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SCS > SEC Filings for SCS > Form 10-K on 19-Apr-2013All Recent SEC Filings

Show all filings for STEELCASE INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for STEELCASE INC


19-Apr-2013

Annual Report


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. 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 income, balance sheets or statements of cash flows of the company. Pursuant to the requirements of Regulation G, we have provided a reconciliation below of non-GAAP financial measures to the most directly comparable GAAP financial measure.
The non-GAAP financial measures used are: (1) organic revenue growth (decline), which represents the change in revenue over the prior year excluding estimated currency translation effects and the impacts of divestitures, acquisitions, the IDEO ownership transition and dealer deconsolidations, and (2) adjusted operating income (loss), which represents operating income (loss) excluding restructuring costs and goodwill impairment charges. 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.
Financial Summary
Results of Operations
Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate expenses are reported as Corporate. In Q3 2013, we realigned portions of our reportable segments for financial reporting purposes as a result of the integration of the PolyVision global technology business into the Steelcase Education Solutions group. Prior to this change, the PolyVision global technology business was combined with the PolyVision surfaces business and was reported collectively as PolyVision in the Other category along with Asia Pacific and Designtex. As a result of these changes, the results of the PolyVision technology business are now reported in the Americas and EMEA segments. The PolyVision surfaces business remains in the Other category. The accompanying segment data for all prior periods has been reclassified to conform to the new segment presentation. See Note 18 to the consolidated financial statements and the Business Segment Disclosure analysis in this Management's Discussion and Analysis of Financial Condition and Results of Operations for further information on our reportable business segments.


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  Statement of Operations                                     Year Ended
           Data-                  February 22,               February 24,              February 25,
       Consolidated                   2013                       2012                      2011
Revenue                     $ 2,868.7       100.0  %   $ 2,749.5       100.0  %   $ 2,437.1       100.0 %
Cost of sales                 1,987.8        69.3        1,913.6        69.6        1,693.8        69.5
Restructuring costs              14.9         0.5           26.2         1.0           25.8         1.1
Gross profit                    866.0        30.2          809.7        29.4          717.5        29.4
Operating expenses              727.0        25.3          708.3        25.8          661.2        27.1
Goodwill impairment charges      59.9         2.1              -           -              -           -
Restructuring costs              19.8         0.7            4.3         0.1            4.8         0.2
Operating income                 59.3         2.1           97.1         3.5           51.5         2.1
Interest expense,
investment income and other
income, net                      (4.4 )      (0.2 )        (15.1 )      (0.5 )         (0.1 )         -
Income before income tax
expense                          54.9         1.9           82.0         3.0           51.4         2.1
Income tax expense               16.1         0.5           25.3         0.9           31.0         1.3
Net income                  $    38.8         1.4  %   $    56.7         2.1  %   $    20.4         0.8 %
Earnings per share:
Basic                       $    0.30                  $    0.43                  $    0.15
Diluted                     $    0.30                  $    0.43                  $    0.15



                                                    Year Ended
                                           February 22,     February 24,
  Organic Revenue Growth-Consolidated          2013             2012
Prior year revenue                       $    2,749.5     $    2,437.1
Divestitures and dealer deconsolidations         (9.6 )           (8.8 )
IDEO ownership transition                           -           (103.4 )
Currency translation effects*                   (33.9 )           30.0
  Prior year revenue, adjusted                2,706.0          2,354.9
Current year revenue                          2,868.7          2,749.5
Dealer acquisitions                             (22.2 )          (55.7 )
  Current year revenue, adjusted              2,846.5          2,693.8
Organic growth $                         $      140.5     $      338.9
Organic growth %                                    5 %             14 %


________________________


* 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.
                                                         Year Ended
  Adjusted Operating Income -      February 22,        February 24,        February 25,
          Consolidated                 2013                2012                2011
Operating income                 $   59.3    2.1 %   $   97.1    3.5 %   $   51.5    2.1 %
Add: goodwill impairment charges     59.9    2.1            -      -            -      -
Add: restructuring costs             34.7    1.2         30.5    1.1         30.6    1.3
Adjusted operating income        $  153.9    5.4 %   $  127.6    4.6 %   $   82.1    3.4 %

Overview
During 2013, we experienced consolidated organic revenue growth of 5% compared to the prior year, which represented the third consecutive year (and twelve consecutive quarters) of organic growth. This growth is generally consistent with or better than global trends in our industry, and was driven in part by increased large project business. Over the past several years, companies have been increasing corporate spending, leveraging the


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strength of their cash positions which were built up in response to the financial crisis in 2009 and 2010. In addition, white collar employment and new construction (traditional industry drivers) have been improving in the Americas, but economic recovery particularly in Europe remains challenged by a variety of headwinds. We believe that our investments in research, product development and other growth initiatives during the financial crisis have helped drive our revenue growth faster than the rest of our industry over the past three years. Our consolidated adjusted operating income margin improved to 5.4% in 2013, compared to 4.6% in 2012 and 3.4% in 2011 as a result of operating leverage from the organic revenue growth and net benefits from restructuring actions, despite an increase in lower-margin project business and spending on product development and other growth initiatives. Our Americas segment posted strong revenue growth and significant improvement in its adjusted operating income margin over the past three years, while the EMEA segment experienced a declining rate of organic revenue growth and an increasing adjusted operating loss. EMEA realized organic revenue growth of 1% in 2013 as a result of the diversification of our business across a large number of geographic markets. The Other category had organic revenue growth in 2012 but a decline in 2013, and its adjusted operating income margin also declined in 2013 following a modest improvement in 2012, primarily as a result of lower revenues in Asia Pacific as well as our continued investment in that region.
In 2013, we also continued taking steps to improve our operating fitness and organizing our business as a globally integrated enterprise, which included implementation and execution of a number of restructuring actions, both in the Americas and EMEA.
2013 compared to 2012
We recorded net income of $38.8 in 2013 compared to net income of $56.7 in 2012. The results in 2013 reflected 5% organic revenue growth compared to 2012 and lower interest expense but included significant goodwill impairment charges, tax valuation allowance adjustments and foreign tax credit benefits.
Operating income of $59.3 in 2013 compared to operating income of $97.1 in 2012. Operating income in 2013 included goodwill impairment charges totaling $59.9. The 2013 adjusted operating income of $153.9 represented an increase of $26.3 compared to the prior year. Strength in the Americas was partially offset by lower profitability in EMEA and the Other category.
Revenue for 2013 was $2,868.7 compared to $2,749.5 for 2012, representing organic revenue growth of 5%. We realized organic growth of 7% in the Americas segment and 1% in the EMEA segment while the Other category experienced a modest decline of 1%. Revenue continued to include a higher mix of project business from some of our largest corporate customers.
Cost of sales decreased to 69.3% of revenue in 2013, a 30 basis point improvement compared to 2012. Benefits from recent pricing adjustments (net of commodity cost changes) and restructuring actions (net of related disruption costs) and other cost reductions in the Americas were partially offset by an increase in lower-margin project business.
Operating expenses of $727.0 increased by $18.7 in 2013 compared to 2012 but decreased as a percentage of sales to 25.3% in 2013 from 25.8% in 2012. The year-over-year comparison included the following:
higher variable compensation expense of $11.7 (which includes expenses associated with our EVA-based bonus programs, the Steelcase Inc. Retirement Plan and stock-based compensation),

favorable foreign currency translation effects of $9.3,

costs of $7.1 related to dealers acquired in 2013,

increased spending of approximately $7 on product development and other initiatives,

increased reserves of $3.6 for environmental remediation costs associated with a previously-owned manufacturing site, and

$1.5 related to dealer divestitures.

Goodwill impairment charges in 2013 totaled $59.9 and related to EMEA and Designtex within the Other category. The EMEA charge of $35.1 was driven in part by the 2013 operating loss. In addition, the near-term outlook for Western Europe remains heavily challenged by macroeconomic headwinds. Therefore, in Q4 2013, we determined that these factors were likely to negatively impact the level of near-term profitability we would expect to achieve with our current business model. The Designtex impairment charge of $24.8 was largely driven by lower than expected operating performance in 2013 and significant future investment required to strengthen our product


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offering, marketing and overall brand image. See further detail of these items in Note 10 to the consolidated financial statements.
We recorded restructuring costs of $34.7 in 2013 compared to $30.5 in 2012. The 2013 charges included the following:
severance and business exit costs of $13.0 from the previously-announced closure of three manufacturing facilities in North America (which are now substantially complete),

real estate impairment charges of $12.4 associated with the previously announced closure of our Corporate Development Center,

severance and business exit costs of $3.8 associated with the EMEA headcount reductions and owned dealer consolidations in Q4 2013 and

severance and business exit costs of $2.0 associated with the integration of PolyVision's global technology business into the Steelcase Education Solutions group.

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 2013 effective tax rate was 29.3%, which is below the U.S. federal statutory tax rate of 35%. The difference was primarily driven by favorable tax items of $56.7, partially offset by unfavorable adjustments to our valuation allowances associated with tax loss carry-forwards and other deferred tax assets and the non-deductible nature of the goodwill impairment charges in EMEA. See Note 15 to the consolidated financial statements for additional information. 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 was 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 approximately $20 on product development and other initiatives in the Americas and Asia Pacific, as well as employee and other costs in EMEA.
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 18% in the Americas segment, 6% in the EMEA segment and 14% in the Other category. Revenue included a higher mix of project business from some of our largest corporate customers.
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 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 $33.9 (which includes expenses associated with our EVA-based bonus programs, the Steelcase Inc. Retirement Plan and stock-based compensation),

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


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increased spending of approximately $20 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.
Interest Expense, Investment Income and Other Income, Net

                                                                     Year Ended
     Interest Expense, Investment Income and        February 22,    February 24,    February 25,
                Other Income, Net                       2013            2012            2011
Interest expense                                   $     (17.8 )   $     (25.6 )   $     (19.3 )
Investment income                                          3.7             5.2            14.0
Other income (expense), net:
Equity in income of unconsolidated ventures                9.4             8.3             6.3
Miscellaneous, net                                         0.3            (3.0 )          (1.1 )
Total other income, net                                    9.7             5.3             5.2
Total interest expense, investment income and
other income, net                                  $      (4.4 )   $     (15.1 )   $      (0.1 )

The decrease in investment income in 2013 was driven by lower variable life COLI income. Interest expense in 2012 includes $7.7 associated with $250 of senior notes which matured and were repaid in Q2 2012. 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.


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                                                           Year Ended
Statement of Operations Data-      February 22,           February 24,           February 25,
          Americas                     2013                   2012                   2011
Revenue                       $ 2,015.1    100.0 %   $ 1,868.4    100.0 %   $ 1,536.0    100.0 %
Cost of sales                   1,384.4     68.7       1,302.3     69.7       1,083.2     70.5
Restructuring costs                13.9      0.7          20.0      1.1           7.0      0.5
Gross profit                      616.8     30.6         546.1     29.2         445.8     29.0
Operating expenses                433.8     21.5         421.8     22.6         377.2     24.6
Goodwill impairment charges           -        -             -        -             -        -
Restructuring costs                14.7      0.7           1.5        -           1.1        -
Operating income              $   168.3      8.4 %   $   122.8      6.6 %   $    67.5      4.4 %



                                                    Year Ended
                                           February 22,     February 24,
    Organic Revenue Growth-Americas            2013             2012
Prior year revenue                       $    1,868.4     $    1,536.0
Divestitures and dealer deconsolidations            -                -
Currency translation effects*                    (0.6 )            3.0
  Prior year revenue, adjusted                1,867.8          1,539.0
Current year revenue                          2,015.1          1,868.4
Dealer acquisitions                             (10.5 )          (55.7 )
  Current year revenue, adjusted              2,004.6          1,812.7
Organic growth $                         $      136.8     $      273.7
Organic growth %                                    7 %             18 %


________________________


* 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.
                                                          Year Ended
                                      February 22,       February 24,       February 25,
Adjusted Operating Income-Americas        2013               2012               2011
Operating income                   $ 168.3    8.4 %   $ 122.8    6.6 %   $  67.5    4.4 %
Add: goodwill impairment charges         -      -           -      -           -      -
Add: restructuring costs              28.6    1.4        21.5    1.1         8.1    0.5
Adjusted operating income          $ 196.9    9.8 %   $ 144.3    7.7 %   $  75.6    4.9 %

2013 compared to 2012
Operating income in the Americas grew to $168.3 in 2013, compared to $122.8 in 2012. Adjusted operating income in 2013 grew to $196.9 from $144.3 in 2012, an increase of $52.6 or 36.5%. This increase was primarily driven by year-over-year benefits from improved pricing (net of commodity cost changes) and benefits from restructuring actions (net of related disruption costs) but impacted by a higher mix of lower-margin project business from some of our largest corporate customers.
The Americas revenue represented 70.2% of consolidated revenue in 2013. Revenue for 2013 was $2,015.1 compared to $1,868.4 in 2012, an increase of $146.7 or 7.9%. After adjusting for currency translation effects and a dealer acquisition, organic revenue growth was $136.8 or 7%. Revenue growth in 2013 is categorized as follows:
Product categories-Substantially all product categories grew in 2013. Revenue growth rates were strongest in the Technology and Details categories, while Seating and Coalesse also exceeded the overall average for the year.

Vertical markets-Strength in the Energy, Insurance Services, Manufacturing and Information Technology sectors more than offset continued weakness in the U.S. Federal Government sector.


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Geographic regions-All regions showed growth over 2012, with notable strength in the West Business Group.

Contract type-The strongest growth came from our project related sales, but revenue from continuing agreements and marketing programs also grew over the prior year.

Cost of sales decreased to 68.7% of revenue in 2013 compared to 69.7% of revenue in 2012. Higher absorption of fixed costs associated with organic revenue growth and benefits from improved pricing (net of commodity cost increases) and restructuring actions (net of related disruption costs) were partially offset by a higher mix of lower-margin project business (which was somewhat offset by a lower mix of federal government business in the U.S.).
Operating expenses increased by $12.0 in 2013 compared to 2012 primarily due to higher variable compensation expense of $12.8 (which includes expenses associated with our EVA-based bonus programs, the Steelcase Inc. Retirement Plan and stock-based compensation). Operating expenses decreased as a percentage of sales to 21.5% in 2013 from 22.6% in 2012.
Restructuring costs of $28.6 incurred in 2013 included $13.0 associated with the North America plant closures announced in Q4 2011 and a $12.4 impairment charge in conjunction with the previously announced closure of our Corporate Development Center.
2012 compared to 2011
Operating income in the Americas grew to $122.8 in 2012, compared to $67.5 in 2011. Adjusted operating income in 2012 grew to $144.3 from $75.6 in 2011, an increase of $68.7 or 90.9%. This increase was primarily driven by operating leverage from organic revenue growth (including benefits from improved pricing) offset in part by higher commodity costs, a higher mix of business from some of our largest corporate customers, owned dealers and services associated with our direct business, and higher spending on product development and other initiatives.
The Americas revenue represented 68.0% of consolidated revenue in 2012. Revenue for 2012 was $1,868.4 compared to $1,536.0 in 2011, an increase of $332.4 or 21.6%. After adjusting for revenue of $55.7 from a dealer acquired in 2012 and currency translation effects of $3.0, organic revenue growth was $273.7 or 18%. 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 Information Technology, 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.

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 continuing business also grew at strong double-digit rates.

Cost of sales decreased to 69.7% of revenue in 2012 compared to 70.5% of revenue in 2011. Higher absorption of fixed costs associated with organic revenue growth (including benefits from improved pricing) was partially offset by higher commodity costs of $27.7 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 $44.6 in 2012 compared to 2011 primarily due to:
higher variable compensation expense of $27.1 (which includes expenses associated with our EVA-based bonus programs, the Steelcase Inc. Retirement Plan and stock-based compensation),

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

increased spending on product development and other initiatives.

Operating expenses decreased as a percentage of sales to 22.6% in 2012 from 24.6% in 2011.


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Restructuring costs of $21.5 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.

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