STEELCASE INC - Quarter Report: 2015 May (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended May 29, 2015 | ||
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)
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) | |
(Registrant’s telephone number, including area code) (616) 247-2710
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
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 June 19, 2015, Steelcase Inc. had 90,192,901 shares of Class A Common Stock and 31,950,413 shares of Class B Common Stock outstanding.
STEELCASE INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 29, 2015 INDEX | ||
Page No. | ||
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements: |
STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in millions, except per share data) | ||||||||
Three Months Ended | ||||||||
May 29, 2015 | May 30, 2014 | |||||||
Revenue | $ | 705.5 | $ | 723.1 | ||||
Cost of sales | 485.0 | 504.5 | ||||||
Restructuring costs (benefits) | 3.9 | (10.5 | ) | |||||
Gross profit | 216.6 | 229.1 | ||||||
Operating expenses | 185.1 | 191.9 | ||||||
Restructuring costs (benefits) | (2.0 | ) | 0.8 | |||||
Operating income | 33.5 | 36.4 | ||||||
Interest expense | (4.4 | ) | (4.4 | ) | ||||
Investment income | 0.4 | 0.4 | ||||||
Other income, net | 2.0 | 3.5 | ||||||
Income before income tax expense | 31.5 | 35.9 | ||||||
Income tax expense | 11.5 | 14.9 | ||||||
Net income | $ | 20.0 | $ | 21.0 | ||||
Earnings per share: | ||||||||
Basic | $ | 0.16 | $ | 0.17 | ||||
Diluted | $ | 0.16 | $ | 0.17 | ||||
Dividends declared and paid per common share | $ | 0.1125 | $ | 0.1050 | ||||
See accompanying notes to the condensed consolidated financial statements.
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STEELCASE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
Three Months Ended | ||||||||
May 29, 2015 | May 30, 2014 | |||||||
Net income | $ | 20.0 | $ | 21.0 | ||||
Other comprehensive income (loss), net: | ||||||||
Unrealized gain on investments | — | 0.1 | ||||||
Pension and other post-retirement liability adjustments | (1.1 | ) | (1.3 | ) | ||||
Foreign currency translation adjustments | (3.6 | ) | 0.7 | |||||
Total other comprehensive loss, net | (4.7 | ) | (0.5 | ) | ||||
Comprehensive income | $ | 15.3 | $ | 20.5 | ||||
See accompanying notes to the condensed consolidated financial statements.
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STEELCASE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions) | |||||||
(Unaudited) | |||||||
May 29, 2015 | February 27, 2015 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 110.5 | $ | 176.5 | |||
Short-term investments | 45.5 | 68.3 | |||||
Accounts receivable, net of allowances of $14.5 and $14.6 | 331.7 | 325.6 | |||||
Inventories | 183.7 | 166.2 | |||||
Deferred income taxes | 34.4 | 46.4 | |||||
Prepaid expenses | 22.6 | 16.5 | |||||
Other current assets | 54.8 | 55.5 | |||||
Total current assets | 783.2 | 855.0 | |||||
Property, plant and equipment, net of accumulated depreciation of $944.7 and $1,055.9 | 394.9 | 389.5 | |||||
Company-owned life insurance ("COLI") | 161.0 | 159.5 | |||||
Deferred income taxes | 87.6 | 100.1 | |||||
Goodwill | 107.1 | 107.2 | |||||
Other intangible assets, net of accumulated amortization of $41.5 and $41.1 | 15.2 | 14.7 | |||||
Investments in unconsolidated affiliates | 59.2 | 59.1 | |||||
Other assets | 39.8 | 34.5 | |||||
Total assets | $ | 1,648.0 | $ | 1,719.6 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 222.0 | $ | 215.0 | |||
Short-term borrowings and current maturities of long-term debt | 2.5 | 2.5 | |||||
Accrued expenses: | |||||||
Employee compensation | 85.3 | 151.9 | |||||
Employee benefit plan obligations | 17.4 | 29.4 | |||||
Customer deposits | 29.8 | 25.1 | |||||
Product warranties | 21.1 | 22.4 | |||||
Other | 115.0 | 99.0 | |||||
Total current liabilities | 493.1 | 545.3 | |||||
Long-term liabilities: | |||||||
Long-term debt less current maturities | 279.3 | 279.6 | |||||
Employee benefit plan obligations | 154.2 | 158.2 | |||||
Other long-term liabilities | 57.5 | 72.7 | |||||
Total long-term liabilities | 491.0 | 510.5 | |||||
Total liabilities | 984.1 | 1,055.8 | |||||
Shareholders’ equity: | |||||||
Common stock | — | — | |||||
Additional paid-in capital | 4.9 | 5.0 | |||||
Accumulated other comprehensive loss | (34.1 | ) | (29.4 | ) | |||
Retained earnings | 693.1 | 688.2 | |||||
Total shareholders’ equity | 663.9 | 663.8 | |||||
Total liabilities and shareholders’ equity | $ | 1,648.0 | $ | 1,719.6 | |||
See accompanying notes to the condensed consolidated financial statements.
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STEELCASE INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions) | |||||||
Three Months Ended | |||||||
May 29, 2015 | May 30, 2014 | ||||||
OPERATING ACTIVITIES | |||||||
Net income | $ | 20.0 | $ | 21.0 | |||
Depreciation and amortization | 16.2 | 14.7 | |||||
Deferred income taxes | 24.8 | 13.0 | |||||
Non-cash restructuring costs (benefits) | 1.9 | (9.7 | ) | ||||
Non-cash stock compensation | 8.8 | 9.6 | |||||
Equity in income of unconsolidated affiliates | (3.3 | ) | (3.7 | ) | |||
Dividends received from unconsolidated affiliates | 3.2 | 2.3 | |||||
Other | (1.4 | ) | (1.7 | ) | |||
Changes in operating assets and liabilities, net of acquisitions: | |||||||
Accounts receivable | (5.6 | ) | (15.0 | ) | |||
Inventories | (15.2 | ) | (9.5 | ) | |||
Assets related to derivative instruments | 22.5 | (1.5 | ) | ||||
Other assets | (32.1 | ) | (9.1 | ) | |||
Accounts payable | 7.7 | 7.6 | |||||
Employee compensation liabilities | (78.5 | ) | (74.4 | ) | |||
Employee benefit obligations | (17.2 | ) | (14.6 | ) | |||
Accrued expenses and other liabilities | 12.4 | (1.6 | ) | ||||
Net cash used in operating activities | (35.8 | ) | (72.6 | ) | |||
INVESTING ACTIVITIES | |||||||
Capital expenditures | (24.2 | ) | (15.8 | ) | |||
Proceeds from disposal of fixed assets | 4.1 | 19.0 | |||||
Purchases of short-term investments | (6.9 | ) | (27.0 | ) | |||
Liquidations of short-term investments | 29.7 | 62.8 | |||||
Acquisitions, net of cash acquired | (6.6 | ) | — | ||||
Other | 0.1 | 9.8 | |||||
Net cash provided by (used in) investing activities | (3.8 | ) | 48.8 | ||||
FINANCING ACTIVITIES | |||||||
Dividends paid | (15.1 | ) | (13.6 | ) | |||
Common stock repurchases | (11.5 | ) | (5.9 | ) | |||
Excess tax benefit from vesting of stock awards | 1.5 | — | |||||
Repayments of long-term debt | (0.5 | ) | (0.6 | ) | |||
Net cash used in financing activities | (25.6 | ) | (20.1 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (0.8 | ) | 0.4 | ||||
Net decrease in cash and cash equivalents | (66.0 | ) | (43.5 | ) | |||
Cash and cash equivalents, beginning of period | 176.5 | 201.8 | |||||
Cash and cash equivalents, end of period | $ | 110.5 | $ | 158.3 | |||
See accompanying notes to the condensed consolidated financial statements.
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STEELCASE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | BASIS OF PRESENTATION |
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 27, 2015 (“Form 10-K”). The Condensed Consolidated Balance Sheet as of February 27, 2015 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.
2. | NEW ACCOUNTING STANDARDS |
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The update changes the presentation of debt issuance costs to a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. Early adoption is permitted, and the new guidance is to be applied on a retrospective basis to all prior periods. We chose to adopt these provisions in Q1 2016, which impacted our Consolidated Balance Sheet as of February 27, 2015, by reducing Other current assets and Other assets by $0.5 and $1.7, respectively, and decreasing Long-term debt by $2.2 and impacted our Consolidated Statement of Cash Flows as of May 30, 2014 by increasing Operating Activities - Other by $0.1 and decreasing Changes in operating assets and liabilities - Other assets by $0.1.
In May 2014, the FASB issued 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. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
3. | EARNINGS PER SHARE |
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.
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Three Months Ended | ||||||||
Computation of Earnings per Share | May 29, 2015 | May 30, 2014 | ||||||
Net income | $ | 20.0 | $ | 21.0 | ||||
Adjustment for earnings attributable to participating securities | (0.4 | ) | (0.4 | ) | ||||
Net income used in calculating earnings per share | $ | 19.6 | $ | 20.6 | ||||
Weighted-average common shares outstanding including participating securities (in millions) | 124.4 | 125.3 | ||||||
Adjustment for participating securities (in millions) | (2.4 | ) | (2.2 | ) | ||||
Shares used in calculating basic earnings per share (in millions) | 122.0 | 123.1 | ||||||
Effect of dilutive stock-based compensation (in millions) | 0.9 | 1.3 | ||||||
Shares used in calculating diluted earnings per share (in millions) | 122.9 | 124.4 | ||||||
Earnings per share: | ||||||||
Basic | $ | 0.16 | $ | 0.17 | ||||
Diluted | $ | 0.16 | $ | 0.17 | ||||
Total common shares outstanding at period end (in millions) | 122.2 | 123.1 | ||||||
Anti-dilutive performance units excluded from computation of diluted earnings per share (in millions) | 0.1 | 0.1 | ||||||
4. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended May 29, 2015:
Unrealized gain on investments | Pension and other post-retirement liability adjustments | Foreign currency translation adjustments | Total | |||||||||||||
Balance as of February 27, 2015 | $ | 0.8 | $ | 8.5 | $ | (38.7 | ) | $ | (29.4 | ) | ||||||
Other comprehensive income (loss) before reclassifications | — | 0.1 | (3.6 | ) | (3.5 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | — | (1.2 | ) | — | (1.2 | ) | ||||||||||
Net current period other comprehensive income (loss) | — | (1.1 | ) | (3.6 | ) | (4.7 | ) | |||||||||
Balance as of May 29, 2015 | $ | 0.8 | $ | 7.4 | $ | (42.3 | ) | $ | (34.1 | ) | ||||||
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The following table provides details about reclassifications out of accumulated other comprehensive income for the three months ended May 29, 2015 and May 30, 2014:
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 | |||||||
May 29, 2015 | May 30, 2014 | ||||||
Amortization of pension and other post-retirement liability adjustments | |||||||
Actuarial losses (gains) | 0.1 | — | Cost of sales | ||||
Actuarial losses (gains) | 0.2 | 0.1 | Operating expenses | ||||
Prior service cost (credit) | (1.1 | ) | (1.1 | ) | Cost of sales | ||
Prior service cost (credit) | (1.2 | ) | (1.2 | ) | Operating expenses | ||
0.8 | 0.9 | Income tax expense | |||||
Total reclassifications | (1.2 | ) | (1.3 | ) | Net income | ||
5. | FAIR VALUE |
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 $281.8 and $282.1 as of May 29, 2015 and February 27, 2015, 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 $320 and $323 as of May 29, 2015 and February 27, 2015, 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.
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Assets and liabilities measured at fair value in our Consolidated Balance Sheets as of May 29, 2015 and February 27, 2015 are summarized below:
May 29, 2015 | |||||||||||||||
Fair Value of Financial Instruments | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | $ | 110.5 | $ | — | $ | — | $ | 110.5 | |||||||
Restricted cash | 2.5 | — | — | 2.5 | |||||||||||
Managed investment portfolio and other investments | |||||||||||||||
Corporate debt securities | — | 16.8 | — | 16.8 | |||||||||||
U.S. agency debt securities | — | 17.3 | — | 17.3 | |||||||||||
Asset backed securities | — | 5.2 | — | 5.2 | |||||||||||
U.S. government debt securities | 5.2 | — | — | 5.2 | |||||||||||
Municipal debt securities | — | 0.3 | — | 0.3 | |||||||||||
Other investments | — | 0.7 | — | 0.7 | |||||||||||
Foreign exchange forward contracts | — | 1.6 | — | 1.6 | |||||||||||
Canadian asset-backed commercial paper restructuring notes | — | 3.3 | — | 3.3 | |||||||||||
Auction rate securities | $ | — | $ | — | $ | 9.7 | $ | 9.7 | |||||||
$ | 118.2 | $ | 45.2 | $ | 9.7 | $ | 173.1 | ||||||||
Liabilities | |||||||||||||||
Foreign exchange forward contracts | $ | — | $ | (4.6 | ) | $ | — | $ | (4.6 | ) | |||||
$ | — | $ | (4.6 | ) | $ | — | $ | (4.6 | ) | ||||||
February 27, 2015 | |||||||||||||||
Fair Value of Financial Instruments | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | $ | 176.5 | $ | — | $ | — | $ | 176.5 | |||||||
Restricted cash | 2.5 | — | — | 2.5 | |||||||||||
Managed investment portfolio and other investments | |||||||||||||||
Corporate debt securities | — | 30.7 | — | 30.7 | |||||||||||
U.S. agency debt securities | — | 24.1 | — | 24.1 | |||||||||||
Asset backed securities | — | 7.7 | — | 7.7 | |||||||||||
U.S. government debt securities | 4.3 | — | — | 4.3 | |||||||||||
Municipal debt securities | — | 0.8 | — | 0.8 | |||||||||||
Other investments | — | 0.7 | — | 0.7 | |||||||||||
Foreign exchange forward contracts | — | 24.1 | — | 24.1 | |||||||||||
Canadian asset-backed commercial paper restructuring notes | — | 3.4 | — | 3.4 | |||||||||||
Auction rate securities | — | — | 9.7 | 9.7 | |||||||||||
$ | 183.3 | $ | 91.5 | $ | 9.7 | $ | 284.5 | ||||||||
Liabilities | |||||||||||||||
Foreign exchange forward contracts | $ | — | $ | (3.1 | ) | $ | — | $ | (3.1 | ) | |||||
$ | — | $ | (3.1 | ) | $ | — | $ | (3.1 | ) | ||||||
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Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for the three months ended May 29, 2015:
Roll-Forward of Fair Value Using Level 3 Inputs | Auction Rate Securities | ||
Balance as of February 27, 2015 | $ | 9.7 | |
Unrealized gain on investments | — | ||
Other-than-temporary impairments | — | ||
Currency translation adjustment | — | ||
Balance as of May 29, 2015 | $ | 9.7 | |
6. | INVENTORIES |
Inventories | May 29, 2015 | February 27, 2015 | |||||
Raw materials and work-in-process | $ | 99.5 | $ | 96.9 | |||
Finished goods | 104.5 | 90.4 | |||||
204.0 | 187.3 | ||||||
Revaluation to LIFO | 20.3 | 21.1 | |||||
$ | 183.7 | $ | 166.2 | ||||
The portion of inventories determined by the LIFO method was $84.3 as of May 29, 2015 and $78.1 as of February 27, 2015.
7. | INCOME TAXES |
In Q4 2015, we implemented changes in EMEA to align our tax structure with the management of our globally integrated business. Our U.S. parent company became the principal in a contract manufacturing model with our Steelcase European subsidiaries.
As of February 27, 2015, we maintained a full valuation allowance against our French net deferred tax assets due to the long history of large net operating losses in France, including losses generated in 2015 due to the fact that the contract manufacturing model was not fully implemented in 2015. In Q1 2016, this new model generated taxable income for our French subsidiaries and allowed for partial utilization of the net operating loss carryforwards in France. It is possible that sufficient positive evidence of sustained profitability may become available in 2016 to reach a conclusion that the remaining French valuation allowance which totaled $57.0 as of May 29, 2015, could be reversed by the end of 2016. A change in judgment regarding our expected ability to realize net deferred tax assets would be accounted for as a discrete tax benefit in the period in which it occurs.
8. | SHARE-BASED COMPENSATION |
Performance Units
In Q1 2016, we awarded 265,814 performance units ("PSUs") to our executive officers. Of the PSUs awarded, 132,907 units are earned after a three-year performance period, from 2016 through 2018, based on our total shareholder return 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 this award is 265,814. 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 $24.16 per unit for these PSUs, compared to $23.25 and $15.50 per unit for PSUs granted in 2015 and 2014, respectively.
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The weighted average grant date fair values were determined using the following assumptions:
2016 Awards | 2015 Awards | 2014 Awards | ||||
Three-year risk-free interest rate (1) | 0.8 | % | 0.7 | % | 0.3 | % |
Expected term | 3 years | 3 years | 3 years | |||
Estimated volatility (2) | 29.4 | % | 42.2 | % | 44.7 | % |
_______________________________________
(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. |
The remaining 132,907 PSUs awarded during Q1 2016 are earned after a three-year performance period, from 2016 through 2018, based on our three-year average return on invested capital, which is a performance 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 this award is 265,814. These units are expensed and recorded in Additional paid-in capital on the Condensed Consolidated Balance Sheets over the performance periods based on the probability that the performance condition will be met. The expense recorded will be adjusted as the estimate of the total number of PSUs that will ultimately be earned changes. The weighted average grant date fair value of these PSUs was $18.68. The fair value is equal to the closing stock price on the date of grant.
For all PSUs awarded in Q1 2016, dividend equivalents are calculated based on the actual number of shares earned at the end of the performance period equal to the dividends that would have been payable on the earned shares had they been held during the entire performance period as Class A Common Stock. At the end of the performance period, the dividend equivalents are paid in the form of cash or Class A Common Stock at the discretion of the Board of Directors. In addition, these awards will be forfeited if the participant leaves the Company for reasons other than retirement, disability or death or if the participant engages in any competition with us, as set forth in the Steelcase Inc. Incentive Compensation Plan ("Incentive Compensation Plan") and the applicable award agreements and as determined by the Administrative Committee in its discretion.
The total PSU expense and associated tax benefit for all outstanding awards for the three months ended May 29, 2015 and May 30, 2014 are as follows:
Three Months Ended | ||||||||
Performance Units | May 29, 2015 | May 30, 2014 | ||||||
Expense | $ | 2.5 | $ | 2.6 | ||||
Tax benefit | 0.9 | 1.0 | ||||||
As of May 29, 2015, there was $9.9 of remaining unrecognized compensation cost related to nonvested PSUs, which is expected to be recognized over a remaining weighted-average period of 2.3 years.
The PSU activity for the three months ended May 29, 2015 is as follows:
Maximum Number of Shares That May Be Issued Under Nonvested Units | Total | Weighted-Average Grant Date Fair Value per Unit | |||
Nonvested as of February 27, 2015 | 1,418,312 | $ | 16.63 | ||
Granted | 531,628 | 21.42 | |||
Nonvested as of May 29, 2015 | 1,949,940 | $ | 17.82 | ||
Restricted Stock Units
During the three months ended May 29, 2015, we awarded 560,060 restricted stock units ("RSUs"), of which 110,636 were awarded to our executive officers. 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. Holders of RSUs receive cash dividends equal to the dividends we declare and pay on our Class A Common Stock, which are included in Dividends paid on the Condensed Consolidated Statements of Cash Flows. These awards will
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be forfeited if a participant leaves the Company for reasons other than retirement, disability or death or if the participant engages in any competition with us, as set forth in the Incentive Compensation Plan and the applicable award agreements and as determined by the Administrative Committee in its discretion. 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.
The RSU expense and associated tax benefit for all outstanding awards for the three months ended May 29, 2015 and May 30, 2014 are as follows:
Three Months Ended | ||||||||
Restricted Stock Units | May 29, 2015 | May 30, 2014 | ||||||
Expense | $ | 6.1 | $ | 6.7 | ||||
Tax benefit | 2.2 | 2.4 | ||||||
As of May 29, 2015, there was $13.8 of remaining unrecognized compensation cost related to nonvested RSUs, which is expected to be recognized over a weighted-average period of 2.1 years.
The RSU activity for the three months ended May 29, 2015 is as follows:
Nonvested Units | Total | Weighted-Average Grant Date Fair Value per Unit | |||
Nonvested as of February 27, 2015 | 2,110,822 | $ | 14.61 | ||
Granted | 560,060 | 18.65 | |||
Vested | (16,469 | ) | 11.13 | ||
Forfeited | (2,750 | ) | 16.19 | ||
Nonvested as of May 29, 2015 | 2,651,663 | $ | 15.50 | ||
9. | REPORTABLE SEGMENTS |
Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate expenses 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 and Turnstone 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, storage and seating solutions. Designtex designs and sells surface materials including textiles and wall coverings which are specified by architects and designers directly to end-use customers primarily in North America. PolyVision manufactures ceramic steel surfaces for use in multiple applications, but primarily for sale to third-party fabricators and distributors to create static whiteboards and chalkboards sold in the primary and secondary education markets globally.
Corporate costs include unallocated portions of shared service functions, such as information technology, human resources, finance, executive, corporate facilities, legal and research, plus deferred compensation expense and income or losses associated with COLI. Corporate assets consist primarily of unallocated cash and investment balances and the cash surrender value of COLI.
11
Revenue and operating income (loss) for the three months ended May 29, 2015 and May 30, 2014 and total assets as of May 29, 2015 and February 27, 2015 by segment are presented below:
Three Months Ended | ||||||||
Reportable Segment Statement of Operations Data | May 29, 2015 | May 30, 2014 | ||||||
Revenue | ||||||||
Americas | $ | 519.7 | $ | 506.3 | ||||
EMEA | 119.9 | 147.6 | ||||||
Other | 65.9 | 69.2 | ||||||
$ | 705.5 | $ | 723.1 | |||||
Operating income (loss) | ||||||||
Americas | $ | 54.1 | $ | 53.2 | ||||
EMEA | (13.5 | ) | (7.7 | ) | ||||
Other | 0.9 | — | ||||||
Corporate | (8.0 | ) | (9.1 | ) | ||||
$ | 33.5 | $ | 36.4 | |||||
Reportable Segment Balance Sheet Data | May 29, 2015 | February 27, 2015 | ||||||
Total assets | ||||||||
Americas | $ | 992.0 | $ | 956.1 | ||||
EMEA | 272.2 | 290.2 | ||||||
Other | 170.1 | 163.1 | ||||||
Corporate | 213.7 | 310.2 | ||||||
$ | 1,648.0 | $ | 1,719.6 | |||||
10. | RESTRUCTURING ACTIVITIES |
In Q1 2016, we recognized a $2.8 gain in the Americas segment related to the sale of our Corporate Development Center that was closed as part of previously announced restructuring actions.
In Q1 2016, we announced restructuring actions in EMEA related to the establishment of a Learning + Innovation Center in Munich, Germany. We expect to incur between $15 and $17 in restructuring costs in connection with this project, including approximately $8 to $10 in costs associated with employee and equipment moves, retention compensation and consulting costs and approximately $7 in potential separation costs. We incurred $0.7 of business exit and other costs in the EMEA segment in connection with these actions during the three months ended May 29, 2015.
In Q2 2015, we announced restructuring actions in EMEA related to the exit of a manufacturing facility in Wisches, France, and the transfer of its activities to other existing facilities in the EMEA region. As a result of these actions, we expect to incur approximately $36 of cash restructuring costs in connection with this project. We incurred $1.0 of business exit and other costs in the EMEA segment in connection with these actions during the three months ended May 29, 2015. During 2015, we incurred $32.8 of business exit and other costs in the EMEA segment in connection with these actions including $27.3 for a facilitation payment related to the transfer of the facility to a third party.
In Q1 2015, we announced restructuring actions in the Americas to close a manufacturing facility in High Point, North Carolina. In connection with this project, we expect to incur approximately $8 of cash restructuring costs, with approximately $4 relating to workforce reductions and approximately $4 relating to manufacturing consolidation and production moves. We incurred $0.7 of employee termination costs and $0.1 of business exit and other related costs in the Americas segment in connection with these actions during the three months ended May 29, 2015. During 2015, we incurred $1.6 of employee termination costs and $0.7 of business exit and other related cost in the Americas segment in connection with these actions.
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In Q1 2015, we recognized a $12.0 gain related to the sale of an idle manufacturing facility in the Americas segment that was closed as part of previously completed restructuring actions.
In Q3 2014, we announced restructuring actions in EMEA to close a manufacturing facility in Durlangen, Germany, and to establish a new manufacturing location in Stribro, Czech Republic. In connection with this project, we expect to incur approximately $23 of cash restructuring costs, with approximately $17 related to employee termination costs and approximately $6 related to business exit and other related costs. We incurred $1.7 of employee termination costs and $0.4 of business exit and other related costs in the EMEA segment in connection with these actions during the three months ended May 29, 2015. During 2015, we incurred $12.7 of employee termination costs and $1.6 of business exit and other related costs in the EMEA segment in connection with these actions.
Restructuring costs (benefits) are summarized in the following table:
Three Months Ended | ||||||||
Restructuring Costs (Benefits) | May 29, 2015 | May 30, 2014 | ||||||
Cost of sales | ||||||||
Americas | $ | 0.8 | $ | (11.6 | ) | |||
EMEA | 3.1 | 1.1 | ||||||
Other | — | — | ||||||
3.9 | (10.5 | ) | ||||||
Operating expenses | ||||||||
Americas | (2.8 | ) | — | |||||
EMEA | 0.8 | 0.8 | ||||||
Other | — | — | ||||||
(2.0 | ) | 0.8 | ||||||
Total | $ | 1.9 | $ | (9.7 | ) | |||
Below is a summary of the net additions, payments and adjustments to the restructuring reserve balance for the three months ended May 29, 2015:
Restructuring Reserve | Employee Termination Costs | Business Exits and Related Costs | Total | ||||||||
Reserve balance as of February 27, 2015 | $ | 13.7 | $ | 1.6 | $ | 15.3 | |||||
Additions | 2.4 | 2.2 | 4.6 | ||||||||
Payments | (0.8 | ) | (2.2 | ) | (3.0 | ) | |||||
Adjustments | (0.4 | ) | — | (0.4 | ) | ||||||
Reserve balance as of May 29, 2015 | $ | 14.9 | $ | 1.6 | $ | 16.5 | |||||
The employee termination costs reserve balance as of May 29, 2015 primarily relates to restructuring actions in EMEA.
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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 27, 2015. 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 Measures
This item contains certain non-GAAP financial measures. A “non-GAAP financial measure” is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the 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 non-GAAP financial measures to the most directly comparable GAAP financial measure.
The non-GAAP financial measures used are: (1) organic revenue growth (decline), which represents the change in revenue 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 are presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors.
Financial Summary
Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate expenses are reported as Corporate.
Results of Operations
Three Months Ended | ||||||||||||||
Statement of Operations Data | May 29, 2015 | May 30, 2014 | ||||||||||||
Revenue | $ | 705.5 | 100.0 | % | $ | 723.1 | 100.0 | % | ||||||
Cost of sales | 485.0 | 68.7 | 504.5 | 69.8 | ||||||||||
Restructuring costs (benefits) | 3.9 | 0.6 | (10.5 | ) | (1.5 | ) | ||||||||
Gross profit | 216.6 | 30.7 | 229.1 | 31.7 | ||||||||||
Operating expenses | 185.1 | 26.3 | 191.9 | 26.5 | ||||||||||
Restructuring costs (benefits) | (2.0 | ) | (0.3 | ) | 0.8 | 0.2 | ||||||||
Operating income | 33.5 | 4.7 | 36.4 | 5.0 | ||||||||||
Interest expense | (4.4 | ) | (0.6 | ) | (4.4 | ) | (0.6 | ) | ||||||
Investment income | 0.4 | — | 0.4 | 0.1 | ||||||||||
Other income, net | 2.0 | 0.3 | 3.5 | 0.5 | ||||||||||
Income before income tax expense | 31.5 | 4.4 | 35.9 | 5.0 | ||||||||||
Income tax expense | 11.5 | 1.6 | 14.9 | 2.1 | ||||||||||
Net income | $ | 20.0 | 2.8 | % | $ | 21.0 | 2.9 | % | ||||||
Earnings per share: | ||||||||||||||
Basic | $ | 0.16 | $ | 0.17 | ||||||||||
Diluted | $ | 0.16 | $ | 0.17 | ||||||||||
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Q1 2016 Organic Revenue Growth (Decline) | Americas | EMEA | Other | Consolidated | ||||||||||||
Q1 2015 revenue | $ | 506.3 | $ | 147.6 | $ | 69.2 | $ | 723.1 | ||||||||
Divestitures | — | (1.3 | ) | — | (1.3 | ) | ||||||||||
Currency translation effects* | (3.9 | ) | (27.2 | ) | (3.0 | ) | (34.1 | ) | ||||||||
Q1 2015 revenue, adjusted | 502.4 | 119.1 | 66.2 | 687.7 | ||||||||||||
Q1 2016 revenue, reported | 519.7 | 119.9 | 65.9 | 705.5 | ||||||||||||
Organic growth (decline) $ | $ | 17.3 | $ | 0.8 | $ | (0.3 | ) | $ | 17.8 | |||||||
Organic growth (decline) % | 3 | % | 1 | % | — | % | 3 | % | ||||||||
* Currency translation effects represent the estimated net effect of translating Q1 2015 foreign currency revenues using the average exchange rates during Q1 2016. | ||||||||||||||||
Three Months Ended | ||||||||||||||
Reconciliation of Operating Income to Adjusted Operating Income | May 29, 2015 | May 30, 2014 | ||||||||||||
Operating income | $ | 33.5 | 4.7 | % | $ | 36.4 | 5.0 | % | ||||||
Add: restructuring costs (benefits) | 1.9 | 0.3 | (9.7 | ) | (1.3 | ) | ||||||||
Adjusted operating income | $ | 35.4 | 5.0 | % | $ | 26.7 | 3.7 | % | ||||||
Overview
In Q1 2016, revenue was $705.5 compared to $723.1 in Q1 2015. Organic revenue growth was 3% compared to the prior year after adjusting for currency translation effects and divestitures, and adjusted operating income was 5.0% of revenue. The Americas posted organic revenue growth of 3%, orders grew 8% compared to the prior year and operating performance in the segment remained strong. EMEA experienced organic revenue growth of 1%, and orders grew 1% (in constant currency) compared to the prior year, which included a large order in France. Organic revenue in the Other category was essentially flat compared with the prior year, as growth in Asia Pacific was offset by declines at PolyVision and Designtex.
We recorded net income of $20.0 in Q1 2016 and $21.0 in Q1 2015. Improvements in adjusted operating income and benefits of a lower effective income tax rate were offset by net restructuring costs in the current year compared to net restructuring benefits in the prior year.
Operating income was $33.5 in Q1 2016 compared to $36.4 in the prior year. Adjusted operating income increased by $8.7 to $35.4 compared to Q1 2015 adjusted operating income of $26.7. The increase was driven by operating improvements in the Americas, partially offset by higher disruption costs and inefficiencies in EMEA.
Cost of sales was 68.7% of revenue in Q1 2016, which represented a 110 basis point improvement compared to Q1 2015. The improvement was driven by benefits of improved pricing, continued cost reduction efforts and lower freight, distribution and warranty costs in the Americas, which were partially offset by an unfavorable shift in business mix in the Americas and an increase in disruption costs and inefficiencies of $3 compared to Q1 2015 associated with manufacturing footprint changes in EMEA. Disruption costs and inefficiencies include labor premiums paid to employees during transition periods and labor inefficiencies caused by work stoppages or slowdowns resulting from restructuring activities. They also include incremental logistics costs caused by split shipments (linked to labor inefficiencies) and interim supply chains during production moves. Lastly, these costs include duplicate labor and overhead at the new Czech Republic facility and other plants impacted by production moves. We believe these costs are temporary and will be eliminated once the manufacturing changes in EMEA are complete and the industrial model returns to normal levels of operating efficiency.
Operating expenses in Q1 2016 of $185.1 represented a decrease of $6.8 and 20 basis points as a percent of revenue compared to Q1 2015. The decrease in dollars was driven by favorable currency translation effects.
We recorded net restructuring costs of $1.9 in Q1 2016 primarily related to actions in EMEA including costs associated with the exit of a manufacturing facility in Wisches, France and the closure of a manufacturing facility in Durlangen, Germany, partially offset by a gain in the Americas segment related to the sale of our Corporate Development Center. In Q1 2015, we recorded net restructuring benefits of $9.7 driven by a gain related to the sale of an idle manufacturing facility in the Americas segment, partially offset by costs in EMEA primarily related to the closure of a manufacturing facility in Durlangen, Germany.
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Our Q1 2016 effective tax rate was 36.5% compared to the Q1 2015 effective tax rate of 41.5%. The decrease was primarily driven by implementing a new transfer pricing model in EMEA in Q4 2015. Our U.S. parent company became the principal in a contract manufacturing model with our Steelcase European subsidiaries. This new model generated taxable income for our Steelcase European subsidiaries in Q1 2016 and allowed for partial utilization of net operating loss carryforwards in Europe which reflected valuation allowances. See Note 7 to the condensed consolidated financial statements for additional information.
Interest Expense, Investment Income and Other Income, Net
Three Months Ended | ||||||||
Interest Expense, Investment Income and Other Income, Net | May 29, 2015 | May 30, 2014 | ||||||
Interest expense | $ | (4.4 | ) | $ | (4.4 | ) | ||
Investment income | 0.4 | 0.4 | ||||||
Other income (expense), net: | ||||||||
Equity in income of unconsolidated ventures | 3.2 | 3.5 | ||||||
Foreign exchange loss | (0.6 | ) | (0.1 | ) | ||||
Miscellaneous, net | (0.6 | ) | 0.1 | |||||
Total other income, net | 2.0 | 3.5 | ||||||
Total interest expense, investment income and other income, net | $ | (2.0 | ) | $ | (0.5 | ) | ||
Other income, net decreased in Q1 2016 primarily due to higher foreign currency losses.
Business Segment Review
See Note 9 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 and Turnstone brands.
Three Months Ended | ||||||||||||||
Statement of Operations Data — Americas | May 29, 2015 | May 30, 2014 | ||||||||||||
Revenue | $ | 519.7 | 100.0 | % | $ | 506.3 | 100.0 | % | ||||||
Cost of sales | 346.3 | 66.6 | 345.9 | 68.3 | ||||||||||
Restructuring costs (benefits) | 0.8 | 0.2 | (11.6 | ) | (2.3 | ) | ||||||||
Gross profit | 172.6 | 33.2 | 172.0 | 34.0 | ||||||||||
Operating expenses | 121.3 | 23.4 | 118.8 | 23.5 | ||||||||||
Restructuring costs (benefits) | (2.8 | ) | (0.6 | ) | — | — | ||||||||
Operating income | $ | 54.1 | 10.4 | % | $ | 53.2 | 10.5 | % | ||||||
Three Months Ended | ||||||||||||||
Reconciliation of Operating Income to Adjusted Operating Income — Americas | May 29, 2015 | May 30, 2014 | ||||||||||||
Operating income | $ | 54.1 | 10.4 | % | $ | 53.2 | 10.5 | % | ||||||
Add: restructuring costs (benefits) | (2.0 | ) | (0.4 | ) | (11.6 | ) | (2.3 | ) | ||||||
Adjusted operating income | $ | 52.1 | 10.0 | % | $ | 41.6 | 8.2 | % | ||||||
Operating income in the Americas increased modestly to $54.1 in Q1 2016 compared to $53.2 in Q1 2015. Adjusted operating income of $52.1 in Q1 2016 represented an improvement of $10.5 compared to Q1 2015 primarily due to benefits associated with organic revenue growth and lower cost of sales, partially offset by higher operating expenses.
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The Americas revenue represented 73.7% of consolidated revenue in Q1 2016. Revenue for Q1 2016 was $519.7 compared to $506.3 in Q1 2015. After adjusting for $3.9 of currency translation effects, organic revenue growth was $17.3 or 3% compared to the prior year. Revenue growth in Q1 2016 is categorized as follows:
• | Product categories — Five out of seven categories grew in Q1 2016, led by Furniture, Turnstone and Coalesse. Seating and Technology declined compared to the prior year. |
• | Vertical markets — Insurance Services, Federal Government, Financial Services, Manufacturing and Technical and Professional experienced strong growth rates, while Energy, Education and Healthcare declined year-over-year. |
• | Geographic regions — The East Business Group posted strong growth while the South and West Business Groups declined. |
• | Contract type — Project business had strong growth, while continuing business and marketing programs declined year-over-year. |
Cost of sales decreased 170 basis points to 66.6% of revenue in Q1 2016 compared to 68.3% of revenue in Q1 2015. The improvement was driven by improved pricing, continued cost reduction efforts and lower freight, distribution and warranty costs, offset in part by an unfavorable shift in business mix.
Operating expenses increased by $2.5 to $121.3 in Q1 2016 compared to the prior year but decreased 10 basis points as a percentage of sales. The improvement was primarily due to operating leverage associated with the revenue growth.
Net restructuring benefits of $2.0 included a $2.8 gain related to the sale of our Corporate Development Center that was closed as part of previously announced restructuring actions, partially offset by costs associated with the planned closure of a manufacturing facility in High Point, North Carolina. Net restructuring benefits of $11.6 in Q1 2015 were primarily driven by a gain related to the sale of an idle 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 | ||||||||||||||
Statement of Operations Data — EMEA | May 29, 2015 | May 30, 2014 | ||||||||||||
Revenue | $ | 119.9 | 100.0 | % | $ | 147.6 | 100.0 | % | ||||||
Cost of sales | 95.1 | 79.3 | 111.7 | 75.6 | ||||||||||
Restructuring costs | 3.1 | 2.6 | 1.1 | 0.7 | ||||||||||
Gross profit | 21.7 | 18.1 | 34.8 | 23.7 | ||||||||||
Operating expenses | 34.4 | 28.7 | 41.7 | 28.3 | ||||||||||
Restructuring costs | 0.8 | 0.7 | 0.8 | 0.5 | ||||||||||
Operating loss | $ | (13.5 | ) | (11.3 | )% | $ | (7.7 | ) | (5.1 | )% | ||||
Reconciliation of Operating Loss to Adjusted Operating Loss — EMEA | Three Months Ended | |||||||||||||
May 29, 2015 | May 30, 2014 | |||||||||||||
Operating loss | $ | (13.5 | ) | (11.3 | )% | $ | (7.7 | ) | (5.1 | )% | ||||
Add: restructuring costs | 3.9 | 3.3 | 1.9 | 1.2 | ||||||||||
Adjusted operating loss | $ | (9.6 | ) | (8.0 | )% | $ | (5.8 | ) | (3.9 | )% | ||||
EMEA reported an operating loss of $13.5 in Q1 2016 compared to an operating loss of $7.7 in Q1 2015. The adjusted operating loss of $9.6 in Q1 2016 compared to an adjusted operating loss of $5.8 in the same period of the prior year. The higher adjusted operating loss was primarily driven by an increase in disruption costs and inefficiencies of $3 compared to Q1 2015 associated with the manufacturing footprint changes, which we expect to complete later this fiscal year.
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EMEA revenue represented 17.0% of consolidated revenue in Q1 2016. Revenue for Q1 2016 was $119.9 compared to $147.6 in Q1 2015. After adjusting for $28.5 of currency translation effects and divestitures, organic revenue grew $0.8 or 1%. Iberia and Africa posted organic revenue growth while the United Kingdom and Germany declined.
Cost of sales climbed to 79.3% of revenue in Q1 2016 from 75.6% of revenue in Q1 2015, a 370 basis point deterioration. The increase in Q1 2016 was driven by an increase in disruption costs and inefficiencies of $3 compared to Q1 2015 associated with the manufacturing footprint changes.
Operating expenses decreased by $7.3 in Q1 2016 compared to the same period last year driven by favorable currency translation effects. As a percentage of sales, operating expenses increased 40 basis points to 28.7% of sales.
Restructuring costs of $3.9 in Q1 2016 were primarily related to costs associated with the exit of a manufacturing facility in Wisches, France and the closure of a manufacturing facility in Durlangen, Germany. Restructuring costs of $1.9 in Q1 2015 were primarily associated with the closure of the facility in Durlangen, Germany and the establishment of a new manufacturing location in Stribro, Czech Republic.
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, storage and seating solutions. Designtex designs and sells surface materials including textiles and wall coverings which are specified by architects and designers directly to end-use customers primarily in North America. PolyVision manufactures ceramic steel surfaces for use in multiple applications, but primarily for sale to third-party fabricators and distributors to create static whiteboards and chalkboards sold in the primary and secondary education markets globally.
Three Months Ended | ||||||||||||||
Statement of Operations Data — Other | May 29, 2015 | May 30, 2014 | ||||||||||||
Revenue | $ | 65.9 | 100.0 | % | $ | 69.2 | 100.0 | % | ||||||
Cost of sales | 43.6 | 66.2 | 46.9 | 67.8 | ||||||||||
Restructuring costs | — | — | — | — | ||||||||||
Gross profit | 22.3 | 33.8 | 22.3 | 32.2 | ||||||||||
Operating expenses | 21.4 | 32.4 | 22.3 | 32.2 | ||||||||||
Restructuring costs | — | — | — | — | ||||||||||
Operating income | $ | 0.9 | 1.4 | % | $ | — | — | % | ||||||
Three Months Ended | ||||||||||||||
Reconciliation of Operating Income to Adjusted Operating Income — Other | May 29, 2015 | May 30, 2014 | ||||||||||||
Operating income | $ | 0.9 | 1.4 | % | $ | — | — | % | ||||||
Add: restructuring costs | — | — | — | — | ||||||||||
Adjusted operating income | $ | 0.9 | 1.4 | % | $ | — | — | % | ||||||
The Other category reported operating income of $0.9 in Q1 2016 compared to breakeven operating income in Q1 2015. The improvement in Q1 2016 is due to lower operating losses in Asia Pacific and improved operating results at Designtex, partially offset by lower operating income at PolyVision.
The Other category revenue represented 9.3% of consolidated revenue in Q1 2016. Revenue decreased by $3.3 or 4.8% in Q1 2016 compared to the prior year. Excluding currency translation effects, organic revenue declined slightly compared to the prior year. Growth in Asia Pacific was offset by declines at PolyVision and Designtex.
Cost of sales as a percent of revenue was 66.2% in Q1 2016 compared to 67.8% in Q1 2015, a 160 basis point improvement. The improvement in Q1 2016 was primarily driven by improvements in Asia Pacific.
Operating expenses decreased by $0.9 or 4.0% in Q1 2016 compared to Q1 2015 but increased slightly as a percent of sales.
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Corporate
Corporate costs include unallocated portions of shared service functions, such as information technology, human resources, finance, executive, corporate facilities, legal and research, plus deferred compensation expense and income or losses associated with COLI.
Three Months Ended | ||||||||
Statement of Operations Data — Corporate | May 29, 2015 | May 30, 2014 | ||||||
Operating expenses | $ | 8.0 | $ | 9.1 | ||||
The decrease in operating expenses in Q1 2016 was primarily due to lower deferred compensation expense and higher income associated with COLI.
Liquidity and Capital Resources
Based on current business conditions, we target a minimum of $75 to $150 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.
Liquidity Sources | May 29, 2015 | February 27, 2015 | |||||
Cash and cash equivalents | $ | 110.5 | $ | 176.5 | |||
Short-term investments | 45.5 | 68.3 | |||||
Company-owned life insurance | 161.0 | 159.5 | |||||
Availability under credit facilities | 157.2 | 154.7 | |||||
Total liquidity | $ | 474.2 | $ | 559.0 | |||
As of May 29, 2015, we held a total of $156.0 in cash and cash equivalents and short-term investments. The majority of our short-term investments are located in the U.S. Of our total $110.5 in cash and cash equivalents, approximately 45% was located in the U.S. and the remaining 55% was located outside of the U.S., primarily in France, Canada, Mexico, Hong Kong and China. The amounts located outside the U.S. would be taxable if repatriated to the U.S., but we do not anticipate repatriating such amounts or needing them for operations in the U.S. 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-term investments are maintained in a managed investment portfolio, which primarily consists of U.S. agency debt securities and corporate debt securities.
Our investments in COLI policies are intended to be utilized as a long-term funding source for long-term employee benefit obligations. However, COLI can be used as a source of liquidity if needed. 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.
Availability under credit facilities may be reduced by the use of cash and cash equivalents and short-term investments for purposes other than the repayment of debt as a result of constraints related to our maximum leverage ratio covenant. See Liquidity Facilities for more information.
19
The following table summarizes our condensed consolidated statements of cash flows for the three months ended May 29, 2015 and May 30, 2014:
Three Months Ended | |||||||
Cash Flow Data | May 29, 2015 | May 30, 2014 | |||||
Net cash provided by (used in): | |||||||
Operating activities | $ | (35.8 | ) | $ | (72.6 | ) | |
Investing activities | (3.8 | ) | 48.8 | ||||
Financing activities | (25.6 | ) | (20.1 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (0.8 | ) | 0.4 | ||||
Net decrease in cash and cash equivalents | (66.0 | ) | (43.5 | ) | |||
Cash and cash equivalents, beginning of period | 176.5 | 201.8 | |||||
Cash and cash equivalents, end of period | $ | 110.5 | $ | 158.3 | |||
Cash provided by operating activities
Three Months Ended | |||||||
Cash Flow Data — Operating Activities | May 29, 2015 | May 30, 2014 | |||||
Net income | $ | 20.0 | $ | 21.0 | |||
Depreciation and amortization | 16.2 | 14.7 | |||||
Deferred income taxes | 24.8 | 13.0 | |||||
Non-cash restructuring costs (benefits) | 1.9 | (9.7 | ) | ||||
Non-cash stock compensation | 8.8 | 9.6 | |||||
Equity in income of unconsolidated affiliates | (3.3 | ) | (3.7 | ) | |||
Dividends received from unconsolidated affiliates | 3.2 | 2.3 | |||||
Other | (1.4 | ) | (1.7 | ) | |||
Changes in accounts receivable, inventories and accounts payable | (13.1 | ) | (16.9 | ) | |||
Changes in employee compensation liabilities | (78.5 | ) | (74.4 | ) | |||
Assets related to derivative instruments | 22.5 | (1.5 | ) | ||||
Changes in other operating assets and liabilities | (36.9 | ) | (25.3 | ) | |||
Net cash used in operating activities | $ | (35.8 | ) | $ | (72.6 | ) | |
Cash used in operating activities in Q1 2016 and Q1 2015 included the payment of employee compensation liabilities related to prior year variable compensation and retirement plan contributions. In addition, Q1 2016 included proceeds from the settlement of foreign exchange forward contracts. Beyond these items, operating cash flows in Q1 2016 also reflected improved operating results compared to the prior year.
Cash used in investing activities
Three Months Ended | |||||||
Cash Flow Data — Investing Activities | May 29, 2015 | May 30, 2014 | |||||
Capital expenditures | $ | (24.2 | ) | $ | (15.8 | ) | |
Proceeds from disposal of fixed assets | 4.1 | 19.0 | |||||
Purchases of short-term investments | (6.9 | ) | (27.0 | ) | |||
Liquidations of short-term investments | 29.7 | 62.8 | |||||
Acquisitions, net of cash acquired | (6.6 | ) | — | ||||
Other | 0.1 | 9.8 | |||||
Net cash provided by (used in) investing activities | $ | (3.8 | ) | $ | 48.8 | ||
Capital expenditures in Q1 2016 included progress payments toward a replacement corporate aircraft. A small dealer in the Americas segment was acquired in Q1 2016. The higher purchases of short-term investments in Q1 2015 primarily related to the receipt of proceeds related to the sale of a former manufacturing facility and the
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repayment of a note receivable from a dealer in the Americas segment. Liquidations of short term investments are primarily related to the funding of our operations.
Cash used in financing activities
Three Months Ended | |||||||
Cash Flow Data — Financing Activities | May 29, 2015 | May 30, 2014 | |||||
Dividends paid | (15.1 | ) | (13.6 | ) | |||
Common stock repurchases | (11.5 | ) | (5.9 | ) | |||
Other | 1.0 | (0.6 | ) | ||||
Net cash used in financing activities | $ | (25.6 | ) | $ | (20.1 | ) | |
We paid dividends of $0.1125 per common share during Q1 2016 and $0.105 per share during Q1 2015.
In Q1 2016, we made common stock repurchases of 577,767 shares, most of which were made to satisfy participants’ tax withholding obligations upon the vesting of restricted stock unit grants, pursuant to the terms of our Incentive Compensation Plan. As of the end of Q1 2016, we had $60.7 of remaining availability under the $250 share repurchase program approved by our Board of Directors in Q4 2008.
Off-Balance Sheet Arrangements
During Q1 2016, no material change in our off-balance sheet arrangements occurred.
Contractual Obligations
During Q1 2016, no material change in our contractual obligations occurred.
Liquidity Facilities
Our total liquidity facilities as of May 29, 2015 were:
Liquidity Facilities | May 29, 2015 | ||
Global committed bank facility | $ | 125.0 | |
Other secured committed bank facility | 5.0 | ||
Various uncommitted lines | 27.2 | ||
Total credit lines available | 157.2 | ||
Less: Borrowings outstanding | — | ||
Available capacity | $ | 157.2 | |
We have a $125 global committed five-year unsecured revolving syndicated credit facility which was entered into in 2013. The facility requires us to satisfy financial covenants including a maximum leverage ratio covenant and a minimum interest coverage ratio covenant. Additionally, the facility requires us to comply with certain other terms and conditions, including a restricted payment covenant which establishes a maximum level of dividends and/or other equity-related distributions or payments (such as share repurchases) we may make in any fiscal year. As of May 29, 2015, we were in compliance with all covenants under the facility. In addition, we have a $5.0 secured revolving credit facility associated with a small dealer acquired during Q1 2016.
The various uncommitted lines may be changed or canceled by the banks at any time. There were no outstanding borrowings under the uncommitted facilities as of May 29, 2015. In addition, we have revolving letter of credit agreements for $10.7 of which $8.6 was utilized primarily related to our self-insured workers’ compensation programs as of May 29, 2015. There were no draws on our standby letters of credit during Q1 2016.
Total consolidated debt as of May 29, 2015 was $281.8. Our debt primarily consists of $247.8 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 May 29, 2015 of $32.9. This term loan has a floating interest rate based on 30-day LIBOR plus 3.35% and is due in 2017. The term notes are unsecured, the term loan is secured by two corporate aircraft, and neither the term notes nor the term loan contain financial covenants or are cross-defaulted to other debt facilities.
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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 believe the timing, strength and continuity of the economic recovery across certain geographies we serve remain uncertain which may continue to dampen our level of cash generation from operations. We continue to maintain a conservative approach to liquidity and maintain flexibility over significant uses of cash including our capital expenditures and discretionary operating expenses.
Our significant funding requirements include operating expenses, non-cancelable operating lease obligations, capital expenditures, variable compensation and retirement plan contributions, dividend payments and debt service obligations.
We currently expect capital expenditures to approximate $100 in 2016 compared to $98 in 2015. This amount includes progress payments toward a replacement corporate aircraft, global upgrades to various manufacturing technologies and investments in showrooms.
On June 24, 2015, we announced a quarterly dividend on our common stock of $0.1125 per share, or $14.0, to be paid in Q2 2016. Future dividends will be subject to approval by our Board of Directors and compliance with the restricted payment covenant of our credit facilities.
Critical Accounting Estimates
During Q1 2016, 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 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. 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; our restructuring activities; 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 May 29, 2015 is the same as disclosed in our Annual Report on Form 10-K for the year ended February 27, 2015. 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 Q1 2016, no material change in foreign exchange risk occurred.
Interest Rate Risk
During Q1 2016, no material change in interest rate risk occurred.
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Fixed Income and Equity Price Risk
During Q1 2016, 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 May 29, 2015. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of May 29, 2015, 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 first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 Q1 2016:
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) | ||||||
02/28/2015 - 04/03/2015 | 516,532 | $ | 20.15 | — | $ | 61.6 | ||||
04/04/2015 - 05/01/2015 | 3,710 | $ | 18.66 | — | $ | 61.6 | ||||
05/02/2015 - 05/29/2015 | 57,525 | $ | 17.15 | 55,749 | $ | 60.7 | ||||
Total | 577,767 | (2) | 55,749 | |||||||
_______________________________________
(1) | In December 2007, our Board of Directors approved a share repurchase program permitting the repurchase of up to $250 of shares of our common stock. This program has no specific expiration date. |
(2) | 522,018 shares were repurchased to satisfy participants’ tax withholding obligations upon the vesting of restricted stock unit grants, pursuant to the terms of our Incentive Compensation Plan. |
Item 6. | Exhibits: |
See Exhibit Index.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STEELCASE INC. | |
By: | /s/ Mark T. Mossing |
Mark T. Mossing Corporate Controller and Chief Accounting Officer (Duly Authorized Officer and Principal Accounting Officer) | |
Date: June 26, 2015
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Exhibit Index
Exhibit No. | Description |
10.1 | Steelcase Inc. Incentive Compensation Plan Form of Performance Units Agreement (TSR) (FY 2016) (1) |
10.2 | Steelcase Inc. Incentive Compensation Plan Form of Performance Units Agreement (ROIC) (FY 2016) (2) |
10.3 | Steelcase Inc. Incentive Compensation Plan Form of Restricted Stock Units Agreement (FY 2016) (3) |
31.1 | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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 April 17, 2015 and incorporated herein by reference. |
(2) | Filed as Exhibit 10.2 to the Company’s Form 8-K, as filed with the Commission on April 17, 2015 and incorporated herein by reference. |
(3) | Filed as Exhibit 10.3 to the Company’s Form 8-K, as filed with the Commission on April 17, 2015 and incorporated herein by reference. |
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