292.6

 
Shareholders’ equity:
 

 
 

 
Additional paid-in capital
25.9

 
16.4

 
Accumulated other comprehensive loss
(55.1
)
 
(47.3
)
 
Retained earnings
881.2

 
880.7

 
Total shareholders’ equity
852.0

 
849.8

 
Total liabilities and shareholders’ equity
$
2,255.7

 
$
2,142.4

 

See accompanying notes to the condensed consolidated financial statements.

3

Table of Contents

STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in millions, except share and per share data)
 
Three Months Ended
 
May 24,
2019
May 25,
2018
Changes in common shares outstanding:
 
 
 
 
Common shares outstanding, beginning of period
116,766,610

 
116,157,443

 
Common stock issuances
11,397

 
13,689

 
Common stock repurchases
(229,303
)
 
(236,102
)
 
Performance units issued as common stock

 
209,353

 
Restricted units issued as common stock
765,051

 
535,652

 
Common shares outstanding, end of period
117,313,755

 
116,680,035

 
 
 
 
 
 
Changes in paid-in capital (1):
 
 
 
 
Paid-in capital, beginning of period
$
16.4

 
$
4.6

 
Common stock issuances
0.2

 
0.2

 
Common stock repurchases
(4.0
)
 
(3.4
)
 
Performance units and restricted stock units expense
9.3

 
9.0

 
Other
4.0

 
2.2

 
Paid-in capital, end of period
25.9

 
12.6

 
 
 
 
 
 
Changes in accumulated other comprehensive income (loss):

 


 
Accumulated other comprehensive income (loss), beginning of period
(47.3
)
 
(10.3
)
 
Other comprehensive income (loss)
(7.8
)
 
(12.9
)
 
Accumulated other comprehensive income (loss), end of period
(55.1
)
 
(23.2
)
 
 
 
 
 
 
Changes in retained earnings:
 
 
 
 
Retained earnings, beginning of period
880.7

 
819.0

 
Net income
17.8

 
17.0

 
Dividends paid ($0.145 and $0.135 per share)
(17.3
)
 
$
(16.3
)
 
Retained earnings, end of period
881.2

 
819.7

 
Total shareholders' equity
$
852.0

 
$
809.1

 
_______________________________________
(1)
Shares of our Class A and Class B common stock have no par value; thus, there are no balances for common stock.
See accompanying notes to the condensed consolidated financial statements.


4

Table of Contents

STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)

 
Three Months Ended
 
May 24,
2019
May 25,
2018
OPERATING ACTIVITIES
 

 
 

 
Net income
$
17.8

 
$
17.0

 
Depreciation and amortization
20.3

 
17.5

 
Non-cash stock compensation
9.5

 
9.2

 
Equity in income of unconsolidated affiliates
(2.5
)
 
(3.3
)
 
Dividends received from unconsolidated affiliates
4.6

 
1.7

 
Other
1.2

 
(2.9
)
 
Changes in operating assets and liabilities:
 

 
 

 
Accounts receivable
(15.0
)
 
(42.2
)
 
Inventories
(17.7
)
 
(20.4
)
 
Other assets
1.1

 
(1.1
)
 
Accounts payable
23.2

 
21.8

 
Employee compensation liabilities
(93.6
)
 
(75.4
)
 
Employee benefit obligations
(24.2
)
 
(26.6
)
 
Accrued expenses and other liabilities
4.3

 
(13.0
)
 
Net cash used in operating activities
(71.0
)
 
(117.7
)
 
INVESTING ACTIVITIES
 

 
 

 
Capital expenditures
(14.8
)
 
(15.8
)
 
Other
1.1

 
7.9

 
Net cash used in investing activities
(13.7
)
 
(7.9
)
 
FINANCING ACTIVITIES
 

 
 

 
Dividends paid
(17.3
)
 
(16.3
)
 
Common stock repurchases
(4.0
)
 
(3.4
)
 
Repayments of long-term debt
(0.6
)
 
(0.7
)
 
Other
0.1

 

 
Net cash used in financing activities
(21.8
)

(20.4
)
 
Effect of exchange rate changes on cash and cash equivalents
(0.7
)
 
(1.3
)
 
Net decrease in cash, cash equivalents and restricted cash
(107.2
)
 
(147.3
)
 
Cash and cash equivalents and restricted cash, beginning of period (1)
264.8

 
285.6

 
Cash and cash equivalents and restricted cash, end of period (2)
$
157.6

 
$
138.3

 
_______________________________________
(1)
These amounts include restricted cash of $3.5 and $2.5 as of February 22, 2019 and February 23, 2018, respectively.
(2)
These amounts include restricted cash of $4.9 and $3.4 as of May 24, 2019 and May 25, 2018, respectively.
Restricted cash primarily represents funds held in escrow for potential future workers’ compensation and product liability claims.  Restricted cash is included as part of Other assets in the Condensed Consolidated Balance Sheets.

See accompanying notes to the condensed consolidated financial statements.

5

Table of Contents

STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
BASIS OF PRESENTATION
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 22, 2019 (“Form 10-K”). The Condensed Consolidated Balance Sheet as of February 22, 2019 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.
2.
NEW ACCOUNTING STANDARDS
Adoption of New Accounting Standards
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), to address the impact of the U.S. Tax Cuts and Jobs Act (the "Tax Act") on tax effects presented in other comprehensive income. The amended guidance allows a reclassification from accumulated other comprehensive income to retained earnings for the tax effects of items within accumulated other comprehensive income resulting from the Tax Act. We elected to not reclassify these amounts to retained earnings. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The amendments may be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the United States ("U.S."). federal corporate income tax rate in the Tax Act is recognized. The adoption of this guidance did not have an effect on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), which simplifies certain aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Certain areas of the simplification apply only to nonpublic entities. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments of the ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of this guidance did not have an effect on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The core principle of the new lease standard is to increase the decision usefulness and comparability among organizations by recognizing right-of-use assets and lease obligations on the balance sheet with additional qualitative and quantitative disclosures. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. The adoption of this guidance and related amendments resulted in an increase in the assets and liabilities on our Condensed Consolidated Balance Sheet as of May 24, 2019. See Note 9 for additional information.

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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accounting Standards Issued But Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General. The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The amended guidance is effective for fiscal years ending after December 15, 2020. The adoption of this guidance will modify our disclosures but is not expected to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the impact of this standard on our consolidated financial statements.
3.
REVENUE
Disaggregation of Revenue
The following table provides information about disaggregated revenue by product category for each of our reportable segments:
Product Category Data
Three Months Ended
May 24,
2019
May 25,
2018
Americas
 
 
 
 
Desking, benching, systems and storage
$
310.8

 
$
258.0

 
Seating
171.7

 
157.9

 
Other (1)
93.8

 
119.9

 
EMEA
 
 
 
 
Desking, benching, systems and storage
62.0

 
62.8

 
Seating
60.0

 
44.2

 
Other (1)
39.3

 
30.4

 
Other
 
 
 
 
Desking, benching, systems and storage
14.5

 
7.7

 
Seating
19.5

 
11.2

 
Other (1)
52.7

 
61.9

 

$
824.3

 
$
754.0

 
_______________________________________
(1)
The Other product category data by segment consists primarily of consolidated dealers, textiles and surface materials, worktools, architecture, technology, other uncategorized product lines and services.


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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reportable geographic information is as follows:
Reportable Geographic Revenue
Three Months Ended
May 24,
2019
May 25,
2018
United States
$
535.9

 
$
471.3

 
Foreign locations
288.4

 
282.7

 
 
$
824.3

 
$
754.0

 


Contract Balances
At times, we receive deposits from customers before revenue is recognized, resulting in the recognition of a contract liability (Customer deposits) presented in the Condensed Consolidated Balance Sheets.
Changes in the Customer deposits balance during the three months ended May 24, 2019 are as follows:
 
Customer Deposits
Balance as of February 22, 2019
$
20.0

 
Increases due to deposits received, net of other adjustments
12.8

 
Revenue recognized
(10.5
)
 
Balance as of May 24, 2019
$
22.3

 

4.
    EARNINGS PER SHARE
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 represent restricted stock units in which the participants have non-forfeitable rights to dividend equivalents during the performance period. Diluted earnings per share includes the effects of certain performance units in which the participants have forfeitable rights to dividend equivalents during the performance period.
 
Three Months Ended
Computation of Earnings per Share
May 24,
2019
May 25,
2018
Net income
$
17.8

 
$
17.0

 
Adjustment for earnings attributable to participating securities
(0.3
)
 
(0.3
)
 
Net income used in calculating earnings per share
$
17.5

 
$
16.7

 
Weighted-average common shares outstanding including participating securities (in millions)
119.4

 
118.7

 
Adjustment for participating securities (in millions)
(2.1
)
 
(2.1
)
 
Shares used in calculating basic earnings per share (in millions)
117.3

 
116.6

 
Effect of dilutive stock-based compensation (in millions)
0.5

 

 
Shares used in calculating diluted earnings per share (in millions)
117.8

 
116.6

 
Earnings per share:
 

 
 

 
Basic
$
0.15

 
$
0.14

 
Diluted
$
0.15

 
$
0.14

 
Total common shares outstanding at period end (in millions)
117.3

 
116.7

 
Anti-dilutive performance units excluded from the computation of diluted earnings per share (in millions)

 
0.4

 


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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended May 24, 2019:
 
Unrealized gain (loss) on investments
Pension and other post-retirement liability adjustments
Derivative adjustments
Foreign currency translation adjustments
Total
Balance as of February 22, 2019
$

 
$
9.7

 
$
(9.6
)
 
$
(47.4
)
 
$
(47.3
)
 
Other comprehensive income (loss) before reclassifications
0.1

 
0.3

 

 
(7.9
)
 
(7.5
)
 
Amounts reclassified from accumulated other comprehensive income (loss)

 
(0.5
)
 
0.2

 

 
(0.3
)
 
Net current period other comprehensive income (loss)
0.1

 
(0.2
)
 
0.2

 
(7.9
)
 
(7.8
)
 
Balance as of May 24, 2019
$
0.1

 
$
9.5

 
$
(9.4
)
 
$
(55.3
)
 
$
(55.1
)
 

The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for the three months ended May 24, 2019 and May 25, 2018:
Detail of Accumulated Other
Comprehensive Income (Loss) Components
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Affected Line in the Condensed Consolidated Statements of Income
Three Months Ended
May 24,
2019
May 25,
2018
Amortization of pension and other post-retirement liability adjustments
 
 
 
 
 
Actuarial losses (gains)
$
(0.7
)
 
$
(0.9
)
 
Other income, net
Prior service cost (credit)

 
(0.6
)
 
Other income, net
 
0.2

 
0.3

 
Income tax expense
 
(0.5
)
 
(1.2
)
 
 
 

 


 

Derivative adjustments
0.3

 

 
Interest expense
 
(0.1
)
 

 
Income tax expense
 
0.2

 

 
 
Total reclassifications
$
(0.3
)
 
$
(1.2
)
 


6.
FAIR VALUE
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 foreign exchange forward contracts and long-term investments are measured at fair value in the Condensed Consolidated Balance Sheets.
Our total debt is carried at cost and was $486.6 and $487.0 as of May 24, 2019 and February 22, 2019, 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 $511 and $492 as of May 24, 2019 and February 22, 2019, respectively. The estimation of the fair value of our total debt is based on Level 2 fair value measurements.
We periodically use derivative financial instruments to manage exposures to movements in foreign exchange rates and interest 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.

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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Assets and liabilities measured at fair value in the Consolidated Balance Sheets as of May 24, 2019 and February 22, 2019 are summarized below:
 
May 24, 2019
Fair Value of Financial Instruments
Level 1
Level 2
Level 3
Total
Assets:
 

 
 

 
 

 
 

 
Cash and cash equivalents
$
152.7

 
$

 
$

 
$
152.7

 
Restricted cash
4.9

 

 

 
4.9

 
Foreign exchange forward contracts

 
2.7

 

 
2.7

 
Auction rate securities

 

 
4.0

 
4.0

 
 
$
157.6

 
$
2.7

 
$
4.0

 
$
164.3

 
Liabilities:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
$

 
$
(0.3
)
 
$

 
$
(0.3
)
 
 
$

 
$
(0.3
)
 
$

 
$
(0.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 22, 2019
Fair Value of Financial Instruments
Level 1
Level 2
Level 3
Total
Assets:
 

 
 

 
 

 
 

 
Cash and cash equivalents
$
261.3

 
$

 
$

 
$
261.3

 
Restricted cash
3.5

 

 

 
3.5

 
Foreign exchange forward contracts

 
3.9

 

 
3.9

 
Auction rate securities

 

 
3.9

 
3.9

 
 
$
264.8

 
$
3.9

 
$
3.9

 
$
272.6

 
Liabilities:
 

 
 

 
 

 
 

 
Foreign exchange forward contracts
$

 
$
(0.5
)
 
$

 
$
(0.5
)
 
 
$

 
$
(0.5
)
 
$

 
$
(0.5
)
 


Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for the three months ended May 24, 2019:
Roll-Forward of Fair Value Using Level 3 Inputs
Auction Rate Securities
Balance as of February 22, 2019
$
3.9

 
Unrealized gain on investments
0.1

 
Balance as of May 24, 2019
$
4.0

 

7.
INVENTORIES
Inventories
May 24,
2019
February 22,
2019
Raw materials and work-in-process
$
127.0

 
$
118.3

 
Finished goods
134.8

 
127.2

 
 
261.8

 
245.5

 
Revaluation to LIFO
20.5

 
20.7

 
 
$
241.3

 
$
224.8

 

The portion of inventories determined by the LIFO method was $110.9 and $96.9 as of May 24, 2019 and February 22, 2019, respectively.

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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.     SHARE-BASED COMPENSATION
Performance Units
During the three months ended May 24, 2019, we granted 98,867 performance units ("PSUs") which are earned over a three-year period based on performance conditions and then modified based on a market condition. The expense for these awards is determined based on the probability that the performance conditions will be met and the fair value of the market condition. We used the Monte Carlo simulation model to calculate the fair value of the market condition, which resulted in a total weighted-average grant date fair value of $16.21 per unit for these PSUs. The PSUs are expensed and recorded in Additional paid-in capital on the Condensed Consolidated Balance Sheets.
The weighted-average grant date fair values were determined using the following assumptions:
 
2020 Awards
Three-year risk-free interest rate (1)
2.3
%
Expected term
3 years

Estimated volatility (2)
32.5
%
_______________________________________
(1)
Based on the U.S. government bond benchmark on the grant date.
(2)
Represents the historical price volatility of the Company’s common stock for the three-year period preceding the grant date.
The total PSU expense and associated tax benefit for all outstanding awards for the three months ended May 24, 2019 and May 25, 2018 are as follows:
 
Three Months Ended
Performance Units
May 24,
2019
May 25,
2018
Expense
$
1.4

 
$
2.3

 
Tax benefit
0.4

 
0.6

 

As of May 24, 2019, there was $1.2 of remaining unrecognized compensation cost related to nonvested PSUs, which is expected to be recognized over a remaining weighted-average period of 1.9 years.
The PSU activity for the three months ended May 24, 2019 is as follows:
Maximum Number of Shares That May Be Issued Under Nonvested Units
Total
Weighted-Average
Grant Date
Fair Value per Unit
Nonvested as of February 22, 2019
676,800

$
18.50

Granted
237,282

16.21

Nonvested as of May 24, 2019
914,082

$
18.93


Restricted Stock Units
During the three months ended May 24, 2019, we awarded 722,209 restricted stock units ("RSUs") to certain employees. These RSUs have restrictions on transfer which lapse three years after the date of grant, at which time the units will be issued as unrestricted shares of Class A Common Stock. RSUs are expensed and recorded in Additional paid-in capital on the Condensed Consolidated Balance Sheets over the requisite service period based on the value of the underlying shares on the date of grant.

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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The RSU expense and associated tax benefit for all outstanding awards for the three months ended May 24, 2019 and May 25, 2018 are as follows:
 
Three Months Ended
Restricted Stock Units
May 24,
2019
May 25,
2018
Expense
$
7.9

 
$
6.7

 
Tax benefit
2.1

 
1.8

 

As of May 24, 2019, there was $10.5 of remaining unrecognized compensation cost related to nonvested RSUs, which is expected to be recognized over a weighted-average period of 2.0 years.
The RSU activity for the three months ended May 24, 2019 is as follows:
Nonvested Units
Total
Weighted-Average
Grant Date
Fair Value
per Unit
Nonvested as of February 22, 2019
1,721,896

$
15.39

Granted
722,209

15.51

Vested
(1,000
)
14.56

Forfeited
(13,786
)
15.00

Nonvested as of May 24, 2019
2,429,319

$
15.43



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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.
LEASES
Accounting Policies
In Q1 2020, we adopted ASU 2016-02, Leases (Topic 842) and related amendments ("ASC 842") on a prospective basis. The effects of the initial application of ASC 842 did not result in a cumulative adjustment to retained earnings.
We have operating leases for corporate offices, sales offices, showrooms, manufacturing facilities, vehicles and equipment that expire at various dates through 2031. Certain lease agreements include contingent rental payments based on per unit usage over contractual levels (e.g., miles driven or machine hours used) and others include rental payments adjusted periodically for inflationary indexes. Additionally, some leases include options to renew or terminate the leases which can be exercised at our discretion. Lease terms include the noncancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods. Our leases do not contain any residual value guarantees or material restrictive covenants. As most of our leases do not provide an implicit discount rate, we use an estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The estimated incremental borrowing rate represents the estimated rate of interest we would have had to pay to borrow on a collateralized basis an amount equal to the lease payments for a similar period of time.
The components of lease expense are as follows:
 
Three Months Ended
May 24,
2019
Operating lease cost
$
12.1

 
Sublease rental income
(0.1
)
 
 
$
12.0

 


Supplemental cash flow and other information related to leases are as follows:
 
Three Months Ended
May 24,
2019
Cash flow information:
 
 
Operating cash flows used for operating leases
$
11.9

 
Leased assets obtained in exchange for new operating lease liabilities
$
39.6

 
Other information:
 
 
Weighted-average remaining term
7.4 years

 
Weighted-average discount rate
4.3
%
 



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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the future minimum lease payments as of May 24, 2019:
Fiscal year ending in February
Amount (1)
2020
$
34.5

 
2021
40.1

 
2022
35.5

 
2023
30.6

 
2024
25.9

 
Thereafter
89.3

 
Total lease payments
255.9

 
Less interest
37.3

 
Present value of lease liabilities
$
218.6

 
_______________________________________
(1)
Lease payments include options to extend lease terms that are reasonably certain of being exercised. The payments exclude legally binding minimum lease payments for leases signed but not yet commenced.
The following table summarizes future minimum lease payments as of February 22, 2019, before adoption of ASC 842:
Fiscal Year Ending in February
Minimum annual
rental commitments
Minimum annual
sublease rental income
Minimum annual
rental commitments, net
2020
$
46.0

 
$
(0.6
)
 
$
45.4

 
2021
41.7

 
(0.3
)
 
41.4

 
2022
40.5

 
(0.2
)
 
40.3

 
2023
36.5

 
(0.2
)
 
36.3

 
2024
28.0

 
(0.2
)
 
27.8

 
Thereafter
72.2

 
(0.6
)
 
71.6

 
 
$
264.9

 
$
(2.1
)
 
$
262.8

 

Practical Expedients Elected    
We elected the following practical expedients as a result of adopting ASC 842:
We elected not to separate non-lease components of a contract from the lease components to which they relate for all classes of lease assets except for embedded leases, which were immaterial in Q1 2020.
We elected the package of practical expedients available for transition which allowed us not to reassess (1) whether previously assessed contracts contain leases, (2) the classification of the leases as operating or finance and (3) the amount of initial direct costs associated with the leases.
We elected not to recognize a right-of-use asset or lease liability for short-term leases that have a lease term of 12 months or less.
We elected not to assess whether land easements that were not previously accounted for as leases are or contain a lease.
We elected not to use hindsight in determining the lease term and in assessing the likelihood that a lessee purchase option will be exercised.

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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10. ACQUISITIONS
Orangebox
In Q3 2019, we acquired Orangebox Group Limited ("Orangebox"), a manufacturer of task seating, architectural pods, privacy solutions and collaborative furniture based in the United Kingdom ("U.K."). The transaction included the purchase of all of the outstanding capital stock of Orangebox for $78.9 (or £60.0) less an adjustment for working capital of $0.5 in an all-cash transaction. An additional $3.9 (or £3.0) is payable to one of the sellers over three years, contingent upon the achievement of certain business performance obligations. The acquisition was funded by borrowings under our global committed bank facility. The goodwill resulting from the acquisition relates to the expected ability to provide customers with a broader range of furniture designed to boost collaboration at work and provide us with an engine to accelerate innovative product development.
Tangible assets and liabilities of Orangebox were valued as of the acquisition date using a market analysis and intangible assets were valued using a discounted cash flow analysis, which represents a Level 3 measurement. On the acquisition date, we recorded $42.2 related to identifiable intangible assets, $23.4 related to goodwill and $16.7 related to tangible assets. The tangible assets mainly consisted of working capital (primarily accounts receivable, inventory and current liabilities), property, plant and equipment (primarily the land, building and equipment of two manufacturing locations in the U.K.) and deferred tax liabilities. Goodwill was recorded in EMEA and the Americas segments in the amounts of $18.8 and $4.6, respectively. The goodwill is not deductible for U.K. or U.S. income tax purposes. Intangible assets are principally related to dealer relationships, the Orangebox trade name and internally-developed know-how and designs, which will be amortized over periods ranging between 9 to 11 years.
The purchase price allocation for the Orangebox acquisition was incomplete as of May 24, 2019. We are still evaluating certain working capital and deferred tax adjustments.
The following table summarizes the acquired identified intangible assets and the respective fair value and useful life of each asset at the date of acquisition:
 
Other Intangible Assets
Weighted
Average
Useful Life
(Years)
Fair Value
 
 
Dealer relationships
10.9
 
$
23.0

 
 
Trademark
9.0
 
13.2

 
 
Know-how/designs
9.0
 
5.0

 
 
Other
0.2
 
1.0

 
 
 
 
 
$
42.2

 
    
The fair value of the acquired intangible assets will be amortized on a straight-line basis over the remaining useful lives. The estimated amortization expense for the next five years is as follows:
Fiscal Year Ending in February
Amount
2020
$
4.2

 
2021
4.1

 
2022
4.1

 
2023
4.1

 
2024
4.1

 
 
$
20.6

 


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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Smith System
In Q2 2019, we acquired Smith System Manufacturing Company ("Smith System"), a Texas-based manufacturer of desking, seating and storage for the pre-K-12 education market. The transaction included the purchase of all of the outstanding capital stock of Smith System for $140.0, payable in cash, plus a net adjustment for working capital of $8.4. In addition, we funded $5.0 to a third-party escrow account, which is payable to the seller at the end of two years based on continued employment. The acquisition was funded through a combination of domestic cash on-hand and short-term borrowings under our global credit facility.
Smith System is an industry leader in the U.S. pre-K-12 education market. The acquisition is expected to advance our growth strategy in the education and office markets particularly as it relates to learning environments and collaborative spaces. The goodwill resulting from the acquisition is primarily related to the growth potential of Smith System as we offer their products through our distribution network.
Tangible assets and liabilities of Smith System were valued as of the acquisition date using a market analysis and intangible assets were valued using a discounted cash flow analysis, which represents a Level 3 measurement. On the acquisition date, we recorded $44.1 related to identifiable intangible assets, $79.3 related to goodwill and $25.0 related to tangible assets, mainly consisting of working capital items such as accounts receivable, inventory and current liabilities. The entire amount recorded to goodwill is deductible for U.S. income tax purposes and is recorded in the Americas segment. Intangible assets are principally related to internally-developed know-how and designs, dealer relationships and the Smith System trade name, which will be amortized over periods ranging between 9 to 11 years. As of May 24, 2019, the purchase accounting for the Smith System acquisition was complete.
The following table summarizes the acquired identified intangible assets and the respective fair value and useful life of each asset at the date of acquisition:
 
Other Intangible Assets
Weighted
Average
Useful Life
(Years)
Fair Value
 
 
Know-how/designs
9.0
 
$
16.0

 
 
Dealer relationships
11.0
 
12.0

 
 
Trademark
9.0
 
12.0

 
 
Other
0.9
 
4.1

 
 
 
 
 
$
44.1

 

The fair value of the acquired intangible assets will be amortized on a straight-line basis over the remaining useful lives. The estimated amortization expense for the next five years is as follows:
Fiscal Year Ending in February
Amount
2020
$
4.8

 
2021
4.4

 
2022
4.2

 
2023
4.2

 
2024
4.2

 
 
$
21.8

 


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Table of Contents
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.
REPORTABLE SEGMENTS
Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate costs are reported as Corporate.
The Americas segment serves customers in the U.S., Canada, the Caribbean Islands and Latin America with a portfolio of integrated architecture, furniture and technology products marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Coalesse, Turnstone, Smith System, AMQ and Orangebox brands.
The EMEA segment serves customers in Europe, the Middle East and Africa primarily under the Steelcase, Orangebox and Coalesse brands, with an emphasis on freestanding furniture systems, storage and seating solutions.
The Other category includes Asia Pacific, Designtex and PolyVision. Asia Pacific serves customers in Asia and Australia primarily under the Steelcase brand with an emphasis on freestanding furniture systems, seating and storage solutions. Designtex primarily sells textiles, wall coverings and surface imaging solutions specified by architects and designers directly to end-use customers through a direct sales force primarily in North America. PolyVision manufactures ceramic steel surfaces for use in various applications globally, including static whiteboards and chalkboards sold through third party fabricators and distributors to the primary and secondary education markets and architectural panels and other special applications sold through general contractors for commercial and infrastructure projects.
We primarily review and evaluate operating income by segment in both our internal review processes and for our external financial reporting. We also allocate resources primarily based on operating income. Total assets by segment include manufacturing and other assets associated with each segment.
Corporate costs include unallocated portions of shared service functions, such as information technology, corporate facilities, finance, human resources, research, legal and customer aviation, plus deferred compensation expense and income or losses associated with COLI. Corporate assets consist primarily of unallocated cash and cash equivalents and COLI.
Revenue and operating income (loss) for the three months ended May 24, 2019 and May 25, 2018 and total assets as of May 24, 2019 and February 22, 2019 by segment are presented below:
 
Three Months Ended
Reportable Segment Statement of Operations Data
May 24,
2019
May 25,
2018
Revenue
 

 
 

 
Americas
$
576.3

 
$
535.8

 
EMEA
161.3

 
137.4

 
Other
86.7

 
80.8

 
 
$
824.3

 
$
754.0

 
Operating income (loss)
 

 
 

 
Americas
$
32.4

 
$
29.7

 
EMEA
0.8

 
(1.7
)
 
Other
2.3

 
1.6

 
Corporate
(7.9
)
 
(6.3
)
 
 
$
27.6

 
$
23.3

 
Reportable Segment Balance Sheet Data
May 24,
2019
February 22,
2019
Total assets
 

 
 

 
Americas
$
1,088.0

 
$
1,044.4

 
EMEA
466.8

 
420.1

 
Other
238.9

 
220.4

 
Corporate
462.0

 
457.5

 
 
$
2,255.7

 
$
2,142.4

 


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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 22, 2019. Reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year, unless indicated by a specific date. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.
Non-GAAP Financial Measure
This item contains a non-GAAP financial measure. A “non-GAAP financial measure” is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the condensed consolidated statements of income, balance sheets or statements of cash flows of the company. Pursuant to the requirements of Regulation G, we have provided a reconciliation below of the non-GAAP financial measure to the most directly comparable GAAP financial measure.
The non-GAAP financial measure used is organic revenue growth, which represents the change in revenue excluding estimated currency translation effects and the impacts of acquisitions and divestitures. This measure is presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors.
Financial Summary

Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate costs are reported as Corporate.
Results of Operations
 
Three Months Ended
Statement of Operations Data
May 24,
2019
May 25,
2018
Revenue
$
824.3

 
100.0
 %
 
$
754.0

 
100.0
 %
 
Cost of sales
565.9

 
68.7

 
516.1

 
68.4

 
Gross profit
258.4

 
31.3

 
237.9

 
31.6

 
Operating expenses
230.8

 
28.0

 
214.6

 
28.5

 
Operating income
27.6

 
3.3

 
23.3

 
3.1

 
Interest expense
(6.7
)
 
(0.8
)
 
(4.4
)
 
(0.5
)
 
Investment income
1.0

 
0.1

 
1.0

 
0.1

 
Other income, net
2.2

 
0.3

 
3.3

 
0.4

 
Income before income tax expense
24.1

 
2.9

 
23.2

 
3.1

 
Income tax expense
6.3

 
0.7

 
6.2

 
0.8

 
Net income
$
17.8

 
2.2
 %
 
$
17.0

 
2.3
 %
 
Earnings per share:
 

 
 

 
 

 
 

 
Basic
$
0.15

 
 

 
$
0.14

 
 

 
Diluted
$
0.15

 
 

 
$
0.14

 
 

 

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Table of Contents

Q1 2020 Organic Revenue Growth
Americas
EMEA
Other
Consolidated
Q1 2019 revenue
$
535.8

 
$
137.4

 
$
80.8

 
$
754.0

 
Acquisitions
16.5

 
22.3

 

 
38.8

 
Divestiture

 
(0.4
)
 

 
(0.4
)
 
Currency translation effects*
(1.5
)
 
(11.6
)
 
(2.0
)
 
(15.1
)
 
   Q1 2019 revenue, adjusted
550.8

 
147.7

 
78.8

 
777.3

 
Q1 2020 revenue
576.3

 
161.3

 
86.7

 
824.3

 
Organic growth $
$
25.5

 
$
13.6

 
$
7.9

 
$
47.0

 
Organic growth %
5
%
 
9
%
 
10
%
 
6
%
 
 
 
 
 
 
 
 
 
 
* Currency translation effects represent the estimated net effect of translating Q1 2019 foreign currency revenues using the average exchange rates during Q1 2020.
Overview
In Q1 2020, we reported 18% growth in operating income compared to the prior year. The growth was driven by higher revenue, and the increase in cost of sales as a percentage of revenue was more than offset by a decrease in operating expenses as a percentage of revenue. Revenue grew by 9% compared to the prior year, driven by recent acquisitions, strong growth in day-to-day business and benefits from recent price list adjustments. The benefits from higher revenue were more than offset by changes in our business mix, which included a shift in sales from higher-margin to lower-margin products. Operating expenses as a percentage of revenue improved by 50 basis points despite increased investments in product development to support our growth initiatives and acquisition-related amortization expense.
We recorded net income of $17.8 and diluted earnings per share of $0.15 in Q1 2020 compared to net income of $17.0 and diluted earnings per share of $0.14 in the prior year. Operating income of $27.6 in Q1 2020 increased by $4.3 and 20 basis points as a percentage of revenue, compared to the prior year.
Revenue of $824.3 in Q1 2020 represented an increase of $70.3 or 9% compared to the prior year. Revenue grew by 8% in the Americas, 17% in EMEA and 7% in the Other category. After adjusting for a $38.8 impact of acquisitions, a $0.4 unfavorable impact of a divestiture and $15.1 of unfavorable currency translation effects, organic revenue growth was $47.0 or 6% compared to the prior year. Organic revenue growth was 5% in the Americas, 9% in EMEA and 10% in the Other category.
Cost of sales as a percentage of revenue increased by 30 basis points to 68.7% of revenue in Q1 2020 compared to Q1 2019. Cost of sales as a percentage of revenue increased by 40 basis points in the Americas but decreased by 60 basis points in EMEA and 30 basis points in the Other category. In the Americas, the increase was driven primarily by unfavorable shifts in business mix, partially offset by benefits from pricing actions, net of higher commodity and freight costs.
Operating expenses of $230.8 in Q1 2020 represented an increase of $16.2 but a decline of 50 basis points as a percentage of revenue compared to the prior year. The increase was due to $12.4 from acquisitions, net of a divestiture (including $3.1 of amortization expense) and higher investment in product development, partially offset by $3.3 of favorable currency translation effects.
Our effective tax rate in Q1 2020 was 26.1% compared to a Q1 2019 effective tax rate of 26.7%.

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Table of Contents

Interest Expense, Investment Income and Other Income, Net
 
Three Months Ended
Interest Expense, Investment Income and Other Income, Net
May 24,
2019
May 25,
2018
Interest expense
$