UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the quarterly period ended August 25, 201724, 2018 |
| or |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-13873
STEELCASE INC.
(Exact name of registrant as specified in its charter)
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| | |
| Michigan | | 38-0819050 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
901 44th Street SE Grand Rapids, Michigan (Address of principal executive offices) | | 49508 (Zip Code) |
(616) 247-2710
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o |
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of September 18, 2017,19, 2018, Steelcase Inc. had 85,563,05086,340,374 shares of Class A Common Stock and 30,471,91530,360,912 shares of Class B Common Stock outstanding.
STEELCASE INC. FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2017August 24, 2018
INDEX
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PART I. FINANCIAL INFORMATION
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| Item 1. | Financial Statements: |
STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in millions, except per share data)
| STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in millions, except per share data)
| STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in millions, except per share data)
|
| | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Revenue | $ | 775.6 |
| | $ | 758.0 |
| | $ | 1,510.7 |
| | $ | 1,476.8 |
| $ | 875.8 |
| | $ | 775.6 |
| | $ | 1,629.8 |
| | $ | 1,510.7 |
| |
| Cost of sales | 517.2 |
| | 494.9 |
| | 1,009.5 |
| | 979.7 |
| 587.2 |
| | 518.3 |
| | 1,103.3 |
| | 1,008.3 |
| |
| Restructuring costs | — |
| | — |
| | — |
| | 4.2 |
| |
| Gross profit | 258.4 |
| | 263.1 |
| | 501.2 |
| | 492.9 |
| 288.6 |
| | 257.3 |
| | 526.5 |
| | 502.4 |
| |
| Operating expenses | 204.2 |
| | 200.9 |
| | 417.1 |
| | 397.0 |
| 220.7 |
| | 205.1 |
| | 435.3 |
| | 415.1 |
| |
| Restructuring costs | — |
| | 0.3 |
| | — |
| | 0.7 |
| |
| Operating income | 54.2 |
| | 61.9 |
| | 84.1 |
| | 95.2 |
| 67.9 |
| | 52.2 |
| | 91.2 |
| | 87.3 |
| |
| Interest expense | (4.4 | ) | | (4.4 | ) | | (8.7 | ) | | (8.6 | ) | (4.9 | ) | | (4.4 | ) | | (9.3 | ) | | (8.7 | ) | |
| Investment income | 0.4 |
| | 0.3 |
| | 0.8 |
| | 0.8 |
| 0.5 |
| | 0.4 |
| | 1.5 |
| | 0.8 |
| |
| Other income, net | 0.5 |
| | 1.8 |
| | 2.9 |
| | 3.9 |
| |
| Other income (expense), net | | 3.7 |
| | 2.5 |
| | 7.0 |
| | (0.3 | ) | |
| Income before income tax expense | 50.7 |
| | 59.6 |
| | 79.1 |
| | 91.3 |
| 67.2 |
| | 50.7 |
| | 90.4 |
| | 79.1 |
| |
| Income tax expense | 13.8 |
| | 21.4 |
| | 24.1 |
| | 33.7 |
| 18.1 |
| | 13.8 |
| | 24.3 |
| | 24.1 |
| |
| Net income | $ | 36.9 |
| | $ | 38.2 |
| | $ | 55.0 |
| | $ | 57.6 |
| $ | 49.1 |
| | $ | 36.9 |
| | $ | 66.1 |
| | $ | 55.0 |
| |
| Earnings per share: | |
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| Basic | $ | 0.31 |
| | $ | 0.32 |
| | $ | 0.46 |
| | $ | 0.47 |
| $ | 0.41 |
| | $ | 0.31 |
| | $ | 0.56 |
| | $ | 0.46 |
| |
| Diluted | $ | 0.31 |
| | $ | 0.31 |
| | $ | 0.46 |
| | $ | 0.47 |
| $ | 0.41 |
| | $ | 0.31 |
| | $ | 0.56 |
| | $ | 0.46 |
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| Dividends declared and paid per common share | $ | 0.1275 |
| | $ | 0.1200 |
| | $ | 0.2550 |
| | $ | 0.2400 |
| $ | 0.1350 |
| | $ | 0.1275 |
| | $ | 0.2700 |
| | $ | 0.2550 |
| |
See accompanying notes to the condensed consolidated financial statements.
STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
| | | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Net income | $ | 36.9 |
| | $ | 38.2 |
| | $ | 55.0 |
| | $ | 57.6 |
| $ | 49.1 |
| | $ | 36.9 |
| | $ | 66.1 |
| | $ | 55.0 |
| |
| Other comprehensive income (loss), net: | | | | | | | | | | | | | | | |
| Unrealized gain (loss) on investments | 0.3 |
| | — |
| | 0.3 |
| | (0.1 | ) | |
| Unrealized gain on investments | | 0.2 |
| | 0.3 |
| | 0.3 |
| | 0.3 |
| |
| Pension and other post-retirement liability adjustments | (1.3 | ) | | (0.6 | ) | | 1.5 |
| | (2.5 | ) | (0.8 | ) | | (1.3 | ) | | (1.6 | ) | | 1.5 |
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| Foreign currency translation adjustments | 8.8 |
| | (1.1 | ) | | 20.3 |
| | 3.3 |
| (6.4 | ) | | 8.8 |
| | (18.6 | ) | | 20.3 |
| |
| Total other comprehensive income (loss), net | 7.8 |
| | (1.7 | ) | | 22.1 |
| | 0.7 |
| (7.0 | ) | | 7.8 |
| | (19.9 | ) | | 22.1 |
| |
| Comprehensive income | $ | 44.7 |
| | $ | 36.5 |
| | 77.1 |
| | 58.3 |
| $ | 42.1 |
| | $ | 44.7 |
| | 46.2 |
| | 77.1 |
| |
See accompanying notes to the condensed consolidated financial statements.
STEELCASE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions) | STEELCASE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions) | STEELCASE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions) |
| | | (Unaudited) | | (Unaudited) | |
| | August 25,
2017 | February 24,
2017 | August 24,
2018 | February 23,
2018 |
| ASSETS | ASSETS | ASSETS | |
| Current assets: | |
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| Cash and cash equivalents | $ | 139.3 |
| | $ | 197.1 |
| $ | 45.7 |
| | $ | 283.1 |
| |
| Short-term investments | 64.8 |
| | 73.4 |
| |
| Accounts receivable, net of allowances of $12.0 and $11.2 | 340.9 |
| | 307.6 |
| |
| Accounts receivable, net of allowances of $11.7 and $11.1 | | 409.7 |
| | 300.3 |
| |
| Inventories | 173.5 |
| | 163.1 |
| 232.3 |
| | 184.6 |
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| Prepaid expenses | 26.2 |
| | 19.1 |
| 22.0 |
| | 19.2 |
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| Assets held for sale | | 12.6 |
| | 13.4 |
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| Other current assets | 48.5 |
| | 58.9 |
| 47.4 |
| | 53.3 |
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| Total current assets | 793.2 |
| | 819.2 |
| 769.7 |
| | 853.9 |
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| Property, plant and equipment, net of accumulated depreciation of $996.7 and $959.6 | 429.2 |
| | 408.1 |
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| Property, plant and equipment, net of accumulated depreciation of $1,005.7 and $998.1 | | 437.8 |
| | 435.1 |
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| Company-owned life insurance ("COLI") | 168.8 |
| | 168.8 |
| 157.1 |
| | 172.2 |
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| Deferred income taxes | 189.1 |
| | 179.6 |
| 130.3 |
| | 135.4 |
| |
| Goodwill | 107.1 |
| | 106.7 |
| 217.6 |
| | 138.2 |
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| Other intangible assets, net of accumulated amortization of $45.0 and $43.2 | 16.4 |
| | 16.8 |
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| Other intangible assets, net of accumulated amortization of $49.0 and $44.6 | | 84.4 |
| | 45.6 |
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| Investments in unconsolidated affiliates | 50.1 |
| | 50.5 |
| 52.5 |
| | 48.4 |
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| Other assets | 21.2 |
| | 42.3 |
| 35.4 |
| | 30.4 |
| |
| Total assets | $ | 1,775.1 |
| | $ | 1,792.0 |
| $ | 1,884.8 |
| | $ | 1,859.2 |
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| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| Current liabilities: | |
| | |
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| Accounts payable | $ | 223.7 |
| | $ | 216.8 |
| $ | 269.3 |
| | $ | 223.1 |
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| Short-term borrowings and current maturities of long-term debt | 2.8 |
| | 2.8 |
| 13.0 |
| | 2.8 |
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| Accrued expenses: | |
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| Employee compensation | 102.6 |
| | 154.3 |
| 114.0 |
| | 145.0 |
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| Employee benefit plan obligations | 23.6 |
| | 35.0 |
| 27.4 |
| | 39.2 |
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| Accrued promotions | 25.9 |
| | 19.0 |
| 30.1 |
| | 25.5 |
| |
| Customer deposits | 20.2 |
| | 15.9 |
| 22.7 |
| | 28.2 |
| |
| Product warranties | 18.6 |
| | 20.4 |
| 15.5 |
| | 18.1 |
| |
| Other | 67.9 |
| | 59.2 |
| 81.6 |
| | 72.8 |
| |
| Total current liabilities | 485.3 |
| | 523.4 |
| 573.6 |
| | 554.7 |
| |
| Long-term liabilities: | |
| | |
| |
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| Long-term debt less current maturities | 293.3 |
| | 294.6 |
| 290.9 |
| | 292.2 |
| |
| Employee benefit plan obligations | 134.3 |
| | 134.3 |
| 123.1 |
| | 130.8 |
| |
| Other long-term liabilities | 67.3 |
| | 73.2 |
| 58.4 |
| | 68.2 |
| |
| Total long-term liabilities | 494.9 |
| | 502.1 |
| 472.4 |
| | 491.2 |
| |
| Total liabilities | 980.2 |
| | 1,025.5 |
| 1,046.0 |
| | 1,045.9 |
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| Shareholders’ equity: | |
| | |
| |
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| Common stock | — |
| | — |
| — |
| | — |
| |
| Additional paid-in capital | — |
| | — |
| 16.2 |
| | 4.6 |
| |
| Accumulated other comprehensive loss | (28.5 | ) | | (50.6 | ) | (30.2 | ) | | (10.3 | ) | |
| Retained earnings | 823.4 |
| | 817.1 |
| 852.8 |
| | 819.0 |
| |
| Total shareholders’ equity | 794.9 |
| | 766.5 |
| 838.8 |
| | 813.3 |
| |
| Total liabilities and shareholders’ equity | $ | 1,775.1 |
| | $ | 1,792.0 |
| $ | 1,884.8 |
| | $ | 1,859.2 |
| |
See accompanying notes to the condensed consolidated financial statements.
STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions)
| STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions)
| STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions)
|
| | | Six Months Ended | Six Months Ended |
| | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 |
| OPERATING ACTIVITIES | |
| | |
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| Net income | $ | 55.0 |
| | $ | 57.6 |
| $ | 66.1 |
| | $ | 55.0 |
| |
| Depreciation and amortization | 31.2 |
| | 29.4 |
| 38.7 |
| | 31.2 |
| |
| Deferred income taxes | (4.0 | ) | | 18.7 |
| |
| Non-cash stock compensation | 11.7 |
| | 12.5 |
| 12.9 |
| | 11.7 |
| |
| Equity in income of unconsolidated affiliates | (5.4 | ) | | (4.8 | ) | (6.8 | ) | | (5.4 | ) | |
| Dividends received from unconsolidated affiliates | 6.1 |
| | 5.1 |
| 7.1 |
| | 6.1 |
| |
| Other | (2.3 | ) | | (4.5 | ) | (11.2 | ) | | (6.3 | ) | |
| Changes in operating assets and liabilities: | |
| | |
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| Accounts receivable | (25.2 | ) | | (0.1 | ) | (99.8 | ) | | (25.2 | ) | |
| Inventories | (7.2 | ) | | (4.2 | ) | (38.0 | ) | | (7.2 | ) | |
| VAT recoverable | 9.5 |
| | 13.2 |
| |
| Other assets | 9.8 |
| | (13.4 | ) | 6.7 |
| | 19.3 |
| |
| Accounts payable | 2.8 |
| | 10.1 |
| 45.6 |
| | 2.8 |
| |
| Employee compensation liabilities | (59.2 | ) | | (70.3 | ) | (40.1 | ) | | (59.2 | ) | |
| Employee benefit obligations | (15.7 | ) | | (14.9 | ) | (18.7 | ) | | (15.7 | ) | |
| Accrued expenses and other liabilities | 15.2 |
| | (14.3 | ) | (0.8 | ) | | 15.2 |
| |
| Net cash provided by operating activities | 22.3 |
| | 20.1 |
| |
| Net cash provided by (used in) operating activities | | (38.3 | ) | | 22.3 |
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| INVESTING ACTIVITIES | |
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| Capital expenditures | (36.6 | ) | | (26.8 | ) | (41.5 | ) | | (36.6 | ) | |
| Purchases of investments | (52.1 | ) | | (37.2 | ) | — |
| | (52.1 | ) | |
| Liquidations of investments | 60.7 |
| | 74.8 |
| — |
| | 60.7 |
| |
| Proceeds from COLI policies | | 20.7 |
| | 2.4 |
| |
| Acquisitions, net of cash acquired | | (149.5 | ) | | — |
| |
| Other | 9.8 |
| | 0.8 |
| 1.9 |
| | 7.4 |
| |
| Net cash provided by (used in) investing activities | (18.2 | ) | | 11.6 |
| |
| Net cash used in investing activities | | (168.4 | ) | | (18.2 | ) | |
| FINANCING ACTIVITIES | |
| | |
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| Dividends paid | (30.9 | ) | | (29.6 | ) | (32.3 | ) | | (30.9 | ) | |
| Common stock repurchases | (33.1 | ) | | (32.5 | ) | (3.5 | ) | | (33.1 | ) | |
| Excess tax benefit from vesting of stock awards | — |
| | (0.3 | ) | |
| Borrowings on lines of credit | | 76.9 |
| | — |
| |
| Repayments on lines of credit | | (66.7 | ) | | — |
| |
| Repayment of long-term debt | (1.3 | ) | | (0.7 | ) | (1.3 | ) | | (1.3 | ) | |
| Net cash used in financing activities | (65.3 | ) |
| (63.1 | ) | (26.9 | ) |
| (65.3 | ) | |
| Effect of exchange rate changes on cash and cash equivalents | 3.4 |
| | 1.0 |
| (2.8 | ) | | 3.4 |
| |
| Net decrease in cash and cash equivalents | (57.8 | ) | | (30.4 | ) | |
| Cash and cash equivalents, beginning of period | 197.1 |
| | 181.9 |
| |
| Cash and cash equivalents, end of period | $ | 139.3 |
| | $ | 151.5 |
| |
| Net decrease in cash, cash equivalents and restricted cash | | (236.4 | ) | | (57.8 | ) | |
| Cash, cash equivalents and restricted cash, beginning of period (1) | | 285.6 |
| | 199.6 |
| |
| Cash, cash equivalents and restricted cash, end of period (2) | | $ | 49.2 |
| | $ | 141.8 |
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| (1) | These amounts include restricted cash of $2.5 as of February 23, 2018 and February 24, 2017, which primarily represents funds held in escrow for potential future workers’ compensation claims. The restricted cash balance is included as part of Other Assets in the Condensed Consolidated Balance Sheets. |
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| (2) | These amounts include restricted cash of $3.5 and $2.5 as of August 24, 2018 and August 25, 2017, respectively, which primarily represents funds held in escrow for potential future workers’ compensation claims. The restricted cash balance is included as part of Other Assets in the Condensed Consolidated Balance Sheets. |
See accompanying notes to the condensed consolidated financial statements.
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes 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 and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended February 24, 201723, 2018 (“Form 10-K”). The Condensed Consolidated Balance Sheet as of February 24, 201723, 2018 was derived from the audited Consolidated Balance Sheet included in our Form 10-K.
As used in this Quarterly Report on Form 10-Q (“Report”), unless otherwise expressly stated or the context otherwise requires, all references to “Steelcase,” “we,” “our,” “Company” and similar references are to Steelcase Inc. and its subsidiaries in which a controlling interest is maintained. Unless the context otherwise indicates, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than a calendar year. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.
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2. | NEW ACCOUNTING STANDARDS |
In March 2017,August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting StandardsStandard Update ("ASU") No. 2017-07,2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General. The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated Other Comprehensive Income ("OCI") expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The amended guidance is effective for fiscal years ending after December 15, 2020. The adoption of this guidance will modify our disclosures but will not have a material effect on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), to address the impact of the U.S. Tax Cuts and Jobs Act (the "Tax Act") on tax effects presented in other comprehensive income. The amended guidance allows a reclassification from accumulated other comprehensive income to retained earnings for the tax effects of items within accumulated other comprehensive income resulting from the Tax Act. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The amendments may be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07,Compensation - Retirement Benefits (Topic 715), to improve the presentation of net periodic pension cost and net periodic post-retirement benefit cost. The amended guidance requires that an employer disaggregate the service cost component from the other components of net benefit cost, provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement, and allows only the service cost component of net benefit cost to be eligible for capitalization. We adopted the amended guidance in Q1 2019 using the practical expedient which allows entities to use information previously disclosed in their pension and other post-retirement benefit plans footnote as the basis to apply the retrospective presentation requirements.
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The adoption of this ASU resulted in the following reclassifications in our 2018 Condensed Consolidated Statements of Income:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | Year Ended |
May 26,
2017 | August 25,
2017 | November 24,
2017 | February 23,
2018 | February 23, 2018 |
| Cost of sales | (2.3 | ) | | 1.1 |
| | 1.0 |
| | 1.1 |
| | 0.9 |
| |
| Operating expenses | (2.9 | ) | | 0.9 |
| | 1.0 |
| | 0.9 |
| | (0.1 | ) | |
| Operating income | 5.2 |
| | (2.0 | ) | | (2.0 | ) | | (2.0 | ) | | (0.8 | ) | |
| Other income (expense), net | (5.2 | ) | | 2.0 |
| | 2.0 |
| | 2.0 |
| | 0.8 |
| |
| Income before income tax expense | — |
| | — |
| | — |
| | — |
| | — |
| |
The amounts reclassified in Q1 2018 include $7.1 of charges related to annuitizing three of the Company's smaller defined benefit plans. There was no impact to Net income on our Condensed Consolidated Statements of Income as a result of this accounting change.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early2019, with early adoption is permitted for the fiscal years, and interim periods within the first interim period of athose fiscal year.years, beginning after December 15, 2018. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
In October 2016, FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The update is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. We chose to early adopt this guidance in Q1 2018, which did not have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), which is part of the FASB Simplification Initiative. The updated guidance simplifies several aspects of the accounting for share-based payment transactions. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We adopted this guidance in Q1 2018 and, as a result, the income tax effects of our share-based compensation awards, which aggregated $0.5, were recognized as a component of Income tax expense on our Consolidated Statement of Income for the six months ended August 25, 2017 instead of a component of Additional paid-in capital on our Consolidated Balance Sheet as of August 25, 2017. The remaining requirements of this new accounting guidance did not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarifies certain aspects of the new lease standard. The amendments in this ASU address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other things. In July 2018, the FASB issuedASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. The amendments have the same effective date and transition requirements as the new lease standard. We expect the adoption of thisthe issued lease guidance will result in a materialan increase in the assets and liabilities on our Consolidated Balance Sheets.
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
this increase.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a new standard on revenue recognition. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. TheWe adopted the updated guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. We are in the process of evaluating the impact that will result from adoption of the new standard, but based on analysis performed as of August 25, 2017, we do not anticipate a significant impact on our consolidated financial statements. We currently plan to apply the new standardQ1 2019 using the modified retrospective method, which did not have a material impact on the consolidated financial statements except for enhanced disclosures. All necessary changes required by the new standard, including those related to our accounting policies, controls and disclosures, have been identified and implemented as of the beginning of 2019. See Note 3 for additional information.
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounting Policies
Our revenue consists substantially of product sales and related service revenue. Product sales are reported net of discounts and are recognized when control, consisting of the rights and obligations associated with the sale, passes to the purchaser. For sales to our dealers, this typically occurs when product is shipped. In cases where we sell directly to customers, control is typically transferred upon delivery. Service revenue is recognized when the services have been rendered.
We account for shipping and handling activities as fulfillment activities even if those activities are performed after the control of the good has been transferred. We expense shipping and handling costs at the time revenue is recognized.
Revenue does not include sales tax or any other taxes assessed by a governmental authority that are imposed on and concurrent with a specific sale, such as use, excise, value-added, and franchise taxes (collectively referred to as consumption taxes). We consider ourselves a pass-through entity for collecting and remitting these consumption taxes.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by product category for each of our reportable segments:
|
| | | | | | | | | | | | | | | | |
| Product Category Data | Three Months Ended | Six Months Ended |
August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Americas | | | | | | | | |
| Systems and storage | $ | 311.0 |
| | $ | 290.0 |
| | $ | 569.0 |
| | $ | 554.5 |
| |
| Seating | 188.0 |
| | 192.2 |
| | 345.9 |
| | 344.9 |
| |
| Other (1) | 155.1 |
| | 86.3 |
| | 275.0 |
| | 204.1 |
| |
| EMEA | | | | | | | | |
| Systems and storage | 61.9 |
| | 52.1 |
| | 124.7 |
| | 104.4 |
| |
| Seating | 44.1 |
| | 39.5 |
| | 88.3 |
| | 76.8 |
| |
| Other (1) | 27.2 |
| | 26.6 |
| | 57.6 |
| | 50.1 |
| |
| Other | | | | | | | | |
| Systems and storage | 20.1 |
| | 20.6 |
| | 27.8 |
| | 34.9 |
| |
| Seating | 30.3 |
| | 28.7 |
| | 41.5 |
| | 42.2 |
| |
| Other (1) | 38.1 |
| | 39.6 |
| | 100.0 |
| | 98.8 |
| |
| $ | 875.8 |
| | $ | 775.6 |
| | $ | 1,629.8 |
| | $ | 1,510.7 |
| |
| |
| (1) | The Other product category data by segment consists primarily of consolidated dealers, textiles and surface materials, worktools, architecture, technology, other uncategorized product lines and services. |
Reportable geographic information is as follows:
|
| | | | | | | | | | | | | | | | |
| Reportable Geographic Revenue | Three Months Ended | Six Months Ended |
August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| United States | $ | 582.8 |
| | $ | 474.0 |
| | $ | 1,054.1 |
| | $ | 955.0 |
| |
| Foreign locations | 293.0 |
| | 301.6 |
| | 575.7 |
| | 555.7 |
| |
| | $ | 875.8 |
| | $ | 775.6 |
| | $ | 1,629.8 |
| | $ | 1,510.7 |
| |
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Contract Balances
At times, we receive deposits from customers before revenue is recognized, resulting in 2019.the recognition of a contract liability (Customer deposits) presented in the Condensed Consolidated Balance Sheets.
Changes in the Customer deposits balance during the six months ended August 24, 2018 are as follows:
|
| | | | |
| | Customer Deposits |
| Balance as of February 23, 2018 | $ | 28.2 |
| |
| Increases due to deposits received, net of other adjustments | 19.6 |
| |
| Revenue recognized | (25.1 | ) | |
| Balance as of August 24, 2018 | $ | 22.7 |
| |
Practical Expedients Elected
Our sales contracts are typically less than one year in length and do not have significant financing components. Therefore, we elected to apply the following practical expedients:
We recognize the incremental costs to obtain a contract as an expense when incurred.
We recognize the promised amount of consideration without adjusting for any significant financing components.
These elections had no effect on our financial statements.
Earnings per share is computed using the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Participating securities represent restricted stock units in which the participants have non-forfeitable rights to dividend equivalents during the performance period. Diluted earnings per share includes the effects of certain performance units in which the participants have forfeitable rights to dividend equivalents during the performance period.
| | | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| Computation of Earnings per Share | August 25,
2017 | | August 26,
2016 | August 25,
2017 | | August 26,
2016 | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Net income | $ | 36.9 |
| | $ | 38.2 |
| | $ | 55.0 |
| | $ | 57.6 |
| $ | 49.1 |
| | $ | 36.9 |
| | $ | 66.1 |
| | $ | 55.0 |
| |
| Adjustment for earnings attributable to participating securities | (0.7 | ) | | (0.7 | ) | | (1.0 | ) | | (1.1 | ) | (1.0 | ) | | (0.7 | ) | | (1.3 | ) | | (1.0 | ) | |
| Net income used in calculating earnings per share | $ | 36.2 |
| | $ | 37.5 |
| | $ | 54.0 |
| | $ | 56.5 |
| $ | 48.1 |
| | $ | 36.2 |
| | $ | 64.8 |
| | $ | 54.0 |
| |
| Weighted-average common shares outstanding including participating securities (in millions) | 119.7 |
| | 121.1 |
| | 119.8 |
| | 121.4 |
| 119.2 |
| | 119.7 |
| | 119.0 |
| | 119.8 |
| |
| Adjustment for participating securities (in millions) | (2.4 | ) | | (2.4 | ) | | (2.2 | ) | | (2.3 | ) | (2.5 | ) | | (2.4 | ) | | (2.3 | ) | | (2.2 | ) | |
| Shares used in calculating basic earnings per share (in millions) | 117.3 |
| | 118.7 |
| | 117.6 |
| | 119.1 |
| 116.7 |
| | 117.3 |
| | 116.7 |
| | 117.6 |
| |
| Effect of dilutive stock-based compensation (in millions) | 0.2 |
| | 0.4 |
| | 0.2 |
| | 0.5 |
| — |
| | 0.2 |
| | — |
| | 0.2 |
| |
| Shares used in calculating diluted earnings per share (in millions) | 117.5 |
| | 119.1 |
| | 117.8 |
| | 119.6 |
| 116.7 |
| | 117.5 |
| | 116.7 |
| | 117.8 |
| |
| Earnings per share: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| Basic | $ | 0.31 |
| | $ | 0.32 |
| | $ | 0.46 |
| | $ | 0.47 |
| $ | 0.41 |
| | $ | 0.31 |
| | $ | 0.56 |
| | $ | 0.46 |
| |
| Diluted | $ | 0.31 |
| | $ | 0.31 |
| | $ | 0.46 |
| | $ | 0.47 |
| $ | 0.41 |
| | $ | 0.31 |
| | $ | 0.56 |
| | $ | 0.46 |
| |
| Total common shares outstanding at period end (in millions) | 116.0 |
| | 118.3 |
| | 116.0 |
| | 118.3 |
| 116.7 |
| | 116.0 |
| | 116.7 |
| | 116.0 |
| |
| | | | | | | | | | | | | | | | |
| Anti-dilutive performance units excluded from the computation of diluted earnings per share (in millions) | 0.5 |
| | 0.3 |
| | 0.5 |
| | 0.3 |
| 0.5 |
| | 0.5 |
| | 0.5 |
| | 0.5 |
| |
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
4.5. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended August 25, 201724, 2018:
| | | | Unrealized gain (loss) on investments | Pension and other post-retirement liability adjustments | Foreign currency translation adjustments | Total | Unrealized gain (loss) on investments | Pension and other post-retirement liability adjustments | Foreign currency translation adjustments | Total |
| Balance as of May 26, 2017 | $ | (0.3 | ) | | $ | 15.8 |
| | $ | (51.8 | ) | | $ | (36.3 | ) | | |
| Balance as of May 25, 2018 | | $ | (0.2 | ) | | $ | 13.9 |
| | $ | (36.9 | ) | | $ | (23.2 | ) | |
| Other comprehensive income (loss) before reclassifications | 0.3 |
| | 0.2 |
| | 8.8 |
| | 9.3 |
| | 0.2 |
| | 0.3 |
| | (6.5 | ) | | (6.0 | ) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | (1.5 | ) | | — |
| | (1.5 | ) | | — |
| | (1.1 | ) | | 0.1 |
| | (1.0 | ) | |
| Net current period other comprehensive income (loss) | 0.3 |
| | (1.3 | ) | | 8.8 |
| | 7.8 |
| | 0.2 |
| | (0.8 | ) | | (6.4 | ) | | (7.0 | ) | |
| Balance as of August 25, 2017 | $ | — |
| | $ | 14.5 |
| | $ | (43.0 | ) | | $ | (28.5 | ) | | |
| Balance as of August 24, 2018 | | $ | — |
| | $ | 13.1 |
| | $ | (43.3 | ) | | $ | (30.2 | ) | |
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the six months ended August 25, 2017:24, 2018:
| | | | Unrealized gain (loss) on investments | Pension and other post-retirement liability adjustments | Foreign currency translation adjustments | Total | Unrealized gain (loss) on investments | Pension and other post-retirement liability adjustments | Foreign currency translation adjustments | Total |
| Balance as of February 24, 2017 | $ | (0.3 | ) | | $ | 13.0 |
| | $ | (63.3 | ) | | $ | (50.6 | ) | | |
| Balance as of February 23, 2018 | | $ | (0.3 | ) | | $ | 14.7 |
| | $ | (24.7 | ) | | $ | (10.3 | ) | |
| Other comprehensive income (loss) before reclassifications | 0.3 |
| | (0.3 | ) | | 20.3 |
| | 20.3 |
| | 0.3 |
| | 0.7 |
| | (18.7 | ) | | (17.7 | ) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 1.8 |
| | — |
| | 1.8 |
| | — |
| | (2.3 | ) | | 0.1 |
| | (2.2 | ) | |
| Net current period other comprehensive income (loss) | 0.3 |
| | 1.5 |
| | 20.3 |
| | 22.1 |
| | 0.3 |
| | (1.6 | ) | | (18.6 | ) | | (19.9 | ) | |
| Balance as of August 25, 2017 | $ | — |
| | $ | 14.5 |
| | $ | (43.0 | ) | | $ | (28.5 | ) | | |
| Balance as of August 24, 2018 | | $ | — |
| | $ | 13.1 |
| | $ | (43.3 | ) | | $ | (30.2 | ) | |
The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended August 25, 201724, 2018 and August 26, 2016:25, 2017:
|
| | | | | | | | | | | | | | | | | |
Detail of Accumulated Other
Comprehensive Income (Loss) Components | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | Affected Line in the Condensed Consolidated Statements of Income |
| Three Months Ended | Six Months Ended |
August 25,
2017 | August 26,
2016 | August 25, 2017 | August 26, 2016 |
| Amortization of pension and other post-retirement liability adjustments | | | | | | | | | |
| Actuarial losses (gains) | (0.5 | ) | | (0.1 | ) | | (0.9 | ) | | (0.1 | ) | | Cost of sales |
| Actuarial losses (gains) | (0.3 | ) | | — |
| | (0.7 | ) | | 0.1 |
| | Operating expenses |
| Prior service cost (credit) | (0.8 | ) | | (1.0 | ) | | (1.6 | ) | | (2.0 | ) | | Cost of sales |
| Prior service cost (credit) | (0.9 | ) | | (1.2 | ) | | (1.9 | ) | | (2.4 | ) | | Operating expenses |
| Settlements - Actuarial losses (gains) | — |
| | — |
| | 3.9 |
| | — |
| | Cost of sales |
| Settlements - Actuarial losses (gains) | — |
| | — |
| | 3.2 |
| | — |
| | Operating expenses |
| | 1.0 |
| | 0.6 |
| | (0.2 | ) | | 1.7 |
| | Income tax expense |
| Total reclassifications | $ | (1.5 | ) | | $ | (1.7 | ) | | $ | 1.8 |
| | $ | (2.7 | ) | | Net income |
|
| | | | | | | | | | | | | | | | | |
Detail of Accumulated Other
Comprehensive Income (Loss) Components | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | Affected Line in the Condensed Consolidated Statements of Income |
| Three Months Ended | Six Months Ended |
August 24,
2018 | August 25,
2017 | August 24, 2018 | August 25, 2017 |
| Amortization of pension and other post-retirement liability adjustments | | | | | | | | | |
| Actuarial losses (gains) (1) | (0.8 | ) | | (0.8 | ) | | (1.7 | ) | | (1.6 | ) | | Other income (expense), net |
| Prior service cost (credit) (1) | (0.6 | ) | | (1.7 | ) | | (1.2 | ) | | (3.5 | ) | | Other income (expense), net |
| Settlements - Actuarial losses (gains) (1) | — |
| | — |
| | — |
| | 7.1 |
| | Other income (expense), net |
| Foreign currency translation | 0.1 |
| | — |
| | 0.1 |
| | — |
| | Other income (expense), net |
| | 0.3 |
| | 1.0 |
| | 0.6 |
| | (0.2 | ) | | Income tax expense |
| Total reclassifications | $ | (1.0 | ) | | $ | (1.5 | ) | | $ | (2.2 | ) | | $ | 1.8 |
| | Net income |
| |
| (1) | Reclassified from Cost of sales and Operating expenses to Other income (expense), net as a result of the adoption of ASU 2017-07. |
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The carrying amounts for many of our financial instruments, including cash and cash equivalents, accounts and notes receivable, accounts and notes payable, short-term borrowings and certain other liabilities, approximate their fair value due to their relatively short maturities. Our short-term investments, foreign exchange forward contracts and long-term investments are measured at fair value on the Condensed Consolidated Balance Sheets.
Our total debt is carried at cost and was $296.1303.9 and $297.4295.0 as of August 25, 201724, 2018 and February 24, 201723, 2018, respectively. The fair value of our total debt is measured using a discounted cash flow analysis based on current market interest rates for similar types of instruments and was approximately $327$320 and $330316 as of August 25, 201724, 2018 and February 24, 201723, 2018, respectively. The estimation of the fair value of our total debt is based on Level 2 fair value measurements.
We periodically use derivative financial instruments to manage exposures to movements in foreign exchange rates and interest rates. The use of these financial instruments modifies the exposure of these risks with the intention to reduce our risk of short-term volatility. We do not use derivatives for speculative or trading purposes.
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assets and liabilities measured at fair value in our Consolidated Balance Sheets as of August 25, 201724, 2018 and February 24, 201723, 2018 are summarized below:
| | | | August 25, 2017 | August 24, 2018 |
| Fair Value of Financial Instruments | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total |
| Assets: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| Cash and cash equivalents | $ | 139.3 |
| | $ | — |
| | $ | — |
| | $ | 139.3 |
| $ | 45.7 |
| | $ | — |
| | $ | — |
| | $ | 45.7 |
| |
| Restricted cash | 2.5 |
| | — |
| | — |
| | 2.5 |
| 3.5 |
| | — |
| | — |
| | 3.5 |
| |
| Managed investment portfolio and other investments | | | | | | | | |
| Corporate debt securities | — |
| | 40.1 |
| | — |
| | 40.1 |
| |
| U.S. agency debt securities | — |
| | 12.8 |
| | — |
| | 12.8 |
| |
| Asset backed securities | — |
| | 8.3 |
| | — |
| | 8.3 |
| |
| U.S. government debt securities | 2.3 |
| | — |
| | — |
| | 2.3 |
| |
| Municipal debt securities | — |
| | 1.3 |
| | — |
| | 1.3 |
| |
| Foreign exchange forward contracts | — |
| | 1.6 |
| | — |
| | 1.6 |
| — |
| | 4.5 |
| | — |
| | 4.5 |
| |
| Auction rate securities | — |
| | — |
| | 3.9 |
| | 3.9 |
| — |
| | — |
| | 3.8 |
| | 3.8 |
| |
| | $ | 144.1 |
| | $ | 64.1 |
| | $ | 3.9 |
| | $ | 212.1 |
| $ | 49.2 |
| | $ | 4.5 |
| | $ | 3.8 |
| | $ | 57.5 |
| |
| Liabilities: | | | | | | | | | | | | | | | |
| Foreign exchange forward contracts | — |
| | (2.4 | ) | | — |
| | (2.4 | ) | — |
| | (0.4 | ) | | — |
| | (0.4 | ) | |
| | $ | — |
| | $ | (2.4 | ) | | $ | — |
| | $ | (2.4 | ) | $ | — |
| | $ | (0.4 | ) | | $ | — |
| | $ | (0.4 | ) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | February 24, 2017 | February 23, 2018 |
| Fair Value of Financial Instruments | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total |
| Assets: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| Cash and cash equivalents | $ | 197.1 |
| | $ | — |
| | $ | — |
| | $ | 197.1 |
| $ | 283.1 |
| | $ | — |
| | $ | — |
| | $ | 283.1 |
| |
| Restricted cash | 2.5 |
| | — |
| | — |
| | 2.5 |
| 2.5 |
| | — |
| | — |
| | 2.5 |
| |
| Managed investment portfolio and other investments | | | | | | | | |
| Corporate debt securities | — |
| | 33.6 |
| | — |
| | 33.6 |
| |
| U.S. agency debt securities | — |
| | 18.6 |
| | — |
| | 18.6 |
| |
| Asset backed securities | — |
| | 3.7 |
| | — |
| | 3.7 |
| |
| U.S. government debt securities | 2.4 |
| | — |
| | — |
| | 2.4 |
| |
| Municipal debt securities | — |
| | 15.1 |
| | — |
| | 15.1 |
| |
| Foreign exchange forward contracts | — |
| | 3.5 |
| | — |
| | 3.5 |
| — |
| | 2.1 |
| | — |
| | 2.1 |
| |
| Auction rate securities | — |
| | — |
| | 3.5 |
| | 3.5 |
| — |
| | — |
| | 3.5 |
| | 3.5 |
| |
| | $ | 202.0 |
| | $ | 74.5 |
| | $ | 3.5 |
| | $ | 280.0 |
| $ | 285.6 |
| | $ | 2.1 |
| | $ | 3.5 |
| | $ | 291.2 |
| |
| Liabilities: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| Foreign exchange forward contracts | $ | — |
| | $ | (0.9 | ) | | $ | — |
| | $ | (0.9 | ) | — |
| | (1.4 | ) | | — |
| | (1.4 | ) | |
| | $ | — |
| | $ | (0.9 | ) | | $ | — |
| | $ | (0.9 | ) | $ | — |
| | $ | (1.4 | ) | | $ | — |
| | $ | (1.4 | ) | |
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for the six months ended August 25, 201724, 2018:
| | | Roll-Forward of Fair Value Using Level 3 Inputs | Auction Rate Securities | Auction Rate Securities |
| Balance as of February 24, 2017 | $ | 3.5 |
| |
| Balance as of February 23, 2018 | | $ | 3.5 |
| |
| Unrealized gain on investments | 0.4 |
| 0.3 |
| |
| Balance as of August 25, 2017 | $ | 3.9 |
| |
| Balance as of August 24, 2018 | | $ | 3.8 |
| |
| | | Inventories | August 25,
2017 | February 24,
2017 | August 24,
2018 | February 23,
2018 |
| Raw materials and work-in-process | $ | 84.7 |
| | $ | 79.6 |
| $ | 114.8 |
| | $ | 98.3 |
| |
| Finished goods | 107.5 |
| | 101.7 |
| 138.1 |
| | 105.3 |
| |
| | 192.2 |
| | 181.3 |
| 252.9 |
| | 203.6 |
| |
| Revaluation to LIFO | 18.7 |
| | 18.2 |
| 20.6 |
| | 19.0 |
| |
| | $ | 173.5 |
| | $ | 163.1 |
| $ | 232.3 |
| | $ | 184.6 |
| |
The portion of inventories determined by the LIFO method was $76.293.5 and $77.9$76.3 as of August 25, 201724, 2018 and February 24, 201723, 2018, respectively.
| |
7.8. | SHORT-TERM BORROWINGS |
On July 12, 2018, we amended our $125 global committed bank facility, which expires in 2022. The amendment increased the aggregate unsecured revolving loan commitment under the credit agreement to $200, and we retained the ability to further increase the aggregate commitment under the facility by up to $75, by obtaining at least one commitment from one or more lenders. As of August 24, 2018, our total borrowings under the facility were $8.3. Current outstanding borrowings under the facility have an effective interest rate of 3.0%.
We can use borrowings under the facility for general corporate purposes, including friendly acquisitions. Interest on borrowings is based on the rate, as selected by us, between the following two options:
the Eurocurrency rate plus the applicable margin as set forth in the credit agreement, for interest periods of one, two, three or six months; or
for floating rate loans (as defined in the credit agreement), the greatest of the prime rate, the Federal funds effective rate plus 0.5%, and the Eurocurrency rate for a one month interest period plus 1%, plus the applicable margin as set forth in the credit agreement.
Up to $25 of the aggregate commitment can be borrowed under a swing line provision, at an agreed upon rate between the borrower and the swing line lender.
The facility continues to require us to satisfy two financial covenants:
A maximum leverage ratio covenant, which is measured by the ratio of (x) indebtedness, minus the amount, if any, of unrestricted cash in excess of $25, to (y) trailing four quarter adjusted EBITDA and is required to be less than 3:1. In the context of certain permitted acquisitions, we have a one-time ability, subject to certain conditions, to increase the maximum ratio to 3.25:1 for four consecutive quarters.
A minimum interest coverage ratio covenant, which is measured by the ratio of (y) trailing four quarter adjusted EBITDA to (z) trailing four quarter interest expense and is required to be no less than 3.5:1.
The facility does not include any restrictions on cash dividend payments or share repurchases. As of August 24, 2018, we were in compliance with all covenants under the facility.
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In Q4 2018, the U.S. government enacted the Tax Act, which was effective January 1, 2018. The Tax Act makes broad and complex changes to the U.S. tax code that affect 2018 and future periods. The following is a summary of the key corporate income tax provisions of the Tax Act:
reduced the U.S. federal corporate income tax rate from 35% to 21%,
implemented a one-time tax on the deemed repatriation of undistributed non-U.S. subsidiary earnings and generally eliminated U.S. federal corporate income taxes on dividends from foreign subsidiaries,
included global intangible low-taxed income ("GILTI") provisions, which impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations, and
included base-erosion and anti-abuse tax provisions, which eliminate the deduction of certain base-erosion payments made to related foreign corporations, and imposed a minimum tax if greater than regular tax.
As of August 24, 2018, the amounts we have recorded for the Tax Act remain provisional for the deemed repatriation tax, the remeasurement of deferred taxes, our reassessment of permanently reinvested earnings, uncertain tax positions and valuation allowances. These amounts may be impacted by further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and the impact of the GILTI provisions.
As of August 24, 2018, we were unable to reasonably estimate, and therefore have not recorded, deferred taxes with respect to the GILTI provisions. We have not yet determined our policy election with respect to whether to record deferred taxes on basis differences that are expected to affect the amount of GILTI inclusions upon reversal or to record the impact of the GILTI tax in the period in which that tax is incurred.
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 10. | SHARE-BASED COMPENSATION |
Performance Units
InDuring the six months ended August 25, 2017,24, 2018, we awarded 154,500183,900 performance units ("PSUs") to our executive officers.certain key employees. The PSUs awarded are earned after a three-year performance period, from 20182019 through 2020,2021, based on achievement of certain total shareholder return results relative to a comparison group of companies, which is a market condition, and, if earned, will be issued in the form of shares of Class A Common Stock. The number of shares that may be earned can range from 0% to 200% of the target amount; therefore, the maximum number of shares that can be issued under these awards is 309,000367,800. These PSUs are expensed and recorded in Additional paid-in capital on the Condensed Consolidated Balance Sheets over the performance period. We used the Monte Carlo simulation model to calculate the fair value of these PSUs on the date of grant. The model resulted in a weighted average grant date fair value of $21.7718.02 per unit for these PSUs, compared to $16.3321.76 and $24.1516.33 per unit for similar PSUs granted in 20172018 and 2016,2017, respectively.
The weighted average grant date fair values were determined using the following assumptions: | | | | 2018 Awards | 2017 Awards | 2016 Awards | 2019 Awards | 2018 Awards | 2017 Awards |
| Three-year risk-free interest rate (1) | 1.4 | % | 0.9 | % | 0.8 | % | 2.6 | % | 1.4 | % | 0.9 | % |
| Expected term | 3 years |
| 3 years |
| 3 years |
| 3 years |
| 3 years |
| 3 years |
|
| Estimated volatility (2) | 31.8 | % | 31.2 | % | 29.4 | % | 33.8 | % | 31.8 | % | 31.2 | % |
| |
| (1) | Based on the U.S. government bond benchmark on the grant date. |
| |
| (2) | Represents the historical price volatility of the Company’s common stock for the three-year period preceding the grant date. |
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The total PSU expense and associated tax benefit for all outstanding awards for the three and six months ended August 25, 201724, 2018 and August 26, 201625, 2017 are as follows:
| | | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| Performance Units | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Expense | $ | 0.9 |
| | $ | 1.0 |
| | $ | 2.5 |
| | $ | 3.2 |
| $ | 1.2 |
| | $ | 0.9 |
| | $ | 3.5 |
| | $ | 2.5 |
| |
| Tax benefit | 0.3 |
| | 0.4 |
| | 0.9 |
| | 1.2 |
| 0.4 |
| | 0.3 |
| | 1.0 |
| | 0.9 |
| |
As of August 25, 201724, 2018, there was $4.21.6 of remaining unrecognized compensation cost related to nonvested PSUs, which is expected to be recognized over a remaining weighted-average period of 1.81.9 years.
The PSU activity for the six months ended August 25, 201724, 2018 is as follows:
| | | Maximum Number of Shares That May Be Issued Under Nonvested Units | Total | Weighted-Average Grant Date Fair Value per Unit | Total | Weighted-Average Grant Date Fair Value per Unit |
| Nonvested as of February 24, 2017 | 916,420 |
| $ | 19.31 |
| |
| Nonvested as of February 23, 2018 | | 688,600 |
| $ | 18.77 |
|
| Granted | 309,000 |
| 21.77 |
| 367,800 |
| 18.02 |
|
| Nonvested as of August 25, 2017 | 1,225,420 |
| $ | 19.93 |
| |
| Nonvested as of August 24, 2018 | | 1,056,400 |
| $ | 18.50 |
|
Restricted Stock Units
During the six months ended August 25, 2017,24, 2018, we awarded 650,321717,804 restricted stock units ("RSUs"), of which 131,200 were awarded to our executive officers.certain employees. These RSUs have restrictions on transfer which lapse three years after the date of grant, at which time the units will be issued as unrestricted shares of Class A Common Stock. RSUs are expensed and recorded in Additional paid-in capital on the Condensed Consolidated Balance Sheets over the requisite service period based on the value of the underlying shares on the date of grant.
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The RSU expense and associated tax benefit for all outstanding awards for the three and six months ended August 25, 201724, 2018 and August 26, 201625, 2017 are as follows:
| | | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| Restricted Stock Units | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Expense | $ | 2.2 |
| | $ | 2.2 |
| | $ | 8.8 |
| | $ | 8.9 |
| $ | 2.3 |
| | $ | 2.2 |
| | $ | 9.0 |
| | $ | 8.8 |
| |
| Tax benefit | 0.8 |
| | 0.8 |
| | 3.2 |
| | 3.2 |
| 0.6 |
| | 0.8 |
| | 2.4 |
| | 3.2 |
| |
As of August 25, 201724, 2018, there was $10.99.0 of remaining unrecognized compensation cost related to nonvested RSUs, which is expected to be recognized over a weighted-average period of 1.9 years.
The RSU activity for the six months ended August 25, 201724, 2018 is as follows:
| | | Nonvested Units | Total | Weighted-Average Grant Date Fair Value per Unit | Total | Weighted-Average Grant Date Fair Value per Unit |
| Nonvested as of February 24, 2017 | 1,731,507 |
| $ | 16.38 |
| |
| Nonvested as of February 23, 2018 | | 1,789,775 |
| $ | 15.75 |
|
| Granted | 650,321 |
| 16.73 |
| 717,804 |
| 14.28 |
|
| Vested | (13,388 | ) | 16.36 |
| (20,428 | ) | 18.24 |
|
| Forfeited | (17,104 | ) | 16.52 |
| (22,389 | ) | 15.73 |
|
| Nonvested as of August 25, 2017 | 2,351,336 |
| $ | 16.47 |
| |
| Nonvested as of August 24, 2018 | | 2,464,762 |
| $ | 15.30 |
|
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Smith System
On July 12, 2018, we acquired Smith System Manufacturing Company ("Smith System"), a Texas-based manufacturer of high quality furniture for the pre-K-12 education market. The total purchase price for the acquisition was $140.0, payable in cash, plus a net adjustment for working capital of $8.4. In addition, we funded $5.0 to a third-party escrow account, which is payable to the seller at the end of two years based on continued employment. The acquisition was funded through a combination of domestic cash on-hand and short-term borrowings under our global credit facility.
Smith System is an industry leader in the U.S. pre-K-12 education market. The acquisition is expected to advance our growth strategy in the education and office markets particularly as it relates to collaborative spaces. The synergies between our existing education brand and the Smith portfolio are expected to be realized as we offer their products to our existing dealer network and expand the business internationally.
Tangible assets and liabilities of Smith System were valued as of the acquisition date using a market analysis and intangible assets were valued using a discounted cash flow analysis, which represents a Level 3 measurement. On the acquisition date, we recorded $44.1 related to identifiable intangible assets, $79.3 related to goodwill and $25.0 related to tangible assets, mainly consisting of working capital items such as accounts receivable, inventory and current liabilities. The entire amount recorded to goodwill is deductible for U.S. income tax purposes and is recorded in the Americas segment. Intangible assets are principally related to internally-developed know-how and designs, dealer relationships and the Smith System trade name, which will be amortized over periods ranging between 9 to 11 years.
The purchase price allocation for the Smith System acquisition was incomplete as of August 24, 2018. We are still evaluating certain working capital adjustments, as well as the reporting unit to which the goodwill resulting from the Smith System acquisition will be allocated for future impairment testing purposes.
The following table summarizes the acquired identified intangible assets and the respective fair value and useful life of each asset at the date of acquisition:
|
| | | | | | | | |
| | Other Intangible Assets | Weighted
Average
Useful Life
(Years) | Fair Value |
| |
| | Know-how/designs | 9.0 |
| | $ | 16.0 |
| |
| | Dealer relationships | 11.0 |
| | 12.0 |
| |
| | Trademark | 9.0 |
| | 12.0 |
| |
| | Other | 0.9 |
| | 4.1 |
| |
| | | | | $ | 44.1 |
| |
The fair value of the acquired intangible assets will be amortized on a straight-line basis over the remaining useful life. The estimated amortization expense for the next five years is as follows:
|
| | | | |
| Fiscal Year Ending in February | Amount |
| 2019 | $ | 5.9 |
| |
| 2020 | 4.8 |
| |
| 2021 | 4.4 |
| |
| 2022 | 4.2 |
| |
| 2023 | 4.2 |
| |
| | $ | 23.5 |
| |
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AMQ
On December 26, 2017, we acquired AMQ Solutions ("AMQ"), a California-based provider of height-adjustable desking, benching and seating for workstations in the open plan, collaborative environments and training rooms. In addition, we acquired certain assets of an affiliated company, Tricom Vision Limited. The total purchase price for the acquisition was $69.9, which was primarily funded by the liquidation of short-term investments. Up to an additional $5.0 is payable to the sellers contingent upon certain performance obligations being met over a two year period. This acquisition is expected to strengthen our reach within the industry by broadening our portfolio at lower price points. The goodwill resulting from the acquisition consists largely of economies of scale expected from integrating AMQ into our existing dealer network.
Tangible assets and liabilities of AMQ were valued as of the acquisition date using a market analysis and intangible assets were valued using a discounted cash flow analysis, which represents a Level 3 measurement. On the acquisition date, we recorded $30.1 related to identifiable intangible assets, $31.5 to goodwill and approximately $12.5 related to working capital items such as accounts receivable, inventories and accounts payable. The entire amount recorded to goodwill is recorded in the Americas segment and is deductible for U.S. income tax purposes. Intangibles are principally related to dealer relationships which will be amortized over 11 years.
In Q1 2019, we recorded measurement period adjustments of $0.5 related to a decrease in net working capital and a decrease of $0.2 to the contingent liability payable to the sellers for certain liabilities existing prior to the opening balance sheet date. These adjustments increased goodwill by $0.3, and all amounts referenced above are inclusive of these measurement period adjustments. No measurement period adjustments were recorded in Q2 2019.
The purchase price allocation for the AMQ acquisition was incomplete as of August 24, 2018. We are still evaluating certain working capital adjustments, as well as the reporting unit to which the goodwill resulting from the AMQ acquisition will be allocated for future impairment testing purposes.
The following table summarizes the acquired identified intangible assets and the respective fair value and useful life of each asset at the date of acquisition:
|
| | | | | | | | |
| | Other Intangible Assets | Weighted
Average
Useful Life
(Years) | Fair Value |
| |
| | Dealer relationships | 11.0 |
| | $ | 25.5 |
| |
| | Trademark | 9.0 |
| | 1.3 |
| |
| | Other | 4.6 |
| | 3.3 |
| |
| | | | | $ | 30.1 |
| |
The fair value of the acquired intangible assets will be amortized on a straight-line basis over the remaining useful life. The estimated amortization expense for the next five years is as follows:
|
| | | | |
| Fiscal Year Ending in February | Amount |
| 2019 | $ | 3.2 |
| |
| 2020 | 3.1 |
| |
| 2021 | 3.0 |
| |
| 2022 | 3.0 |
| |
| 2023 | 3.0 |
| |
| | $ | 15.3 |
| |
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate costs are reported as Corporate.
The Americas segment serves customers in the U.S., Canada, the Caribbean Islands 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, Smith System, and TurnstoneAMQ brands.
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, storage and seating solutions.
The Other category includes Asia Pacific, Designtex and PolyVision. Asia Pacific serves customers in Asia and Australia primarily under the Steelcase brand with an emphasis on freestanding furniture systems, seating and storage solutions. Designtex primarily sells textiles, wall coverings and surface imaging solutions specified by architects and designers directly to end-use customers through a direct sales force primarily in North America. PolyVision manufactures ceramic steel surfaces for use in various applications globally, including static whiteboards and chalkboards sold through third party fabricators and distributors to the primary and secondary education markets and architectural panels and other special applications sold through general contractors for commercial and infrastructure projects.
We primarily review and evaluate operating income by segment in both our internal review processes and for our external financial reporting. We also allocate resources primarily based on operating income. Total assets by segment include manufacturing and other assets associated with each segment.
Corporate costs include unallocated portions of shared service functions, such as information technology, corporate facilities, finance, human resources, research, legal and customer aviation, plus deferred compensation expense and income or losses associated with COLI. Corporate assets consist primarily of unallocated cash short-term investment balances and COLI balances.COLI.
Revenue and operating income (loss) for the three and six months ended August 25, 201724, 2018 and August 26, 201625, 2017 and total assets as of August 25, 201724, 2018 and February 24, 201723, 2018 by segment are presented below:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | Six Months Ended |
| Reportable Segment Statement of Operations Data | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Revenue | |
| | |
| | | | | |
| Americas | $ | 654.1 |
| | $ | 568.5 |
| | $ | 1,189.9 |
| | $ | 1,103.5 |
| |
| EMEA | 133.2 |
| | 118.2 |
| | 270.6 |
| | 231.3 |
| |
| Other | 88.5 |
| | 88.9 |
| | 169.3 |
| | 175.9 |
| |
| | $ | 875.8 |
| | $ | 775.6 |
| | $ | 1,629.8 |
| | $ | 1,510.7 |
| |
| Operating income (loss) | |
| | |
| | |
| | |
| |
| Americas | $ | 77.2 |
| | $ | 55.5 |
| | $ | 106.9 |
| | $ | 98.4 |
| |
| EMEA | (6.0 | ) | | (3.6 | ) | | (7.7 | ) | | (12.2 | ) | |
| Other | 4.8 |
| | 6.8 |
| | 6.4 |
| | 16.3 |
| |
| Corporate | (8.1 | ) | | (6.5 | ) | | (14.4 | ) | | (15.2 | ) | |
| | $ | 67.9 |
| | $ | 52.2 |
| | $ | 91.2 |
| | $ | 87.3 |
| |
| | | | Three Months Ended | Six Months Ended | |
| Reportable Segment Statement of Operations Data | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | |
| Revenue | |
| | |
| | | | | | |
| Americas | $ | 568.5 |
| | $ | 571.0 |
| | $ | 1,103.5 |
| | $ | 1,091.4 |
| | |
| EMEA | 118.2 |
| | 112.8 |
| | 231.3 |
| | 238.1 |
| | |
| Other | 88.9 |
| | 74.2 |
| | 175.9 |
| | 147.3 |
| | |
| | $ | 775.6 |
| | $ | 758.0 |
| | $ | 1,510.7 |
| | $ | 1,476.8 |
| | |
| Operating income (loss) | |
| | |
| | |
| | |
| | |
| Reportable Segment Balance Sheet Data | | August 24,
2018 | February 23,
2018 |
| Total assets | | |
| | |
| |
| Americas | $ | 57.7 |
| | $ | 78.0 |
| | $ | 99.5 |
| | $ | 124.6 |
| | $ | 1,179.3 |
| | $ | 943.2 |
| |
| EMEA | (3.6 | ) | | (11.4 | ) | | (12.2 | ) | | (17.6 | ) | | 288.7 |
| | 300.3 |
| |
| Other | 6.8 |
| | 3.5 |
| | 13.3 |
| | 5.7 |
| | 215.9 |
| | 209.1 |
| |
| Corporate | (6.7 | ) | | (8.2 | ) | | (16.5 | ) | | (17.5 | ) | | 200.9 |
| | 406.6 |
| |
| | $ | 54.2 |
| | $ | 61.9 |
| | $ | 84.1 |
| | $ | 95.2 |
| | $ | 1,884.8 |
| | $ | 1,859.2 |
| |
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | |
| Reportable Segment Balance Sheet Data | August 25,
2017 | February 24,
2017 |
| Total assets | |
| | |
| |
| Americas | $ | 1,010.3 |
| | $ | 960.7 |
| |
| EMEA | 294.4 |
| | 297.4 |
| |
| Other | 208.1 |
| | 191.1 |
| |
| Corporate | 262.3 |
| | 342.8 |
| |
| | $ | 1,775.1 |
| | $ | 1,792.0 |
| |
On September 19, 2018, we acquired Orangebox Group Limited ("Orangebox"), a U.K.-based manufacturer of task seating, privacy solutions and collaborative furniture. The transaction included the purchase of all of the outstanding capital stock of Orangebox for $78.9 (or £60.0) less an adjustment for working capital of $0.1 in an all-cash transaction. An additional $3.9 (or £3.0) is payable to one of the sellers over three years, contingent upon the achievement of certain business performance obligations. The acquisition was funded by borrowings under our global committed bank facility.
On September 19, 2018, we borrowed $79.0 under our global committed bank facility to fund the acquisition of Orangebox. The amount borrowed is subject to an initial rate of interest equal to 3.3% per annum.
| |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations: |
This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 24, 201723, 2018. Reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year, unless indicated by a specific date. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.
Non-GAAP Financial MeasuresMeasure
This item contains certaina non-GAAP financial measures.measure. 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 condensed 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 the non-GAAP financial measuresmeasure to the most directly comparable GAAP financial measure.
The non-GAAP financial measuresmeasure used are: (1)is organic revenue growth (decline), which represents the change in revenue excluding estimated currency translation effects and the impacts of acquisitions and divestitures, and (2) adjusted operating income (loss), which represents operating income (loss) excluding restructuring costs (benefits). These measures aredivestitures. This measure is 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
Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate costs are reported as Corporate.
Results of Operations
| | | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| Statement of Operations Data | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Revenue | $ | 775.6 |
| | 100.0 | % | | $ | 758.0 |
| | 100.0 | % | | $ | 1,510.7 |
| | 100.0 | % | | $ | 1,476.8 |
| | 100.0 | % | $ | 875.8 |
| | 100.0 | % | | $ | 775.6 |
| | 100.0 | % | | $ | 1,629.8 |
| | 100.0 | % | | $ | 1,510.7 |
| | 100.0 | % |
| Cost of sales | 517.2 |
| | 66.7 |
| | 494.9 |
| | 65.3 |
| | 1,009.5 |
| | 66.8 |
| | 979.7 |
| | 66.3 |
| 587.2 |
| | 67.0 |
| | 518.3 |
| | 66.8 |
| | 1,103.3 |
| | 67.7 |
| | 1,008.3 |
| | 66.7 |
|
| Restructuring costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4.2 |
| | 0.3 |
| |
| Gross profit | 258.4 |
| | 33.3 |
| | 263.1 |
| | 34.7 |
| | 501.2 |
| | 33.2 |
| | 492.9 |
| | 33.4 |
| 288.6 |
| | 33.0 |
| | 257.3 |
| | 33.2 |
| | 526.5 |
| | 32.3 |
| | 502.4 |
| | 33.3 |
|
| Operating expenses | 204.2 |
| | 26.3 |
| | 200.9 |
| | 26.5 |
| | 417.1 |
| | 27.6 |
| | 397.0 |
| | 26.9 |
| 220.7 |
| | 25.2 |
| | 205.1 |
| | 26.5 |
| | 435.3 |
| | 26.7 |
| | 415.1 |
| | 27.5 |
|
| Restructuring costs | — |
| | — |
| | 0.3 |
| | — |
| | — |
| | — |
| | 0.7 |
| | 0.1 |
| |
| Operating income | 54.2 |
| | 7.0 |
| | 61.9 |
| | 8.2 |
| | 84.1 |
| | 5.6 |
| | 95.2 |
| | 6.4 |
| 67.9 |
| | 7.8 |
| | 52.2 |
| | 6.7 |
| | 91.2 |
| | 5.6 |
| | 87.3 |
| | 5.8 |
|
| Interest expense | (4.4 | ) | | (0.6 | ) | | (4.4 | ) | | (0.6 | ) | | (8.7 | ) | | (0.7 | ) | | (8.6 | ) | | (0.6 | ) | (4.9 | ) | | (0.6 | ) | | (4.4 | ) | | (0.6 | ) | | (9.3 | ) | | (0.6 | ) | | (8.7 | ) | | (0.7 | ) |
| Investment income | 0.4 |
| | — |
| | 0.3 |
| | — |
| | 0.8 |
| | 0.1 |
| | 0.8 |
| | 0.1 |
| 0.5 |
| | 0.1 |
| | 0.4 |
| | 0.1 |
| | 1.5 |
| | 0.1 |
| | 0.8 |
| | 0.1 |
|
| Other income, net | 0.5 |
| | 0.1 |
| | 1.8 |
| | 0.3 |
| | 2.9 |
| | 0.2 |
| | 3.9 |
| | 0.3 |
| |
| Other income (expense), net | | 3.7 |
| | 0.4 |
| | 2.5 |
| | 0.3 |
| | 7.0 |
| | 0.4 |
| | (0.3 | ) | | — |
|
| Income before income tax expense | 50.7 |
| | 6.5 |
| | 59.6 |
| | 7.9 |
| | 79.1 |
| | 5.2 |
| | 91.3 |
| | 6.2 |
| 67.2 |
| | 7.7 |
| | 50.7 |
| | 6.5 |
| | 90.4 |
| | 5.5 |
| | 79.1 |
| | 5.2 |
|
| Income tax expense | 13.8 |
| | 1.7 |
| | 21.4 |
| | 2.9 |
| | 24.1 |
| | 1.6 |
| | 33.7 |
| | 2.3 |
| 18.1 |
| | 2.1 |
| | 13.8 |
| | 1.7 |
| | 24.3 |
| | 1.4 |
| | 24.1 |
| | 1.6 |
|
| Net income | $ | 36.9 |
| | 4.8 | % | | $ | 38.2 |
| | 5.0 | % | | $ | 55.0 |
| | 3.6 | % | | $ | 57.6 |
| | 3.9 | % | $ | 49.1 |
| | 5.6 | % | | $ | 36.9 |
| | 4.8 | % | | $ | 66.1 |
| | 4.1 | % | | $ | 55.0 |
| | 3.6 | % |
| Earnings per share: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Basic | $ | 0.31 |
| | |
| | $ | 0.32 |
| | |
| | $ | 0.46 |
| | |
| | $ | 0.47 |
| | |
| $ | 0.41 |
| | |
| | $ | 0.31 |
| | |
| | $ | 0.56 |
| | |
| | $ | 0.46 |
| | |
|
| Diluted | $ | 0.31 |
| | |
| | $ | 0.31 |
| | |
| | $ | 0.46 |
| | |
| | $ | 0.47 |
| | |
| $ | 0.41 |
| | |
| | $ | 0.31 |
| | |
| | $ | 0.56 |
| | |
| | $ | 0.46 |
| | |
|
|
| | | | | | | | | | | | | | | | |
| Q2 2018 Organic Revenue Growth (Decline) | Americas | EMEA | Other | Consolidated |
| Q2 2017 revenue | $ | 571.0 |
| | $ | 112.8 |
| | $ | 74.2 |
| | $ | 758.0 |
| |
| Divestitures | — |
| | (1.0 | ) | | — |
| | (1.0 | ) | |
| Currency translation effects* | 0.1 |
| | 2.0 |
| | 0.3 |
| | 2.4 |
| |
| Q2 2017 revenue, adjusted | 571.1 |
| | 113.8 |
| | 74.5 |
| | 759.4 |
| |
| Q2 2018 revenue | 568.5 |
| | 118.2 |
| | 88.9 |
| | 775.6 |
| |
| Organic growth (decline) $ | $ | (2.6 | ) | | $ | 4.4 |
| | $ | 14.4 |
| | $ | 16.2 |
| |
| Organic growth (decline) % | — | % | | 4 | % | | 19 | % | | 2 | % | |
| | | | | | | | | |
| * Currency translation effects represent the estimated net effect of translating Q2 2017 foreign currency revenues using the average exchange rates during Q2 2018. |
|
| | | | | | | | | | | | | | | | |
| Q2 2019 Organic Revenue Growth | Americas | EMEA | Other | Consolidated |
| Q2 2018 revenue | $ | 568.5 |
| | $ | 118.2 |
| | $ | 88.9 |
| | $ | 775.6 |
| |
| Acquisitions | 38.5 |
| | — |
| | — |
| | 38.5 |
| |
| Divestitures | (5.3 | ) | | (0.5 | ) | | — |
| | (5.8 | ) | |
| Currency translation effects* | (0.4 | ) | | 2.0 |
| | (0.8 | ) | | 0.8 |
| |
| Q2 2018 revenue, adjusted | 601.3 |
| | 119.7 |
| | 88.1 |
| | 809.1 |
| |
| Q2 2019 revenue | 654.1 |
| | 133.2 |
| | 88.5 |
| | 875.8 |
| |
| Organic growth $ | $ | 52.8 |
| | $ | 13.5 |
| | $ | 0.4 |
| | $ | 66.7 |
| |
| Organic growth % | 9 | % | | 11 | % | | — | % | | 8 | % | |
| | | | | | | | | |
| * Currency translation effects represent the estimated net effect of translating Q2 2018 foreign currency revenues using the average exchange rates during Q2 2019. |
|
| | | | | | | | | | | | | | | | |
| Year-to-Date 2018 Organic Revenue Growth (Decline) | Americas | EMEA | Other | Consolidated |
| Year-to-date 2017 revenue | $ | 1,091.4 |
| | $ | 238.1 |
| | $ | 147.3 |
| | $ | 1,476.8 |
| |
| Divestitures | — |
| | (1.8 | ) | | — |
| | (1.8 | ) | |
| Currency translation effects* | (0.8 | ) | | (4.1 | ) | | (0.5 | ) | | (5.4 | ) | |
| Year-to-date 2017 revenue, adjusted | 1,090.6 |
| | 232.2 |
| | 146.8 |
| | 1,469.6 |
| |
| Year-to-date 2018 revenue | 1,103.5 |
| | 231.3 |
| | 175.9 |
| | 1,510.7 |
| |
| Organic growth (decline) $ | $ | 12.9 |
| | $ | (0.9 | ) | | $ | 29.1 |
| | $ | 41.1 |
| |
| Organic growth (decline) % | 1 | % | | — | % | | 20 | % | | 3 | % | |
| | | | | | | | | |
| * Currency translation effects represent the estimated net effect of translating year-to-date 2017 foreign currency revenues using the average exchange rates during year-to-date 2018. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | Six Months Ended |
Reconciliation of Operating Income to Adjusted Operating Income | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 |
| Operating income | $ | 54.2 |
| | 7.0 | % | | $ | 61.9 |
| | 8.2 | % | | $ | 84.1 |
| | 5.6 | % | | $ | 95.2 |
| | 6.4 | % |
| Add: restructuring costs | — |
| | — |
| | 0.3 |
| | — |
| | — |
| | — |
| | 4.9 |
| | 0.4 |
|
| Adjusted operating income | $ | 54.2 |
| | 7.0 | % | | $ | 62.2 |
| | 8.2 | % | | $ | 84.1 |
| | 5.6 | % | | $ | 100.1 |
| | 6.8 | % |
|
| | | | | | | | | | | | | | | | |
| Year-to-Date 2019 Organic Revenue Growth (Decline) | Americas | EMEA | Other | Consolidated |
| Year-to-date 2018 revenue | $ | 1,103.5 |
| | $ | 231.3 |
| | $ | 175.9 |
| | $ | 1,510.7 |
| |
| Acquisitions | 47.4 |
| | — |
| | — |
| | 47.4 |
| |
| Divestitures | (9.9 | ) | | (1.2 | ) | | — |
| | (11.1 | ) | |
| Currency translation effects* | 1.2 |
| | 16.5 |
| | 1.4 |
| | 19.1 |
| |
| Year-to-date 2018 revenue, adjusted | 1,142.2 |
| | 246.6 |
| | 177.3 |
| | 1,566.1 |
| |
| Year-to-date 2019 revenue | 1,189.9 |
| | 270.6 |
| | 169.3 |
| | 1,629.8 |
| |
| Organic growth (decline) $ | $ | 47.7 |
| | $ | 24.0 |
| | $ | (8.0 | ) | | $ | 63.7 |
| |
| Organic growth (decline) % | 4 | % | | 10 | % | | (5 | )% | | 4 | % | |
| | | | | | | | | |
| * Currency translation effects represent the estimated net effect of translating year-to-date 2018 foreign currency revenues using the average exchange rates during year-to-date 2019. | |
Overview
In Q2 2018,2019, we posted 2% revenuereported strong earnings growth overcompared to the prior year, driven by strong revenue growth in Asia Pacific and 5%relatively flat spending as a percentage of revenue. Revenue grew by 13% compared to the prior year, driven by revenue from the acquisitions of Smith System and AMQ and organic revenue growth in EMEA, while revenue in the Americas declined by less than 1%and EMEA, which included increased project business from both large and small customers. In the Americas, our order growth outpaced the industry in the trailing six months ended in July, and order backlog in the Americas and EMEA were up 11% and 34%, respectively, at the end of the quarter compared to the prior year. In the Americas, continued growth from new productsHigher commodity and solutions wasfreight costs were mostly offset by continued declines in traditional furniture applications. Demand from large customers remained subdued,the benefits of pricing actions but the rate of decline was lower than the first quarter.
Despite the revenue growth, operating income declined compared to the prior year ashad a result of increases in cost of salesnegative impact on our gross margin, and operating expenses as a percentage of revenue in the Americas. The increases reflected higher discounting and incentives, higher commodity costs, investments in support of product development and manufacturing agility, andwe experienced unfavorable shifts in business mix. We have continued to invest in product development, sales, marketing and information technology that support our strategies, and we intend to launch a significant number of new products throughout 2018.mix during the second quarter.
Q2 20182019 Compared to Q2 20172018
We recorded net income of $49.1 and diluted earnings per share of $0.41 in Q2 2019. In the prior year, we recorded net income of $36.9 and diluted earnings per share of $0.31 in Q2 2018 compared to net income of $38.2 and diluted earnings per share of $0.31 in Q2 2017. The Q2 2018 results reflected the net impact of the sale of property in Rosenheim, Germany and a favorable tax adjustment which together increased diluted earnings per share by approximately $0.05.$0.31. Operating income of $54.2$67.9 in Q2 20182019 represented an increase of $15.7, or 110 basis points as a percentage of revenue, compared to the prior year driven by the Americas. The improvement in the Americas was driven by higher revenue and lower operating incomeexpenses as a percentage of $61.9 in Q2 2017. Benefits associated with revenue, growth in Q2 2018 were more thanpartially offset by higher cost of sales as a percentage of revenuerevenue.
Revenue of $875.8 in the Americas and higher operating expensesQ2 2019 represented an increase of $100.2 or 13% compared to the prior year. After adjusting forSmith System and AMQ, net of divestitures, represented $45.5 of the impact of restructuring costsincrease, with the remaining growth driven by strong project business from both large and small customers in the prior year, operating income of $54.2Americas and EMEA. Revenue grew by 15% in Q2 2018 compared to adjusted operating income of $62.2the Americas and 13% in Q2 2017.
Revenue of $775.6 in Q2 2018 represented an increase of $17.6 or 2% compared to the prior year. The increase in revenue was driven by growth of 20% inEMEA, while the Other category and 5% in EMEA, while revenue in the Americas declined by less than 1%was approximately flat compared to thea strong prior year. After adjusting for $2.4a $38.5 impact of acquisitions, a $5.8 unfavorable impact of divestitures and $0.8 of favorable currency translation effects, and a $1.0 unfavorable impact due to divestitures, organic revenue growth was $16.2$66.7 or 2%approximately 8% compared to the prior year. On an organic basis, revenue in the Other category grew by 19% and revenue in EMEA grew by 4%, while revenuegrowth was 9% in the Americas declined by less than 1% compared to the prior year.and 11% in EMEA.
Cost of sales as a percentage of revenue increased by 14020 basis points to 66.7%67.0% of revenue in Q2 20182019 compared to Q2 2017.2018. The increase was driven primarily by a 25030 basis point increase in the Americas and a 20 basis point increase in EMEA, partially offset by a 280110 basis point decrease in the Other category. In the Americas, approximately $10 of higher commodity and freight costs were mostly offset by benefits from pricing actions but had an unfavorable net impact of approximately 70 basis points on cost of sales as a percentage of revenue. The Americas results also reflected unfavorable shifts in business mix, which were more than offset by higher absorption of fixed costs, and warranty and workers' compensation costs that were $4.3 lower than the prior year. Favorable impacts from the acquisition of Smith System, which realizes a majority of their revenue during the summer months, were largely offset by the initial effects of purchase accounting. The increase in EMEA was driven by unfavorable shifts in business mix and negative effects of changes in foreign currencies, partially offset by higher absorption of fixed costs. The decrease in the Other category was driven by higher absorption of fixed costs.
Operating expenses of $220.7 in Q2 2019 represented an increase of $15.6, but declined as a percentage of revenue compared to the prior year. The increase was due to $9.7 from acquisitions, net of divestitures (including $4.2 of amortization expense) and $7.9 of higher variable compensation expense, partially offset by $3.5 of higher property gains ($7.5 in the Americas in the current year compared to $4.0 in EMEA in the prior year). Operating expenses as a percentage of sales improved by 130 basis points compared to the prior year.
Our effective tax rate in Q2 2019 was 26.9% compared to a Q2 2018 effective tax rate of 27.2%. The Q2 2019 rate reflected the impact of tax reform in the U.S. The Q2 2018 rate was lower than the federal statutory rate due to a $3.9 favorable tax adjustment.
Year-to-Date 2019 Compared to Year-to-Date 2018
We recorded year-to-date 2019 net income of $66.1 and diluted earnings per share of $0.56, compared to year-to-date 2018 net income of $55.0 and diluted earnings per share of $0.46. The year-to-date 2018 results included the net impact of the annuitization of three small defined benefit plans, which reduced diluted earnings per share by $0.03. Year-to-date 2019 operating income increased $3.9 to $91.2 compared to the prior year. The increase was driven by the same factors as the quarter.
Year-to-date 2019 revenue of $1,629.8 represented an increase of $119.1 or 8% compared to year-to-date 2018. The increase was driven by 8% growth in the Americas and 17% growth in EMEA, partially offset by a 4% decline in the Other category, which compared to a strong prior year. Smith System and AMQ, net of divestitures, represented $51.1 of the increase, with the remaining growth driven by strong project business from both large and small customers in the Americas and EMEA. After adjusting for a $47.4 impact of acquisitions, an $11.1 unfavorable impact of divestitures and $19.1 of favorable currency translation effects, organic revenue growth was $63.7 or 4%. On an organic basis, revenue increased by 4% in the Americas and 10% in EMEA, partially offset by a 5% decline in the Other category.
Cost of sales increased by 100 basis points to 67.7% of revenue in year-to-date 2019 compared to year-to-date 2018. The increase was due to a 120 basis point increase in the Americas and a 100 basis point increase in the Other category, partially offset by an improvement of 120 basis points in EMEA. The increase in the Americas was driven by higher discounting and incentives,approximately $15 of higher commodity costs, investments in support of product development and manufacturing agility,freight costs and unfavorable shifts in business mix.mix, partially offset by the benefits of pricing actions, $3.9 of lower warranty costs compared to the prior year and higher absorption of fixed costs. Favorable impacts from the acquisition of Smith System, which realizes a majority of their revenue during the summer months, were largely offset by the initial effects of purchase accounting. The improvement in EMEA was driven by higher absorption of fixed costs and benefits associated with cost reduction and other gross margin improvement initiatives.efforts, partially offset by unfavorable shifts in business mix. The increase in the Other category was driven primarily by an increase in inventory reserves.
Operating expenses of $204.2$435.3 in Q2 2018year-to-date 2019 represented an increase of $3.3$20.2 or a decline of 2080 basis points as a percentage of revenue compared to the prior year. Current quarter operating expenses included a $4.0 gain on the saleThe increase was driven primarily by $11.9 from acquisitions, net of the Rosenheim property and $1.8divestitures (including $5.1 of lower deferredamortization expense), $6.1 of higher variable compensation expense compared to the prior year. Increased spending in the current quarter included investments in product development, sales, marketing and information technology in support$4.2 of our strategies,unfavorable currency translation effects, partially offset by lower variable compensation expense.
There were no restructuring costs in Q2 2018 compared to restructuring costs$3.5 of $0.3 in Q2 2017. The Q2 2017 amount included costs associated with the establishment of the Learning + Innovation Center in Munich, Germany.higher property gains.
Our year-to-date 2019 effective tax rate in Q2 2018 was 27.2%26.9% compared to a Q2 2017year-to-date 2018 effective tax rate of 35.9%30.5%. The improvement was primarily due to a $3.9 favorable tax adjustment recorded during the current quarter.
Year-to-Date 2018 Compared to Year-to-Date 2017
We recorded year-to-date 2018 net income of $55.0 compared to year-to-date 2017 net income of $57.6. The slight decline wasrates were driven by the same factors as the quarter. The year-to-date 2018 results reflected the net impact of the sale of the Rosenheim property and a favorable tax adjustment in Q2 2018 which together increased diluted earnings per share by approximately $0.05, partially offset by the defined benefit plan annuitizations in Q1 2018 which decreased diluted earnings per share by approximately $0.03.
Year-to-date 2018 revenue of $1,510.7 represented an increase of $33.9 or 2% compared to year-to-date 2017. The increase in revenue was driven by higher volume in the Other category and the Americas. After adjusting for $5.4 of unfavorable currency translation effects and a $1.8 unfavorable impact due to divestitures, the organic revenue increase was $41.1 or 3%. On an organic basis, revenue increased by 20% in the Other category and 1% in the Americas, while EMEA was flat compared to the prior year.
Cost of sales increased by 50 basis points to 66.8% of revenue in year-to-date 2018 compared to year-to-date 2017. The increase was due to a 140 basis point increase in the Americas, partially offset by an improvement of 120 basis points in EMEA and an improvement of 220 basis points in the Other category. The increase in the Americas was driven by higher discounting and incentives, higher commodity costs, investments in support of product development and manufacturing agility, unfavorable shifts in business mix and $3.4 of charges associated with the defined benefit plan annuitizations recorded in Q1 2018, partially offset by ongoing cost reduction initiatives and $5.4 of lower warranty costs compared to the prior year. The improvement in EMEA was driven by benefits associated with cost reduction and other gross margin improvement initiatives. The improvement in the Other category was driven by the impact of higher sales volume.
Operating expenses of $417.1 in year-to-date 2018 represented an increase of $20.1 or 70 basis points as a percentage of revenue compared to the prior year. Operating expenses increased by $17.2 in the Americas and $5.9 in the Other category, while operating expenses decreased by $2.0 in EMEA. The increase in the Americas and Other category was driven primarily by investments in product development, sales, marketing and information technology. The decrease in EMEA included a $4.0 gain from the sale of the Rosenheim property, partially offset by higher costs related to product development and our new Learning + Innovation Center in Munich. In addition, the higher spending included $3.9 of expense associated with the defined benefit plan annuitizations ($3.0 in the Other category and $0.9 in Corporate).
There were no restructuring costs in year-to-date 2018 compared to net restructuring costs of $4.9 in year-to-date 2017. The year-to-date 2017 amount included costs related to the closure of a manufacturing facility in High Point, North Carolina, the closure of a manufacturing facility in Durlangen, Germany and the establishment of the Learning + Innovation Center in Munich.
Our year-to-date 2018 effective tax rate was 30.5% compared to a year-to-date 2017 effective tax rate of 36.9%. The decrease was driven by the same factor as the quarter.
Interest Expense, Investment Income and Other Income (Expense), Net
| | | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| Interest Expense, Investment Income and Other Income, Net | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | |
| Interest Expense, Investment Income and Other Income (Expense), Net | | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Interest expense | $ | (4.4 | ) | | $ | (4.4 | ) | | $ | (8.7 | ) | | $ | (8.6 | ) | $ | (4.9 | ) | | $ | (4.4 | ) | | $ | (9.3 | ) | | $ | (8.7 | ) | |
| Investment income | 0.4 |
| | 0.3 |
| | 0.8 |
| | 0.8 |
| 0.5 |
| | 0.4 |
| | 1.5 |
| | 0.8 |
| |
| Other income (expense), net: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| Equity in income of unconsolidated affiliates | 2.6 |
| | 2.2 |
| | 5.6 |
| | 4.7 |
| 3.4 |
| | 2.6 |
| | 6.8 |
| | 5.6 |
| |
| Foreign exchange gains (losses) | (0.2 | ) | | 0.2 |
| | (2.2 | ) | | 0.7 |
| 0.4 |
| | (0.2 | ) | | 0.5 |
| | (2.2 | ) | |
| Net periodic pension and post-retirement credit (expense), excluding service cost | | 1.0 |
| | 2.0 |
| | 1.9 |
| | (3.2 | ) | |
| Miscellaneous, net | (1.9 | ) | | (0.6 | ) | | (0.5 | ) | | (1.5 | ) | (1.1 | ) | | (1.9 | ) | | (2.2 | ) | | (0.5 | ) | |
| Total other income, net | 0.5 |
| | 1.8 |
| | 2.9 |
| | 3.9 |
| |
| Total interest expense, investment income and other income, net | $ | (3.5 | ) | | $ | (2.3 | ) | | $ | (5.0 | ) | | $ | (3.9 | ) | |
| Total other income (expense), net | | 3.7 |
| | 2.5 |
| | 7.0 |
| | (0.3 | ) | |
| Total interest expense, investment income and other income (expense), net | | $ | (0.7 | ) | | $ | (1.5 | ) | | $ | (0.8 | ) | | $ | (8.2 | ) | |
Net periodic pension and post-retirement credit (expense), excluding service cost in year-to-date 2018 includes charges related to the annuitization of three small defined benefit plans in Q1 2018.
Business Segment Review
See Note 89 to the condensed consolidated financial statements for additional information regarding our business segments.
Americas
The Americas segment serves customers in the U.S., Canada, the Caribbean Islands 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, Smith System and TurnstoneAMQ brands.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | Six Months Ended |
| Statement of Operations Data — Americas | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 |
| Revenue | $ | 568.5 |
| | 100.0 | % | | $ | 571.0 |
| | 100.0 | % | | $ | 1,103.5 |
| | 100.0 | % | | $ | 1,091.4 |
| | 100.0 | % |
| Cost of sales | 372.7 |
| | 65.6 |
| | 360.5 |
| | 63.1 |
| | 725.8 |
| | 65.8 |
| | 703.2 |
| | 64.4 |
|
| Restructuring costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2.6 |
| | 0.3 |
|
| Gross profit | 195.8 |
| | 34.4 |
| | 210.5 |
| | 36.9 |
| | 377.7 |
| | 34.2 |
| | 385.6 |
| | 35.3 |
|
| Operating expenses | 138.1 |
| | 24.3 |
| | 132.5 |
| | 23.2 |
| | 278.2 |
| | 25.2 |
| | 261.0 |
| | 23.9 |
|
| Restructuring costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Operating income | $ | 57.7 |
| | 10.1 | % | | $ | 78.0 |
| | 13.7 | % | | $ | 99.5 |
| | 9.0 | % | | $ | 124.6 |
| | 11.4 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | Six Months Ended |
Reconciliation of Operating Income to Adjusted Operating Income — Americas | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 |
| Operating income | $ | 57.7 |
| | 10.1 | % | | $ | 78.0 |
| | 13.7 | % | | $ | 99.5 |
| | 9.0 | % | | $ | 124.6 |
| | 11.4 | % |
| Add: restructuring costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2.6 |
| | 0.3 |
|
| Adjusted operating income | $ | 57.7 |
| | 10.1 | % | | $ | 78.0 |
| | 13.7 | % | | $ | 99.5 |
| | 9.0 | % | | $ | 127.2 |
| | 11.7 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | Six Months Ended |
| Statement of Operations Data — Americas | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Revenue | $ | 654.1 |
| | 100.0 | % | | $ | 568.5 |
| | 100.0 | % | | $ | 1,189.9 |
| | 100.0 | % | | $ | 1,103.5 |
| | 100.0 | % |
| Cost of sales | 432.6 |
| | 66.1 |
| | 373.8 |
| | 65.8 |
| | 796.2 |
| | 66.9 |
| | 724.6 |
| | 65.7 |
|
| Gross profit | 221.5 |
| | 33.9 |
| | 194.7 |
| | 34.2 |
| | 393.7 |
| | 33.1 |
| | 378.9 |
| | 34.3 |
|
| Operating expenses | 144.3 |
| | 22.1 |
| | 139.2 |
| | 24.4 |
| | 286.8 |
| | 24.1 |
| | 280.5 |
| | 25.4 |
|
| Operating income | $ | 77.2 |
| | 11.8 | % | | $ | 55.5 |
| | 9.8 | % | | $ | 106.9 |
| | 9.0 | % | | $ | 98.4 |
| | 8.9 | % |
Operating income in the Americas decreasedincreased by $20.3$21.7 and $25.1 respectively,$8.5, or 200 basis points and 10 basis points as a percentage of revenue, in Q2 20182019 and year-to-date 20182019, respectively, compared to the prior year. The decline in the quarter wasincreases were driven by higher revenue and lower operating expenses as a percentage of revenue, partially offset by higher cost of sales as a percentage of revenue and higher operating expenses. On a year-to-date basis, the decline was driven by higher cost of sales as a percentage of revenue and higher operating expenses, partially offset by higher revenue. After adjusting for the impact of restructuring costs in the prior year, operating income of $57.7 and $99.5 in Q2 2018 and year-to-date 2018 compared to adjusted operating income of $78.0 and $127.2 in the prior year.
The Americas revenue represented 73.3%74.7% of consolidated revenue in Q2 2018. Revenue for2019. Q2 2018 was $568.52019 revenue of $654.1 represented an increase of $85.6 or 15%, compared to $571.0 in Q2 2017. The continuedthe prior year. Smith System and AMQ net of a small divestiture, represented $46.0 of the increase, with the remaining growth driven by strong project business from our new productsboth large and solutions was offset by declines in traditional furniture applications. Demandsmall customers and benefits from large customers remained subdued, but the rate of decline was lower than Q1 2018.recent pricing actions. After adjusting for $0.1a $38.5 impact of acquisitions, a $5.3 unfavorable impact of a divestiture, and $0.4 of unfavorable currency translation effects, the organic revenue decreasegrowth in Q2 20182019 was $2.6.
Year-to-date 2018 revenue of $1,103.5 represented an increase of $12.1 compared to year-to-date 2017. The slight increase in revenue reflected continued growth from our new products and solutions, partially offset by declines in traditional furniture applications. After adjusting for $0.8 of unfavorable currency translation effects, the year-to-date 2018 organic revenue increase was $12.9$52.8 or 1%9% compared to the prior year.
Year-to-date 2019 revenue of $1,189.9 represented an increase of $86.4 or 8% compared to year-to-date 2018. Smith System and AMQ, net of a small divestiture, represented $52.3 of the increase, and growth from continuing agreements and marketing programs was partially offset by a decline in project business, which included $20 from a very large project in Q1 2018. After adjusting for a $47.4 impact due to acquisitions, a $9.9 unfavorable impact due to a divestiture and $1.2 of favorable currency translation effects,year-to-date 2019 organic revenue growth was $47.7 or 4% compared to the prior year.
Cost of sales as a percentage of revenue increased 250by 30 basis points in Q2 20182019 compared to Q2 2017,2018. Higher commodity and freight costs of approximately $10 were mostly offset by benefits from pricing actions but had an unfavorable net impact of approximately 70 basis points on cost of sales as a percentage of revenue. The Americas results also reflected unfavorable shifts in business mix, which representedwere more than offset by higher absorption of fixed costs, and warranty and workers' compensation costs that were $4.3 lower than the lowest levelprior year. Favorable impacts from the acquisition of Smith System, which realizes a majority of their revenue during the summer months, were largely offset by the initial effects of purchase accounting. Year-to-date 2019 cost of sales as a percentage of revenue in more than a decade.increased by 120 basis points compared to the prior year. The increase was driven by higher discounting and incentives,approximately $15 of higher commodity costs, higher investments in support of product development and manufacturing agility,freight costs and unfavorable shifts in business mix, each of which contributed similarly to the increase. Year-to-date 2018 cost of sales represented an increase of 140 basis points compared to the prior year and was driven by higher discounting and incentives, approximately $6 of higher commodity costs, approximately $5 of higher investments in support of product development and manufacturing agility, unfavorable shifts in business mix, and $3.4 of charges associated with the defined benefit plan annuitizations, partially offset by ongoing cost reduction initiativesthe benefits of pricing actions and $5.4$3.9 of lower warranty costs compared to the prior year.
Operating expenses in Q2 20182019 increased by $5.6, or 110 basis points$5.1, but declined as a percentage of revenue compared to the prior year driven by $7.3year. The increase was due primarily to $10.0 from acquisitions, net of a divestiture (including $5.1 of amortization expense) and $5.8 of higher investments in product development, sales, marketing and information technology that support our product development and growth strategies.variable compensation, partially offset by a $7.5 gain on the sale of property. Operating expenses increased by $17.2, or 130 basis points as a percentage of revenue,$6.3 in year-to-date 20182019 compared to the prior year and the increase was driven by the same factors as the quarter.
There were no restructuring costs recorded in the Americas in Q2 2018 or Q2 2017. There were no restructuring costs recorded in the Americas in year-to-date 2018 compared to restructuring costs of $2.6 in year-to-date 2017 associated with the closure of the High Point manufacturing facility.
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.
| | | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| Statement of Operations Data — EMEA | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Revenue | $ | 118.2 |
| | 100.0 | % | | $ | 112.8 |
| | 100.0 | % | | $ | 231.3 |
| | 100.0 | % | | $ | 238.1 |
| | 100.0 | % | $ | 133.2 |
| | 100.0 | % | | $ | 118.2 |
| | 100.0 | % | | $ | 270.6 |
| | 100.0 | % | | $ | 231.3 |
| | 100.0 | % |
| Cost of sales | 86.8 |
| | 73.4 |
| | 86.0 |
| | 76.2 |
| | 171.4 |
| | 74.1 |
| | 179.3 |
| | 75.3 |
| 98.1 |
| | 73.6 |
| | 86.8 |
| | 73.4 |
| | 197.4 |
| | 72.9 |
| | 171.4 |
| | 74.1 |
|
| Restructuring costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1.6 |
| | 0.7 |
| |
| Gross profit | 31.4 |
| | 26.6 |
| | 26.8 |
| | 23.8 |
| | 59.9 |
| | 25.9 |
| | 57.2 |
| | 24.0 |
| 35.1 |
| | 26.4 |
| | 31.4 |
| | 26.6 |
| | 73.2 |
| | 27.1 |
| | 59.9 |
| | 25.9 |
|
| Operating expenses | 35.0 |
| | 29.6 |
| | 37.9 |
| | 33.6 |
| | 72.1 |
| | 31.2 |
| | 74.1 |
| | 31.1 |
| 41.1 |
| | 30.9 |
| | 35.0 |
| | 29.6 |
| | 80.9 |
| | 29.9 |
| | 72.1 |
| | 31.2 |
|
| Restructuring costs | — |
| | — |
| | 0.3 |
| | 0.3 |
| | — |
| | — |
| | 0.7 |
| | 0.3 |
| |
| Operating loss | $ | (3.6 | ) | | (3.0 | )% | | $ | (11.4 | ) | | (10.1 | )% | | $ | (12.2 | ) | | (5.3 | )% | | $ | (17.6 | ) | | (7.4 | )% | $ | (6.0 | ) | | (4.5 | )% | | $ | (3.6 | ) | | (3.0 | )% | | $ | (7.7 | ) | | (2.8 | )% | | $ | (12.2 | ) | | (5.3 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reconciliation of Operating Income (Loss) to Adjusted Operating Income (Loss) — EMEA | Three Months Ended | Six Months Ended |
August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 |
| Operating loss | $ | (3.6 | ) | | (3.0 | )% | | $ | (11.4 | ) | | (10.1 | )% | | $ | (12.2 | ) | | (5.3 | )% | | $ | (17.6 | ) | | (7.4 | )% |
| Add: restructuring costs | — |
| | — |
| | 0.3 |
| | 0.3 |
| | — |
| | — |
| | 2.3 |
| | 1.0 |
|
| Adjusted operating loss | $ | (3.6 | ) | | (3.0 | )% | | $ | (11.1 | ) | | (9.8 | )% | | $ | (12.2 | ) | | (5.3 | )% | | $ | (15.3 | ) | | (6.4 | )% |
Operating resultsThe operating loss in EMEA improved significantly in Q2 20182019 was $6.0 compared to $3.6 in the prior year, which included a $4.0 gain on the sale of property. The operating loss in year-to-date 2019 was $7.7 compared to $12.2 in the prior year. Excluding the impact of the property sale in the prior year, the improved performance was driven by higher revenue and lower cost of sales and operating expenses as a percentage of revenue.
EMEA revenue represented 15.2% of consolidated revenue in Q2 2019. Revenue for Q2 2019 was $133.2 compared to $118.2 in Q2 2018. The $15.0 or 13% increase in revenue was driven by growth in Germany, the United Kingdom and France, partially offset by a decline in the Middle East. After adjusting for $2.0 of favorable currency translation effects and a $0.5 unfavorable impact of divestitures, organic revenue growth was $13.5 or 11%. For year-to-date 20182019, revenue increased by $39.3 or 17% compared to the prior year. The increase was driven by $16.5 of favorable currency translation effects and higher revenue in Germany, the United Kingdom and Iberia, partially offset by a decline in the Middle East. After adjusting for $16.5 of favorable currency translation effects and a $1.2 unfavorable impact due to divestitures, organic revenue growth was $24.0 or 10% compared to the prior year.
Cost of sales as a percentage of revenue increased 20 basis points to 73.6% of revenue in Q2 2019 compared to the prior year. The increase was driven by unfavorable shifts in business mix and negative effects of changes in foreign currencies, partially offset by higher absorption of fixed costs. Cost of sales as a percentage of revenue decreased 120 basis points to 72.9% of revenue in year-to-date 2019 compared to the prior year. The improvement was driven by higher absorption of fixed costs and benefits associated with cost reduction efforts, partially offset by unfavorable shifts in business mix. Additionally, our pricing actions and other gross margin improvement initiatives offset the effects of inflation.
Operating expenses in Q2 2019 and year-to-date 2019 increased by $6.1 and $8.8, respectively, compared to the prior year, which included a $4.0 gain on the sale of property. Adjusted for the Rosenheim property.
EMEA revenue represented 15.2% of consolidated revenueproperty gain in Q2 2018. Revenue for Q2 2018 was $118.2 compared to $112.8 in Q2 2017. The increase in revenue was driven by higher volume in Eastern Europe, Iberia, the Middle East, and the United Kingdom, partially offset by a decline in Germany. After adjusting for $2.0 of favorable currency translation effects, the organic revenue increase was $4.4 or 4%. For year-to-date 2018, revenue declined by $6.8 or 3% compared to the prior year, the increase in Q2 2019 was due to lower volumehigher variable compensation expense, and the increase in Germany, partially offset by growth in the Middle East and Eastern Europe.
Cost of sales as a percentage of revenue decreased significantly in Q2 2018 and year-to-date 2018 compared to the prior year. The improved performance2019 was driven primarily by benefits associated with cost reduction and other gross margin improvement initiatives and favorable shifts in business mix.$4.7 of unfavorable currency translation effects.
Operating expenses in Q2 2018 and year-to-date 2018 decreased by $2.9 and $2.0, respectively, compared to the prior year. The decreases included a $4.0 gain on the sale of the Rosenheim property, partially offset by higher costs related to product development and our new Learning + Innovation Center in Munich.
There were no restructuring costs in EMEA in Q2 2018 and year-to-date 2018 compared to restructuring costs of $0.3 and $2.3, in Q2 2017 and year-to-date 2017, respectively. The restructuring costs in Q2 2017 and year-to-date 2017 were associated with the closure of the Durlangen manufacturing facility and the establishment of the Learning + Innovation Center in Munich.
Other
The Other category includes Asia Pacific, Designtex and PolyVision. Asia Pacific serves customers in Asia and Australia primarily under the Steelcase brand with an emphasis on freestanding furniture systems, seating and storage solutions. Designtex primarily sells textiles, wall coverings and surface imaging solutions specified by architects and designers directly to end-use customers through a direct sales force primarily in North America. PolyVision manufactures ceramic steel surfaces for use in various applications globally, including static whiteboards and chalkboards sold through third party fabricators and distributors to the primary and secondary education markets and architectural panels and other special applications sold through general contractors for commercial and infrastructure projects.
| | | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| Statement of Operations Data — Other | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Revenue | $ | 88.9 |
| | 100.0 | % | | $ | 74.2 |
| | 100.0 | % | | $ | 175.9 |
| | 100.0 | % | | $ | 147.3 |
| | 100.0 | % | $ | 88.5 |
| | 100.0 | % | | $ | 88.9 |
| | 100.0 | % | | $ | 169.3 |
| | 100.0 | % | | $ | 175.9 |
| | 100.0 | % |
| Cost of sales | 57.7 |
| | 64.9 |
| | 48.4 |
| | 65.2 |
| | 112.3 |
| | 63.8 |
| | 97.2 |
| | 66.0 |
| 56.5 |
| | 63.8 |
| | 57.7 |
| | 64.9 |
| | 109.7 |
| | 64.8 |
| | 112.3 |
| | 63.8 |
|
| Restructuring costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Gross profit | 31.2 |
| | 35.1 |
| | 25.8 |
| | 34.8 |
| | 63.6 |
| | 36.2 |
| | 50.1 |
| | 34.0 |
| 32.0 |
| | 36.2 |
| | 31.2 |
| | 35.1 |
| | 59.6 |
| | 35.2 |
| | 63.6 |
| | 36.2 |
|
| Operating expenses | 24.4 |
| | 27.5 |
| | 22.3 |
| | 30.1 |
| | 50.3 |
| | 28.6 |
| | 44.4 |
| | 30.1 |
| 27.2 |
| | 30.8 |
| | 24.4 |
| | 27.5 |
| | 53.2 |
| | 31.4 |
| | 47.3 |
| | 26.9 |
|
| Restructuring costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Operating income | $ | 6.8 |
| | 7.6 | % | | $ | 3.5 |
| | 4.7 | % | | $ | 13.3 |
| | 7.6 | % | | $ | 5.7 |
| | 3.9 | % | $ | 4.8 |
| | 5.4 | % | | $ | 6.8 |
| | 7.6 | % | | $ | 6.4 |
| | 3.8 | % | | $ | 16.3 |
| | 9.3 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | Six Months Ended |
| Reconciliation of Operating Income to Adjusted Operating Income — Other | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 |
| Operating income | $ | 6.8 |
| | 7.6 | % | | $ | 3.5 |
| | 4.7 | % | | $ | 13.3 |
| | 7.6 | % | | $ | 5.7 |
| | 3.9 | % |
| Add: restructuring costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Adjusted operating income | $ | 6.8 |
| | 7.6 | % | | $ | 3.5 |
| | 4.7 | % | | $ | 13.3 |
| | 7.6 | % | | $ | 5.7 |
| | 3.9 | % |
Revenue in the Other category represented 11.5%10.1% of consolidated revenue in Q2 2018.2019. Revenue in Q2 2018 increased $14.7 or 20%2019 was flat compared to the prior year drivenas growth at Designtex and PolyVision was offset by strong growtha decline in Asia Pacific (led by India) and Designtex.Pacific. Year-to-date 20182019 revenue of $175.9$169.3 represented an increasea decrease of $28.6$6.6 or 19%4% compared to the prior year. The increasedecrease was driven by the same factors as the quarter.
OperatingAsia Pacific, which posted strong results in the Other category improved significantly in Q2 2018 and year-to-date 2018 compared to the prior year. The Q2 2018 results reflected strong performance in Asia Pacific driven by higher volume. Operating results in year-to-date 2018 were driven by strong performance in Asia Pacific,year, partially offset by lower incomegrowth at Designtex which included $3.0 of charges related to the defined benefit plan annuitizations in Q1 2018.and PolyVision.
STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Corporate
Corporate costs include unallocated portions of shared service functions, such as information technology, corporate facilities, finance, human resources, research, legal and customer aviation, plus deferred compensation expense and income or losses associated with COLI.
| | | | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended |
| Statement of Operations Data — Corporate | August 25,
2017 | August 26,
2016 | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 | August 24,
2018 | August 25,
2017 |
| Operating expenses | $ | 6.7 |
| | $ | 8.2 |
| | $ | 16.5 |
| | $ | 17.5 |
| $ | 8.1 |
| | $ | 6.5 |
| | $ | 14.4 |
| | $ | 15.2 |
| |
The decreaseincrease in operating expenses in Q2 2018 and year-to-date 20182019 compared to the prior year was primarily due to lower deferred compensation expense compared toin the prior year.year and higher variable compensation expense in the current year, partially offset by higher COLI income. The decrease in year-to-date 2019 was due to higher COLI income.
Liquidity and Capital Resources
Based on current business conditions, we target a range of $75 to $150$175 in cash and cash equivalents and short-term investments to fund day-to-day operations, including seasonal disbursements, particularly the annual payment of accrued variable compensation and retirement plan contributions in Q1 of each fiscal year. In addition, we may carry additional liquidity for potential investments in strategic initiatives and as a cushion against economic volatility. From time to time, we may allow our cash and cash equivalents and short-term investments to temporarily fall below our targeted range to fund acquisitions and other growth initiatives.
| | | Liquidity Sources | August 25,
2017 | February 24,
2017 | August 24,
2018 | February 23,
2018 |
| Cash and cash equivalents | $ | 139.3 |
| | $ | 197.1 |
| $ | 45.7 |
| | $ | 283.1 |
| |
| Short-term investments | 64.8 |
| | 73.4 |
| |
| Company-owned life insurance | 168.8 |
| | 168.8 |
| 157.1 |
| | 172.2 |
| |
| Availability under credit facilities | 155.1 |
| | 150.3 |
| 215.5 |
| | 152.2 |
| |
| Total liquidity | $ | 528.0 |
| | $ | 589.6 |
| $ | 418.3 |
| | $ | 607.5 |
| |
As of August 25, 201724, 2018, we held a total of $204.145.7 in cash and cash equivalents and short-term investments.equivalents. Of ourthat total, $139.3 in cash and cash equivalents, approximately 51%6% was located in the U.S. and the remaining 49%94% was located outside of the U.S., primarily in China, India, France, Mexico China and Hong Kong.Malaysia. The majority of amounts located outside the U.S. would be taxable if repatriatedTax Cuts and Jobs Act imposes a mandatory transition tax on accumulated foreign earnings and eliminates U.S. taxes on foreign subsidiary distributions. As a result, earnings in foreign jurisdictions are available for distribution to the U.S. as dividends. However, such amounts are considered available to repay intercompany debt, available to meet local working capital requirements or permanently reinvested in foreign subsidiaries. The majority of our short-termwithout incremental U.S. taxes.
COLI investments are located in the U.S. and maintained in a managed investment portfolio, which primarily consistsrecorded at their net cash surrender value. A portion of corporate debt securities and U.S. agency debt securities.
Ourour investments in COLI policies are intended to be utilized as a long-term funding source for long-term employee benefit obligations. However, COLI can also be used as a source of liquidity. We believe the financial strength of the issuing insurance companies associated with our COLI policies is sufficient to meet their obligations. COLI investments are recorded at their net cash surrender value.
We have availability under a $200 global committed five-year bank facility which we can utilize for various liquidity needs including acquisitions, day-to-day operations and other corporate purposes. During the quarter, we borrowed $75.0 under the facility to partially fund the acquisition of Smith System, and $8.3 was outstanding under the facility on August 24, 2018.
Availability under credit facilities may be reduced related to compliance with applicable covenants. See Liquidity Facilities for more information.
The following table summarizes our condensed consolidated statements of cash flows for the six months ended August 25, 201724, 2018 and August 26, 2016:25, 2017:
| | | | Six Months Ended | Six Months Ended |
| Cash Flow Data | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 |
| Net cash provided by (used in): | |
| | |
| |
| | |
| |
| Operating activities | $ | 22.3 |
| | $ | 20.1 |
| $ | (38.3 | ) | | $ | 22.3 |
| |
| Investing activities | (18.2 | ) | | 11.6 |
| (168.4 | ) | | (18.2 | ) | |
| Financing activities | (65.3 | ) | | (63.1 | ) | (26.9 | ) | | (65.3 | ) | |
| Effect of exchange rate changes on cash and cash equivalents | 3.4 |
| | 1.0 |
| (2.8 | ) | | 3.4 |
| |
| Net decrease in cash and cash equivalents | (57.8 | ) | | (30.4 | ) | |
| Cash and cash equivalents, beginning of period | 197.1 |
| | 181.9 |
| |
| Cash and cash equivalents, end of period | $ | 139.3 |
| | $ | 151.5 |
| |
| Net decrease in cash, cash equivalents and restricted cash | | (236.4 | ) | | (57.8 | ) | |
| Cash, cash equivalents and restricted cash, beginning of period | | 285.6 |
| | 199.6 |
| |
| Cash, cash equivalents and restricted cash, end of period | | $ | 49.2 |
| | $ | 141.8 |
| |
Cash used in provided by (used in) operating activities
| | | | Six Months Ended | Six Months Ended |
| Cash Flow Data — Operating Activities | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 |
| Net income | $ | 55.0 |
| | $ | 57.6 |
| $ | 66.1 |
| | $ | 55.0 |
| |
| Depreciation and amortization | 31.2 |
| | 29.4 |
| 38.7 |
| | 31.2 |
| |
| Non-cash stock compensation | 11.7 |
| | 12.5 |
| 12.9 |
| | 11.7 |
| |
| Other | (1.6 | ) | | (4.2 | ) | (10.9 | ) | | (5.6 | ) | |
| Changes in accounts receivable, inventories and accounts payable | (29.6 | ) | | 5.8 |
| (92.2 | ) | | (29.6 | ) | |
| Changes in VAT recoverable | 9.5 |
| | 13.2 |
| |
| Changes in employee compensation liabilities | (59.2 | ) | | (70.3 | ) | (40.1 | ) | | (59.2 | ) | |
| Changes in other operating assets and liabilities and deferred income taxes | 5.3 |
| | (23.9 | ) | |
| Net cash provided by operating activities | $ | 22.3 |
| | $ | 20.1 |
| |
| Employee benefit obligations | | (18.7 | ) | | (15.7 | ) | |
| Changes in other operating assets and liabilities | | 5.9 |
| | 34.5 |
| |
| Net cash provided by (used in) operating activities | | $ | (38.3 | ) | | $ | 22.3 |
| |
The increased use of working capital in the current period was driven primarily by revenue growth which was notably higher toward the end of Q2 20182019 compared to Q2 2017. The lower level2018. Inventory has increased to support increased sales volume and a significant number of new product launches, some of which include long distance supply chains. Year-over-year changes in employee compensation liabilities in the current period was driven by lower variable compensation payments in Q1 2018 compared to Q1 2017. Changes in other operating assets and liabilities and deferred income taxes were primarily driven by the timing of paymentscustomer deposits and collections related to various tax accounts and accrued expenses.net receipts of VAT.
Cash used in investing activities
| | | | Six Months Ended | Six Months Ended |
| Cash Flow Data — Investing Activities | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 |
| Capital expenditures | $ | (36.6 | ) | | $ | (26.8 | ) | $ | (41.5 | ) | | $ | (36.6 | ) | |
| Purchases of investments | (52.1 | ) | | (37.2 | ) | — |
| | (52.1 | ) | |
| Liquidations of investments | 60.7 |
| | 74.8 |
| — |
| | 60.7 |
| |
| Proceeds from COLI policies | | 20.7 |
| | 2.4 |
| |
| Acquisitions, net of cash acquired | | (149.5 | ) | | — |
| |
| Other | 9.8 |
| | 0.8 |
| 1.9 |
| | 7.4 |
| |
| Net cash provided by (used in) investing activities | $ | (18.2 | ) | | $ | 11.6 |
| |
| Net cash used in investing activities | | $ | (168.4 | ) | | $ | (18.2 | ) | |
Capital expenditures in year-to-date 20182019 included investments in our global manufacturing operations, showrooms and product development and the new Learning + Innovation Center in Munich.development.
Liquidations ofIn year-to-date 2019, we did not hold any short-term investmentsinvestments. Proceeds from our COLI policies were lowersignificantly higher in year-to-date 20182019 than the prior year due to lower variable compensation payments in Q1 2018 compared to Q1 2017.policy maturities.
In Q2 2019, we completed the acquisition of Smith System for a purchase price of $140.0 plus an $8.4 adjustment for working capital. See Note 11for additional information.
Cash used in financing activities
| | | | Six Months Ended | Six Months Ended |
| Cash Flow Data — Financing Activities | August 25,
2017 | August 26,
2016 | August 24,
2018 | August 25,
2017 |
| Dividends paid | $ | (30.9 | ) | | $ | (29.6 | ) | $ | (32.3 | ) | | $ | (30.9 | ) | |
| Common stock repurchases | (33.1 | ) | | (32.5 | ) | (3.5 | ) | | (33.1 | ) | |
| Excess tax benefit from vesting of stock awards | — |
| | (0.3 | ) | |
| Repayments of debt | (1.3 | ) | | (0.7 | ) | |
| Net borrowings and repayments of debt | | 8.9 |
| | (1.3 | ) | |
| Net cash used in financing activities | $ | (65.3 | ) | | $ | (63.1 | ) | $ | (26.9 | ) | | $ | (65.3 | ) | |
We paid dividends of $0.135 per common share in each of Q1 2019 and Q2 2019 and $0.1275 per common share in each of Q1 2018 and Q2 2018 and $0.12 per share in each2018.
In year-to-date 2019, we made common stock repurchases of Q1 2017 and Q2 2017.
245,663 shares, 236,102 of which were made to satisfy participants' tax withholding obligations upon the vesting of equity awards, pursuant to the terms of our Incentive Compensation Plan. In year-to-date 2018, we made common stock repurchases of 2,358,714 shares, 358,714 of which were made to satisfy participants' tax withholding obligations upon the vesting of equity awards, pursuant to the terms of the Incentive Compensation Plan. In year-to-date 2017, we made common stock repurchases of 2,315,717 shares, 448,817 of which were made to satisfy participants' tax withholding obligations upon the vesting of equity awards.
As of the end of Q2 2018,2019, we had $99.2$99.0 of remaining availability under the $150 share repurchase program approved by our Board of Directors in Q4 2016.
Off-Balance Sheet Arrangements
During Q2 20182019, no material change in our off-balance sheet arrangements occurred.
Contractual Obligations
During Q2 2018,2019, no material change in our contractual obligations occurred.
Liquidity Facilities
Our total liquidity facilities as of August 25, 201724, 2018 were:
| | | Liquidity Facilities | August 25,
2017 | August 24,
2018 |
| Global committed bank facility | $ | 125.0 |
| $ | 200.0 |
| |
| Various uncommitted lines | 30.1 |
| 25.7 |
| |
| Total credit lines available | 155.1 |
| 225.7 |
| |
| Less: Borrowings outstanding | — |
| (10.2 | ) | |
| Available capacity | $ | 155.1 |
| $ | 215.5 |
| |
We have a $125$200 global committed five-year bank facility which was entered into in Q3 2017.facility. As of August 25, 2017,24, 2018, there were no borrowingswas $8.3 outstanding under the facility, our remaining availability was not limited, and we were in compliance with all covenants under the facility. Current outstanding borrowings under the facility have an effective interest rate of 3.0%. See Note 8 for additional information.
The various uncommitted lines may be changed or canceled by the banks at any time. There were nowas $1.9 of outstanding borrowings under the uncommitted facilities as of August 25, 2017.24, 2018.
In addition, we have credit agreements totaling $43.5$44.6 which can be utilized to support letters of credit, bank guarantees or foreign exchange contracts; letters of credit and bank guarantees totaling $14.5$14.6 were outstanding under such facilities as of August 25, 2017.24, 2018. There were no draws on our standby letters of credit during Q2 2018.year-to-date 2019.
Total consolidated debt as of August 25, 201724, 2018 was $296.1.$303.9. Our debt primarily consists of $248.9$249.2 in term notes due in 2021 with an effective interest rate of 6.6%. In addition, we have a term loan with a balance as of August 25, 201724, 2018 of $46.7.$44.1. This term loan has a floating interest rate based on 30-day LIBOR plus 1.20% and is due in Q1 2024. The term notes are unsecured, and the term loan is secured by two of our corporate aircraft. The term notes and the term loan do not contain financial covenants and are not cross-defaulted to our other debt facilities.
Liquidity Outlook
Our current cash and cash equivalents, and short-term investment balances, funds available under our credit facilities, funds available from COLI and cash generated from future operations are expected to be sufficient to finance our known or foreseeable liquidity needs. We continue to maintain a conservative approach to liquidity andIn addition, we have flexibility over significant uses of cash including our capital expenditures, growth strategies and discretionary operating expenses.
Our significant funding requirements include the acquisition of Orangebox (see Note 13 for additional information), operating expenses, non-cancelable operating lease obligations, capital expenditures, variable compensation and retirement plan contributions, dividend payments and debt service obligations. In Q3 2019, we funded the acquisition of Orangebox for $78.9, less an adjustment for working capital, primarily through borrowings under our global credit facility.
We currently expect capital expenditures to approximate $80 to $90 in 20182019 compared to $61$88 in 2017.2018. This amount includes investments in our global manufacturing operations, product development and the new Learning + Innovation Center in Munich. We closely manage capital spending to ensure we are making investments that we believe will sustain our business and preserve our ability to introduce innovative new products.customer-facing facilities.
On September 18, 2017,20, 2018, we announced a quarterly dividend on our common stock of $0.1275$0.135 per share, or approximately $15.1,$16.1, to be paid in Q3 2018.2019. Future dividends will be subject to approval by our Board of Directors.
Critical Accounting Estimates
During Q2 2018,2019, there have been no changes in the items that we have identified as critical accounting estimates.
Recently Issued Accounting Standards
See Note 2 to the condensed consolidated financial statements.
Forward-looking Statements
From time to time, in written and oral statements, we discuss our expectations regarding future events and our plans and objectives for future operations. These forward-looking statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on current beliefs of management as well as assumptions made by, and information currently available to, us. Forward-looking statements generally are accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to vary from our expectations because of factors such as, but not limited to, competitive and general economic conditions domestically and internationally; acts of terrorism, war, governmental action, natural disasters and other Force Majeure events; changes in the legal and regulatory environment; changes in raw materials and commodity costs; currency fluctuations; changes in customer demand; and the other risks and contingencies detailed in this Report, our most recent Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. We undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
| |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk: |
The nature of market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) faced by us as of August 25, 201724, 2018 is the same as disclosed in our Annual Report on Form 10-K for the year ended February 24, 201723, 2018. We are exposed to market risks from foreign currency exchange, interest rates, commodity prices and fixed income and equity prices, which could affect our operating results, financial position and cash flows.
Foreign Exchange Risk
During Q2 20182019, no material change in foreign exchange risk occurred.
Interest Rate Risk
During Q2 20182019, no material change in interest rate risk occurred.
Commodity Price Risk
During Q2 20182019, no material change in commodity price risk occurred.
Fixed Income and Equity Price Risk
During Q2 20182019, no material change in fixed income and equity price risk occurred.
| |
| Item 4. | Controls and Procedures: |
(a) Disclosure Controls and Procedures. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of August 25, 201724, 2018. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of August 25, 201724, 2018, our disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (2) ensuring that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during our second fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds: |
Issuer Purchases of Equity Securities
The following is a summary of share repurchase activity during Q2 20182019:
|
| | | | | | | | | | |
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | (d) Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1) (in millions) |
| 05/27/2017 - 06/30/2017 | 722,508 |
| $ | 13.93 |
| 722,225 |
| $ | 116.4 |
|
| 07/01/2017 - 07/28/2017 | 293,358 |
| $ | 14.18 |
| 293,358 |
| $ | 112.3 |
|
| 07/29/2017 - 08/25/2017 | 984,417 |
| $ | 13.30 |
| 984,417 |
| $ | 99.2 |
|
| Total | 2,000,283 |
| (2) | 2,000,000 |
| |
|
|
| | | | | | | | | | |
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | (d) Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1) (in millions) |
| 5/26/2018 - 6/29/2018 | — |
| $ | — |
| — |
| $ | 99.2 |
|
| 6/30/2018 - 7/27/2018 | — |
| $ | — |
| — |
| $ | 99.2 |
|
| 7/28/2018 - 8/24/2018 | 9,561 |
| $ | 13.50 |
| 9,561 |
| $ | 99.0 |
|
| Total | 9,561 |
| | 9,561 |
| |
|
| |
| (1) | In January 2016, the Board of Directors approved a share repurchase program permitting the repurchase of up to $150 of shares of our common stock. This program has no specific expiration date. On April 18, 2017,July 27, 2018, we entered into a stock repurchase agreement with a third party broker under which the broker was authorized to repurchase up to 4 million1,000,000 shares of our common stock on our behalf during the period from from April 18, 2017July 27, 2018 through September 21, 2017.2018, subject to certain price, market and volume constraints specified in the agreement. The agreement was established in accordance with Rule 10b5-1 of the Exchange Act. Shares purchased under the agreement are part of the Company's share repurchase program approved in January 2016. |
| |
(2) | 283 of these shares were repurchased to satisfy participants’ tax withholding obligations upon the vesting of equity awards, pursuant to the terms of our Incentive Compensation Plan. |
See Exhibit Index.
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.
|
| |
| By: | /s/ Mark T. MossingDavid C. Sylvester |
| | Mark T. MossingDavid C. Sylvester
Corporate Controller and
Senior Vice President, Chief AccountingFinancial Officer
(Duly Authorized Officer and
Principal AccountingFinancial Officer) |
Date: September 20, 201721, 2018
Exhibit Index
|
| |
Exhibit No. | Description |
| | |
| 10.1 | |
10.2 | |
10.3 | Steelcase Inc. Management Incentive Plan, as amendedSecond Amended and restatedRestated Credit Agreement, dated as of February 25, 2017 (2)September 23, 2016 among the Company and JPMorgan Chase Bank, N.A., as Administrative Agent; Bank of America, N.A., and Wells Fargo Bank, National Association as Co-Syndication Agents; HSBC Bank USA, National Association as Documentation Agent; and certain other lenders, dated as of July 12, 2018 (1) |
| 31.1 | |
| 31.2 | |
| 32.1 | |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Schema Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.LAB | XBRL Labels Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
________________________
| |
| (1) | Filed as Exhibit 10.1 to the Company’s Form 8-K, as filed with the Commission on July 14, 2017 (commission file number 001-13873), and incorporated herein by reference. |
| |
(2) | Filed as Exhibit 10.2 to the Company’s Form 8-K, as filed with the Commission on July 14, 201716, 2018 (commission file number 001-13873), and incorporated herein by reference. |
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