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SCS > SEC Filings for SCS > Form 10-K on 17-Apr-2014All Recent SEC Filings

Show all filings for STEELCASE INC

Form 10-K for STEELCASE INC


17-Apr-2014

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, the impacts of acquisitions and divestitures and an additional week of revenue in 2014; and (2) adjusted operating income (loss), which represents operating income (loss) excluding restructuring costs (benefits) and goodwill and intangible asset 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.

  Statement of Operations                                      Year Ended
           Data-                  February 28,               February 22,               February 24,
       Consolidated                   2014                       2013                       2012
Revenue                     $ 2,988.9       100.0  %   $ 2,868.7       100.0  %   $ 2,749.5       100.0  %
Cost of sales                 2,046.5        68.5        1,987.8        69.3        1,913.6        69.6
Restructuring costs
(benefits)                       (2.8 )      (0.1 )         14.9         0.5           26.2         1.0
Gross profit                    945.2        31.6          866.0        30.2          809.7        29.4
Operating expenses              757.0        25.3          727.0        25.3          708.3        25.8
Goodwill and intangible
asset impairment charges         12.9         0.4           59.9         2.1              -           -
Restructuring costs               9.4         0.3           19.8         0.7            4.3         0.1
Operating income                165.9         5.6           59.3         2.1           97.1         3.5
Interest expense,
investment income (loss)
and other income (expense),
net                             (18.7 )      (0.6 )         (4.4 )      (0.2 )        (15.1 )      (0.5 )
Income before income tax
expense                         147.2         5.0           54.9         1.9           82.0         3.0
Income tax expense               59.5         2.0           16.1         0.5           25.3         0.9
Net income                  $    87.7         3.0  %   $    38.8         1.4  %   $    56.7         2.1  %
Earnings per share:
Basic                       $    0.70                  $    0.30                  $    0.43
Diluted                     $    0.69                  $    0.30                  $    0.43


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                                               Year Ended
                                      February 28,     February 22,
Organic Revenue Growth-Consolidated       2014             2013
Prior year revenue                  $    2,868.7     $    2,749.5
Divestitures                                (6.3 )           (9.6 )
Currency translation effects*                7.4            (33.9 )
  Prior year revenue, adjusted           2,869.8          2,706.0
Current year revenue                     2,988.9          2,868.7
Dealer acquisitions                        (11.4 )          (22.2 )
Impact of additional week **               (42.0 )              -
  Current year revenue, adjusted         2,935.5          2,846.5
Organic growth $                    $       65.7     $      140.5
Organic growth %                               2 %              5 %


________________________


* 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. ** 2014 included 53 weeks of revenue in the Americas and Other category. EMEA always ends its fiscal year on the last day of February, so the comparison to the prior year is generally consistent.
                                                             Year Ended
Adjusted Operating Income -      February 28,              February 22,              February 24,
       Consolidated                  2014                      2013                      2012
Operating income            $   165.9         5.6 %   $    59.3         2.1 %   $    97.1         3.5 %
Add: goodwill and
intangible asset impairment
charges                          12.9         0.4          59.9         2.1             -           -
Add: restructuring costs          6.6         0.2          34.7         1.2          30.5         1.1
Adjusted operating income   $   185.4         6.2 %   $   153.9         5.4 %   $   127.6         4.6 %

Overview
During 2014, organic revenue growth was 2% compared to the prior year, which represented the fourth consecutive year of organic growth. This growth is generally consistent with or better than global trends in our industry and was driven in part by increased project business. We believe that our investments in research, product development and other growth initiatives have helped drive our revenue growth faster than the rest of our industry over the past three years. The Americas and the Other category posted organic revenue growth of 5%, and 2%, respectively, while EMEA experienced an 8% organic revenue decline. The organic revenue growth in the Americas represented the fourth consecutive year of organic revenue growth, while EMEA remains challenged by the macroeconomic environment in Western Europe. The organic revenue growth in the Other category was primarily driven by PolyVision.
Our consolidated adjusted operating income margin improved to 6.2% in 2014, compared to 5.4% in 2013 and 4.6% in 2012. The improvement was driven by strength in our Americas segment, which increased its adjusted operating income margin over each of the past three years to a high of 11.5% in 2014, while our EMEA segment reported an increase in adjusted operating losses in 2014. The Other category had a slight decline in its adjusted operating income margin, as improvements at PolyVision were more than offset by declines in Asia Pacific and Designtex.
In 2014, we continued taking steps to improve our operating fitness and our global competitiveness. This included implementation of a number of restructuring actions in EMEA, the most significant of which was the initiation of actions to close a manufacturing facility in Germany and the establishment of a new manufacturing location in the Czech Republic. 2014 compared to 2013
We recorded net income of $87.7 in 2014 compared to net income of $38.8 in 2013. The increase in 2014 was driven in large part by improved operating results. The increase was also a result of year-over-year declines in


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goodwill and other intangible asset impairment charges and restructuring costs, partially offset by higher non-operating charges and a higher effective tax rate in 2014.
Operating income grew to $165.9 in 2014 compared to $59.3 in 2013. The 2014 adjusted operating income of $185.4 represented an increase of $31.5 compared to the prior year. The improvement was driven by strength in the Americas, partially offset by higher adjusted operating losses in EMEA and lower adjusted operating income in the Other category.
Revenue for 2014 was $2,988.9 compared to $2,868.7 for 2013, representing organic revenue growth of 2%. We realized organic growth of 5% in the Americas segment and 2% in the Other category while the EMEA segment experienced an organic decline of 8%. Revenue continued to include a higher mix of project business from some of our largest corporate customers.
Cost of sales decreased to 68.5% of revenue in 2014, an 80 basis point improvement compared to 2013. The improvement was primarily driven by benefits associated with organic revenue growth, net pricing adjustments and various other cost reductions in the Americas, partially offset by costs associated with the changes to the EMEA manufacturing footprint and higher competitive discounting in EMEA and Asia Pacific.
Operating expenses of $757.0 increased by $30.0 in 2014 compared to 2013 but remained flat as a percentage of sales. The year-over-year comparison included the following:
unfavorable foreign currency translation effects of $3.0,

costs of $3.7 related to dealer acquisitions, net of a divestiture,

approximately $10.3 of costs related to the additional week,

higher variable compensation expense of $2.9,

a reduction of $1.6 in environmental charges, and

other costs of $11.7 related to increased spending on marketing, product development and other initiatives in the Americas, net of benefits from restructuring activities and other cost reduction efforts in EMEA.

Goodwill and intangible asset impairment charges in 2014 totaled $12.9 and related to Asia Pacific within the Other category. Goodwill impairment charges in 2013 totaled $59.9 and related to the EMEA segment and Designtex within the Other category. See further details on these items in Note 10 to the consolidated financial statements.
We recorded net restructuring costs of $6.6 in 2014 compared to $34.7 in 2013. The 2014 net charges included the following:
severance and business exit costs of $7.9 associated with actions in the EMEA segment,

a gain of $4.5 related to the sale of a facility in the EMEA segment in connection with previously announced restructuring actions and

business exit costs of $0.9 associated with the completion of 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 2014 effective tax rate was 40.4%, which is higher than the U.S. federal statutory tax rate of 35%. The higher tax rate is being driven by the losses in EMEA, for which no tax benefit is recognized due to full valuation allowances. Income taxes also reflect unfavorable adjustments to valuation allowances associated with deferred tax assets, including tax loss carryforwards (primarily in EMEA) and the non-deductible nature of the goodwill impairment charges in Asia Pacific, largely offset by an $8.5 benefit associated with a tax strategy in Asia Pacific. See Note 15 to the consolidated financial statements for additional information.
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.


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Operating income of $59.3 in 2013 compared to operating income of $97.1 in 2012. The 2013 adjusted operating income of $153.9 represented an increase of $26.3 compared to the prior year, due to strength in the Americas. 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 organic revenue growth, 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 and higher competitive discounting in EMEA.
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,

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 the EMEA segment and Designtex within the Other category. 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 a foreign tax benefit totaling $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.


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

                                                                     Year Ended
  Interest Expense, Investment Income (Loss) and    February 28,    February 22,    February 24,
           Other Income (Expense), Net                  2014            2013            2012
Interest expense                                   $     (17.8 )   $     (17.8 )   $     (25.6 )
Investment income (loss)                                  (0.3 )           3.7             5.2
Other income (expense), net:
Equity in income of unconsolidated ventures               10.2             9.4             8.3
Miscellaneous, net                                       (10.8 )           0.3            (3.0 )
Total other income (expense), net                         (0.6 )           9.7             5.3
Total interest expense, investment income (loss)
and other income (expense), net                    $     (18.7 )   $      (4.4 )   $     (15.1 )

Miscellaneous other expense of $10.8 in 2014 included $6.0 of charges related to a minority equity investment and $5.1 of foreign exchange losses compared to small foreign exchange gains in 2013. An investment loss in 2014 compared to an investment gain in 2013. The decline was driven by reductions in the cash surrender value of variable life COLI in 2014 compared to gains in 2013. 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, Nurture, Coalesse, Details and Turnstone brands.

  Statement of Operations                                    Year Ended
           Data-                  February 28,              February 22,              February 24,
         Americas                     2014                      2013                      2012
Revenue                     $ 2,154.4       100.0 %   $ 2,015.1       100.0 %   $ 1,868.4       100.0 %
Cost of sales                 1,438.2        66.8       1,384.4        68.7       1,302.3        69.7
Restructuring costs               0.7           -          13.9         0.7          20.0         1.1
Gross profit                    715.5        33.2         616.8        30.6         546.1        29.2
Operating expenses              467.1        21.7         433.8        21.5         421.8        22.6
Goodwill and intangible
asset impairment charges            -           -             -           -             -           -
Restructuring costs               1.0         0.1          14.7         0.7           1.5           -
Operating income            $   247.4        11.4 %   $   168.3         8.4 %   $   122.8         6.6 %


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                                            Year Ended
                                   February 28,     February 22,
Organic Revenue Growth-Americas        2014             2013
Prior year revenue               $    2,015.1     $    1,868.4
Divestitures                                -                -
Currency translation effects*            (6.3 )           (0.6 )
  Prior year revenue, adjusted        2,008.8          1,867.8
Current year revenue                  2,154.4          2,015.1
Dealer acquisitions                         -            (10.5 )
Impact of additional week **            (36.2 )              -
  Current year revenue, adjusted      2,118.2          2,004.6
Organic growth $                 $      109.4     $      136.8
Organic growth %                            5 %              7 %


________________________


* 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. ** 2014 included 53 weeks of revenue.
                                                            Year Ended
    Adjusted Operating            February 28,             February 22,             February 24,
      Income-Americas                 2014                     2013                     2012
Operating income            $  247.4        11.4 %   $  168.3         8.4 %   $  122.8         6.6 %
Add: goodwill and
intangible asset impairment
charges                            -           -            -           -            -           -
Add: restructuring costs         1.7         0.1         28.6         1.4         21.5         1.1
Adjusted operating income   $  249.1        11.5 %   $  196.9         9.8 %   $  144.3         7.7 %

2014 compared to 2013
Operating income in the Americas grew to $247.4 in 2014, compared to $168.3 in 2013. Adjusted operating income in 2014 grew to $249.1 from $196.9 in 2013, an increase of $52.2 or 26.5%. The improvement was driven by organic revenue growth, improved customer mix, various cost reduction efforts in manufacturing and logistics and net benefits from pricing adjustments and previous restructuring actions, offset in part by increased spending on marketing, product development and other initiatives and the impact of a higher mix of lower margin project business.
The Americas revenue represented 72.1% of consolidated revenue in 2014. Revenue for 2014 was $2,154.4 compared to $2,015.1 in 2013, an increase of $139.3 or 6.9%. After adjusting for currency translation effects and the approximate impact of an additional week, organic revenue growth was $109.4 or 5%. Revenue growth in 2014 is categorized as follows:
Product categories - Seven out of nine product categories grew in 2014, led by Architectural Solutions, Details and Turnstone. The Wood and Nurture categories declined compared to the prior year.

Vertical markets - Information Technology, Insurance, Technical and Professional and Education experienced strong growth rates, while Energy, Federal Government and Financial Services declined.

Geographic regions - All regions showed growth over 2013, led by the East Business Group.

Contract type - The strongest growth came from project sales, while continuing business grew modestly and marketing programs declined year-over-year.

Cost of sales improved to 66.8% of revenue in 2014 compared to 68.7% of revenue in 2013. The improvement was largely driven by the benefits of organic revenue growth, improved customer mix, various cost reduction efforts in manufacturing and logistics and net benefits from pricing adjustments and previous restructuring actions.


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Operating expenses increased by $33.3 in 2014 compared to 2013 primarily due to higher spending on marketing, product development and other initiatives and the impact of the additional week. Operating expenses increased slightly as a percentage of sales to 21.7% in 2014 from 21.5% in 2013.
Restructuring costs of $1.7 incurred in 2014 were primarily related to the completion of the integration of PolyVision's global technology business into the Steelcase Education Solutions group. 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 organic revenue growth, 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.

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 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. Benefits from organic revenue growth, 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. 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.

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.
                                                             Year Ended
  Statement of Operations         February 28,              February 22,              February 24,
         Data-EMEA                    2014                      2013                      2012
Revenue                     $  566.9       100.0  %   $  594.8       100.0  %   $  610.5       100.0  %
Cost of sales                  429.5        75.8         434.0        73.0         432.9        70.9
Restructuring costs
(benefits)                      (3.6 )      (0.6 )         1.0         0.2           5.0         0.8
Gross profit                   141.0        24.8         159.8        26.8         172.6        28.3
Operating expenses             164.2        29.0         171.6        28.8         179.5        29.4
Goodwill and intangible
asset impairment charges           -           -          35.1         5.9             -           -
Restructuring costs              8.2         1.4           4.0         0.7           3.0         0.5

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