<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 NOVEMBER 27, 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 GRAND 49508
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. [X] Yes [_] 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 December 31, 1998, the
Registrant had outstanding 23,007,429 shares of Class A Common Stock and
130,611,266 shares of Class B Common Stock.
Exhibit index located on page number 18.
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<PAGE>
STEELCASE INC. FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 27, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
Three and Nine Months Ended November 27, 1998 and November 28,
1997............................................................... 3
Condensed Consolidated Balance Sheets
As of November 27, 1998 and February 27, 1998...................... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended November 27, 1998 and November 28, 1997.......... 5
Notes to Condensed Consolidated Financial Statements................ 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 9-15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.............................. 16
Signatures............................................................ 17
Exhibit Index......................................................... 18
</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 NINE MONTHS
ENDED ENDED
----------------- -----------------
NOV. 27, NOV. 28, NOV. 27, NOV. 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.................................. $687.6 $702.0 $2,063.9 $2,060.5
Cost of sales.............................. 446.9 459.4 1,304.8 1,316.5
------ ------ -------- --------
Gross profit............................... 240.7 242.6 759.1 744.0
Selling, general and administrative
expenses.................................. 163.9 173.8 512.2 499.1
------ ------ -------- --------
Operating income........................... 76.8 68.8 246.9 244.9
Other income, net.......................... 11.6 5.4 20.3 15.7
------ ------ -------- --------
Income before provision for income taxes
and equity in net income of joint ventures
and dealer transitions.................... 88.4 74.2 267.2 260.6
Provision for income taxes................. 31.0 28.5 98.9 100.3
------ ------ -------- --------
Income before equity in net income of joint
ventures and dealer transitions........... 57.4 45.7 168.3 160.3
Equity in net income of joint ventures and
dealer transitions........................ -- 4.1 5.8 3.0
------ ------ -------- --------
Net income................................. $ 57.4 $ 49.8 $ 174.1 $ 163.3
====== ====== ======== ========
Basic and Diluted earnings per share....... $ 0.37 $ 0.32 $ 1.13 $ 1.05
====== ====== ======== ========
Dividends per share of common stock........ $ 0.10 $ 0.10 $ 0.30 $ 0.30
====== ====== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
STEELCASE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
(UNAUDITED)
NOV. 27, FEB. 27,
ASSETS 1998 1998
------ ----------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 200.1 $ 103.1
Accounts receivable, net................................ 354.9 364.3
Notes receivable and leased assets...................... 153.1 142.1
Income taxes receivable................................. -- 32.8
Inventories............................................. 99.1 105.8
Other current assets.................................... 79.0 76.9
-------- --------
Total current assets.................................. 886.2 825.0
Property and equipment, net............................... 729.5 671.2
Notes receivable and leased assets........................ 186.3 158.0
Joint ventures and dealer transitions..................... 139.1 115.9
Other assets.............................................. 240.3 237.1
-------- --------
Total assets.......................................... $2,181.4 $2,007.2
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts and notes payable.............................. $ 90.4 $ 117.8
Accrued expenses:
Employee compensation.................................. 140.2 103.9
Employee benefit plan obligations...................... 50.5 59.1
Other.................................................. 200.7 189.1
-------- --------
Total current liabilities............................. 481.8 469.9
-------- --------
Long-term liabilities:
Employee benefit plan obligations....................... 208.2 191.2
Other long-term liabilities............................. 18.9 13.7
-------- --------
Total long-term liabilities........................... 227.1 204.9
-------- --------
Total liabilities..................................... 708.9 674.8
-------- --------
Shareholders' equity:
Common stock............................................ 379.4 369.6
Accumulated other comprehensive income:
Cumulative translation adjustment...................... (11.8) (14.5)
Unrealized loss on investments......................... (0.3) --
Retained earnings....................................... 1,105.2 977.3
-------- --------
Total shareholders' equity............................ 1,472.5 1,332.4
-------- --------
Total liabilities and shareholders' equity............ $2,181.4 $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>
NINE MONTHS ENDED
---------------------
NOV. 27, NOV. 28,
1998 1997
-------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $174.1 $163.3
Depreciation and amortization........................... 75.9 76.8
Changes in current assets and liabilities............... 11.8 52.0
Other, net.............................................. 23.4 14.0
------ ------
Net cash provided by operating activities............. 285.2 306.1
------ ------
INVESTING ACTIVITIES
Capital expenditures.................................... (138.3) (96.9)
Other, net.............................................. (13.5) (15.4)
------ ------
Net cash used in investing activities................. (151.8) (112.3)
------ ------
FINANCING ACTIVITIES
Common stock issuance................................... 24.8 --
Common stock repurchase................................. (15.0) --
Dividends paid.......................................... (46.2) (44.9)
------ ------
Net cash used in financing activities.................. (36.4) (44.9)
------ ------
Net increase in cash and cash equivalents.............. 97.0 148.9
Cash and cash equivalents, beginning of period........ 103.1 174.0
------ ------
Cash and cash equivalents, end of period.............. $200.1 $322.9
====== ======
</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 of the condensed consolidated financial statements
have been included. Results for interim periods should not be considered
indicative of results to be expected for a full year. Reference should be made
to the consolidated financial statements contained in the registrant's Annual
Report on Form 10-K for the fiscal year ended February 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.
INVENTORIES
Inventories consist of (in millions):
<TABLE>
<CAPTION>
NOV. 27, FEB. 27,
1998 1998
-------- ---------
<S> <C> <C>
Finished goods........................................... $45.8 $ 42.9
Work in process.......................................... 35.4 33.7
Raw materials............................................ 69.0 80.8
----- ------
150.2 157.4
LIFO reserve............................................. (51.1) (51.6)
----- ------
$99.1 $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 to 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 three million
shares of common stock. During the third quarter of 1999, the
6
<PAGE>
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Company repurchased 444,300 Class A common shares at a cost of $7.0 million.
Total repurchases during the nine months ended November 27, 1998 amounted to
794,300 Class A common shares at a cost of $15.0 million. As of November 27,
1998, 2,205,700 shares remain available for repurchase under the program.
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 common shares outstanding plus 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 NINE MONTHS
ENDED ENDED
----------------- -----------------
NOV. 27, NOV. 28, NOV. 27, NOV. 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NUMERATORS:
Net income numerator for both basic and
diluted EPS.............................. $57.4 $49.8 $174.1 $163.3
===== ===== ====== ======
DENOMINATORS:
Denominator for both basic and diluted
EPS--Weighted average common shares
outstanding.............................. 153.9 154.9 153.8 154.9
===== ===== ====== ======
</TABLE>
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, 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 NINE MONTHS
ENDED ENDED
----------------- -----------------
NOV. 27, NOV. 28, NOV. 27, NOV. 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income................ $57.4 $49.8 $174.1 $163.3
Other comprehensive
income:
Foreign currency
translation
adjustments............ 11.3 (1.6) 2.7 (15.4)
Unrealized gain (loss)
on investments......... 0.3 -- (0.3) --
----- ----- ------ ------
Comprehensive income...... $69.0 $48.2 $176.5 $147.9
===== ===== ====== ======
</TABLE>
7
<PAGE>
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Accumulated other comprehensive income totaled $(12.1) million and $(14.5)
million at November 27, 1998 and February 27, 1998, respectively. During the
nine-month periods ended November 27, 1998 and November 28, 1997, translation
adjustments of $2.7 million and $(15.4) million, respectively, resulting from
foreign currency denominated assets and liabilities of the Company's foreign
subsidiaries and joint ventures and related fluctuations in exchange rates,
were charged directly to a component of shareholder's equity in the
accompanying condensed consolidated balance sheets.
JOINT VENTURES AND DEALER TRANSITIONS
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. The Company
accounts for these joint ventures and dealer transitions pursuant to the
equity method of accounting.
Summarized financial information for Steelcase Strafor, for the three and
nine months ended September 30, 1998 and 1997, is as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
------------- -------------
SEP. SEP. SEP. SEP.
30, 30, 30, 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Results of Operations:
Revenues.......................................... $117.0 $100.4 $375.0 $323.7
Operating income.................................. 3.7 2.8 30.6 14.4
Net income........................................ 0.5 6.3 11.6 7.0
</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 nine months ended November 27, 1998 and November 28,
1997.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
----------------- PERCENTAGE ----------------- PERCENTAGE
NOV. 27, NOV. 28, INCREASE NOV. 27, NOV. 28, INCREASE
1998 1997 (DECREASE) 1998 1997 (DECREASE)
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% (2.1)% 100.0% 100.0% 0.2 %
Cost of sales........... 65.0 65.4 (2.7)% 63.2 63.9 (0.9)%
----- ----- ----- -----
Gross profit............ 35.0 34.6 (0.8)% 36.8 36.1 2.0 %
Selling, general and
administrative
expenses............... 23.8 24.8 (5.7)% 24.8 24.2 2.6 %
----- ----- ----- -----
Operating income........ 11.2 9.8 11.6 % 12.0 11.9 0.8 %
Other income, net 1.7 0.8 n/m (1) 0.9 0.8 29.3 %
----- ----- ----- -----
Income before provision
for income taxes and
equity in net income of
joint ventures and
dealer transitions..... 12.9 10.6 19.1 % 12.9 12.7 2.5 %
Provision for income
taxes.................. 4.5 4.1 8.8 % 4.8 4.9 (1.4)%
----- ----- ----- -----
Income before equity in
net income of joint
ventures and dealer
transitions............ 8.4 6.5 25.6 % 8.1 7.8 5.0 %
Equity in net income of
joint ventures and
dealer transitions..... -- 0.6 n/m (1) 0.3 0.1 n/m (1)
----- ----- ----- -----
Net income.............. 8.4% 7.1% 15.3 % 8.4% 7.9% 6.6 %
===== ===== ===== =====
</TABLE>
- --------
(1) not meaningful
OVERVIEW
Consolidated net sales of $687.6 million for Q3 1999 decreased 2.1% as
compared to the same year ago period, representing the first decrease for the
Company in quarter over quarter net sales in ten quarters. These results
brought the year-to-date growth rate down to 0.2%. Consolidated net sales for
the nine month period ended November 27, 1998 aggregated $2,063.9 million.
While the sales performance for the third quarter was relatively soft, the
Company posted earnings growth in excess of 15% and has initiated steps to
increase sales, including an increase in sales personnel by more than 10%.
Third quarter 1999 net income was $57.4 million, an increase of 15.3% over one
year ago, and basic and diluted earnings per share were $0.37. Net income for
the current nine month period was $174.1 million, an increase of 6.6% over the
prior year, and basic and diluted earnings per share were $1.13.
The current quarter benefited from the favorable resolution of income tax
litigation dating back to 1989, primarily related to investment tax credits
and accelerated depreciation on the Company's Corporate Development Center.
The resolution of these matters allowed the Company to reduce its expected
effective tax rate for 1999 to 37.0%, and record interest income of $5.8
million. These tax matters increased Q3 1999 consolidated net income by $6.2
million, or $0.04 per share, and will generate cash flow of approximately $14
million. The third quarter of 1998 was negatively impacted, as noted in the
Company's initial public offering prospectus, by various charges aggregating
$18.8 million related to furniture distribution process changes, the
restructuring and disposition of a non-furniture related manufacturing
facility, certain manufacturing equipment write-offs and the relocation of a
showroom facility. These charges decreased consolidated net income in Q3 1998
by $11.5 million, or $0.07 per share.
9
<PAGE>
THREE AND NINE MONTHS ENDED NOVEMBER 27, 1998 COMPARED TO THREE AND NINE
MONTHS ENDED NOVEMBER 28, 1997
Similar to the first two quarters of this fiscal year, third quarter 1999
consolidated net sales performance continues to be impacted by factors
identified in previous quarterly filings. The slight growth in consolidated
net sales through nine months has resulted from a net increase in the
Company's U.S. office furniture business, offset by decreases in the Company's
international and other business units. The Company's U.S. office furniture
net sales decreased 0.3% for Q3 1999 and increased 1.8% for the first nine
months of 1999. The Business and Institutional Furniture Manufacturers'
Association ("BIFMA") reported increases in shipments of 2% and 3% for the
months of September and October 1998, respectively. BIFMA reported increases
for the ten month period ended October 1998 of 9% for shipments. Management
continues to believe that the softer than expected growth is 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 of the WWA accounts have exposure to the
current financial volatility in the Asian, Russian and Latin American markets.
Additionally, a number of these accounts have also delayed spending as a
result of domestic merger and acquisition activities. Overall, net sales to
the WWA decreased by approximately 13% for Q3 1999 and approximately 10% for
the first nine months of 1999 due to approximately 60% of the accounts lagging
1998's sales rates.
Within the U.S., it's important to note that not all business areas are
impacted by the deferred spending actions of the WWA. Net sales growth for the
quarter and year-to-date in the Company's Design Partnership, Wood, Revest and
Turnstone operations continued to average better than 20 percent. This
increase in net sales growth was offset by a 6.3% and 3.8% 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. In addition, management believes that dealer sales
excluding the WWA, which experienced a growth rate of approximately 4% for the
quarter and 8% year-to-date, continued to keep pace with overall industry
trends. The decrease in sales at the Company's services and other business
units, which approximated 14%, resulted primarily from the disposal of a
product line and distributor within the Company's marine business.
The Company's non-domestic net sales decreased 12.3% for Q3 1999 and 10.9%
for the first nine months of 1999. Several factors contributed to these
decreases: first, although Canadian sales in local currency increased 17.1%
for the quarter and 7.7% for the first nine months of 1999, unfavorable
exchange rates entirely offset this growth; second, the Company has
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.
The net improvements in gross profit, as a percentage of net sales, for the
quarter and the nine month periods were driven primarily by the Company's
ability to improve efficiency within the manufacturing process partially
offset by the effects of new product introductions, soft overall sales
performance and the consolidation of certain manufacturing facilities.
Improved manufacturing efficiencies principally derived during the first half
of the year are attributable to cost containment efforts, facility
rationalization, and collaborative process improvements with the Company's
vendors to improve quality and reduce raw material prices. The prior year
third quarter was adversely impacted by incremental costs related to furniture
distribution process changes, the restructuring and disposition of a non-
furniture related manufacturing facility and certain manufacturing equipment
write-offs which aggregated $15.0 million.
Selling, general and administrative expenses decreased from Q3 1998 to Q3
1999 as a result of cost controlling measures. In addition, selling, general
and administrative expenses for the prior year third quarter were adversely
impacted by incremental costs related to the relocation of a showroom facility
that aggregated $3.8 million. Selling, general and administrative expenses
increased from 24.2% of net sales for the first nine
10
<PAGE>
months of 1998 to 24.8% of net sales for the first nine months of 1999,
primarily attributable to the impact on last year's operating expenses of a
non-recurring pretax gain of $9.8 million, related to a litigation settlement.
Excluding the effects of the prior year second quarter favorable litigation
settlement, selling, general and administrative expenses as a percentage of
net sales for the nine month periods is flat.
Other income, net, increased $6.2 million in the third quarter of 1999 and
$4.6 million for the first nine months of 1999 over the comparable periods of
the prior year. The increases were primarily a result of interest income
recorded in connection with the favorable resolution of the income tax
litigation previously noted.
Income tax expense for Q3 1999 was 35.1% of income before taxes, as compared
to 38.4% for Q3 1998. Income tax expense for the first nine months of 1999 was
37.0% of income before taxes, as compared to 38.5% for the first nine months
of 1998. The decreases in the effective income tax rates were attributable to
a number of items including the favorable resolution of income tax matters, as
discussed above, and the non-deductibility of IPO-related expenses in the
prior year which impacted the effective tax rate recorded for the first nine
months of 1998.
Equity in net income from joint ventures and dealer transitions decreased to
nil for Q3 1999 from $4.1 million for Q3 1998 but increased to $5.8 million
for the first nine months of 1999 from $3.0 million for the first nine months
of 1998. The Company's 50% share in earnings of Steelcase Strafor decreased
from $3.2 million for Q3 1998 to $0.3 million for Q3 1999 but contributed an
increase for the first nine months of 1999 to $5.8 million from $3.5 million
for the first nine months of 1998. The higher profitability in Q3 1998 was
primarily related to the favorable outcome of uncertainties related to
rationalization of operations in Germany. Regarding year-to-date performance,
Steelcase Strafor is realizing sales increases over the prior year arising
from positive macroeconomic conditions in the European market. Steelcase
Strafor net sales in U.S. dollars for the third quarter and the first nine
months of 1999 increased by 16.5% and 15.9% over the respective year-ago
periods. This represented a 13.0% and 20.7% increase in local currency sales,
respectively.
For the reasons set forth above, net income increased 15.3% to $57.4 million
in Q3 1999 from $49.8 million in Q3 1998, and increased 6.6% to $174.1 million
for the nine months ended November 27, 1998 from $163.3 million for the nine
months ended November 28, 1997.
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 $285.2 million for the nine months ended November 27, 1998. The
Company's financial position is strong with cash and cash equivalents of
$200.1 million at November 27, 1998. These funds, in addition to cash
generated from future operations and available credit facilities, are expected
to be sufficient to finance the known or foreseeable future liquidity and
capital needs of the Company.
On January 4, 1999, the Company completed the acquisition of the assets of
J.M. Lynne Co., Inc., of Long Island, New York with annual sales in excess of
$45 million. J.M. Lynne is a leading designer and distributor of vinyl
wallcoverings for commercial environments. On December 17, 1998, the Company
announced the completion of an acquisition by its Steelcase Strafor joint
venture of Munich-based Werndl Buromobel AG, the second-largest wood office
furniture company in Germany with annual sales in excess of US $115 million.
Steelcase Inc. and Strafor Facom S.A. will each own 5% of Werndl with
Steelcase Strafor owning the remaining 90% of the German company. In
connection with these acquisitions and the continued pursuit of its European
strategy, the Company will have cash outlays of approximately $100 million
during the fourth quarter of 1999.
11
<PAGE>
The Company's capital expenditures were $138.3 million for the nine months
ended November 27, 1998 compared to $96.9 million for the nine months ended
November 28, 1997. During the quarter, the Company purchased two facilities in
the San Francisco Bay area for $26 million. One building was acquired to
relieve production constraints and the other to house the west coast Work Life
Center. The Company expects capital expenditures for the remainder of the
current year to continue to outpace the prior year and approximate $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
implementations and new manufacturing equipment intended to increase plant
capacity.
During the first quarter of 1999, eligible employees purchased Class A
common shares pursuant to the terms of the Employee Discount Option Grant,
resulting in proceeds to the Company of $24.8 million. During the second and
third quarters of 1999, the Company repurchased 350,000 and 444,300 Class A
common shares for $8.0 million and $7.0 million, respectively, under a three
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 continue to convert into Class A common shares over time.
YEAR 2000
The Company is actively engaged in replacing or modifying all business
software applications as well as manufacturing and other equipment with
embedded technology that could fail or generate erroneous results by or at the
Year 2000 ("Year 2000 issues"), an issue affecting Steelcase Inc. and most
other companies. The Company intends that its business application systems,
technical infrastructure components, and manufacturing equipment be Year 2000
ready by the end of June of 1999. However, management views the process of
assessing and remediating Year 2000 issues as an on-going process which will
require continued focus, testing and verification throughout calendar year
1999.
The Company's Year 2000 readiness effort is comprised of five phases defined
below:
Awareness: Activities to ensure management and all affected employees are
aware that Year 2000 issues exist.
Assessment: Includes the inventory of all potentially affected hardware,
software, and embedded technology equipment, along with a determination as to
whether or not they may be impacted by the Year 2000 issues.
Remediation: Repairs, replacement, and/or modifications to eliminate the
Year 2000 issues in hardware, software or equipment.
Testing: Testing of the hardware, software or equipment to determine if the
remediation was successful.
Implementation: Moving the hardware, software or equipment from a test
status or test location to production usage.
Although the Company's individual business units, majority-owned
subsidiaries and unconsolidated joint ventures may be individually at
different stages of readiness, the following comments summarize Steelcase
Inc.'s state of readiness with respect to Year 2000 issues.
Since 1994, the Company has been selectively replacing business software
applications with SAP, a Year 2000 compliant comprehensive information
management system. This project is part of a strategic business plan to
upgrade the overall capabilities of the Company's business application
systems. Costs to date specifically to address Year 2000 issues, separate from
SAP implementation, have not been significant. Future costs anticipated to
remedy Year 2000 issues have been budgeted and are not expected to be
material. Additionally, various individual business units, majority-owned
subsidiaries and unconsolidated joint ventures are engaged in the
implementation of Year 2000 compliant enterprise software systems.
12
<PAGE>
In late 1995, the Company began its efforts to address those business
applications which might not be replaced in time with equivalent SAP systems,
by engaging a third party specializing in the modification of business
software applications. The engagement lasted through December 1997, at which
time the majority of remediation efforts related to those business software
applications were substantially complete. Since that time, the Company has
been testing those business software applications and as of November 27, 1998
had completed the initial testing of over 90% of those software applications.
In December 1997, the Company established a Program Management Office
("PMO"), reporting to the Chief Information Officer of the Company. The PMO
has the responsibility to provide oversight for the Company's Year 2000
readiness program that consists of the five phases noted above. These five
phases will be employed for the following areas: business application
software, manufacturing and other equipment with embedded chip technology, and
evaluation and due diligence with respect to the Company's supply chain and
distribution channel. The PMO is also responsible for periodic status
reporting to the Company's executive management and to the Board of Directors.
Additionally, the Year 2000 PMO is providing oversight for the development and
execution of contingency and business continuity planning efforts, which has
begun in a number of the Company's business units.
As of November 27, 1998, the Company had completed the assessment phase for
the majority of its manufacturing facilities having embedded technology. The
assessment resulted in minimal findings of non-compliance. The Company's
manufacturing equipment is generally Year 2000 ready and is not anticipated to
require significant reprogramming or replacement. Remediation and testing of
the equipment identified as needing some reprogramming or replacement is
expected to be substantially complete by mid-calendar year 1999.
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 November 27, 1998, over 2,000 suppliers have been
contacted. The Company believes that its supply chain partners are actively
seeking to become Year 2000 ready. The Company has initiated further in-depth
analyses of the readiness of approximately 80 key suppliers. In addition, as
of November 27, 1998, a majority of the dealers, both international and
domestic, had responded, mostly with favorable self-assessment ratings.
However, a number of dealers, whose volume represents a significant portion of
sales volume, have not responded to the Company's request for information. The
Company is increasing its effort to elicit responses from those dealers. In
addition, many governmental agencies are not expected to be Year 2000
compliant. It is difficult for Steelcase Inc. and most other companies to
assess the likelihood, or the impact, if any, on their businesses, of such
entities' failure to be Year 2000 compliant.
The Company presently believes that, upon completion of its current plans
for remediation of its business software applications as well as manufacturing
and other equipment with embedded technology, the Year 2000 issue will not
present a materially adverse risk to the Company's future consolidated results
of operations, liquidity or capital resources. However, if such planned
remediation is not completed in a timely manner, the level of timely
compliance by key suppliers or dealers is not sufficient, or if unforeseen
circumstances arise, 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. The Company believes that its Year 2000 readiness program, including
contingency and business continuity plans under development, should generally
reduce the extent of materially adverse effects that Year 2000 related
disruptions may have upon the Company.
Contingency and business continuity planning activities have been initiated
in various business areas within the Company. Additional planning will occur
as the Company identifies those circumstances that would require development
of a contingency and business continuity plan. The Company believes
contingency and business continuity planning efforts to be ongoing activities,
subject to frequent review throughout calendar year 1999.
13
<PAGE>
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. There will be a transition period from January 1,
1999 through January 1, 2002, at which time all legal tender will convert to
the euro. The Company's primary exposure to the euro conversion is
concentrated in its joint venture, Steelcase Strafor.
In December 1997, Steelcase Strafor created an internal Euro Committee, a
paneuropean multifunctional team whose goal was to determine the impact of
this currency change on products, markets, and information systems. At this
time, Steelcase Strafor is preparing an implementation of unified price lists
for dealers. The aim is to have three commercial zones in Europe within the
three year transition period but no change is expected in calendar 1999.
Steelcase Strafor is adapting and migrating its internal system in order to be
euro compliant. This migration is scheduled to be completed by March 1, 1999.
Steelcase Strafor is also assisting and educating its dealers to become euro
compliant. Training for employees will begin during the transition period. The
transition period is anticipated to resolve difficulties in handling local
currencies and the euro simultaneously, while remaining flexible to the
market. Steelcase Strafor sees the primary financial impact of the euro
conversion to be potential savings on foreign exchange hedging and
commissions. No gains are expected in treasury management as financial
transfers within the euro zone will continue to be accounted for as
international transfers. Based on the Euro Committee's work to date, the
Company does not expect the euro conversion to have a material impact on
Steelcase Strafor's financial position, or on the Company.
SAFE HARBOR PROVISION
There are certain forward-looking statements under the Liquidity and Capital
Resources, Year 2000, and Euro Conversion 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,
the expected ability of and costs to the Company and its key customers,
dealers and suppliers to successfully manage Year 2000 issues, and the impact
of the euro conversion on the financial position of Steelcase Strafor and the
Company. Such statements involve certain risks and uncertainties that could
cause actual results to vary from stated expectations. The Company's
performance may differ materially from that contemplated by such statements
for a variety of reasons, including, but not limited to, competitive and
general economic conditions; changes in customer order patterns; continued
success in technological advances, including development and implementation of
new processes and strategic products for specific market segments; the ability
to grow new businesses and successfully integrate and operate any acquired
businesses; the impact on the Company's business due to internal systems or
systems of suppliers, key customers, dealers and other third parties adversely
affected by Year 2000 issues; costs, including claims, due to Year 2000 issues
and remediation efforts; the future success of new products and their impact
on our manufacturing processes; the impact of the euro conversion, and other
risks detailed in the Company's 10-K Report for the year ended February 27,
1998, and its other filings with the Securities and Exchange Commission.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information establishes standards for reporting information about operating
segments in annual and interim financial statements. It also establishes new
standards for disclosures regarding products and services, geographic areas
and major customers. This statement is effective for the Company for 1999.
SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, revises existing disclosure requirements for pension and other
postretirement benefit plans thereby intending to improve the
understandability of benefit disclosures, eliminate certain requirements that
the Financial Accounting Standards Board believes are no longer necessary, and
standardize footnote disclosures. This statement is effective for the Company
for 1999 and requires comparative information for earlier years to be
restated. The Company's condensed consolidated balance sheets and the related
condensed
14
<PAGE>
consolidated statements of income and cash flows will not be materially
affected by implementation of SFAS No. 131 and SFAS No. 132.
SFAS No. 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's
financial statements.
No recently issued accounting pronouncements are expected to have a material
impact on the Company's financial statements.
15
<PAGE>
PART II. OTHER INFORMATION
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 November
27, 1998.
16
<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: January 11, 1999
/s/ Alwyn Rougier-Chapman
-------------------------------------
Alwyn Rougier-Chapman
Senior Vice President--Finance,
Chief Financial Officer and
Treasurer (Duly Authorized Officer
and Principal Financial Officer)
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
27.1 Financial Data Schedule, for the nine months ended November 27,
1998 and November 28, 1997, respectively.
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> FEB-26-1999 FEB-27-1998
<PERIOD-START> FEB-28-1998 MAR-01-1997
<PERIOD-END> NOV-27-1998 NOV-28-1997
<CASH> 200 323
<SECURITIES> 10 29
<RECEIVABLES> 508 556
<ALLOWANCES> 25 33
<INVENTORY> 99 104
<CURRENT-ASSETS> 886 1,038
<PP&E> 1,908 1,791
<DEPRECIATION> 1,178 1,131
<TOTAL-ASSETS> 2,181 2,171
<CURRENT-LIABILITIES> 482 487
<BONDS> 0 0
0 0
0 0
<COMMON> 379 409
<OTHER-SE> 1,094 1,074
<TOTAL-LIABILITY-AND-EQUITY> 2,181 2,171
<SALES> 2,064 2,061
<TOTAL-REVENUES> 2,064 2,061
<CGS> 1,305 1,317
<TOTAL-COSTS> 1,305 1,317
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 5 7
<INTEREST-EXPENSE> 1 1
<INCOME-PRETAX> 267 261
<INCOME-TAX> 99 100
<INCOME-CONTINUING> 174 163
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 174 163
<EPS-PRIMARY> 1.13 1.05
<EPS-DILUTED> 1.13 1.05
</TABLE>
