<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-13873
STEELCASE INC.
MICHIGAN 38-0819050
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
901 44TH STREET 49508
GRAND RAPIDS, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(616) 247-2710
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common stock, as of the latest practicable date: As of October 2, 1998, the
Registrant had outstanding 22,438,706 shares of Class A Common Stock and
131,624,289 shares of Class B Common Stock.
Exhibit index located on page number 17.
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<PAGE>
STEELCASE INC. FORM 10-Q
FOR THE QUARTER ENDED AUGUST 28, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
Three and Six Months Ended August 28, 1998 and August 29, 1997..... 3
Condensed Consolidated Balance Sheets
As of August 28, 1998 and February 27, 1998........................ 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended August 28, 1998 and August 29, 1997............... 5
Notes to Condensed Consolidated Financial Statements................ 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 9-14
Part II. Other Information
Item 5. Other Information............................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
Signatures............................................................ 16
Exhibit Index......................................................... 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -----------------
AUG. 28, AUG. 29, AUG. 28, AUG. 29,
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................. $ 704.0 $ 695.3 $1,376.3 $1,358.5
Cost of sales......................... 438.8 435.4 857.9 857.1
--------- --------- -------- --------
Gross profit.......................... 265.2 259.9 518.4 501.4
Selling, general and administrative
expenses............................. 173.4 160.7 348.3 325.3
--------- --------- -------- --------
Operating income...................... 91.8 99.2 170.1 176.1
Other income, net..................... 5.0 5.2 8.7 10.3
--------- --------- -------- --------
Income before provision for income
taxes and equity in net income (loss)
of joint ventures and dealer
transitions.......................... 96.8 104.4 178.8 186.4
Provision for income taxes............ 36.6 40.2 67.9 71.8
--------- --------- -------- --------
Income before equity in net income
(loss) of joint ventures and dealer
transitions.......................... 60.2 64.2 110.9 114.6
Equity in net income (loss) of joint
ventures and dealer transitions...... 2.5 2.1 5.8 (1.1)
--------- --------- -------- --------
Net income............................ $ 62.7 $ 66.3 $ 116.7 $ 113.5
========= ========= ======== ========
Basic and Diluted earnings per share.. $ 0.41 $ 0.43 $ 0.76 $ 0.73
========= ========= ======== ========
Dividends per share of common stock... $ 0.10 $ 0.10 $ 0.20 $ 0.20
========= ========= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
STEELCASE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
(UNAUDITED)
AUG. 28, FEB. 27,
1998 1998
----------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 192.7 $ 103.1
Accounts receivable, net................................ 360.7 364.3
Notes receivable and leased assets...................... 140.1 142.1
Income taxes receivable................................. -- 32.8
Inventories............................................. 100.5 105.8
Other current assets.................................... 71.2 76.9
-------- --------
Total current assets................................ 865.2 825.0
Property and equipment, net............................... 687.9 671.2
Notes receivable and leased assets........................ 171.0 158.0
Joint ventures and dealer transitions..................... 121.5 115.9
Other assets.............................................. 235.6 237.1
-------- --------
Total assets........................................ $2,081.2 $2,007.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts and notes payable.............................. $ 92.4 $ 117.8
Accrued expenses:
Employee compensation................................. 120.9 103.9
Employee benefit plan obligations..................... 44.2 59.1
Other................................................. 178.6 189.1
-------- --------
Total current liabilities........................... 436.1 469.9
-------- --------
Long-term liabilities:
Employee benefit plan obligations....................... 200.1 191.2
Other long-term liabilities............................. 19.1 13.7
-------- --------
Total long-term liabilities......................... 219.2 204.9
-------- --------
Total liabilities................................... 655.3 674.8
-------- --------
Shareholders' equity:
Common stock............................................ 386.4 369.6
Accumulated other comprehensive income:
Cumulative translation adjustment...................... (23.1) (14.5)
Unrealized loss on investments......................... (0.6) --
Retained earnings....................................... 1,063.2 977.3
-------- --------
Total shareholders' equity.......................... 1,425.9 1,332.4
-------- --------
Total liabilities and shareholders' equity.......... $2,081.2 $2,007.2
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
AUG. 28, AUG. 29,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................... $116.7 $113.5
Depreciation and amortization................................ 51.3 46.4
Changes in current assets and liabilities.................... 2.9 18.3
Other, net................................................... 8.2 17.5
------ ------
Net cash provided by operating activities.................. 179.1 195.7
------ ------
INVESTING ACTIVITIES
Capital expenditures......................................... (75.0) (49.0)
Other, net................................................... (0.5) (18.3)
------ ------
Net cash used in investing activities...................... (75.5) (67.3)
------ ------
FINANCING ACTIVITIES
Common stock issuance........................................ 24.8 --
Common stock repurchase...................................... (8.0) --
Dividends paid............................................... (30.8) (29.9)
------ ------
Net cash used in financing activities...................... (14.0) (29.9)
------ ------
Net increase in cash and cash equivalents.................. 89.6 98.5
Cash and cash equivalents, beginning of period........... 103.1 174.0
------ ------
Cash and cash equivalents, end of period................. $192.7 $272.5
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and adjustments) considered necessary
for a fair presentation have been included. Results for interim periods should
not be considered indicative of results to be expected for a full year.
Reference should be made to the consolidated financial statements contained in
the registrant's Annual Report on Form 10-K for the fiscal year ended February
27, 1998 (the "10-K Report"). For purposes hereof, "Steelcase Inc." or the
"Company" means Steelcase Inc. and its majority owned subsidiaries unless the
context requires otherwise.
Effective March 1, 1995, the Company changed its fiscal year-end from
February 28 to the last Friday of February. In addition, the Company
standardized its fiscal quarters to include 13 weeks.
INVENTORIES
Inventories consist of (in millions):
<TABLE>
<CAPTION>
AUG. 28, FEB. 27,
1998 1998
-------- --------
<S> <C> <C>
Finished goods............................................. $ 44.8 $ 42.9
Work in process............................................ 34.3 30.8
Raw materials.............................................. 72.5 83.7
------ ------
151.6 157.4
LIFO reserve............................................... (51.1) (51.6)
------ ------
$100.5 $105.8
====== ======
</TABLE>
INITIAL PUBLIC OFFERING
Effective February 18, 1998, certain of the Company's shareholders ("Selling
Shareholders") sold 13,972,500 shares of Class A Common Stock in an initial
public offering at a price of $28.00 per share (the "Offering"). In connection
with the Offering, the Company completed a recapitalization of its existing
preferred and common stock, the impact of which has been given retroactive
effect in the consolidated financial statements of the Company. In addition,
the Company purchased 1,650,000 shares of Class B Common Stock from the
Selling Shareholders at the same price at which the shares of Class A Common
Stock were sold to the Underwriters in the Offering to fulfill the Employee
Stock Grant and the Employee Discount Option Grant.
Pursuant to the Employee Discount Option Grant, eligible employees were
permitted to purchase up to 100 shares of Class A Common Stock from the
Company at a purchase price of $23.80 per share. This purchase was completed
during the three months ended May 29, 1998 and resulted in net proceeds of
$24.8 million being received by the Company.
The recapitalization and resulting capital structure, as well as the
Employee Stock Grant and the Employee Discount Option Grant are further
described in the Company's 10-K Report.
COMMON STOCK REPURCHASE PROGRAM
Effective June 17, 1998, the Company's Board of Directors approved a common
stock repurchase program authorizing the repurchase of up to 3 million shares
of common stock. During the second quarter of 1999, the Company repurchased
350,000 Class A common shares at a cost of $8.0 million. As of August 28,
1998, 2,650,000 shares remained available for repurchase under the program.
6
<PAGE>
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
EARNINGS PER SHARE
As of February 27, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share. This statement
establishes standards for computing and presenting "basic" and "diluted"
earnings per share ("EPS"). Basic EPS excludes the dilutive effect of common
shares that could potentially be issued (i.e., stock options) and is computed
by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed by dividing net income by
the weighted average number of shares outstanding including all dilutive
shares that could potentially be issued applying the treasury stock method.
All prior period EPS data have been restated to conform to this statement. The
following table reconciles the numerator and denominators used in the
calculations of basic and diluted EPS (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- -----------------
AUG. 28, AUG. 29, AUG. 28, AUG. 29,
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
NUMERATORS:
Net income numerator for both basic
and diluted EPS..................... $62.7 $66.3 $116.7 $113.5
========= ========= ====== ======
DENOMINATORS:
Denominator for both basic and
diluted EPS--Weighted average common
shares outstanding.................. 154.3 154.9 153.8 154.9
========= ========= ====== ======
</TABLE>
COMPREHENSIVE INCOME
SFAS 130, Reporting Comprehensive Income, issued in June 1997, was adopted
by the Company during the three months ended May 29, 1998. This Statement
requires that all components of comprehensive income and total comprehensive
income be reported in one of the following: a statement of income and
comprehensive income, a statement of comprehensive income or a statement of
shareholders' equity. Comprehensive income is comprised of net income and all
changes to shareholders' equity, except those due to investments by owners and
distributions to owners.
Comprehensive income and its components consist of the following (in
millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- -----------------
AUG. 28, AUG. 29, AUG. 28, AUG. 29,
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income........................... $62.7 $66.3 $116.7 $113.5
Other comprehensive income:
Foreign currency translation
adjustments....................... (3.6) (5.3) (8.6) (13.8)
Unrealized loss on investments..... (0.6) -- (0.6) --
--------- --------- ------ ------
Comprehensive income................. $58.5 $61.0 $107.5 $99.7
========= ========= ====== ======
</TABLE>
Accumulated other comprehensive income totaled $(23.7) million and $(14.5)
million at August 28, 1998 and February 27, 1998, respectively. During the
six-month periods ended August 28, 1998 and August 29, 1997, translation
adjustments of $(8.6) million and $(13.8) million, respectively, resulting
from foreign currency denominated assets and liabilities of the Company's
foreign subsidiaries and joint ventures and related fluctuation in exchange
rates, were charged directly to a component of shareholder's equity in the
accompanying condensed consolidated balance sheets.
7
<PAGE>
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
JOINT VENTURES AND DEALER TRANSITIONS
The Company's investments in and advances to its unconsolidated joint
ventures and dealer transitions consist of an investment in Steelcase Strafor,
a 50% owned joint venture with Strafor Facom S.A., investments in dealer
transitions, and other joint ventures and alliances.
Summarized financial information for Steelcase Strafor, for the three and
six months ended June 30, 1998 and 1997, is as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Results of Operations:
Revenues...................................... $131.3 $111.9 $258.0 $223.3
Operating income.............................. 12.6 6.7 26.9 11.6
Net income.................................... 5.5 1.2 11.1 0.7
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the accompanying Condensed
Consolidated Financial Statements of the Company and Management's Discussion
and Analysis of Financial Condition and Results of Operations set forth in the
10-K Report.
RESULTS OF OPERATIONS
The following table sets forth condensed consolidated statement of income
data for the three and six months ended August 28, 1998 and August 29, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERCENTAGE SIX MONTHS ENDED PERCENTAGE
---------------------- CHANGE ----------------- CHANGE
AUG. 28, AUG. 29, INCREASE/ AUG. 28, AUG. 29, INCREASE
1998 1997 (DECREASE) 1998 1997 (DECREASE)
--------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 1.3% 100.0% 100.0% 1.3%
Cost of sales........... 62.3 62.6 0.8% 62.3 63.1 0.1%
--------- --------- ----- -----
Gross profit............ 37.7 37.4 2.0% 37.7 36.9 3.4%
Selling, general and
administrative
expenses............... 24.7 23.1 7.9% 25.3 24.0 7.1%
--------- --------- ----- -----
Operating income........ 13.0 14.3 (7.5)% 12.4 12.9 (3.4)%
Other income, net....... 0.8 0.7 (3.8)% 0.6 0.8 (15.5)%
--------- --------- ----- -----
Income before provision
for income taxes and
equity in net income
(loss) of joint
ventures and dealer
transitions............ 13.8 15.0 (7.3)% 13.0 13.7 (4.1)%
Provision for income
taxes.................. 5.2 5.8 (9.0)% 4.9 5.3 (5.4)%
--------- --------- ----- -----
Income before equity in
net income (loss) of
joint ventures and
dealer transitions..... 8.6 9.2 (6.2)% 8.1 8.4 (3.2)%
Equity in net income
(loss) of joint
ventures and dealer
transitions............ 0.3 0.3 19.1% 0.4 (0.1) n/m(1)
--------- --------- ----- -----
Net income.............. 8.9% 9.5% (5.4)% 8.5% 8.3% 2.8%
========= ========= ===== =====
</TABLE>
(1) not meaningful
9
<PAGE>
OVERVIEW
Second quarter 1999 net sales increased 1.3% over the prior year second
quarter and set a new quarterly record at $704.0 million. Net sales of
$1,376.3 million for the six month period ended August 28, 1998 increased 1.3%
over the same period of the prior year. Second quarter net income was $62.7
million, a decrease of 5.4% over one year ago, and basic and diluted earnings
per share was $0.41. Net income for the current six month period was $116.7
million, an increase of 2.8% over the prior year, and basic and diluted
earnings per share was $0.76. Excluding last year's second quarter non-
recurring gain from the litigation settlement, noted below, consolidated net
income for the second quarter and first six months of 1999 increased 4.0% and
8.6%, respectively, over the comparable periods of the prior year.
THREE AND SIX MONTHS ENDED AUGUST 28, 1998 COMPARED TO THREE AND SIX MONTHS
ENDED AUGUST 29, 1997
Steelcase Inc. posted record net sales, increasing 1.3% over the second
quarter of 1998. Consolidated net sales for the six months ended August 28,
1998 also increased 1.3% over the six months ended August 29, 1997. The
increases resulted from a net increase in the Company's U.S. office furniture
business, which was offset by decreases in the Company's international and
other business units. The Company's U.S. office furniture net sales for Q2
1999 and the first half of 1999 increased 2.9% and 2.8%, respectively,
compared to Q2 1998 and the first half of 1998. The Business and Institutional
Furniture Manufacturers' Association ("BIFMA") reported increases for the
months of June and July 1998 of 8% and 3% for orders and 9% and 11% for
shipments. BIFMA reported increases for the seven month period ended July 1998
of 6% for orders and 10% for shipments. Management believes that the Company's
softer than expected growth in net sales was primarily due to deferred
spending actions on the part of many of the Company's large corporate accounts
or World Wide Accounts ("WWA") which are principally comprised of
multinational corporations. Several large corporate accounts have exposure to
the current financial volatility in the Asian, Russian and Latin American
markets. Additionally, several of these accounts have also delayed spending as
a result of domestic merger and acquisition activities.
Net sales growth for Q2 1999 and the first half of 1999 compared to Q2 1998
and the first half of 1998, of 20.2% and 19.8%, respectively, for the
Company's Design Partnership, Wood, Revest and Turnstone businesses was offset
by a 1.4% and 1.9% decrease for the respective periods in the Company's Steel
operations. The Steel operations are the Company's largest business unit and
represent approximately 75% of annualized U.S. revenues. Management believes
that the decrease in net sales growth of the Steel operations is attributable
to the impact of decreased sales to WWA. Sales to WWA decreased by
approximately 2% from Q2 1998 to Q2 1999 due to approximately 60% of the
accounts lagging Q2 1998's sales rates.
The remainder of the Company's domestic net sales was slightly behind last
year due to the disposal of a product line and distributor within the
Company's marine business. The Company's non-domestic net sales decreased
11.5% for Q2 1999 versus Q2 1998 and decreased 10.1% for the first half of
1999 versus the first half of 1998. Several factors contributed to these
decreases; first, Canadian sales remained relatively flat between the
comparable periods, but were adversely affected by unfavorable exchange rates;
second, the Company experienced a reduction in export projects in Latin
America and flat sales in Asia; and third, the Company's Japanese subsidiary
was reorganized and is now receiving royalty income instead of recording sales
as reflected in the comparable period of the prior year.
Gross profit increased by 2.0% for Q2 1999 versus Q2 1998 and increased by
3.4% for the first half of 1999 versus the first half of 1998. As a percentage
of net sales, gross profit for the three months ended August 28, 1998
increased to 37.7% from 37.4% for the three months ended August 29, 1997.
Gross profit for the six months ended August 28, 1998 also increased to 37.7%
from 36.9% for the six months ended August 29, 1997. The net improvements in
gross profit were driven primarily by the Company's ability to improve
efficiency within the manufacturing process. Increased gross profits are
primarily attributable to cost containment efforts, facility rationalization,
and collaborative process improvements with the Company's vendors to improve
quality and reduce raw material prices.
10
<PAGE>
Selling, general and administrative expenses increased from 23.1% of net
sales for Q2 1998 to 24.7% of net sales for Q2 1999 and increased from 24.0%
of net sales for the first half of 1998 to 25.3% of net sales for the first
half of 1999, primarily as a result of the impact on last year's operating
expenses of a non-recurring pretax gain of $9.8 million, or 1.4% and 0.7% of
prior year's Q2 and first half net sales, respectively, related to a
litigation settlement. Excluding the effects of the litigation settlement, the
net increases were primarily a result of three on-going efforts throughout the
Company: first, the Company is in the midst of an extensive training effort to
educate its dealers and salespeople on the new Pathways-based products;
second, the Company continues to make substantial investments in SAP, a
comprehensive information management system ("SAP"); and third, the Company
continues to devote resources to research, new product development and new
product launch activities such as the Answer office furniture system.
Other income, net, decreased $0.2 million in the second quarter of 1999 and
$1.6 million for the first six months of 1999, or 3.8% and 15.5%,
respectively, over the comparable periods of the prior year. The decreases
were primarily a result of decreased interest income attributable to lower
average cash balances during the three and six months ended August 28, 1998,
versus the three and six months ended August 29, 1997.
Income tax expense for Q2 1999 was 37.8% of income before taxes, as compared
to 38.5% for Q2 1998. Income tax expense for the first half of 1999 was 38.0%
of income before taxes, as compared to 38.5% for the first half of 1998. The
decreases in the effective income tax rates were attributable to a number of
items including an increase in non-taxable income during the current periods
relating to corporate-owned life insurance and the non-deductibility of IPO-
related expenses in the prior year which impacted the effective tax rate
recorded for the first half of 1998.
Equity in net income from joint ventures and dealer transitions increased to
$2.5 million for Q2 1999 from $2.1 million for Q2 1998 and increased to $5.8
million for the first half of 1999 from a $1.1 million loss for the first half
of 1998. The Company's 50% share in Steelcase Strafor contributed an increase
from $0.6 million of equity in earnings for Q2 1998 to $2.7 million of equity
in earnings for Q2 1999 and contributed an increase from $0.4 million of
equity in earnings for the first half of 1998 to $5.5 million of equity in
earnings for the first half of 1999. Steelcase Strafor is realizing sales
increases over the prior year arising from positive macroeconomic conditions
in the European market which are not reflected in Steelcase Inc.'s net sales
since the Company utilizes the equity method of accounting for this joint
venture. Second quarter and first half of 1999 sales in U.S. dollars for
Steelcase Strafor increased by 17.3% and 15.5% over the respective year-ago
periods. This represented a 22.7% and 24.4% increase in local currency sales,
respectively, partially offset by unfavorable exchange rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to have no long-term debt, satisfying its cash and
capital requirements through cash generated from operating activities, which
aggregated $179.1 million for the six months ended August 28, 1998 versus
$195.7 million for the six months ended August 29, 1997. The Company's
financial position is very strong with cash and cash equivalents of $192.7
million at August 28, 1998. These funds, in addition to cash generated from
future operations, are expected to be sufficient to finance the known or
foreseeable future liquidity and capital needs of the Company.
11
<PAGE>
The Company's capital expenditures were $75.0 million for the six months
ended August 28, 1998 compared to $49.0 million for the six months ended
August 29, 1997. The Company expects capital expenditures for the remainder of
the current year to continue to outpace the prior year and approach $170
million by the end of the fiscal year as a result of the Company's on-going
investments in corporate and showroom facilities, new product development, SAP
implementation and new manufacturing equipment intended to increase plant
capacity. While certain costs of purchasing and implementing SAP have been and
will continue to be capitalized and amortized over the software's expected
useful life, costs associated with certain modifications, Year 2000 related
matters, data preparation, and training are being expensed as incurred.
During the first quarter of 1999, eligible employees purchased Class A
common shares aggregating $24.8 million, pursuant to the terms of the Employee
Discount Option Grant. During the second quarter of 1999, the Company
repurchased 350,000 Class A common shares for $8.0 million under a 3 million
share repurchase program authorized by the Board on June 17, 1998. Management
anticipates that the stock repurchase program will not reduce the Company's
tradable share float in the long run as it expects that Class B common shares
will convert into Class A common shares over time.
YEAR 2000
The Company is actively engaged in replacing or modifying all business
software applications as well as manufacturing and other equipment with
embedded technology that could fail or generate erroneous results by or at the
Year 2000 ("Year 2000 issues"), an issue affecting Steelcase Inc. and most
other companies. The Company's Year 2000 readiness effort is comprised of five
phases defined below:
Awareness: Activities to ensure management as well as all affected
employees are aware that Year 2000 issues exist.
Assessment: Includes the inventory of all potentially affected hardware,
software, and embedded technology equipment, along with a determination as
to whether or not they may be impacted by the Year 2000 issues.
Remediation: Repairs, replacement, and/or modifications to eliminate the
Year 2000 issues in hardware, software or equipment.
Testing: Testing of the hardware, software or equipment to determine if
the remediation was successful.
Implementation: Moving the hardware, software or equipment from a test
status or test location to production usage.
Although the Company's individual business units and majority-owned
subsidiaries may be individually at different stages of readiness, the
following comments summarize Steelcase Inc.'s state of readiness with respect
to Year 2000 issues. The Company began its efforts in late 1995 by engaging a
third party specializing in the modification of business software
applications. The engagement lasted through December 1997, at which time the
majority of remediation efforts related to the business software applications
were substantially complete. Since that time, the Company has been testing the
business software applications and as of August 28, 1998 had completed the
initial testing of the majority of those software applications. With respect
to manufacturing equipment and control systems, as of August 28, 1998 the
Company is nearing completion of the assessment phase. Remediation and testing
are expected to be substantially complete by mid-1999. Furthermore, the
Company is in the process of assessing the Year 2000 readiness of its software
applications and databases which are made available to dealers and other
interested third parties. Management, however, views the process of assessing
and remediating Year 2000 issues as an on-going process which will require the
continued focus of management.
Since 1994, the Company has been selectively replacing business software
applications with SAP, a Year 2000 compliant comprehensive information
management system. This project is part of a strategic business plan to
upgrade the overall capabilities of the Company's business systems. Costs to
date specifically to address Year
12
<PAGE>
2000 issues, separate from the SAP implementation, have not been significant.
Future costs anticipated to remedy Year 2000 issues have been budgeted and are
not expected to be material.
The Company initiated formal communications with production suppliers in
January 1998 and with its dealer network in May 1998, inquiring as to their
state of readiness. As of August 28, 1998, the majority of the suppliers had
responded, mostly with favorable self-assessment ratings. The Company has
initiated further in-depth analyses of the readiness of approximately 80 key
suppliers and its dealer network. In addition, many governmental agencies are
not expected to be Year 2000 complaint. It is difficult for Steelcase Inc. and
most other companies to assess the likelihood, or the impact, if any, on their
businesses, of such entities' failure to be Year 2000 compliant.
The Company presently believes, that upon remediation of its business
software applications as well as manufacturing and other equipment with
embedded technology, the Year 2000 issue will not present a materially adverse
risk to the Company's future consolidated results of operations, liquidity,
and capital resources. However, if such remediation is not completed in a
timely manner or the level of timely compliance by key suppliers or dealers is
not sufficient, the Year 2000 issue could have a material impact on the
Company's operations including, but not limited to, delays in shipments of
products resulting in loss of revenues, increased operating costs, loss of
customers or suppliers, or other significant disruptions to the Company's
business.
Contingency planning will be initiated at which point the Company identifies
those circumstances that would require development of a contingency plan. The
Company expects to begin contingency planning activities by mid-1999 and
expects this planning to continue throughout 1999.
13
<PAGE>
SAFE HARBOR PROVISION
There are certain forward-looking statements under the Liquidity and Capital
Resources and Year 2000 sections, particularly those with respect to the
Company's future liquidity and capital needs, future capital expenditures,
conversion of Class B common shares to Class A common shares, and the expected
ability of and costs to the Company and its key customers, dealers and
suppliers to successfully manage Year 2000 issues. Such statements involve
certain risks and uncertainties that could cause actual results to vary from
stated expectations. The Company's performance may differ materially from that
contemplated by such statements for a variety of reasons, including, but not
limited to, competitive and general economic conditions; changes in customer
order patterns; continued success in technological advances, including
development and implementation of new processes and strategic products for
specific market segments; the ability to grow new businesses and successfully
integrate and operate any acquired businesses; the impact on the Company's
business due to internal systems or systems of suppliers, key customers,
dealers and other third parties adversely affected by Year 2000 issues; costs,
including claims, due to Year 2000 issues and remediation efforts; the future
success of new products and their impact on our manufacturing processes, and
other risks detailed in the Company's 10-K Report for the year ended February
27, 1998, and its other filings with the Securities and Exchange Commission.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company's condensed consolidated balance sheets and the related
condensed consolidated statements of income, and cash flows will not be
materially affected by implementation of SFAS No. 131 and SFAS No. 132.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in the
fair value of a derivative (that is, gains and losses) depends on the intended
use of the derivative and the resulting designation. This statement is
effective for the Company for the year ending February 23, 2001. The adoption
of this statement is not expected to have a material impact on the Company.
No other recently issued accounting pronouncements are expected to have a
material impact on the Company.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company must receive notice of any proposals of shareholders that are
intended to be presented at the Company's 1999 Annual Meeting of Shareholders,
but that are not intended to be considered for inclusion in the Company's
Proxy Statement and Proxy related to that meeting, no later than April 12,
1999 to be considered timely. Such proposals should be sent to the Company's
Secretary at the Company's principal executive offices, 901 44th Street SE,
Grand Rapids, MI 49508, by certified mail, return receipt requested. If the
Company does not have notice of the matter by that date, the Company's form of
proxy in connection with that meeting may confer discretionary authority to
vote on that matter, and the persons named in the Company's form of proxy will
vote the shares represented by such proxies in accordance with their best
judgment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. EXHIBITS
See Exhibit Index
2. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended August
28, 1998.
15
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Steelcase Inc.
Date: October 9, 1998
/s/ Alwyn Rougier-Chapman
-----------------------------
Alwyn Rougier-Chapman
Senior Vice President--
Finance,
Chief Financial Officer and
Treasurer (Duly Authorized
Officer
and Principal Financial
Officer)
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule, for the three months ended August 28, 1998 and August 29, 1997,
respectively.
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> FEB-26-1999 FEB-27-1998
<PERIOD-START> FEB-28-1998 MAR-01-1997
<PERIOD-END> AUG-28-1998 AUG-29-1997
<CASH> 193 273
<SECURITIES> 8 29
<RECEIVABLES> 501 488
<ALLOWANCES> 26 24
<INVENTORY> 101 105
<CURRENT-ASSETS> 865 953
<PP&E> 1,853 1,782
<DEPRECIATION> 1,165 1,134
<TOTAL-ASSETS> 2,081 2,065
<CURRENT-LIABILITIES> 436 419
<BONDS> 0 0
0 0
0 0
<COMMON> 386 409
<OTHER-SE> 1,040 1,041
<TOTAL-LIABILITY-AND-EQUITY> 2,081 2,065
<SALES> 704 695
<TOTAL-REVENUES> 704 695
<CGS> 439 435
<TOTAL-COSTS> 439 435
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 2 2
<INTEREST-EXPENSE> 1 1
<INCOME-PRETAX> 97 104
<INCOME-TAX> 37 40
<INCOME-CONTINUING> 63 66
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 63 66
<EPS-PRIMARY> 0.41 0.43
<EPS-DILUTED> 0.41 0.43
</TABLE>
