STEELCASE INC (Form: 10-K, Received: 04/23/2012 15:23:07)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

         þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

           For the fiscal year ended February 24, 2012

OR

 

         ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)
  (IRS employer identification number)

901 44th Street SE

Grand Rapids, Michigan

  49508
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (616) 247-2710

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class    Name of each exchange on which registered

Class A Common Stock

   New York Stock Exchange

 

 

 

Securities registered pursuant to 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   þ          No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨         No   þ

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   ¨

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   þ         No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

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.

        Large accelerated filer   ¨               Accelerated filer   þ               Non-accelerated filer   ¨                Smaller reporting company   ¨

                             (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 Act).    Yes   ¨          No   þ

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates, computed by reference to the closing price of the Class A Common Stock on the New York Stock Exchange, as of August 26, 2011 (the last day of the registrant’s most recently completed second fiscal quarter) was approximately $605 million. There is no quoted market for registrant’s Class B Common Stock, but shares of Class B Common Stock may be converted at any time into an equal number of shares of Class A Common Stock.

As of April 17, 2012, 85,836,258 shares of the registrant’s Class A Common Stock and 41,215,970 shares of the registrant’s Class B Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive proxy statement for its 2012 Annual Meeting of Shareholders, to be held on July 11, 2012, are incorporated by reference in Part III of this Form 10-K.

 

 

 


Table of Contents

STEELCASE INC.

FORM 10-K

YEAR ENDED FEBRUARY 24, 2012

TABLE OF CONTENTS

 

             Page No.     

  Part I

    

Item 1.

  Business      1   

Item 1A.

  Risk Factors      8   

Item 1B.

  Unresolved Staff Comments      12   

Item 2.

  Properties      12   

Item 3.

  Legal Proceedings      12   

Item 4.

  Mine Safety Disclosures      12   
  Supplementary Item. Executive Officers of the Registrant      13   

  Part II

    

Item 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      14   

Item 6.

  Selected Financial Data      15   

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   

Item 7A.

  Quantitative and Qualitative Disclosures About Market Risk      38   

Item 8.

  Financial Statements and Supplementary Data      41   

Item 9.

  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      100   

Item 9A.

  Controls and Procedures      100   

Item 9B.

  Other Information      100   

  Part III

    

Item 10.

  Directors, Executive Officers and Corporate Governance      100   

Item 11.

  Executive Compensation      101   

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      101   

Item 13.

  Certain Relationships and Related Transactions, and Director Independence      101   

Item 14.

  Principal Accounting Fees and Services      101   

  Part IV

    

Item 15.

  Exhibits, Financial Statement Schedules      102   

Signatures

     103   

Schedule II

     S-1   

Index of Exhibits

     E-1   


Table of Contents

PART I

Item 1.    Business:

The following business overview is qualified in its entirety by the more detailed information included elsewhere or incorporated by reference in this Annual Report on Form 10-K (“Report”). As used in this 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.

Our Business

Steelcase is the global leader in furnishing the work experience in office environments. In our 100 th anniversary year, we are an insight-led company which helps create great experiences, wherever work happens. We offer a comprehensive portfolio of products and services for the workplace, inspired by insights gained from serving the world’s leading organizations.

Our growth strategy is to leverage our deep understanding of the patterns of work, workers and workplaces to help our existing customers migrate to new ways of working and to grow our business into new customer markets and new geographies. We design for a wide variety of customer needs through our three core brands: Steelcase, Turnstone and Coalesse. Our primary focus is on creativity-based work and workers, meaning any worker doing critical thinking and seeking smart solutions, rather than following a routine process, and we seek to help these people become more productive, engaged and inspired. We support them in a variety of settings, primarily in leading organizations, in emerging geographies and wherever work happens, from hospital rooms and other clinical settings, to classrooms, to small businesses and beyond.

Insights are core to everything we do. We study the ways people work, and we collaborate with a global network of research partners including leading universities, research institutes and corporations. We seek to innovate by understanding the likely evolution of key trends and forces, anticipating the impact of those forces on human behavior and developing insights around emerging social, spatial and informational patterns. By focusing our insights on the intersection of these elements, we translate our insights into an integrated set of products, applications and services that enable better social interactions, enhance collaboration and facilitate greater information sharing.

We create value by translating our insights into products, applications and experiences through thoughtful design, which we define as being smart, desirable and viable. When we understand something new about the way people work and address that insight with a product, it’s smart. When we create experiences or objects that are considered refined and highly relevant, they are desirable. And when we do this with fewer, more understandable elements, it’s viable. We incorporate sustainability in our approach to design, manufacturing, delivery and product life cycle management, and we consider the impact of our work on the environment. At Steelcase our approach to sustainability is holistic, scientific, measureable and long-term in focus.

We offer our products and services to customers around the globe, and we have significant sales, manufacturing and administrative operations in North America, Europe and Asia. We market our products and services primarily through a network of independent and company-owned dealers, and we also sell directly to end-use customers. We extend our reach with a presence in retail and web-based channels.

 

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Founded in 1912, Steelcase became a publicly-traded company in 1998, and our stock is listed on the New York Stock Exchange under the symbol “SCS.” Headquartered in Grand Rapids, Michigan, U.S.A., Steelcase is a global company with approximately 10,000 employees and 2012 revenue of $2.75 billion.

Our Offerings

Our brands provide an integrated portfolio of furniture systems and seating, user-centered technologies and interior architectural products across a range of price points. Our furniture portfolio includes panel-based and freestanding furniture systems and complementary products such as storage, tables and ergonomic worktools. Our seating products include chairs which are highly ergonomic, seating that can be used in collaborative or casual settings and specialty seating for specific vertical markets such as healthcare and education. Our technology solutions support group collaboration by integrating furniture and technology. Our interior architectural products include full and partial height walls and doors. We also offer services designed to reduce costs and enhance the performance of people, wherever they work. Among these services are workplace strategy consulting, lease origination services and furniture and asset management.

Steelcase—Insight-led performance in an interconnected world

The Steelcase brand takes our insights and delivers high performance, sustainable work environments while striving to be a trusted partner. Being a trusted partner means understanding and helping our customers and partners who truly seek to elevate their performance. The Steelcase brand’s core customers are leading organizations (such as corporations, healthcare organizations, colleges/universities and government entities) that are often large with complex needs and who have an increasingly global reach. We strive to meet their diverse needs while minimizing complexity by using a platform approach—from product components to common processes—wherever possible.

Steelcase sub-brands include:

 

   

Details , which researches, designs and markets worktools, personal lighting and furniture that provide healthy and productive connections between people, their technology, their workplaces and their work.

 

   

Nurture by Steelcase , which is focused on healthcare environments that can help make patients more comfortable, caregivers more efficient and partners in care more receptive to healthcare delivery. Nurture brings a holistic viewpoint to healthcare environments and works with patients and healthcare professionals to develop valuable insights into environments that promote healing.

Coalesse—Insight-led inspiration

Coalesse is founded on the belief that the boundaries between work and life have blurred and seeks to design solutions that support meaningful experiences and create inspiring spaces for a growing class of high performance knowledge workers. Coalesse collaborates with some of the world’s best design talent to create inspired solutions that challenge generic approaches to home and office environments. Coalesse also offers products that knit together the rich design histories of our Brayton, Metro and Vecta brands. Coalesse’s clients desire premium performance and versatility in furnishings that can be applied in a home workplace as elegantly as a professional office environment.

Turnstone—Insight-led simplicity

Turnstone is focused on making it easy and compelling for emerging companies to create great working spaces. Today, emerging companies do not have easy access to solutions that will help them

 

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work more effectively. These smaller companies are faced with many of the same complex problems as larger established companies—but often without the professional help. Turnstone strives to provide simple solutions for the complex social, spatial and informational problems of emerging companies through thoughtful products and solutions, convenient access and a great experience.

Designtex

Designtex is a design, marketing, sales and distribution business focused on providing insight-led environment enhancement. Designtex products are premium surface materials designed to enhance seating, walls, work stations, floors and ceilings, and can provide privacy, way-finding, motivation, communications and artistic expression.

PolyVision

PolyVision’s main focus is to understand the needs of K-12 teachers and students and to develop tools that bring learning to life in an effort to provide a better learning experience for students globally. PolyVision provides an offering of visual communication solutions, including interactive electronic whiteboards.

Reportable Segments

We operate on a worldwide basis within our Americas and EMEA reportable segments plus an “Other” category. Additional information about our reportable segments, including financial information about geographic areas, is contained in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 18 to the consolidated financial statements.

Americas Segment

Our Americas segment serves customers in the United States (“U.S.”), Canada and Latin America. Our portfolio of integrated architecture, furniture and technology products is marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Details, Coalesse, Nurture by Steelcase and Turnstone brands.

We serve Americas customers mainly through approximately 250 independent and company-owned dealers and we also sell directly to end-use customers. Our end-use customers are distributed across a broad range of industries and vertical markets including healthcare, government, financial services, higher education and technology, but no industry or vertical market individually represented more than 14% of the Americas segment revenue in 2012.

Each of our dealers maintains its own sales force, which is complemented by our sales representatives who work closely with our dealers throughout the selling process. The largest independent dealer in the Americas accounted for approximately 6% of the segment’s revenue in 2012, and the five largest independent dealers collectively accounted for approximately 17% of the segment’s revenue.

In 2012, the Americas segment recorded revenue of $1,842.5, or 67.0% of our consolidated revenue, and as of the end of the year had approximately 6,500 employees, of which approximately 4,300 related to manufacturing.

The Americas office furniture industry is highly competitive, with a number of competitors offering similar categories of products. The industry competes on a combination of insight, product performance, design, price and relationships with customers, architects and designers. Our most

 

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significant competitors in the U.S. are Haworth, Inc., Herman Miller, Inc., HNI Corporation, Kimball International Inc. and Knoll, Inc. Together with Steelcase, domestic revenue from these companies represents approximately one-half of the U.S. office furniture industry.

EMEA Segment

Our EMEA segment serves customers in Europe, the Middle East and Africa primarily under the Steelcase brand, with an emphasis on freestanding furniture systems, storage and seating solutions. Our largest presence is in Western Europe, where we have the leading market share in Germany, France and Spain. In 2012, approximately 85% of EMEA revenue was from Western Europe. The remaining revenue was from other parts of Europe, the Middle East and Africa. No individual country in the EMEA segment represented more than 7% of our consolidated revenue in 2012.

We serve EMEA customers through approximately 400 independent and company-owned dealers. In certain geographic markets, we sell directly to end-use customers. No single independent dealer in the EMEA segment accounted for more than 3% of the segment’s revenue in 2012. The five largest independent dealers collectively accounted for approximately 9% of the segment’s revenue in 2012.

In 2012, our EMEA segment recorded revenue of $603.1, or 21.9% of our consolidated revenue, and as of the end of the year had approximately 2,200 employees, of which approximately 1,200 related to manufacturing.

The EMEA office furniture market is highly competitive and fragmented. We compete with many local and regional manufacturers in many different markets. In several cases, these competitors focus on specific product categories.

Other Category

The Other category includes Asia Pacific, PolyVision and Designtex. IDEO was included in the Other category through Q3 2011, but due to the ownership transition, our remaining 20% share of IDEO income has been recorded as a non-operating item since Q4 2011.

Asia Pacific serves customers in the People’s Republic of China (including Hong Kong), Australia, India, Japan and other countries in southeast Asia, primarily under the Steelcase brand with an emphasis on furniture systems and seating solutions. We sell through company-owned and independent dealers to end use customers. Our end-use customers are larger multinational or regional companies spread across a broad range of industries and are located in both established and emerging markets. Our competition includes all the large global competitors as well as many local and regional manufactures.

PolyVision designs and distributes visual communication products, such as interactive electronic whiteboards. PolyVision also manufactures steel and ceramic surfaces for use in multiple applications, but primarily for sale to third-party fabricators to create static whiteboards sold in the primary and secondary education markets in the U.S. and Europe.

Designtex primarily sells textiles and wall covering products specified by architects and designers directly to end-use customers through a direct sales force primarily in North America.

In 2012, the Other category accounted for $303.9, or 11.1% of our consolidated revenue, and as of the end of the year had approximately 1,300 employees, of which approximately 700 related to manufacturing.

 

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Corporate

Corporate costs include portions of shared service functions such as information technology, human resources, finance, executive, corporate facilities, legal and research. Approximately 82% of corporate expenses were charged to the operating segments in 2012 as part of a corporate allocation. Unallocated corporate expenses are reported as Corporate.

Joint Ventures and Other Equity Investments

We enter into joint ventures and other equity investments from time to time to expand or maintain our geographic presence, support our distribution network or invest in complementary products and services. As of February 24, 2012, our investment in these unconsolidated joint ventures and other equity investments totaled $47.7. Our share of the earnings from joint ventures and other equity investments is recorded in Other income (expense), net on the Consolidated Statements of Operations.

Customer and Dealer Concentrations

Our largest direct-sale customer accounted for 0.8% of our consolidated revenue in 2012, and our five largest direct-sale customers collectively accounted for 3.4% of our consolidated revenue. However, these percentages do not include revenue from various government agencies. In aggregate, entities purchasing under our U.S. General Services Administration contract collectively accounted for approximately 4% of our consolidated revenue. We do not believe our business is dependent on any single or small number of end-use customers, the loss of which would have a material adverse effect on our business.

No single independent dealer accounted for more than 5% of our consolidated revenue in 2012. The five largest independent dealers collectively accounted for approximately 11% of our consolidated revenue. We do not believe our business is dependent on any single dealer, the loss of which would have a sustained material adverse effect upon our business.

Working Capital

Our accounts receivable are from our dealers and direct-sale customers. Payment terms vary by country and region. The terms of our Americas segment, and certain markets within the EMEA segment, encourage prompt payment from dealers by offering an early settlement discount. Other international markets have, by market convention, longer payment terms. We are not aware of any special or unusual practices or conditions related to working capital items, including accounts receivable, inventory and accounts payable, which are significant to understanding our business or the industry at large.

Backlog

Our products are generally manufactured and shipped within two to six weeks following receipt of order; therefore, we do not view the amount of backlog at any particular time as a meaningful indicator of longer-term shipments.

Global Manufacturing and Supply Chain

Manufacturing and Logistics

We have manufacturing operations throughout North America (principally in the United States and Mexico), Europe (principally in France, Germany and Spain) and Asia (principally in China and

 

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Malaysia). We are in the process of localizing production of certain products and establishing the corresponding supply chain in India to serve that market. This initial effort will be completed during 2013 with the ability to add more products as needed.

Our manufacturing model is predominately make-to-order with lead times typically ranging from two to six weeks. We manufacture our products using lean manufacturing principles, which allow us to maintain efficiencies and cost savings by minimizing the amount of inventory on hand. As a result, we purchase direct materials and components as needed to meet demand. We have evolved our manufacturing and supply chain systems significantly over the past several years by implementing continuous one-piece flow, platforming our processes and product offerings and developing a global network of integrated suppliers. Any operation which cannot be part of one-piece flow may be evaluated to see whether outside partners would offer better levels of service, quality and cost. Our global manufacturing operations are centralized under a single organization to serve our customers’ needs across multiple brands and geographies.

This approach has reduced the capital needs of our business, inventory levels and the footprint of our manufacturing space, while at the same time, allowing us to improve quality, delivery performance and the customer experience. We continue to identify opportunities to improve the fitness of our business and strengthen our long-term competitiveness. In 2011, we substantially completed a project to reorganize our European manufacturing operations, and we announced the planned closure of three additional manufacturing facilities in North America. We are in the process of moving production within these three facilities to other Steelcase locations in North America and expect to complete these moves by the end of Q1 2014.

In addition to our ongoing focus on enhancing the efficiency of our manufacturing operations, we also seek to reduce costs through our global sourcing effort. We have capitalized on raw material and component cost savings available through lower cost suppliers around the globe. This global view of potential sources of supply has enhanced our leverage with domestic supply sources, and we have been able to reduce cycle times through improvements with our partners throughout the supply chain.

Our physical distribution system utilizes commercial transport, company-owned and dedicated fleet delivery services. We have implemented a network of regional distribution centers to reduce freight costs and improve service to our dealers and customers. Some of these distribution centers are located within our manufacturing facilities, and we have engaged third-party logistics providers to operate most of these regional distribution centers.

Raw Materials

We source raw materials and components from a significant number of suppliers around the world. Those raw materials include petroleum-based products, steel, other metals, wood, particleboard and other materials and components. To date, we have not experienced any significant difficulties in obtaining these raw materials.

The prices for certain commodities such as steel, aluminum and other metals, wood, particleboard and petroleum-based products have fluctuated significantly in recent years due to changes in global supply and demand. Our global supply chain team continually evaluates current market conditions, the financial viability of our suppliers and available supply options on the basis of cost, quality and reliability of supply.

Research, Design and Development

Our extensive global research—a combination of user observations, feedback sessions and sophisticated analysis—has helped us develop social, spatial and informational insights into work

 

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effectiveness. We maintain collaborative relationships with external world-class innovators, including leading universities, think tanks and knowledge leaders, to expand and deepen our understanding of how people work.

Understanding patterns of work enables us to identify and anticipate user needs across the globe. Our design teams explore and develop prototypical solutions to address these needs. These solutions vary from furniture, architecture and technology solutions to single products or enhancements to existing products, and across different vertical market applications such as healthcare, higher education and professional services. Organizationally, global design leadership directs strategy and project work, which is distributed to design studios across our major businesses and often involves external design services.

Our marketing team evaluates product concepts using several criteria, including financial return metrics, and chooses which products will be developed and launched. Designers then work closely with engineers and suppliers to co-develop products and processes that incorporate innovative user features with efficient manufacturing practices. Products are tested for performance, quality and compliance with applicable standards and regulations.

Exclusive of royalty payments, we invested $35.8, $32.0 and $33.0 in research, design and development activities in 2012, 2011 and 2010, respectively. We continue to invest approximately one to two percent of our revenue in research, design and development each year. Royalties are sometimes paid to external designers of our products as the products are sold. These costs are not included in research and development expenses.

Intellectual Property

We generate and hold a significant number of patents in a number of countries in connection with the operation of our business. We also hold a number of trademarks that are very important to our identity and recognition in the marketplace. We do not believe that any material part of our business is dependent on the continued availability of any one or all of our patents or trademarks or that our business would be materially adversely affected by the loss of any of such, except the “Steelcase,” “Coalesse,” “PolyVision,” “Designtex,” “Details,” “Turnstone,” and “Nurture by Steelcase” trademarks.

We occasionally enter into license agreements under which we pay a royalty to third parties for the use of patented products, designs or process technology. We have established a global network of intellectual property licenses with our subsidiaries.

Employees

As of February 24, 2012, we had approximately 10,000 employees, including 4,800 hourly employees and 5,200 salaried employees. Additionally, we had approximately 1,800 temporary workers who primarily work in manufacturing. Approximately 220 employees in the U.S. are covered by collective bargaining agreements. Internationally, 1,450 employees are represented by workers’ councils that operate to promote the interests of workers. Management promotes positive relations with employees based on empowerment and teamwork.

Environmental Matters

We are subject to a variety of federal, state, local and foreign laws and regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment (“Environmental Laws”). We believe our operations are in substantial compliance with all Environmental Laws. We do not believe existing Environmental Laws and regulations have had or will have any material effects upon our capital expenditures, earnings or competitive position.

 

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Under certain Environmental Laws, we could be held liable, without regard to fault, for the costs of remediation associated with our existing or historical operations. We could also be held responsible for third-party property and personal injury claims or for violations of Environmental Laws relating to contamination. We are a party to, or otherwise involved in, proceedings relating to several contaminated properties being investigated and remediated under Environmental Laws, including as a potentially responsible party in several Superfund site cleanups. Based on our information regarding the nature and volume of wastes allegedly disposed of or released at these properties, the total estimated cleanup costs and other financially viable potentially responsible parties, we do not believe the costs to us associated with these properties will be material, either individually or in the aggregate. We have established reserves that we believe are adequate to cover our anticipated remediation costs. However, certain events could cause our actual costs to vary from the established reserves. These events include, but are not limited to: a change in governmental regulations or cleanup standards or requirements; undiscovered information regarding the nature and volume of wastes allegedly disposed of or released at these properties; and other factors increasing the cost of remediation or the loss of other potentially responsible parties that are financially capable of contributing toward cleanup costs.

Available Information

We file annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, including Steelcase, that file electronically with the SEC.

We also make available free of charge through our internet website, www.steelcase.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, as soon as reasonably practicable after we electronically file such reports with or furnish them to the SEC. In addition, our Corporate Governance Principles, Code of Ethics, Code of Business Conduct and the charters for the Audit, Compensation and Nominating and Corporate Governance Committees are available free of charge through our website or by writing to Steelcase Inc., Investor Relations, GH-3C, PO Box 1967, Grand Rapids, Michigan 49501-1967.

We are not including the information contained on our website as a part of, or incorporating it by reference into, this Report.

Item 1A.    Risk Factors:

The following risk factors and other information included in this annual report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we do not know about currently, or that we currently believe are less significant, may also adversely affect our business, operating results, cash flows and financial condition. If any of these risks actually occur, our business, operating results, cash flows and financial condition could be materially adversely affected.

Our industry is influenced significantly by cyclical macroeconomic factors which are difficult to predict.

Our revenue is generated predominantly from the office furniture industry, and demand for office furniture is influenced heavily by a variety of macroeconomic factors, such as corporate profits,

 

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non-residential fixed investment, white-collar employment and commercial office construction and vacancy rates. In recent history, the U.S. office furniture industry has gone through two major downturns, with consumption declining by more than 30% from calendar year 2000 to 2003 and again from 2007 to 2009, according to the Business and Institutional Furniture Manufacturer’s Association. During these downturns, our revenue declined in similar proportion and our profitability was significantly reduced. We have made a number of changes to adapt our business model to these cycles, but our profitability could be impacted in the future by cyclical downturns. In addition, the pace of industry recovery after a cyclical downturn may vary, including by geography or vertical market. These macroeconomic factors are difficult to predict, and if we are unsuccessful in adapting our business as economic cyclical changes occur, our results may be adversely affected.

Failure to respond to changes in workplace trends and the competitive landscape may adversely affect our revenue and profits.

Advances in technology, the globalization of business, changing workforce demographics and shifts in work styles and behaviors are changing the world of work and may have a significant impact on the types of workplace products and services purchased by our customers and the geographic location of the demand. For example, in recent years, these trends have resulted in a reduction in the amount of office floor space allocated per employee, a reduction in size (and price) of a typical workstation and an increase in work occurring in more collaborative settings and a variety of locations beyond the traditional office. The confluence of these factors could attract new competitors from outside the traditional office furniture industry offering products and services which compete with those offered by us and our dealers. In addition, the traditional office furniture industry is highly competitive, with a number of competitors offering similar categories of products. We compete on a variety of factors, including: brand recognition and reputation, insight from our research, product design and features, price, lead time, delivery and service, product quality, strength of dealers and other distributors and relationships with customers and key influencers, such as architects, designers and facility managers. If we are unsuccessful in developing and offering products and services which respond to changes in workplace trends, or we or our dealers are unsuccessful in competing with existing competitors and new competitive offerings which could arise from outside our industry, our revenue and profits may be adversely affected.

We may not be able to successfully develop, implement and manage our diversification and growth strategies.

Our longer-term success depends on our ability to successfully develop, implement and manage strategies that will preserve our position as the world’s largest office furniture manufacturer, as well as expand our offerings into adjacent and emerging markets. In particular, our diversification and growth strategies include:

 

   

translating our research regarding the world of work into innovative solutions which address market needs,

 

   

continuing our expansion into adjacent markets such as smaller companies, healthcare clinical spaces and classrooms,

 

   

growing our market share in emerging markets such as China, India, Africa and the Middle East,

 

   

investing in acquisitions and new business ventures and

 

   

developing new alliances and additional channels of distribution.

If these strategies to diversify and increase our revenues are not sufficient, or if we do not execute these strategies successfully, our results of operations may be adversely affected.

 

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We have been and expect to continue making investments in strategic growth initiatives and new product development. If our return on these investments is lower, or develops more slowly, than we anticipate, the results of our operations may be adversely affected.

We may be adversely affected by changes in raw material and commodity costs.

We procure raw materials (including steel, aluminum, other metals, wood, particleboard and petroleum-based products) from a significant number of sources globally. These raw materials are not rare or unique to our industry. The costs of these commodities, as well as fuel and energy costs, have fluctuated significantly in recent years due to changes in global supply and demand, which can also cause supply interruptions. In the short-term, rapid increases in raw material and commodity costs can be very difficult to offset with price increases because of existing contractual commitments with our customers, and it is difficult to find effective financial instruments to hedge against such changes. As a result, our gross margins can be adversely affected by short-term fluctuations in these costs. Also, if we are not successful in passing along higher raw material and commodity costs to our customers over the longer-term because of competitive pressures, our profitability could be negatively impacted.

Our global presence subjects us to risks that may negatively affect our profitability and financial condition.

We have manufacturing facilities and sales, administrative and shared services offices in many countries, and as a result, we are subject to risks associated with doing business globally. Our success depends on our ability to manage the complexity associated with designing, developing, manufacturing and selling our solutions in a variety of countries. Our global presence is also subject to market risks, which in turn could have an adverse effect on our results of operations and financial condition, including:

 

   

differing business practices, cultural factors and regulatory requirements,

 

   

fluctuations in currency exchange rates and currency controls,

 

   

political, social and economic instability, natural disasters, security concerns, including terrorist activity, armed conflict and civil or military unrest, and global health issues and

 

   

intellectual property protection challenges.

Our continuing efforts to improve our business model could result in additional restructuring costs and may result in customer disruption.

Over the past decade, we have implemented significant restructuring actions to transform our business through the reinvention of our industrial system and white collar processes. While we believe we have made significant progress, we continue to evolve and optimize our business model to be more flexible and agile in meeting changing demand, and incremental restructuring actions may be necessary. The success of our restructuring initiatives is dependent on several factors, including our ability to manage these actions without disrupting existing customer commitments. Further, these actions may take longer than anticipated and may distract management from other activities, and we may not fully realize the expected benefits of our restructuring activities, either of which would have a negative impact on our results of operations.

 

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We are increasingly reliant on a global network of suppliers.

Our migration to a less vertically integrated manufacturing model has increased our dependency on a global network of suppliers. We are reliant on the timely flow of raw materials, components and finished goods from third-party suppliers. The flow of such materials, components and goods may be affected by:

 

   

fluctuations in the availability and quality of raw materials,

 

   

the financial solvency of our suppliers and their supply chains,

 

   

disruptions caused by labor activities and

 

   

damage and loss of production from accidents, natural disasters and other causes.

Any disruptions in the supply and delivery of raw materials, component parts and finished goods or deficiencies in our ability to manage our global network of suppliers could have an adverse impact on our business, operating results or financial condition.

Disruptions within our dealer network could adversely affect our business.

We rely largely on a network of approximately 650 independent and company-owned dealers to market, deliver and install our products to customers. From time to time, we or a dealer may choose to terminate our relationship, or the dealer could face financial insolvency or difficulty in transitioning to new ownership. Our business is influenced by our ability to initiate and manage new and existing relationships with dealers, and establishing new dealers in a market can take considerable time and resources. Disruption of dealer coverage within a specific local market could have an adverse impact on our business within the affected market. The loss or termination of a significant number of dealers or the inability to establish new dealers could cause difficulties in marketing and distributing our products and have an adverse effect on our business, operating results or financial condition. In the event that a dealer in a strategic market experiences financial difficulty, we may choose to make financial investments in the dealership which would reduce the risk of disruption but increase our financial exposure.

We may be required to record impairment charges related to goodwill and indefinite-lived intangible assets which would adversely affect our results of operations.

Goodwill and other acquired intangible assets with indefinite lives are not amortized but are evaluated for impairment annually and whenever an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. Poor performance in portions of our business where we have goodwill or intangible assets, or declines in the market value of our equity, may result in impairment charges, which would adversely affect our profitability.

There may be significant limitations to our utilization of net operating loss carryforwards to offset future taxable income.

We have deferred tax asset values related to net operating loss carryforwards (“NOLs”) totaling $60.0 which reside primarily in various non-U.S. jurisdictions and reflect a $32.1 valuation allowance. We may be unable to generate sufficient taxable income from future operations in the applicable jurisdiction or implement tax, business or other planning strategies to fully utilize the estimated value of our NOLs. We have NOLs in various currencies that are also subject to foreign exchange risk, which could reduce the amount we may ultimately realize. Additionally, future changes in tax laws or interpretations of such tax laws may limit our ability to fully utilize our NOLs.

 

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Item 1B.    Unresolved Staff Comments:

None.

Item 2.    Properties:

We have operations at locations throughout the U.S. and around the world. None of our owned properties are mortgaged or are held subject to any significant encumbrance. We believe our facilities are in good operating condition and, at present, are in excess of that needed to meet volume needs currently and for the foreseeable future. Our global headquarters is located in Grand Rapids, Michigan, U.S.A. Our owned and leased principal manufacturing and distribution center locations with greater than 100,000 square feet are as follows:

 

       Number of Principal                    
Segment/Category Primarily Supported    Locations      Owned      Leased  

Americas

     13         6         7   

EMEA

     5         4         1   

Other

     5         2         3   
  

 

 

    

 

 

    

 

 

 

Total

     23         12         11   
  

 

 

    

 

 

    

 

 

 

In 2012, we closed one owned manufacturing facility in our EMEA segment, exited one manufacturing facility previously leased by PolyVision and added one leased distribution facility in the Americas. In addition, we sold and subsequently leased back one manufacturing facility for six months in the Americas.

Item 3.    Legal Proceedings:

We are involved in litigation from time to time in the ordinary course of our business. Based on known information, we do not believe we are a party to any lawsuit or proceeding that is likely to have a material adverse effect on the Company.

Item 4.    Mine Safety Disclosures:

Not applicable.

 

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Supplementary Item.    Executive Officers of the Registrant:

Our executive officers are:

 

Name    Age     Position

  Sara E. Armbruster

     41      Vice President, WorkSpace Futures and Corporate Strategy

  Mark A. Baker

     51      Senior Vice President, Global Operations Officer

  James P. Hackett

     57      President and Chief Executive Officer, Director

  Nancy W. Hickey

     60      Senior Vice President, Chief Administrative Officer

  James P. Keane

     52      President, Steelcase Group

  Frank H. Merlotti, Jr.  

     61      President, Coalesse

  Mark T. Mossing

     54      Corporate Controller and Chief Accounting Officer

  Lizbeth S. O’Shaughnessy

     50      Senior Vice President, Chief Legal Officer and Secretary

  David C. Sylvester

     47      Senior Vice President, Chief Financial Officer

Sara E. Armbruster has been Vice President, WorkSpace Futures and Corporate Strategy since May 2009. Ms. Armbruster was Vice President, Corporate Strategy from when she joined Steelcase in 2007 to May 2009.

Mark A. Baker has been Senior Vice President, Global Operations since September 2004 and has been employed by Steelcase since 1995.

James P. Hackett has been President, Chief Executive Officer and Director since December 1994 and has been employed by Steelcase since 1981. Mr. Hackett also serves as a member of the Board of Trustees of the Northwestern Mutual Life Insurance Company and the Board of Directors of Fifth Third Bancorp.

Nancy W. Hickey has been Senior Vice President, Chief Administrative Officer since November 2001 and has been employed by Steelcase since 1986.

James P. Keane has been President, Steelcase Group since October 2006 and has been employed by Steelcase since 1997.

Frank H. Merlotti, Jr. has been President, Coalesse since October 2006 and has been employed by Steelcase since 2002.

Mark T. Mossing has been Corporate Controller and Chief Accounting Officer since April 2008 and was Vice President, Corporate Controller from 1999 to April 2008. Mr. Mossing has been employed by Steelcase since 1993.

Lizbeth S. O’Shaughnessy has been Senior Vice President, Chief Legal Officer and Secretary since April 2011 and was Vice President, Chief Legal Officer and Secretary from 2007 to April 2011. Ms. O’Shaughnessy has been employed by Steelcase since 1992.

David C. Sylvester has been Senior Vice President, Chief Financial Officer since April 2011 and was Vice President, Chief Financial Officer from 2006 to April 2011. Mr. Sylvester has been employed by Steelcase since 1995.

 

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PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities:

Common Stock

Our Class A Common Stock is listed on the New York Stock Exchange under the symbol “SCS.” Our Class B Common Stock is not registered under the Exchange Act or publicly traded. See Note 14 to the consolidated financial statements for additional information. As of the close of business on April 17, 2012, we had outstanding 127,052,228 shares of common stock with 7,961 shareholders of record. Of these amounts, 85,836,258 shares are Class A Common Stock with 7,862 shareholders of record and 41,215,970 shares are Class B Common Stock with 99 shareholders of record.

 

Class A Common Stock

Per Share Price Range

  First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 

Fiscal 2012

       

High

  $ 12.12      $ 11.94      $ 8.55      $ 9.86   

Low

  $ 9.23      $ 6.48      $ 5.40      $ 6.45   

Fiscal 2011

       

High

  $ 9.47      $ 8.59      $ 9.66      $ 11.23   

Low

  $ 6.35      $ 6.17      $ 6.17      $ 9.27   

Dividends

The declaration of dividends is subject to the discretion of our Board of Directors and to compliance with applicable laws. Dividends in 2012 and 2011 were declared and paid quarterly. The amount and timing of future dividends depends upon our results of operations, financial condition, cash requirements, future business prospects, general business conditions and other factors that our Board of Directors may deem relevant at the time.

As of February 24, 2012, our global committed, syndicated credit facility contained a restricted payment covenant which established a maximum level of dividends and/or other equity-related distributions or payments (such as share repurchases) we could make in a fiscal year. We were in compliance with this covenant during 2012 and 2011.

During Q1 2013, we entered into a new credit facility, which amended and restated the former facility. The new facility includes a restriction on the aggregate amount of cash dividend payments and share repurchases in any fiscal year but is less restrictive than the old facility. Under the new facility, as long as the Company’s leverage ratio is less than 2.50 to 1.0, there is no restriction on cash dividends and share repurchases. If the Company’s leverage ratio is between 2.50 to 1.0 and the maximum then permitted, the Company’s ability to pay more than $35.0 million in cash dividends and share repurchases in aggregate in any fiscal year may be restricted, depending on the Company’s liquidity. See Note 12 and Note 22 to the consolidated financial statements for additional information.

 

Total Dividends Paid  
      First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Total  

2012

  $ 8.0      $ 8.0      $ 7.9      $ 7.8      $ 31.7   

2011

  $ 5.4      $ 5.4      $ 5.4      $ 5.4      $ 21.6   

 

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Fourth Quarter Share Repurchases

The following table is a summary of share repurchase activity during Q4 2012:

 

Period   (a)
Total Number of
Shares Purchased
    (b)
Average Price
Paid per Share
    (c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs (1)
    (d)
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
or Programs
 

11/26/11—12/30/11

    854,079     $ 6.75        853,308     $ 154.1   

12/31/11—1/27/12

    117,987     $ 7.46        117,987      $ 153.2   

1/28/12—2/24/12

    —        $ —          —        $ 153.2   
 

 

 

     

 

 

   

Total

    972,066  (2)        971,295     
 

 

 

     

 

 

   

 

(1) In December 2007, our Board of Directors approved a share repurchase program permitting the repurchase of up to $250 of our common stock. This program has no specific expiration date.

 

(2) 771 of these shares were repurchased to satisfy participants’ tax withholding obligations upon the vesting of restricted stock unit grants, pursuant to the terms of our Incentive Compensation Plan.

Item 6.    Selected Financial Data:

 

      Year Ended  
Financial Highlights   February 24,
2012
    February 25,
2011
    February 26,
2010
    February 27,
2009
    February 29,
2008 (1)
 

Operating Results:

         

Revenue

  $ 2,749.5      $ 2,437.1      $ 2,291.7      $ 3,183.7      $ 3,420.8   

Gross profit

    809.7        717.5        649.8        923.1        1,098.6   

Operating income (loss)

    97.1        51.5        (11.5     1.0        202.8   

Income (loss) before income tax expense (benefit)

    82.0        51.4        (31.1     (8.8     211.4   

Net income (loss)

    56.7        20.4        (13.6     (11.7     133.2   

Supplemental Operating Data:

         

Restructuring costs

  $ (30.5   $ (30.6   $ (34.9   $ (37.9   $ 0.4   

Goodwill and intangible asset impairment charges

    —          —          —          (65.2     (21.1

Variable life COLI income (loss) (2)

    3.2        10.6        33.1        (41.1     (0.5

Per Share Data:

         

Earnings per common share

  $ 0.43      $ 0.15      $ (0.10   $ (0.09   $ 0.93   

Dividends paid per common share (3)

  $ 0.24      $ 0.16      $ 0.20      $ 0.53      $ 2.35   

Balance Sheet Data:

         

Cash and cash equivalents

  $ 112.1      $ 142.2      $ 111.1      $ 117.6      $ 213.9   

Short-term investments

    79.1        350.8        68.2        76.0        50.1   

Variable life COLI

    113.1        110.3        100.3        67.7        109.8   

Working capital (4)

    240.2        275.5        222.9        246.1        267.5   

Total assets

    1,701.0        1,996.5        1,677.2        1,750.0        2,124.4   

Total debt

    291.5        546.8        300.8        255.2        258.7   

Total liabilities

    992.4        1,278.1        979.6        1,017.2        1,213.5   

Total shareholders’ equity

    708.6        718.4        697.6        732.8        910.9   

Statement of Cash Flow Data:

         

Net cash provided by (used in):

         

Operating activities

  $ 101.7      $ 72.7      $ (10.9   $ 104.2      $ 249.7   

Investing activities

    203.2        (254.3     (10.0     (61.1     (91.3

Financing activities

    (334.3     211.1        13.0        (132.2     (484.4

 

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(1) The fiscal year ended February 29, 2008 contained 53 weeks. All other years shown contained 52 weeks.

 

(2) Variable life COLI income (loss) represents the net returns in cash surrender value, normal insurance expenses and any death benefit gains (“COLI income”) related to our investments in variable life company-owned life insurance (“COLI”) policies. In Q1 2011, we began considering our investments in variable life COLI policies to be primarily a source of corporate liquidity. As a result of this change beginning in Q1 2011, variable life COLI income has been recorded in Investment income on the Consolidated Statements of Operations. See Note 9 to the consolidated financial statements for additional information.

 

(3) Includes special cash dividend of $1.75 per share paid in January 2008.

 

(4) Working capital equals current assets minus current liabilities, as presented in the Consolidated Balance Sheets.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations:

The following review of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere within this Report. 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 Measures

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

The non-GAAP financial measures used are: (1) organic revenue growth, which represents the change in revenue over the prior year excluding estimated currency translation effects and the impacts of dealer deconsolidations, divestitures, the IDEO ownership transition and acquisitions, and (2) adjusted operating income (loss), which represents operating income (loss) excluding restructuring costs and income associated with changes in the cash surrender value of variable life company-owned life insurance policies (“variable life COLI income”). These measures are presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors.

 

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Table of Contents

Financial Summary

Results of Operations

As of the end of the first quarter of fiscal year 2012, we realigned our reportable segments for financial reporting purposes primarily as a result of the previously announced organizational changes to strengthen our position as a globally integrated enterprise. Thus, our reportable segments now consist of the Americas segment, the EMEA segment and the Other category. The accompanying segment data for all prior periods has been reclassified to reflect these realignments. See Note 18 to the consolidated financial statements and “Business Segment Review” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information on our reportable business segments.

 

Statement of Operations Data—

Consolidated

  Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Revenue

  $ 2,749.5        100.0   $ 2,437.1        100.0   $ 2,291.7        100.0

Cost of sales

    1,913.6        69.6        1,693.8        69.5        1,619.9        70.7   

Restructuring costs

    26.2        1.0        25.8        1.1        22.0        0.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    809.7        29.4        717.5        29.4        649.8        28.4   

Operating expenses

    708.3        25.8        661.2        27.1        648.4        28.3   

Restructuring costs

    4.3        0.1        4.8        0.2        12.9        0.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    97.1        3.5        51.5        2.1        (11.5     (0.5

Interest expense, investment income and other income (expense), net

    (15.1     (0.5     (0.1     (0.0     (19.6     (0.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    82.0        3.0        51.4        2.1        (31.1     (1.4

Income tax expense (benefit)

    25.3        0.9        31.0        1.3        (17.5     (0.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 56.7        2.1   $ 20.4        0.8   $ (13.6     (0.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

           

Basic

  $ 0.43        $ 0.15        $ (0.10  
 

 

 

     

 

 

     

 

 

   

Diluted

  $ 0.43        $ 0.15        $ (0.10  
 

 

 

     

 

 

     

 

 

   

 

Organic Revenue Growth—Consolidated   Year Ended  
  February 24,
2012
    February 25,
2011
 

Prior year revenue

  $ 2,437.1      $ 2,291.7   

Dealer deconsolidations and divestitures

    (8.8     (63.0

IDEO ownership transition

    (103.4     (29.0

Currency translation effects (1)

    30.0        (21.0
 

 

 

   

 

 

 

Prior year revenue, adjusted

    2,354.9        2,178.7   

Current year revenue

    2,749.5        2,437.1   

Dealer acquisition

    (55.7     —     
 

 

 

   

 

 

 

Current year revenue, adjusted

    2,693.8        2,178.7   
 

 

 

   

 

 

 

Organic revenue growth

  $ 338.9      $ 258.4   
 

 

 

   

 

 

 

Organic revenue growth %

    14     12

 

(1) Currency translation effects represent the net effect of translating prior year foreign currency revenues using the average exchange rate on a quarterly basis during the current year.

 

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Adjusted Operating Income (Loss)—

Consolidated

  Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Operating income (loss)

  $ 97.1        3.5   $ 51.5        2.1   $ (11.5     (0.5 )% 

Add: Restructuring costs

    30.5        1.1        30.6        1.3        34.9        1.5   

Less: Variable life COLI income (1)

    —          —          —          —          33.1        1.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating income (loss)

  $ 127.6        4.6   $ 82.1        3.4   $ (9.7     (0.4 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) In Q1 2011, we began considering our investments in variable life COLI policies to be primarily a source of corporate liquidity. As a result of this change beginning in Q1 2011, COLI income related to our investments in variable life COLI policies has been recorded in Investment income on the Consolidated Statements of Operations. The variable life COLI income previously included in operating income is excluded for comparative purposes.

Overview

During 2012, we experienced 14% organic revenue growth compared to the prior year, including 19% organic revenue growth in the Americas. This growth is better than global trends in our industry. Companies have been increasing corporate spending thus far in the economic recovery, leveraging the strength of their cash positions. During the second half of 2012, white collar employment and new construction (traditional industry drivers) started to modestly improve in the Americas, but the broader economic recovery remains challenged by a variety of headwinds, including the ongoing sentiment surrounding European sovereign debt.

Additionally, we believe many of our customers have deferred spending during a decade in which various forces have dramatically impacted their work environments, and many are at the point where they are now investing to address these impacts. We have been conducting research and launching new products, applications and experiences over the past several years to address these forces, some of which include globalization trends, miniaturization of technology, mobility of workers, increased collaboration and multi-generations at work. We believe staying invested in these growth initiatives during the worst of the recession helped drive our strong revenue growth as our customers increased spending. During the second half of 2012, we increased investments in product development and other initiatives. We believe these investments will strengthen our market leadership and help to sustain the momentum we have in our business.

Beyond our revenue growth, in 2012 we also took a number of steps to improve our operating fitness and organize our business as a globally integrated enterprise, which included implementation of a number of restructuring actions, both in North America and Europe. These actions are expected to reduce our operating costs in future periods.

2012 compared to 2011

We recorded net income of $56.7 in 2012 compared to $20.4 in 2011. The increase in net income was driven by higher operating income in the Americas and Asia Pacific and lower income tax expense, but partially offset by lower operating income due to the IDEO ownership transition, higher interest expense and lower variable life COLI income.

Operating income grew to $97.1 in 2012 compared to $51.5 in 2011. The 2012 adjusted operating income of $127.6 represented an improvement of $45.5 compared to the prior year primarily due to operating leverage from organic revenue growth across all segments, but partially offset by higher operating expenses, including increased spending of $19.9 on product development and other initiatives in the Americas and Asia Pacific, as well as employee and other costs in EMEA.

 

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Revenue for 2012 was $2,749.5 compared to $2,437.1 for 2011, representing organic revenue growth of 14%. The organic revenue growth was broad-based, with organic growth of 19% in the Americas segment, 6% in the EMEA segment and 9% in the Other category.

Cost of sales increased to 69.6% of revenue in 2012, a 10 basis point increase compared to 2011. Higher absorption of fixed costs associated with the organic revenue growth (including benefits of improved pricing) was partially offset by the impact of deconsolidating IDEO, increased commodity costs of $38.3 and a business mix weighted more heavily towards some of our largest corporate customers.

Operating expenses of $708.3 increased by $47.1 in 2012 compared to 2011 but decreased as a percentage of sales to 25.8% in 2012 from 27.1% in 2011. Operating expenses in 2011 included the following:

 

   

$36.3 related to IDEO and a small division of PolyVision, which have since been deconsolidated,

 

   

favorable foreign currency translation effects of $8.6 and

 

   

a gain of $13.2 from the IDEO ownership transition.

Aside from these items, 2012 operating expenses increased primarily due to:

 

   

higher variable compensation expense of $29.7 (which includes expenses associated with our EVA-based bonus programs and the Steelcase Inc. Retirement Plan),

 

   

costs of $13.2 related to a dealer acquired in Q1 2012 and

 

   

increased spending of $19.9 on product development and other initiatives in the Americas and Asia Pacific, as well as employee and other costs in EMEA.

We recorded restructuring costs of $30.5 in 2012 compared to $30.6 in 2011. The 2012 charges included the following:

 

   

severance and business exits costs of $17.9 from the previously-announced closure of three manufacturing facilities in North America,

 

   

severance and business exit costs of $3.0 from the closure of our Morocco manufacturing facility within our EMEA segment,

 

   

costs of $1.9 from the reorganization of our European manufacturing operations on the basis of specialized competencies and

 

   

lease impairments of $1.7 and $1.3 in our EMEA and Americas segments, respectively.

See further discussion and detail of these items in the Business Segment Disclosure analysis below and in Note 20 to the consolidated financial statements.

Our 2012 effective tax rate was 31%, which is below the U.S. federal statutory tax rate of 35%. The difference was primarily driven by favorable tax items of $4.5 and other tax benefits related to COLI income and research tax credits, partially offset by U.S. taxes on income repatriated from Canada and other permanent adjustments. See Note 15 to the consolidated financial statements for additional information.

2011 compared to 2010

We recorded net income of $20.4 in 2011 compared to a net loss of $13.6 in 2010. The increase in net income was driven by higher operating income in all of our segments primarily due to operating

 

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leverage from organic revenue growth and benefits from restructuring activities and other cost reduction efforts, offset in part by lower variable life COLI income and an income tax charge of $11.4 resulting from the U.S. healthcare reform legislation enacted in Q1 2011.

Operating income grew to $51.5 in 2011 compared to an operating loss of $11.5 in 2010. The 2011 adjusted operating income of $82.1 represented an improvement of $91.8 compared to the prior year primarily due to operating leverage from organic revenue growth, benefits from restructuring activities and other cost reduction efforts and a gain from the IDEO ownership transition totaling $9 (net of incremental variable compensation expense), partially offset by:

 

   

higher compensation costs of $12 related to the reinstatement of employee salaries and certain retirement benefits to 2009 levels and

 

   

increased commodity costs of approximately $10.

Revenue for 2011 was $2,437.1 compared to $2,291.7 for 2010, representing organic revenue growth of 12%. The organic revenue growth was broad-based, with organic growth of 13% in the Americas segment, 10% in the EMEA segment and 13% in the Other category.

Cost of sales decreased to 69.5% of revenue in 2011, a 120 basis point improvement compared to 2010. Higher absorption of fixed costs associated with organic revenue growth and benefits from restructuring activities and other cost reduction efforts were partially offset by the reclassification of variable life COLI income, which beginning in Q1 2011 is reported in Investment income, and increased commodity costs of $10.

Operating expenses increased by $12.8 in 2011 compared to 2010. The increase was primarily due to:

 

   

higher variable compensation expense of $21 related to our Economic Value Added (“EVA”)-based bonus programs,

 

   

variable life COLI income in the prior year of $13.8,

 

   

higher compensation costs of $9 related to the reinstatement of employee salaries and certain retirement benefits to 2009 levels and

 

   

increases in other operating costs.

These increases were partially offset by:

 

   

a reduction of $31.0 from deconsolidations,

 

   

a gain of $13.2 from the IDEO ownership transition,

 

   

favorable currency translation effects of approximately $7 and

 

   

benefits from restructuring activities and other cost reduction efforts.

We recorded restructuring costs of $30.6 in 2011 compared to $34.9 in 2010. The 2011 charges primarily related to the reorganization of our European manufacturing operations on the basis of specialized competencies and several smaller actions to consolidate manufacturing facilities and reorganize other areas of our business. In addition, Q4 2011 included a $10.6 gain related to the sale and leaseback of a facility in Canada offset by $10.1 of restructuring costs associated with the planned closure of three additional manufacturing facilities in North America. See further discussion and detail of these items in the Business Segment Disclosure analysis below and in Note 20 to the consolidated financial statements.

 

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Our 2011 effective tax rate was 60%, significantly higher than the U.S. federal statutory tax rate of 35%. The difference was primarily driven by a tax charge of $11.4 related to a reduction in deferred tax assets related to the U.S. healthcare reform legislation enacted in Q1 2011. See Note 15 to the consolidated financial statements for additional information.

Interest Expense, Investment Income and Other Income (Expense), Net

 

      Year Ended  

Interest Expense, Investment Income and

Other Income (Expense), Net

  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Interest expense

  $ (25.6   $ (19.3   $ (18.2
 

 

 

   

 

 

   

 

 

 

Investment income

    5.2        13.3        2.9   

Other income (expense), net:

     

Equity in earnings of unconsolidated affiliates

    8.3        6.3        1.2   

Miscellaneous, net

    (3.0     (0.4     (5.5
 

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    5.3        5.9        (4.3
 

 

 

   

 

 

   

 

 

 

Total interest expense, investment income and other income (expense), net

  $ (15.1   $ (0.1   $ (19.6
 

 

 

   

 

 

   

 

 

 

Beginning in Q1 2011, Investment income includes gains and losses from variable life COLI policies. See Note 9 to the consolidated financial statements for additional information.

Interest expense in 2012 includes $7.7 associated with $250 of senior notes which matured and were repaid in Q2 2012. The decrease in investment income in 2012 was driven by lower variable life COLI income.

Business Segment Disclosure

See Note 18 to the consolidated financial statements for additional information regarding our business segments.

Americas

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

 

Statement of Operations Data—

Americas

  Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Revenue

  $ 1,842.5        100.0   $ 1,504.6        100.0   $ 1,389.4        100.0

Cost of sales

    1,285.0        69.7        1,066.3        70.9        993.0        71.5   

Restructuring costs

    20.2        1.1        6.6        0.4        8.5        0.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    537.3        29.2        431.7        28.7        387.9        27.9   

Operating expenses

    405.3        22.0        360.0        23.9        333.4        24.0   

Restructuring costs

    1.5        0.1        1.1        0.1        4.1        0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 130.5        7.1   $ 70.6        4.7   $ 50.4        3.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Organic Revenue Growth—Americas   Year Ended  
  February 24,
2012
    February 25,
2011
 

Prior year revenue

  $ 1,504.6      $ 1,389.4   

Dealer deconsolidations and divestitures

    —          (63.0

Currency translation effects (1)

    3.0        9.0   
 

 

 

   

 

 

 

Prior year revenue, adjusted

    1,507.6        1,335.4   

Current year revenue

    1,842.5        1,504.6   

Dealer acquisition

    (55.7     —     
 

 

 

   

 

 

 

Current year revenue, adjusted

    1,786.8        1,504.6   
 

 

 

   

 

 

 

Organic revenue growth

  $ 279.2      $ 169.2   
 

 

 

   

 

 

 

Organic revenue growth %

    19     13

 

(1) Currency translation effects represent the net effect of translating prior year foreign currency revenues using the average exchange rate on a quarterly basis during the current year.

 

Adjusted Operating Income—Americas   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Operating income

  $ 130.5        7.1   $ 70.6        4.7   $ 50.4        3.6

Add: Restructuring costs

    21.7        1.2        7.7        0.5        12.6        0.9   

Less: Variable life COLI income (1)

    —          —          —          —          32.9        2.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating income

  $ 152.2        8.3   $ 78.3        5.2   $ 30.1        2.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) In Q1 2011, we began considering our investments in variable life COLI policies to be primarily a source of corporate liquidity. As a result of this change beginning in Q1 2011, COLI income related to our investments in variable life COLI policies has been recorded in Investment income on the Consolidated Statements of Operations. The variable life COLI income previously included in operating income is excluded for comparative purposes.

2012 compared to 2011

Operating income in the Americas grew to $130.5 in 2012, compared to $70.6 in 2011. Adjusted operating income in 2012 grew to $152.2 from $78.3 in 2011, an increase of $73.9 or 94.4%. This increase was primarily driven by operating leverage from organic revenue growth (including benefits from improved pricing) offset in part by $27.7 of higher commodity costs, a higher mix of business from some of our largest corporate customers, services and owned dealers, and higher spending on product development and other initiatives.

The Americas revenue represented 67.0% of consolidated revenue in 2012. Revenue for 2012 was $1,842.5 compared to $1,504.6 in 2011, an increase of $337.9 or 22.5%. After adjusting for revenue of $55.7 from a dealer acquired in 2012 and currency translation effects of $3.0, organic revenue growth was $279.2 or 19%. Revenue growth in 2012 is categorized as follows:

 

   

Product categories —All product categories grew in 2012. Revenue growth rates were strongest in the Technology category. Details and Turnstone also showed strength relative to the other product categories. Our two largest categories, Furniture and Seating, were in line with the overall average for the year. Coalesse, Wood and Nurture were below the average for the year but still grew at double-digit rates.

 

   

Vertical markets —Other than State and Local Government, all major vertical markets grew with notable strength in the IT, Technical/Professional and Financial Services sectors. Healthcare and Education revenue growth was in line with the average. Insurance and Federal Government were below average but still grew nicely year over year.

 

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Geographic regions —All regions showed growth over 2011, with notable strength in the Central and New York regions of the U.S.

 

   

Contract type —The strongest growth came from our marketing programs targeted toward small to medium-sized businesses, but project and day-to-day business also grew at strong double-digit rates.

Cost of sales decreased to 69.7% of revenue in 2012 compared to 70.9% of revenue in 2011. Higher absorption of fixed costs associated with organic revenue growth was partially offset by higher commodity costs and a business mix weighted more heavily towards some of our largest corporate customers, owned dealers and services associated with our direct business.

Operating expenses increased by $45.3 in 2012 compared to 2011 primarily due to:

 

   

higher variable compensation expense of $23.9 (which includes expenses associated with our EVA-based bonus programs and the Steelcase Inc. Retirement Plan),

 

   

incremental costs of $13.2 related to a dealer acquired in Q1 2012 and

 

   

increased spending on product development and other initiatives.

Restructuring costs of $21.7 incurred in 2012 primarily related to the consolidation of manufacturing facilities announced in Q4 2011. In addition, 2011 restructuring included a $10.6 gain related to the sale and leaseback of a facility in Canada.

2011 compared to 2010

Operating income in the Americas grew to $70.6 in 2011 compared to $50.4 in 2010, which included $32.9 of variable life COLI income. Adjusted operating income increased by $48.2, primarily driven by operating leverage from organic revenue growth, and benefits from restructuring activities and other cost reduction efforts, partially offset by:

 

   

higher compensation costs of $11 related to the reinstatement of employee salaries and certain retirement benefits to 2009 levels,

 

   

incremental variable compensation expense of approximately $6 related to a gain on sale of a facility, which was recorded as a restructuring item, and a gain from the IDEO ownership transition, which was recorded in Corporate,

 

   

charges related to a product recall and an impairment related to an asset held for sale totaling $8 and

 

   

increased commodity costs of approximately $7.

The Americas revenue represented 61.7% of consolidated revenue in 2011. Revenue for 2011 was $1,504.6 compared to $1,389.4 in 2010, representing organic revenue growth of 13% after adjusting for dealer deconsolidations and currency translation effects. Revenue growth was broad-based with notable vertical market growth reflected in financial services, technical/professional, higher education, healthcare and government. In addition, seating revenue growth was the strongest across our product categories.

Cost of sales decreased to 70.9% of revenue in 2011, a 60 basis point improvement compared to 2010. Excluding the 140 basis point favorable impact of variable life COLI income in 2010, cost of sales improved by 200 basis points, which was largely driven by higher absorption of fixed costs associated with organic revenue growth and benefits from restructuring activities and other cost reduction efforts, partially offset by higher commodity costs and a product specific warranty charge related to a retrofit project.

 

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Operating expenses increased by $26.6 in 2011 compared to 2010 primarily due to:

 

   

higher variable compensation expense of $17 related to our EVA-based bonus programs,

 

   

variable life COLI income in 2010 of $13.6 and

 

   

higher compensation costs of $8 related to the reinstatement of employee salaries and certain retirement benefits to 2009 levels.

These increases were partially offset by a reduction of $20.6 from dealer deconsolidations as well as benefits of restructuring activities and other cost reduction efforts.

Restructuring costs of $7.7 incurred in 2011 primarily related to the consolidation of manufacturing facilities. In addition, Q4 2011 included a $10.6 gain related to the sale and leaseback of a facility in Canada offset by $10.1 of restructuring costs associated with the planned closure of three additional manufacturing facilities in North America as part of our ongoing efforts to improve the fitness of our business and strengthen the Company's long-term competitiveness.

EMEA

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

 

Statement of Operations Data—EMEA   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Revenue

  $ 603.1        100.0   $ 547.3        100.0   $ 530.3        100.0

Cost of sales

    427.9        70.9        390.5        71.4        376.9        71.1   

Restructuring costs

    5.0        0.8        18.7        3.4        10.1        1.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    170.2        28.3        138.1        25.2        143.3        27.0   

Operating expenses

    175.0        29.0        156.1        28.5        160.4        30.2   

Restructuring costs

    3.0        0.5        0.4        0.1        4.9        0.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

  $ (7.8     (1.3 )%    $ (18.4     (3.4 )%    $ (22.0     (4.1 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Organic Revenue Growth—EMEA   Year Ended  
  February 24,
2012
    February 25,
2011
 

Prior year revenue

  $ 547.3      $ 530.3   

Currency translation effects (1)

    22.0        (35.0
 

 

 

   

 

 

 

Prior year revenue, adjusted

    569.3        495.3   

Current year revenue

    603.1        547.3   
 

 

 

   

 

 

 

Organic revenue growth

  $ 33.8      $ 52.0   
 

 

 

   

 

 

 

Organic revenue growth %

    6     10

 

(1) Currency translation effects represent the net effect of translating prior year foreign currency revenues using the average exchange rate on a quarterly basis during the current year.

 

Adjusted Operating Income (Loss)—EMEA   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Operating loss

  $ (7.8     (1.3 )%    $ (18.4     (3.4 )%    $ (22.0     (4.1 )% 

Add: Restructuring costs

    8.0        1.3        19.1        3.5        15.0        2.8   

Less: Variable life COLI income

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating income (loss)

  $ 0.2        0.0   $ 0.7        0.1   $ (7.0     (1.3 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

2012 compared to 2011

EMEA reported an operating loss of $7.8 in 2012 compared to an operating loss of $18.4 in 2011. Adjusted operating income of $0.2 represented a decline of $0.5 compared to 2011. Overall, the profit decline was primarily driven by higher operating expenses, including higher employee expenses, offset in part by leverage from organic revenue growth.

EMEA revenue represented 21.9% of consolidated revenue in 2012. Revenue for 2012 was $603.1 compared to $547.3 in 2011, representing organic revenue growth of 6% after adjusting for currency translation effects. During 2012, Northern Europe and Germany showed double digit organic revenue growth, and the rest of EMEA showed mid single digit organic revenue growth, while France and Spain revenue declined.

Cost of sales decreased to 70.9% of revenue in 2012, a 50 basis point improvement compared to 2011. The improvement was mainly due to higher absorption of fixed costs associated with higher volume, improved pricing, and benefits from restructuring activities and other cost reduction efforts, offset in part by higher commodity costs of $10.2 and higher overhead costs.

2012 operating expenses increased by $18.9 due to higher employee expenses, including variable compensation expense associated with our EVA-based bonus programs, annual employee merit increases and additional headcount in support of sales and distribution, offset by $7.7 of favorable foreign currency translation effects.

Restructuring costs of $8.0 incurred in 2012 primarily related to the project to reorganize our European manufacturing operations, which we have completed. The total cost was slightly higher than our estimates because more employees than anticipated accepted the severance offer.

2011 compared to 2010

EMEA reported an operating loss of $18.4 in 2011 compared to an operating loss of $22.0 in 2010. The adjusted operating loss of $0.7 represented an improvement of $7.7 compared to 2010. Overall, the profit improvement was primarily driven by operating leverage from organic revenue growth and benefits from restructuring activities and other cost reduction efforts, offset in part by higher commodity costs and other operating costs. Our results in the United Kingdom continued to be negatively affected by unfavorable currency impacts.

EMEA revenue represented 22.5% of consolidated revenue in 2011. Revenue for 2011 was $547.3 compared to $530.3 in 2010, representing organic revenue growth of 10% after adjusting for currency translation effects. During 2011, all regions reported organic revenue growth, with notable increases in Germany and Spain. Large projects in Spain more than offset the recessionary impact on our revenue.

Cost of sales increased to 71.4% of revenue in 2011, a 30 basis point erosion compared to 2010. The increase was primarily due to higher commodity costs and disruption costs associated with the reorganization of manufacturing operations.

2011 operating expenses decreased by $4.3 due to benefits from restructuring activities and other cost reduction efforts and favorable currency translation effects of approximately $10.4, offset by higher variable compensation expense related to our EVA-based bonus programs and higher bad debt charges.

Restructuring costs of $19.1 incurred in 2011 primarily related to the project to reorganize our European manufacturing operations. The total estimated cost was slightly higher than our estimates because more employees than anticipated voluntarily accepted a severance offer.

 

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Table of Contents

Other

The Other category includes Asia Pacific, PolyVision and Designtex. Asia Pacific serves customers in Asia and Australia primarily under the Steelcase brand with an emphasis on freestanding furniture systems, storage and seating solutions. PolyVision designs and manufactures visual communication products, such as interactive electronic whiteboards which are sold into the primary and secondary education markets around the world. Designtex designs and sells surface materials including textiles and wall coverings which are specified by architects and designers directly to end-use customers through a direct sales force. IDEO was consolidated in the Other category through Q3 2011, but due to the ownership transition, our remaining 20% share of IDEO income has been recorded as a non-operating item since Q4 2011. See Note 19 to the consolidated financial statements for additional information.

 

Statement of Operations Data—Other   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Revenue

  $ 303.9        100.0   $ 385.2        100.0   $ 372.0        100.0

Cost of sales

    200.7        66.0        237.0        61.5        250.0        67.2   

Restructuring costs

    1.0        0.4        0.5        0.1        3.4        0.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    102.2        33.6        147.7        38.4        118.6        31.9   

Operating expenses

    97.6        32.1        131.0        34.0        136.8        36.8   

Restructuring costs

    (0.2     (0.1     3.3        0.9        3.9        1.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  $ 4.8        1.5   $ 13.4        3.5   $ (22.1     (5.9 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Organic Revenue Growth—Other   Year Ended  
  February 24,
2012
    February 25,
2011
 

Prior year revenue

  $ 385.2      $ 372.0   

Divestiture

    (8.8       

IDEO ownership transition

    (103.4     (29.0

Currency translation effects (1)

    5.0        (2.0
 

 

 

   

 

 

 

Prior year revenue, adjusted

    278.0        341.0   

Current year revenue

    303.9        385.2   
 

 

 

   

 

 

 

Organic revenue growth

  $ 25.9      $ 44.2   
 

 

 

   

 

 

 

Organic revenue growth %

    9     13

 

(1) Currency translation effects represent the net effect of translating prior year foreign currency revenues using the average exchange rate on a quarterly basis during the current year.

 

Adjusted Operating Income (Loss)—Other   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Operating income (loss)

  $ 4.8        1.5   $ 13.4        3.5   $ (22.1     (5.9 )% 

Add: Restructuring costs

    0.8        0.3        3.8        1.0        7.3        1.9   

Less: Variable life COLI income

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating income (loss)

  $ 5.6        1.8   $ 17.2        4.5   $ (14.8     (4.0 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2012 compared to 2011

The Other category reported operating income of $4.8 in 2012 compared to $13.4 in 2011, which included $11.8 from IDEO. Adjusted operating income decreased by $11.6 primarily due to the impact of the IDEO ownership transition. In addition, improved results in Asia Pacific were offset in part by lower operating income from PolyVision which continues to be impacted by reduced funding for education from state and local governments in the United States.

 

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Table of Contents

2012 revenue of $303.9 decreased by $81.3 compared to 2011 revenue of $385.2. Excluding the decrease in revenue due to the IDEO ownership transition, the divestiture of a small division at PolyVision and currency translation effects, organic revenue growth was $25.9 or 9%, driven by strength in the Asia Pacific region.

Cost of sales as a percent of revenue increased by 450 basis points in 2012 compared to 2011. After adjusting for the impact of deconsolidating IDEO, cost of sales increased by 190 basis points. Higher absorption of fixed costs associated with revenue growth in Asia Pacific was more than offset by unfavorable product mix and lower absorption of fixed costs at PolyVision.

Operating expenses in the Other category decreased by $33.4 to $97.6 in 2012 compared to $131.0 in 2011. The decrease was driven by the deconsolidation of IDEO in 2011, which had the effect of decreasing operating expenses by $35.3.

2011 compared to 2010

Operating income in the Other category increased by $35.5 in 2011 compared to 2010. Adjusted operating income improved by $32.0 primarily due to:

 

   

improvements at PolyVision as a result of growth in higher margin Technology and Surfaces product categories and benefits from the 2010 exit of lower margin businesses in the U.S.,

 

   

benefits from restructuring activities and other cost reduction efforts and

 

   

revenue growth at IDEO through Q3 2011.

2011 revenue increased by $13.2 compared to 2010, representing organic growth of 13% after adjusting for the IDEO ownership transition. PolyVision experienced single digit revenue growth; however, excluding the impact of businesses exited in 2010, PolyVision revenue increased by 17%. IDEO experienced a significant increase in revenue through Q3 2011 compared to the same period in 2010 as a result of a number of large consulting projects.

Cost of sales as a percent of revenue improved by 570 basis points compared to 2010 primarily due to improvements at PolyVision as a result of growth in higher margin Technology and Surfaces product categories and benefits from the 2010 exit of lower margin businesses in the U.S.

Operating expenses decreased by $5.8 due to $10.4 from the IDEO deconsolidation in Q4 2011 offset by higher variable compensation expense related to our EVA-based bonus programs.

Restructuring costs of $3.8 in 2011 primarily related to the consolidation of manufacturing facilities.

On December 14, 2010, certain members of the management of IDEO who collectively owned 20% of IDEO purchased an additional 60% equity interest in IDEO pursuant to an agreement entered into during 2008. We retained a 20% equity interest in IDEO, and we expect to continue our collaborative relationship. This transaction generated $30 of cash and resulted in a Q4 2011 pre-tax gain of $9, net of incremental variable compensation expense. In Q4 2011, we deconsolidated the operations of IDEO and recorded our share of IDEO’s earnings as equity in earnings of unconsolidated affiliates in Other income (expense), net on the Consolidated Statements of Operations. See Note 19 consolidated financial statements for additional information.

Corporate

Approximately 82% of corporate expenses were charged to the operating segments in each of 2012, 2011 and 2010 as part of a corporate allocation. Unallocated portions of these expenses are

 

27


Table of Contents

considered general corporate costs and are reported as Corporate. Corporate costs include unallocated portions of executive costs and shared service functions such as information technology, human resources, finance, legal, research and development and corporate facilities.

 

Statement of Operations Data—Corporate   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Operating expenses

  $ 30.4      $ 14.1      $ 17.8   

2011 operating expenses include a $13.2 gain from the ownership transition of IDEO. Related variable compensation expense was allocated among the Americas and EMEA segments, the Other category and Corporate. Excluding this gain, the increase in Corporate operating expenses primarily relates to higher variable compensation expense related to our EVA-based bonus programs in the current year.

Liquidity and Capital Resources

Liquidity

Based on current business conditions, we target a minimum of $100 in cash and cash equivalents and short-term investments to fund day-to-day operations, to provide available liquidity for investments in growth initiatives and as a cushion against economic volatility. Our actual cash and cash equivalents and short-term investment balances will fluctuate from quarter to quarter as we plan for and manage certain seasonal disbursements, particularly the annual payment of accrued variable compensation and retirement plan contributions in Q1 of each fiscal year, when applicable.

 

Primary Liquidity Sources   February 24,
2012
    February 25,
2011
 

Cash and cash equivalents

  $ 112.1      $ 142.2   

Short-term investments

    79.1        350.8   

Variable life COLI

    113.1        110.3   

Availability under credit facilities

    174.2        165.7   
 

 

 

   

 

 

 

Total primary liquidity sources

  $ 478.5      $ 769.0   
 

 

 

   

 

 

 

As of February 24, 2012, we held a total of $191.2 in cash and cash equivalents and short-term investments. All of our short-term investments are located in the U.S. Of our total cash and cash equivalents, approximately 51% was located in the U.S. and the remaining 49%, or $55.0, was located outside of the U.S., primarily in Asia, France and Canada. The amounts located outside the U.S. would be taxable if repatriated to the U.S., but we do not anticipate repatriating such amounts or needing them for operations in the U.S. Such amounts are considered permanently reinvested in foreign subsidiaries or available to repay intercompany debt, and in Canada and Mexico, such amounts are expected to be utilized to meet local working capital requirements.

The majority of our short-term investments are maintained in the U.S. in a managed investment portfolio, which primarily consists of U.S. agency debt securities, U.S. government debt securities, corporate debt securities and municipal debt securities. The short-term investment balance as of February 25, 2011 included $246.9 from the net proceeds received in Q4 2011 from the issuance of unsecured unsubordinated senior notes, due in February 2021. In Q2 2012, the net proceeds were used, together with available cash on hand, to repay the outstanding $250 aggregate principal amount of our 6.5% senior notes due August 15, 2011.

Our investments in COLI policies are recorded at their net cash surrender value. We consider our investments in variable life COLI policies to be primarily a source of corporate liquidity, and our investments in whole life COLI policies represent an additional potential source of liquidity, as their

 

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designation to fund employee benefit plan obligations can be changed at any time. We believe the financial strength of the issuing insurance companies associated with our variable and whole life COLI policies are sufficient to meet their obligations. See Note 9 to the consolidated financial statements for more information.

Availability under credit facilities may be reduced by the use of cash and cash equivalents and short-term investments for purposes other than the repayment of debt as a result of constraints related to our maximum leverage ratio covenant. See Liquidity Facilities for more information.

The following table summarizes our consolidated statements of cash flows:

 

Cash Flow Data   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Net cash flow provided by (used in):

     

Operating activities

  $ 101.7      $ 72.7      $ (10.9

Investing activities

    203.2        (254.3     (10.0

Financing activities

    (334.3     211.1        13.0   

Effect of exchange rate changes on cash and cash equivalents

    (0.7     1.6        1.4   
 

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    (30.1     31.1        (6.5

Cash and cash equivalents, beginning of period

    142.2        111.1        117.6   
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 112.1      $ 142.2      $ 111.1   
 

 

 

   

 

 

   

 

 

 

Cash provided by (used in) operating activities

 

Cash Flow Data—Operating Activities   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Net income (loss)

  $ 56.7      $ 20.4      $ (13.6

Depreciation and amortization

    56.4        64.4        74.2   

Changes in accounts receivable, inventories, and accounts payable, net of deconsolidation

    (11.1     (59.5     61.9   

Changes in cash surrender value of COLI

    (4.5     (13.5     (38.0

Changes in deferred income taxes

    13.6        11.3        (18.2

Changes in employee compensation liabilities

    (32.5     3.4        (85.5

Changes in other operating assets and liabilities, net of deconsolidation

    (23.1     29.6        (37.9

Other

    46.2        16.6        46.2   
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  $ 101.7      $ 72.7      $ (10.9
 

 

 

   

 

 

   

 

 

 

The change in cash provided by operating activities in 2012 compared to 2011 was primarily due to an increase in cash generated from net income, partially offset by higher variable compensation payments in Q1 2012, and Q1 2011 included the receipt of a U.S. income tax refund of approximately $20.

 

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Cash provided by (used in) investing activities

 

Cash Flow Data—Investing Activities   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Capital expenditures

  $ (64.9   $ (46.0   $ (35.2

Proceeds from disposal of fixed assets

    11.7        44.9        9.4   

Proceeds from IDEO ownership transition

    —          29.8        —     

Purchases of investments

    (195.8     (335.4     (4.7

Liquidations of investments

    466.1        59.0        15.6   

Acquisitions

    (20.9     —          —     

Other, net

    7.0        (6.6     4.9   
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

  $ 203.2      $ (254.3   $ (10.0
 

 

 

   

 

 

   

 

 

 

Capital expenditures in 2012 were primarily related to investments in product development in the Americas and EMEA, spending on corporate facilities related to campus consolidation in the Americas and payments totaling $20 towards a replacement aircraft. In Q4 2011, we issued $250 in unsecured unsubordinated senior notes, which generated net proceeds of $247 which were subsequently invested in short-term investments. In Q2 2012 we liquidated these investments to repay $250 in senior notes. See Note 12 to the consolidated financial statements for additional information.

Cash provided by (used in) financing activities

 

Cash Flow Data—Financing Activities   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Borrowings (repayments) of short-term and long-term debt, net

  $ (256.0   $ 243.1      $ 45.5   

Dividends paid

    (31.7     (21.6     (26.9

Common stock repurchases, net of issuances

    (47.7     (10.8     (4.6

Other

    1.1        0.4        (1.0
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  $ (334.3   $ 211.1      $ 13.0   
 

 

 

   

 

 

   

 

 

 

In Q2 2012, we repaid $250.0 of senior notes at face value with the proceeds from the issuance of senior notes in Q4 2011.

We paid dividends of $0.06 per common share during each quarter in 2012. We paid $0.04 per common share during each quarter in 2011 and the last three quarters of 2010 and $0.08 per common share during the first quarter of 2010. On March 22, 2012 our Board of Directors declared a dividend of $0.09 per common share to be paid in Q1 2013.

During 2012, 2011 and 2010, we made common stock repurchases of $47.7, $10.8, and $4.6, respectively, all of which related to our Class A Common Stock. As of February 24, 2012, we had $153.2 of remaining availability under the $250 share repurchase program approved by our Board of Directors in Q4 2008. On November 4, 2011, we entered into a stock repurchase agreement with an independent third party broker under which the broker was authorized to repurchase up to $25 of the Company’s common stock on behalf of the Company during the period from November 4, 2011 through March 21, 2012, subject to certain price, market and volume constraints specified in the agreement. As of the end of 2012, there was $15 remaining availability under this agreement, and no repurchases were completed during March 2012.

 

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Share repurchases of Class A Common Stock to enable participants to satisfy tax withholding obligations upon vesting of restricted stock and restricted stock units, pursuant to the terms of our Incentive Compensation Plan, were $0.1, $0.7 and $0.4 in 2012, 2011 and 2010, respectively.

Capital Resources

Off-Balance Sheet Arrangements

We are contingently liable under loan and lease guarantees for certain Steelcase dealers and joint ventures in the event of default or non-performance of the financial repayment of a liability. In certain cases, we also guarantee completion of contracts by our dealers. Due to the contingent nature of guarantees, the full value of the guarantees is not recorded on our Consolidated Balance Sheets; however, when necessary, we record reserves to cover potential losses. See Note 17 to the consolidated financial statements for additional information.

Contractual Obligations

Our contractual obligations as of February 24, 2012 were as follows:

 

Contractual Obligations   Payments Due by Period  
  Total     Less than
1 Year
    1-3
Years
    3-5
Years
    After 5
Years
 

Long-term debt and short-term borrowings

  $ 291.5      $ 2.6      $ 5.0      $ 4.8      $ 279.1   

Estimated interest on debt obligations

    149.8        17.4        34.9        33.8        63.7   

Operating leases

    167.1        44.7        66.2        37.4        18.8   

Committed capital expenditures

    12.9        12.9        —          —          —     

Purchase obligations

    39.0        23.0        5.6        5.3        5.1  

Other liabilities

    2.1        2.1        —          —          —     

Employee benefit and compensation obligations

    244.0        83.8        43.8        34.7        81.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 906.4      $ 186.5      $ 155.5      $ 116.0      $ 448.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated debt as of February 24, 2012 was $291.5. Of our total debt, $249.9 is in the form of term notes due in February 2021 and $40.8 is related to financing secured by our corporate aircraft.

We have commitments related to certain sales offices, showrooms, warehouses and equipment under non-cancelable operating leases that expire at various dates through fiscal 2023. Minimum payments under operating leases, net of sublease rental income, are presented in the contractual obligations table above.

Committed capital expenditures represent obligations we have related to property, plant and equipment purchases.

We define purchase obligations as non-cancelable signed contracts to purchase goods or services beyond the needs of meeting current backlog or production.

Other liabilities represent obligations for foreign exchange forward contracts.

Employee benefit obligations represent contributions and benefit payments expected to be made for our post-retirement, pension, deferred compensation, defined contribution, severance arrangements and variable compensation plans. Our obligations related to post-retirement benefit plans are not contractual, and the plans could be amended at the discretion of the Compensation Committee of the Board of Directors. We limited our disclosure of contributions and benefit payments to 10 years as information beyond this time period was not available. See Note 13 to the consolidated financial statements for additional information.

 

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The contractual obligations table above is current as of February 24, 2012. The amounts of these obligations could change materially over time as new contracts or obligations are initiated and existing contracts or obligations are terminated or modified. Our current cash and cash equivalents and short-term investment balances, funds available under our credit facilities, funds available from COLI and cash generated from future operations are expected to be sufficient to fulfill our existing contractual obligations.

Liquidity Facilities

Our total liquidity facilities as of February 24, 2012 were:

 

Liquidity Facilities   February 24,
2012
 

Global committed bank facility

  $ 125.0   

Various uncommitted lines

    49.2   
 

 

 

 

Total credit lines available

    174.2   

Less:

 

Borrowings outstanding

    —     
 

 

 

 

Available capacity

  $ 174.2   
 

 

 

 

As of February 24, 2012 and February 25, 2011, there were no borrowings outstanding under our global committed, syndicated credit facility. The facility required us to satisfy financial covenants including a maximum leverage ratio covenant and a minimum interest coverage ratio covenant. Additionally, the facility required us to comply with certain other terms and conditions, including a restricted payment covenant which established a maximum level of dividends and/or other equity-related distributions or payments (such as share repurchases) we may make in a fiscal year. As of February 24, 2012 and February 25, 2011, we were in compliance with all covenants under the facility. During Q1 2013, we entered into a new credit facility, which amended and restated the former facility. See Note 12 and Note 22 to the consolidated financial statements for additional information.

The various uncommitted lines may be changed or cancelled by the banks at any time. There were no outstanding borrowings on uncommitted facilities as of February 24, 2012. In addition, we have a revolving letter of credit agreement for $12.9 of which $12.3 was utilized primarily related to our self-insured workers’ compensation programs as of February 24, 2012. There were no draws on our standby letters of credit during 2012. See Note 12 to the consolidated financial statements for additional information.

Total consolidated debt as of February 24, 2012 was $291.5. Our debt primarily consists of $249.9 in term notes due in Q4 2021 with an effective interest rate of 6.6%. In addition, we have a $40.8 term loan due in Q2 2017 at a floating interest rate based on 30-day LIBOR plus 3.35%. The term notes are unsecured, the term loan is secured by two corporate aircraft, and neither the term notes nor the term loan contain financial covenants or are cross-defaulted to other debt facilities. See Note 12 and Note 22 to the consolidated financial statements for additional information.

Liquidity Outlook

Our current cash and cash equivalents and short-term investment balances, funds available under our credit facilities, funds available from COLI and cash generated from future operations are expected to be sufficient to finance our known or foreseeable liquidity needs. We believe the timing, strength and continuity of the economic recovery across the geographies we serve remain uncertain which may continue to challenge our level of cash generation from operations. We continue to maintain a conservative approach to liquidity and have flexibility over significant uses of cash including our capital expenditures and discretionary operating expenses.

 

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Our significant funding requirements include operating expenses, non-cancelable operating lease obligations, capital expenditures, variable compensation and retirement plan contributions, dividend payments and debt service obligations.

We expect capital expenditures to total between $75 and $85 in 2013 compared to $65 in 2012. This amount includes the completion of our campus consolidation in North America, global product development projects and facilities updates in both EMEA and the Americas. We closely manage capital spending to ensure we are making investments that we believe will sustain our business and preserve our ability to introduce innovative new products.

In Q4 2011, we announced the planned closure of three additional manufacturing facilities in North America as part of our ongoing efforts to improve the fitness of our business and strengthen the Company's long-term competitiveness. We are in the process of moving production within these facilities to other Steelcase locations in North America and expect the manufacturing consolidation to be completed by the end of Q1 2014. We currently estimate the cash restructuring costs associated with these actions will be approximately $40, with approximately $30 related to workforce reductions and approximately $10 related to costs associated with manufacturing consolidation and production moves.

On March 22, 2012, we announced a quarterly dividend on our common stock of $0.09 per share, or $11.4 to be paid in Q1 2013. Future dividends will be subject to approval by our Board of Directors and compliance with the restricted payment covenant of our credit facilities.

Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements and accompanying notes. Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and accompanying notes. Although these estimates are based on historical data and management’s knowledge of current events and actions it may undertake in the future, actual results may differ from the estimates if different conditions occur. The accounting estimates that typically involve a higher degree of judgment and complexity are listed and explained below. These estimates were discussed with the Audit Committee of the Board of Directors and affect all segments of the Company.

Goodwill and Other Intangible Assets

Goodwill represents the difference between the purchase price and the related underlying tangible and identifiable intangible net asset values resulting from business acquisitions. Annually in Q4, or earlier if conditions indicate it is necessary, the carrying value of the reporting unit is compared to an estimate of its fair value. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written down to its estimated fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. We evaluated goodwill and intangible assets using six reporting units where goodwill is recorded: Americas and Coalesse within the Americas reportable segment, EMEA, Asia Pacific, and Designtex and PolyVision within the Other category.

Annually in Q4, or earlier if conditions indicate it is necessary, we also perform an impairment analysis of our intangible assets not subject to amortization using an income approach based on the cash flows attributable to the related products. We also perform an impairment analysis of our intangible assets subject to amortization during interim periods upon the occurrence of certain events or changes in circumstance. An impairment loss is recognized if the carrying amount of a long-lived

 

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asset exceeds its fair value. In testing for impairment, we first determine if the asset is recoverable and then compare the discounted cash flows over the asset’s remaining life to the carrying value.

As of February 24, 2012, we had $176.6 of goodwill and $18.8 of net intangible assets recorded on our Consolidated Balance Sheets as follows:

 

Reportable Segment   Goodwill     Other Intangible
Assets, Net
 

Americas

  $ 90.7      $ 8.6   

EMEA

    30.0        —     

Other category

    55.9        10.2   
 

 

 

   

 

 

 

Total

  $ 176.6      $ 18.8   
 

 

 

   

 

 

 

During Q4 2012, we performed our annual impairment assessment of goodwill in our reporting units. In the first step to test for potential impairment, we measured the estimated fair value of our reporting units using a discounted cash flow valuation (“DCF”) method and reconciled the fair value of our reporting units to the sum of our total market capitalization plus a control premium (our “adjusted market capitalization”). The control premium represents an estimate associated with obtaining control of the company in an acquisition of the outstanding shares of Class A Common Stock and Class B Common Stock. The DCF analysis used the present value of projected cash flows and a residual value. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows in measuring fair value. Assumptions used in our impairment valuations, such as forecasted growth rates and cost of capital, are consistent with our current internal projections.

As part of the reconciliation to our adjusted market capitalization, we made adjustments to the estimated future cash flows, as well as the discount rates used in calculating the estimated fair value of the reporting units. The discount rates ranged from 13.0% to 14.0%. Due to the subjective nature of this reconciliation process, these assumptions could change over time, which may result in future impairment charges.

As of the valuation date, the enterprise value available for goodwill determined as described above is in excess of the underlying reported value of goodwill as follows:

 

Reportable Segment   Enterprise Value
Available in Excess
of Goodwill
 

Americas

  $ 735.0   

EMEA

    108.0   

Other category

    74.0   

For each reporting unit, the excess enterprise value available for goodwill is primarily driven by the residual value of future years. Thus, increasing the discount rate by 1%, leaving all other assumptions unchanged, would reduce the enterprise value in excess of goodwill to the following amounts:

 

Reportable Segment   Enterprise Value
Available in Excess
of Goodwill
 

Americas

  $ 610.0   

EMEA

    83.0   

Other category

    56.0   

Based on the sensitivity analysis above, no reporting units would have had goodwill balances in excess of enterprise value available for goodwill as of the valuation date.

 

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See Note 2 and Note 10 to the consolidated financial statements for additional information.

Income Taxes

Our annual effective tax rate is based on income, statutory tax rates and tax planning strategies in various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating tax positions. Tax positions are reviewed quarterly and balances are adjusted as new information becomes available.

We are audited by the U.S. Internal Revenue Service under the Compliance Assurance Process (“CAP”). Under CAP, the U.S. Internal Revenue Service works with large business taxpayers to identify and resolve issues prior to the filing of a tax return. Accordingly, we expect to record minimal liabilities for U.S. Federal uncertain tax positions. Tax positions are reviewed regularly for state, local and non-U.S. tax liabilities associated with uncertain tax positions. Our liability for uncertain tax positions in these jurisdictions is $1.2.

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. In evaluating our ability to recover deferred tax assets within the jurisdiction from which they arise, we consider all positive and negative evidence. These assumptions require significant judgment and are developed using forecasts of future taxable income that are consistent with the internal plans and estimates we are using to manage the underlying business.

Future tax benefits of tax loss and credit carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. As of February 24, 2012, we recorded tax benefits from the operating loss carryforwards of $92.1, but we have also recorded valuation allowances totaling $32.1, which reduced our realized tax benefit to $60.0. Additionally, we have recognized tax benefits from tax credit carryforwards of $30.7. It is considered more likely than not that a combined cash benefit of $91.6 will be realized on these carryforwards in future periods. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies will enable us to utilize the carryforwards. To the extent that available evidence raises doubt about the realization of a deferred tax asset, a valuation allowance is established or adjusted.

As of February 24, 2012, we have recorded partial valuation allowances totaling $29.6 on certain net operating loss carryforwards totaling $77.6. These carryforward benefits relate to jurisdictions that allow indefinite carryforward periods and in which we have reported cumulative losses in the most recent three years. Our judgment regarding the utilization of these net operating losses is based on our conclusion that we have sufficient evidence that it is more likely than not that we will generate future taxable income in these jurisdictions. The key factors that we considered in our analysis included the impact of restructuring activities and tax planning strategies, as well as the impact of the cyclical nature of our business on future sales levels. Our judgment related to the realization of the deferred tax assets is based on current and expected market conditions and could change in the event market conditions and our profitability in these jurisdictions differ significantly from our current estimates.

A 10% decrease in the expected amount of cash benefit to be realized on the carryforwards would have resulted in a decrease in net income for 2012 of approximately $9.

 

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Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.

See Note 15 to the consolidated financial statements for additional information.

Pension and Other Post-Retirement Benefits

The Company sponsors a number of domestic and foreign plans to provide pension, medical and life insurance benefits to retired employees. As of February 24, 2012 and February 25, 2011, the benefit obligations, fair value of plan assets and funded status of these plans are as follows:

 

      Defined Benefit
Pension Plans
    Post-Retirement
Plans
 
      February 24,
2012
    February 25,
2011
    February 24,
2012
    February 25,
2011
 

Benefit plan obligations

  $ 95.0      $ 87.3      $ 90.9      $ 110.5   

Fair value of plan assets

    49.1        50.2        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Funded status

  $ (45.9   $ (37.1   $ (90.9   $ (110.5
 

 

 

   

 

 

   

 

 

   

 

 

 

The post-retirement medical and life insurance plans are unfunded, but our investments in whole life COLI policies are intended to be utilized as a long-term funding source for these benefit obligations. The asset values of the whole life COLI policies are not segregated in a trust specifically for the plans, thus are not considered plan assets. Changes in the values of these policies have no effect on the post-retirement benefits expense or benefit obligations recorded in the consolidated financial statements.

As of February 24, 2012, approximately 68% of our unfunded defined benefit pension obligations related to our non-qualified supplemental retirement plan that is limited to a select group of management approved by the Compensation Committee. This plan is unfunded, but our investments in whole life COLI policies are intended to be utilized as a long-term funding source for these benefit obligations. The asset values of the whole life COLI policies are not segregated in a trust specifically for the plan, thus are not considered plan assets. Changes in the values of these policies have no effect on the defined benefit pension expense or benefit obligations recorded in the consolidated financial statements.

We recognize the cost of benefits provided during retirement over the employees’ active working lives. Inherent in this approach is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Key actuarial assumptions that require significant management judgment and have a material impact on the measurement of our consolidated benefits expense and benefit obligations include, among others, the discount rate and health cost trend rates. These assumptions are reviewed with our actuaries and updated annually based on relevant external and internal factors and information, including, but not limited to, benefit payments, expenses paid from the fund, rates of termination, medical inflation, technology and quality care changes, regulatory requirements, plan changes and governmental coverage changes.

To conduct our annual review of discount rates, we perform a matching exercise of projected plan cash flows against spot rates on a yield curve comprised of high quality corporate bonds as of the measurement date (Ryan ALM 45/95 curve) with a primary focus for our domestic plans. The measurement dates for our retiree benefit plans are consistent with our fiscal year-end. Accordingly, we select discount rates to measure our benefit obligations that are consistent with market indices at the end of each fiscal year.

 

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Based on consolidated benefit obligations as of February 24, 2012, a one percentage point decline in the weighted-average discount rate used for benefit plan measurement purposes would have changed the 2012 consolidated benefits expense by less than $1 and changed the consolidated benefit obligations by less than $15. All obligation-related experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants.

To conduct our annual review of healthcare cost trend rates, we model our actual claims cost data over a historical period, including an analysis of pre-65 versus post-65 age groups and other important demographic components of our covered retiree population. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the underlying cost inflation trends. Our initial healthcare cost trend rate is reviewed annually and adjusted as necessary to remain consistent with recent historical experience and our expectations regarding short-term future trends. As of February 24, 2012, our initial rates of 8.10% for pre-age 65 retirees and 6.48% for post-age 65 retirees were trended downward by each year, until the ultimate trend rate of 4.5% is reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate healthcare cost premium.

Based on consolidated benefit obligations as of February 24, 2012, a one percentage point increase or decrease in the assumed healthcare cost trend rates would have changed the 2012 consolidated benefits expense by less than $1 and changed the consolidated benefit obligations by less than $1. All experience gains and losses are amortized using a straight-line method, over at least the minimum amortization period prescribed by accounting guidance.

Despite the previously described policies for selecting key actuarial assumptions, we periodically experience material differences between assumed and actual experience. As of February 24, 2012, we had consolidated unamortized prior service credits and net experience gains of $23.4, as compared to $22.9 as of February 25, 2011, recorded in Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.

See Note 13 to the consolidated financial statements for additional information.

Forward-Looking Statements

From time to time, in written and oral statements, we discuss our expectations regarding future events and our plans and objectives for future operations. These forward-looking statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on current beliefs of management as well as assumptions made by, and information currently available to, us. Forward-looking statements generally are accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to vary from our expectations because of factors such as, but not limited to, competitive and general economic conditions domestically and internationally; acts of terrorism, war, governmental action, natural disasters and other Force Majeure events; changes in the legal and regulatory environment; our restructuring activities; changes in raw materials and commodity costs; currency fluctuations; changes in customer demands; and the other risks and contingencies detailed in this Report and our other filings with the Securities and Exchange Commission. We undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Recently Issued Accounting Standards

See Note 3 to the consolidated financial statements for information regarding recently issued accounting standards.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk:

We are exposed to market risks from foreign currency exchange, interest rates, commodity prices and fixed income and equity prices, which could affect our operating results, financial position and cash flows.

Foreign Currency Exchange Risk

We are exposed to foreign currency exchange rate risk primarily on sales commitments, anticipated sales and purchases and assets and liabilities denominated in currencies other than the U.S. dollar. In both 2012 and 2011, we transacted business in 16 primary currencies worldwide, of which the most significant were the euro, the Canadian dollar and the pound sterling. Revenue from foreign locations represented approximately 36% of our consolidated revenue in 2012, 38% in 2011 and 36% in 2010. We actively manage the foreign currency exposures that are associated with committed foreign currency purchases and sales created in the normal course of business at the local entity level. Exposures that cannot be naturally offset within a local entity to an immaterial amount are often hedged with foreign currency derivatives or netted with offsetting exposures at other entities. Our results are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold.

We estimate that an additional 10% strengthening of the U.S. dollar against local currencies would have decreased operating income by approximately $2 in both 2012 and 2011, assuming no changes other than the exchange rate itself. However, this quantitative measure has inherent limitations. The sensitivity analysis disregards the possibility that rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency.

The translation of the assets and liabilities of our international subsidiaries is made using the foreign currency exchange rates as of the end of the fiscal year. Translation adjustments are not included in determining net income but are included in Accumulated other comprehensive income (loss) within shareholders’ equity on the Consolidated Balance Sheets until a sale or substantially complete liquidation of the net investment in the international subsidiary takes place. In certain markets, we could recognize a significant gain or loss related to unrealized cumulative translation adjustments if we were to exit the market and liquidate our net investment. As of February 24, 2012 and February 25, 2011, the cumulative net currency translation adjustments reduced shareholders’ equity by $17.8 and $18.6, respectively.

Foreign currency exchange gains and losses reflect transaction gains and losses, which arise from monetary assets and liabilities denominated in currencies other than a business unit’s functional currency. For 2012 and 2011, net transaction losses were $0.3 and $1.2, respectively.

See Note 2 to the consolidated financial statements for additional information.

Interest Rate Risk

We are exposed to interest rate risk primarily on our short-term and long-term investments and short-term and long-term borrowings. Our short-term investments are primarily invested in U.S. agency debt securities, U.S. government debt securities and corporate debt securities. Additionally we held $16.7 investments in auction rate securities and Canadian $5.0 par asset-backed commercial

 

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paper restructuring notes as of February 24, 2012 and February 25, 2011, which are classified as long-term investments as no liquid markets currently exist for these securities. The risk on our short-term and long-term borrowings is primarily related to a loan with a balance of $40.8 and $43.1 as of February 24, 2012 and February 25, 2011, respectively. This loan bears a floating interest rate based on 30-day LIBOR plus 3.35%.

We estimate a 1% increase in interest rates would have increased our results of operations by approximately $1 in 2012 and would not have had a material impact in 2011, mainly as a result of higher interest income on our investments. Significant changes in interest rates could have an impact on the market value of our managed fixed-income investment portfolio. However, this quantitative measure has inherent limitations since not all of our investments are in similar asset classes. In addition, our investment manager actively manages certain investments, thus our results could be better or worse than market returns. As of February 24, 2012, approximately 39% of our fixed-income investments mature within one year, approximately 23% in two years and approximately 29% in three to five years.

See Note 6 and Note 12 to the consolidated financial statements for additional information.

Commodity Price Risk

We are exposed to commodity price risk primarily on our raw materials inventory. These raw materials are not rare or unique to our industry. The cost of steel, aluminum, other metals, wood, particleboard, petroleum-based products and other commodities, such as fuel and energy, has fluctuated significantly in recent years due to changes in global supply and demand. Our gross margins could be affected if these types of costs continue to fluctuate. We actively manage these raw material costs through global sourcing initiatives and price increases on our products. However, in the short-term, rapid increases in raw material costs can be very difficult to offset with price increases because of contractual agreements with our customers, and it is difficult to find effective financial instruments to hedge against such changes.

As a result of changes in commodity costs, cost of sales increased approximately $38 and $10 during 2012 and 2011, respectively. The increase in commodity costs during 2012 was driven primarily by higher steel and fuel costs. We estimate that a 1% increase in commodity prices, assuming no offsetting benefit of price increases, would have decreased our operating income by approximately $22 and $9 in 2012 and 2011, respectively.

Fixed Income and Equity Price Risk

We are exposed to fixed income and equity price risk primarily on the cash surrender value associated with our investments in variable life COLI policies. During 2010, our results of operations were significantly impacted by COLI income related to our investments in variable life COLI policies. We recognized non-taxable income of $33.1 in 2010 related to variable life COLI income in Operating income on the Consolidated Statements of Operations. In Q1 2011, we began considering our investments in variable life COLI policies to be primarily a source of corporate liquidity. Accordingly, we set the allocation of our investments in variable life COLI policies to a more conservative profile with a heavier weighting to fixed income securities, and we began recognizing variable life COLI income in Investment income on the Consolidated Statements of Operations. In Q4 2012, we further revised the allocation of our investments in variable life COLI policies to include only fixed income securities. See Note 9 to the consolidated financial statements for additional information.

We estimate a 10% adverse change in the value of the equity portion of our variable life COLI investments would have reduced our net income by approximately $2 in both 2012 and 2011. We

 

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estimate that the risk of changes in the value of the variable life COLI investments due to other factors, including changes in interest rates, yield curve and portfolio duration, would not have a material impact on our results of operations or financial condition. This quantitative measure has inherent limitations since not all of our investments are in similar asset classes. In addition, our investment manager actively manages certain investments, thus our results could be better or worse than market returns.

See Note 6 and Note 9 to the consolidated financial statements for additional information.

 

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Item 8.     Financial Statements and Supplementary Data:

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining effective internal control over financial reporting. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect all misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.

Management assessed the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that our system of internal control over financial reporting was effective as of February 24, 2012.

Deloitte & Touche LLP, the independent registered certified public accounting firm that audited our financial statements included in this annual report on Form 10-K, also audited the effectiveness of our internal control over financial reporting, as stated in their report which is included herein.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

STEELCASE INC.

GRAND RAPIDS, MICHIGAN

We have audited the internal control over financial reporting of Steelcase Inc. and subsidiaries (the “Company”) as of February 24, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 24, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated financial statements and financial statement schedule listed in the Index at Item 15 as of and for the year ended February 24, 2012 of the Company and our report dated April 23, 2012 expressed an unqualified opinion on those financial statements and financial statement schedule.

 

/s/    Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Grand Rapids, Michigan
April 23, 2012

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

STEELCASE INC.

GRAND RAPIDS, MICHIGAN

We have audited the accompanying consolidated balance sheets of Steelcase Inc. and subsidiaries (the “Company”) as of February 24, 2012 and February 25, 2011, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended February 24, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Steelcase Inc. and subsidiaries at February 24, 2012 and February 25, 2011 and the results of their operations and their cash flows for each of the three years in the period ended February 24, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of February 24, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 23, 2012 expressed an unqualified opinion on the Company's internal control over financial reporting.

 

/s/    Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Grand Rapids, Michigan
April 23, 2012

 

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STEELCASE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

 

      Year Ended  
      February 24,
2012
    February 25,
2011
    February 26,
2010
 

Revenue

  $ 2,749.5      $ 2,437.1      $ 2,291.7   

Cost of sales

    1,913.6        1,693.8        1,619.9   

Restructuring costs

    26.2        25.8        22.0   
 

 

 

   

 

 

   

 

 

 

Gross profit

    809.7        717.5        649.8   

Operating expenses

    708.3        661.2        648.4   

Restructuring costs

    4.3        4.8        12.9   
 

 

 

   

 

 

   

 

 

 

Operating income (loss)

    97.1        51.5        (11.5

Interest expense

    (25.6     (19.3     (18.2

Investment income

    5.2        14.0        3.1   

Other income (expense), net

    5.3        5.2        (4.5
 

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    82.0        51.4        (31.1

Income tax expense (benefit)

    25.3        31.0        (17.5
 

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 56.7      $ 20.4      $ (13.6
 

 

 

   

 

 

   

 

 

 

Earnings per share:

     

Basic

  $ 0.43      $ 0.15      $ (0.10
 

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.43      $ 0.15      $ (0.10
 

 

 

   

 

 

   

 

 

 

Dividends declared and paid per common share

  $ 0.24      $ 0.16      $ 0.20   
 

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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STEELCASE INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

      February 24,
2012
    February 25,
2011
 
ASSETS   

Current assets:

   

Cash and cash equivalents

  $ 112.1      $ 142.2   

Short-term investments

    79.1        350.8   

Accounts receivable, net of allowances of $19.6 and $23.1

    271.4        271.0   

Inventories

    139.5        127.1   

Deferred income taxes

    42.4        58.0   

Prepaid expenses

    17.5        17.6   

Other current assets

    40.1        45.6   
 

 

 

   

 

 

 

Total current assets

    702.1        1,012.3   
 

 

 

   

 

 

 

Property, plant and equipment, net of accumulated depreciation of $1,215.3 and $1,228.1

    346.9        345.8   

Company-owned life insurance

    227.6        223.1   

Deferred income taxes

    132.5        132.2   

Goodwill

    176.6        174.8   

Other intangible assets, net of accumulated amortization of $60.2 and $58.7

    18.8        21.7   

Investments in unconsolidated affiliates

    47.7        45.2   

Other assets

    48.8        41.4   
 

 

 

   

 

 

 

Total assets

  $ 1,701.0      $ 1,996.5   
 

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current liabilities:

   

Accounts payable

  $ 191.3      $ 195.0   

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

    2.6        255.5   

Accrued expenses:

   

Employee compensation

    123.0        136.3   

Customer deposits

    15.0        18.0   

Product warranties

    14.0        17.3   

Employee benefit plan obligations

    22.6        15.5   

Other

    93.4        99.2   
 

 

 

   

 

 

 

Total current liabilities

    461.9        736.8   
 

 

 

   

 

 

 

Long-term liabilities:

   

Long-term debt less current maturities

    288.9        291.3   

Employee benefit plan obligations

    161.1        170.0   

Other long-term liabilities

    80.5        80.0   
 

 

 

   

 

 

 

Total long-term liabilities

    530.5        541.3   
 

 

 

   

 

 

 

Total liabilities

    992.4        1,278.1   
 

 

 

   

 

 

 

Shareholders’ equity:

   

Preferred Stock-no par value; 50,000,000 shares authorized, none issued and outstanding

    —          —     

Class A Common Stock-no par value; 475,000,000 shares authorized, 85,260,736 and 88,009,433 issued and outstanding

    1.1        48.5   

Class B Common Stock-no par value; 475,000,000 shares authorized, 41,228,593 and 44,225,135 issued and outstanding

    —          —     

Additional paid-in capital

    32.6        20.2   

Accumulated other comprehensive income (loss)

    0.8        0.6   

Retained earnings

    674.1        649.1   
 

 

 

   

 

 

 

Total shareholders’ equity

    708.6        718.4   
 

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 1,701.0      $ 1,996.5   
 

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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STEELCASE INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in millions, except share and per share data)

 

      Common
Shares
Outstanding
    Class A
Common
Stock
    Class B
Common
Stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total
Shareholders’
Equity
    Total
Comprehensive
Income (Loss)
 

February 27, 2009

    133,801,321      $ 59.8      $ —        $ 4.7      $ (22.5   $ 690.8      $ 732.8      $ (51.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issuance

    44,346        0.2                0.2     

Common stock repurchases

    (1,060,743     (4.6             (4.6  

Tax effect of exercise of stock awards

      (1.0             (1.0  

Stock compensation related to IDEO ownership transition

          0.3            0.3     

Restricted stock expense

      0.3                0.3     

Restricted stock units converted to common stock

    144,595        1.6          (1.6         —       

Performance shares converted to common stock, restricted stock and restricted stock units

    33,692        0.7          (0.7         —       

Performance share, performance units and restricted stock units expense

          5.5            5.5     

Other comprehensive income

            4.6          4.6        4.6   

Dividends paid ($0.20 per share)

              (26.9     (26.9  

Net loss

              (13.6     (13.6     (13.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

February 26, 2010

    132,963,211      $ 57.0      $ —        $ 8.2      $ (17.9   $ 650.3      $ 697.6      $ (9.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issuance

    41,720        0.3                0.3     

Common stock repurchases

    (1,001,590     (10.8             (10.8  

Tax effect of exercise of stock awards

          0.4            0.4     

Stock compensation related to IDEO ownership transition

          6.5            6.5     

Restricted stock expense

      0.1                0.1     

Restricted stock units converted to common stock

    231,227        1.9          (1.9         —       

Performance share, performance units and restricted stock units expense

          7.0            7.0     

Other comprehensive income

            18.5          18.5        18.5   

Dividends paid ($0.16 per share)

              (21.6     (21.6  

Net income

              20.4        20.4        20.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

February 25, 2011

    132,234,568      $ 48.5      $ —        $ 20.2      $ 0.6      $ 649.1      $ 718.4      $ 38.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issuance

    38,888        0.3                0.3     

Common stock repurchases

    (5,802,293     (47.7             (47.7  

Tax effect of exercise of stock awards

          1.1            1.1     

Restricted stock units issued as common stock

    18,166                 

Performance units and restricted stock units expense

          11.3            11.3     

Other comprehensive income

            0.2          0.2        0.2   

Dividends paid ($0.24 per share)

              (31.7     (31.7  

Net income

              56.7        56.7        56.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

February 24, 2012

    126,489,329      $ 1.1      $ —        $ 32.6      $ 0.8      $ 674.1      $ 708.6      $ 56.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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STEELCASE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

      Year Ended  
      February 24,
2012
    February 25,
2011
    February 26,
2010
 

OPERATING ACTIVITIES

     

Net income (loss)

  $ 56.7      $ 20.4      $ (13.6

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

     

Depreciation and amortization

    56.4        64.4        74.2   

Changes in cash surrender value of COLI

    (4.5     (13.5     (38.0

(Gain) loss on disposal of fixed assets

    4.6        (5.7     3.4   

Gain from IDEO ownership transition

    —          (13.2     —     

Deferred income taxes

    13.6        11.3        (18.2

Pension and post-retirement benefit cost (benefit)

    (0.9     4.0        5.9   

Restructuring costs

    30.5        30.6        34.9   

Non-cash stock compensation

    11.6        7.4        5.7   

Other

    0.4        (6.5     (3.7

Changes in operating assets and liabilities, net of acquisitions, divestures, and deconsolidations:

     

Accounts receivable

    8.0        (65.2     44.7   

Inventories

    (17.1     (28.5     33.9   

Other assets

    7.3        10.9        2.5   

Accounts payable

    (2.0     34.2        (16.7

Employee compensation

    (32.5     3.4        (85.5

Employee benefit obligations

    (0.4     (23.0     (3.7

Accrued expenses and other liabilities

    (30.0     41.7        (36.7
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    101.7        72.7        (10.9
 

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

     

Capital expenditures

    (64.9     (46.0     (35.2

Proceeds from disposal of fixed assets

    11.7        44.9        9.4   

Purchases of investments

    (195.8     (335.4     (4.7

Liquidations of investments

    466.1        59.0        15.6   

Proceeds from IDEO ownership transition

    —          29.8        —     

Acquisitions

    (20.9     —          —     

Other

    7.0        (6.6     4.9   
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    203.2        (254.3     (10.0
 

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

     

Dividends paid

    (31.7     (21.6     (26.9

Common stock repurchases

    (47.7     (10.8     (4.6

Excess tax (expense) benefit from vesting of stock awards

    1.1        0.4        (1.0

Borrowings of long-term debt, net of issuance costs

    0.2        247.4        47.0   

Repayments of long-term debt

    (255.5     (2.8     (2.2

Borrowings of lines of credit

    —          0.2        4.2   

Repayments of lines of credit

    (0.7     (1.7     (3.5
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (334.3     211.1        13.0   
 

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    (0.7     1.6        1.4   
 

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    (30.1     31.1        (6.5

Cash and cash equivalents, beginning of year

    142.2        111.1        117.6   
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

  $ 112.1      $ 142.2      $ 111.1   
 

 

 

   

 

 

   

 

 

 

Supplemental Cash Flow Information:

     

Income taxes paid, net of refunds received

  $ 10.7      $ (2.3   $ 9.1   
 

 

 

   

 

 

   

 

 

 

Interest paid, net of amounts capitalized

  $ 26.2      $ 17.7      $ 17.7   
 

 

 

   

 

 

   

 

 

 

Trade-in value received for existing corporate aircraft

      $ 18.5   

Final progress payment towards replacement corporate aircraft

        (13.5

Deposit towards future replacement corporate aircraft

        (1.0
     

 

 

 

Proceeds from trade-in of corporate aircraft

      $ 4.0   
     

 

 

 

See accompanying notes to the consolidated financial statements.

 

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STEELCASE INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.    NATURE OF OPERATIONS

Steelcase is the global leader in furnishing the work experience in office environments. Founded in 1912, we are headquartered in Grand Rapids, Michigan, U.S.A. and employ approximately 10,000 employees. We operate manufacturing and distribution center facilities in 23 principal locations. We distribute products through various channels, including independent and company-owned dealers, in more than 800 locations throughout the world, and have led the global office furniture industry in revenue every year since 1974. We operate under the Americas and EMEA reportable segments plus an “Other” category. Additional information about our reportable segments is contained in Note 18.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Steelcase Inc. and its subsidiaries. We consolidate entities in which we maintain a controlling interest. All material intercompany transactions and balances have been eliminated in consolidation.

We also consolidate variable interest entities when appropriate. As of February 26, 2010 and for the fiscal year then ended, we consolidated a variable interest dealer because we were considered the primary beneficiary under applicable accounting guidance. However, we deconsolidated this dealer in 2011 under new accounting guidance, which we adopted in Q1 2011. This deconsolidation had no effect on net income. See Note 19 for additional information.

Investments in entities where our equity ownership falls between 20% and 50%, or where we otherwise have significant influence, are accounted for under the equity method of accounting. All other investments in unconsolidated affiliates are accounted for under the cost method of accounting. These investments are reported as Investments in unconsolidated affiliates on the Consolidated Balance Sheets, and income from equity method and cost method investments are reported in Other income (expense), net on the Consolidated Statements of Operations. See Note 11 for additional information.

Fiscal Year

Our fiscal year ends on the last Friday in February with each fiscal quarter including 13 weeks. In addition, 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.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts and disclosures in the consolidated financial statements and accompanying notes. Although these estimates are based on historical data and management’s knowledge of current events and actions we may undertake in the future, actual results may differ from these estimates under different assumptions or conditions.

 

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STEELCASE INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Foreign Currency

For most international operations, local currencies are considered the functional currencies. We translate assets and liabilities of these subsidiaries to their U.S. dollar equivalents at exchange rates in effect as of the balance sheet date. Translation adjustments are not included in determining net income, but are recorded in Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets until a sale or substantially complete liquidation of the net investment in the international subsidiary takes place. We translate Consolidated Statements of Operations accounts at average exchange rates for the period.

Foreign currency transaction gains and losses, net of derivatives, arising primarily from changes in exchange rates on foreign currency denominated intercompany working capital loans and other intercompany transactions and balances between foreign locations, are recorded in Other income (expense), net .

Cash and Cash Equivalents

Cash and cash equivalents include demand bank deposits and highly liquid investment securities with an original maturity of three months or less. Cash equivalents are reported at cost and approximate fair value. Outstanding checks in excess of funds on deposit are classified as Accounts payable on the Consolidated Balance Sheets. Our restricted cash balance of $3.5 at February 24, 2012 consists primarily of funds held in escrow for potential future workers’ compensation claims.

Allowances for Credit Losses

Allowances for credit losses related to accounts receivable and notes receivable are maintained at a level considered by management to be adequate to absorb an estimate of probable future losses existing at the balance sheet date. In estimating probable losses, we review accounts that are past due or in bankruptcy. We consider an accounts receivable or notes receivable balance past due when payment is not received within the stated terms. We review accounts that may have higher credit risk using information available about the customer or dealer, such as financial statements, news reports and published credit ratings. We also use general information regarding industry trends, the economic environment and information gathered through our network of field-based employees. Using an estimate of current fair market value of any applicable collateral and other credit enhancements, such as third party guarantees, we arrive at an estimated loss for specific concerns and estimate an additional amount for the remainder of trade balances based on historical trends and other factors previously referenced. Receivable balances are written off when we determine the balance is uncollectible. Subsequent recoveries, if any, are credited to bad debt expense when received.

Concentrations of Credit Risk

Our trade receivables are primarily due from independent dealers who, in turn, carry receivables from their customers. We monitor and manage the credit risk associated with individual dealers and direct customers where applicable. Dealers are responsible for assessing and assuming credit risk of their customers and may require their customers to provide deposits, letters of credit or other credit enhancement measures. Some sales contracts are structured such that the customer payment or obligation is direct to us. In those cases, we may assume the credit risk. Whether from dealers or customers, our trade credit exposures are not concentrated with any particular entity.

 

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STEELCASE INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Inventories

Inventories are stated at the lower of cost or market. The Americas segment primarily uses the last in, first out (“LIFO”) method to value its inventories. The EMEA segment values inventories primarily using the first in, first out method. Businesses within the Other category primarily use the first in, first out or the average cost inventory valuation methods. See Note 7 for additional information.

Property, Plant and Equipment

Property, plant and equipment, including some internally-developed internal use software, are stated at cost. Major improvements that materially extend the useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided using the straight-line method over the estimated useful lives of the assets.

Long-lived assets such as property, plant and equipment are tested for impairment when conditions indicate that the carrying value may not be recoverable. We evaluate several conditions, including, but not limited to, the following: a significant decrease in the market price of an asset or an asset group; a significant adverse change in the extent or manner in which a long-lived asset is being used, including an extended period of idleness; and a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. We review the carrying value of our long-lived assets held and used using estimates of future undiscounted cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

When assets are classified as “held for sale,” losses are recorded for the difference between the carrying amount of the property, plant and equipment and the estimated fair value less estimated selling costs. Property, plant and equipment are considered “held for sale” when it is expected that the asset is going to be sold within twelve months. See Note 8 for additional information.

Operating Leases

Rent expense under operating leases is recorded on a straight-line basis over the lease term unless the lease contains an escalation clause which is not fixed and determinable. The lease term begins when we have the right to control the use of the leased property, which is typically before rent payments are due under the terms of the lease. If a lease has a fixed and determinable escalation clause, the difference between rent expense and rent paid is recorded as deferred rent. Rent expense under operating leases that do not have an escalation clause or where escalation is based on an inflation index is expensed over the lease term as it is payable. See Note 17 for additional information.

Goodwill and Other Intangible Assets

Goodwill represents the difference between the purchase price and the related underlying tangible and identifiable intangible net asset values resulting from business acquisitions. Annually in Q4, or earlier if conditions indicate it is necessary, the carrying value of the reporting unit is compared to an estimate of its fair value. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written down to its estimated fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. We evaluate goodwill and intangible assets using six reporting units where goodwill is recorded: the Americas, Coalesse, EMEA, Asia Pacific, Designtex and PolyVision. See Note 10 for additional information.

 

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STEELCASE INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Other intangible assets subject to amortization consist primarily of proprietary technology, trademarks and non-compete agreements and are amortized over their estimated useful economic lives using the straight-line method. Other intangible assets not subject to amortization, consisting of certain trademarks, are accounted for and evaluated for potential impairment in a manner consistent with goodwill. See Note 10 for additional information.

Contingencies

Loss contingencies are accrued if the loss is probable and the amount of the loss can be reasonably estimated. Legal costs associated with potential loss contingencies are expensed as incurred. We are involved in litigation from time to time in the ordinary course of our business. Based on known information, we do not believe we are party to any lawsuit or proceeding that is likely to have a material adverse impact on the consolidated financial statements.

Self-Insurance

We are self-insured for certain losses relating to domestic workers’ compensation, product liability, and employee medical, dental, and short-term disability 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 February 24, 2012 and February 25, 2011 was $16.3 and $16.8, respectively. Our reserve for estimated domestic workers’ compensation claims expected to be paid within one year as of February 24, 2012 and February 25, 2011 was $4.7 and $5.2, respectively, and is included in Accrued expenses: Other on the 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 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 February 24, 2012 and February 25, 2011 was $5.0 and $5.3, respectively, and is included in Accrued expenses: Other on the 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.

The estimate for employee medical, dental, and short-term disability claims incurred as of February 24, 2012 and February 25, 2011 was $4.2 and $4.1, respectively, and is recorded within Accrued expenses: Other on the Consolidated Balance Sheets.

 

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STEELCASE INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Product Warranties

We offer warranties ranging from 8 years to lifetime 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.

 

Roll-Forward of Accrued
Liability for Product Warranties
  Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Balance as of beginning of period

  $ 31.3      $ 22.1      $ 19.2   

Accruals related to product warranties, recalls and retrofits

    11.1        17.5        16.8   

Adjustments related to changes in estimates

    1.9        6.0        —     

Reductions for settlements

    (14.4     (14.3     (13.9
 

 

 

   

 

 

   

 

 

 

Balance as of end of period

  $ 29.9      $ 31.3      $ 22.1   
 

 

 

   

 

 

   

 

 

 

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 retrofit project. Our reserve for estimated settlements expected to be paid beyond one year as of February 24, 2012 and February 25, 2011 was $15.9 and $14.0, respectively, and is included in Other long-term liabilities on the Consolidated Balance Sheets.

Pension and Other Post-Retirement Benefits

We sponsor a number of domestic and foreign plans to provide pension benefits and medical and life insurance benefits to retired employees. We measure the net over-funded or under-funded positions of our defined benefit pension plans and post-retirement benefit plans as of the fiscal year end and display that position as an asset or liability on the Consolidated Balance Sheets. Any unrecognized prior service cost, experience gains/losses or transition obligation is reported as a component of Accumulated Other Comprehensive Income (Loss) , net of tax, in shareholders’ equity. See Note 5 and Note 13 for additional information.

Environmental Matters

Environmental expenditures related to current operations are expensed or capitalized as appropriate. Expenditures related to an existing condition allegedly caused by past operations, and not associated with current or future revenue generation, are expensed. Generally, the timing of these accruals coincides with completion of a feasibility study or our commitment to a formal plan of action. Liabilities are recorded on an undiscounted basis unless site-specific plans indicate the amount and timing of cash payments are fixed or reliably determinable. We have ongoing monitoring and identification processes to assess how the activities, with respect to the known exposures, are

 

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STEELCASE INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

progressing against the accrued cost estimates, as well as to identify other potential remediation sites that are presently unknown. The liability for environmental contingencies included in Accrued expenses: Other on the Consolidated Balance Sheets was $1.4 and $2.2 as of February 24, 2012 and February 25, 2011, respectively. These liabilities were discounted using a rate of 6.5%. Our undiscounted liabilities were $3.2 and $3.4 as of February 24, 2012 and February 25, 2011, respectively. Based on our ongoing evaluation of these matters, we believe we have accrued sufficient reserves to absorb the costs of all known environmental assessments and the remediation costs of all known sites.

Asset Retirement Obligations

We record all known asset retirement obligations for which the liability’s fair value can be reasonably estimated. We also have known conditional asset retirement obligations that are not reasonably estimable due to insufficient information about the timing and method of settlement of the obligation. Accordingly, these obligations have not been recorded in the consolidated financial statements. A liability for these obligations will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability’s fair value. In addition, there may be conditional asset retirement obligations we have not yet discovered, and therefore, these obligations also have not been included in the consolidated financial statements.

Revenue Recognition

Revenue consists substantially of product sales and related service revenue. Product sales are reported net of discounts and estimated returns and allowances and are recognized when title and risks associated with ownership have passed to the dealer or customer. Typically, this is when product is shipped to the dealer. When product is shipped directly to an end customer, revenue is typically recognized upon delivery or upon acceptance by the end customer. Revenue from services is recognized when the services have been rendered. Total revenue does not include sales tax, as we consider ourselves a pass-through entity for collecting and remitting sales taxes.

Cost of Sales

Cost of sales includes material, labor and overhead. Included within these categories are such items as compensation expense, depreciation, facilities expense, inbound freight charges, warehousing costs, shipping and handling expenses, internal transfer costs and other costs of our distribution network.

Operating Expenses

Operating expenses include selling, general and administrative expenses not directly related to the manufacturing of our products. Included in these expenses are items such as compensation expense, depreciation, facilities expense, rental expense, royalty expense, information technology services, legal and other professional services and travel and entertainment expense.

Research and Development Expenses

Research and development expenses, which are expensed as incurred, were $35.8 for 2012, $32.0 for 2011 and $33.0 for 2010. Royalties are sometimes paid to external designers of our products as the products are sold. These costs are not included in the research and development expenses.

 

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STEELCASE INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Income Taxes

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases. These deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in income in the period that includes the enactment date.

We have net operating loss carryforwards available in certain jurisdictions to reduce future taxable income. Future tax benefits associated with net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies will enable us to utilize the net operating loss carryforwards. In making this determination we consider all available positive and negative evidence. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.

We recognize the tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits from uncertain tax positions recognized are reflected at the amounts most likely to be sustained on examination. See Note 15 for additional information.

Stock-Based Compensation

Our stock-based compensation consists of restricted stock, restricted stock units, performance shares and performance units. Our policy is to expense stock-based compensation using the fair-value based method of accounting for all awards granted, modified or settled.

Restricted stock, restricted stock units, performance shares and performance units are credited to equity as they are expensed over the requisite service periods based on the grant-date fair value of the shares expected to be issued. See Note 16 for additional information.

Financial Instruments

The carrying amounts of our financial instruments, consisting of cash and cash equivalents, accounts and notes receivable, accounts and notes payable 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 Consolidated Balance Sheets. Our total debt is carried at cost and was $291.5 and $546.8 as of February 24, 2012 and February 25, 2011, respectively. The fair value of our total debt is measured using a discounted cash flow analysis based on current market interest rates for similar types of instruments and was approximately $305 and $555 as of February 24, 2012 and February 25, 2011, respectively. See Note 6 and Note 12 for additional information.

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.

 

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STEELCASE INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Foreign Exchange Forward Contracts

A portion of our revenue and earnings is exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk largely through operational means, including matching same currency revenue with same currency costs and same currency assets with same currency liabilities. Foreign exchange risk is also managed through the use of derivative instruments. Foreign exchange forward contracts serve to mitigate the risk of translation of certain foreign denominated net income, assets and liabilities. We primarily use derivatives for intercompany working capital loans and certain forecasted transactions. The foreign exchange forward contracts relate principally to the euro, pound sterling, Canadian dollar and Mexican peso and have maturity dates less than one year. See Note 6 for additional information.

Assets and liabilities related to derivative instruments as of February 24, 2012 and February 25, 2011 are summarized below:

 

Consolidated Balance Sheets   February 24,
2012
    February 25,
2011
 

Other current assets

  $ 0.9      $ 0.5   

Accrued expenses

    (2.1     (4.0
 

 

 

   

 

 

 

Total net fair value of derivative instruments (1)

  $ (1.2   $ (3.5
 

 

 

   

 

 

 

 

(1) The notional amounts of the outstanding foreign exchange forward contracts were $115.2 as of February 24, 2012 and $147.4 as of February 25, 2011.

Net gains (losses) recognized from derivative instrument activity in 2012, 2011 and 2010 are summarized below:

 

Gain (Loss) Recognized in Consolidated Statements of Operations   Year Ended  
  February 24,
2012
    February 25,
2011
    February 26,
2010
 

Cost of sales

  $ 0.3      $ (0.8   $ (0.8

Operating expenses

    0.1        0.1        —     

Other income (expense), net

    4.8        (1.8     (3.3
 

 

 

   

 

 

   

 

 

 

Total net gains (losses)

  $ 5.2      $ (2.5   $ (4.1
 

 

 

   

 

 

   

 

 

 

3.    NEW ACCOUNTING STANDARDS

In September 2011, the Financial Accounting Standards Board (“FASB”) amended Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other . This amendment is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The amended provisions are effective for reporting periods beginning on or after December 15, 2011 (Q1 2013 for the Company). However, early adoption is permitted if an entity’s financial statements for the most recent annual or interim period have not yet been issued. This amendment impacts testing steps only, and therefore adoption will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

 

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