UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-K

 

Commission File Number 1-13873

 

 

 

 

STEELCASE INC.

(Exact name of Registrant as specified in its Charter)

 

 

Registrant’s telephone number, including area code: (616) 247-2710

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Securities registered pursuant to 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No x

 

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 (§ 229.405 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 o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 o          Accelerated filer x          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 Act).  Yes o     No þ

 

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates, computed by reference to the closing price of the Class A Common Stock on the New York Stock Exchange, as of August 28, 2009 (the last day of the registrant’s most recently completed second fiscal quarter) was approximately $467 million. There is no quoted market for registrant’s Class B Common Stock, but shares of Class B Common Stock may be converted at any time into an equal number of shares of Class A Common Stock.

 

As of April 23, 2010, 83,899,442 shares of the registrant’s Class A Common Stock and 49,075,054 shares of the registrant’s Class B Common Stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the registrant’s definitive proxy statement for its 2010 Annual Meeting of Shareholders, to be held on June 24, 2010, are incorporated by reference in Part III of this Form 10-K.

 

 

STEELCASE INC.
FORM 10-K

YEAR ENDED FEBRUARY 26, 2010

TABLE OF CONTENTS

 

 

 

The following business overview is qualified in its entirety by the more detailed information included elsewhere or incorporated by reference in this Annual Report on Form 10-K (“Report”). As used in this 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.

 

Our Business

 

Steelcase is the global leader in furnishing the work experience in office environments. We aspire to create great experiences, wherever work happens. We provide products and services founded in a research methodology that generates insights about how people work and how spaces can help create great experiences. We offer a comprehensive portfolio of products and services for the workplace, inspired by insights gained serving the world’s leading organizations for nearly 100 years.

 

We design for a wide variety of customer needs through our three core brands: Steelcase, Turnstone and Coalesse. The primary focus of these brands is the office furniture segment, but we also extend our capabilities to serve needs in areas such as healthcare, education and distributed work. Our strategy is to grow by leveraging our deep understanding of the patterns of work, workers and workplaces to offer solutions to help our existing customers migrate to new ways of working, and to grow our business into new customer markets and new geographies.

 

Insights are core to everything we do. We study the ways people work, and we collaborate with a global network of research partners including leading universities, research institutes and corporations. We seek to understand and recognize emerging social, spatial and informational patterns and create products and solutions that solve for the intersection of all three. By focusing our insights on the overlap of these elements, we can create products and solutions that enable better social interactions, enhance collaboration, and facilitate greater information sharing. This approach is the lens through which we filter opportunities for development.

 

We create value by translating our insights into products, solutions and experiences that solve our customers’ critical business issues at competitive prices. Our insights are translated into products, solutions and experiences through thoughtful design, which we define as being smart, desirable and viable. When we understand something new about the way people work and address that insight with a product, it’s smart. When we create experiences or objects that are considered refined and highly relevant, they are desirable. And when we do this with fewer, more understandable elements, it’s viable. We incorporate sustainability in our approach to design, manufacturing, delivery and product life cycle, and we consider the impact of our work on the environment. At Steelcase our approach to sustainability is holistic, scientific, measureable and long-term in focus.

 

We offer our products and services to customers around the globe, and we have significant sales, manufacturing and administrative operations in North America, Europe and Asia. We market our products and services primarily through a highly networked group of independent and company-owned dealers, and we also sell directly to end-use customers. We extend our reach with a presence in retail and web-based channels.

 

Founded in 1912, Steelcase became a publicly-traded company in 1998, and our stock is listed on the New York Stock Exchange under the symbol “SCS.” Headquartered in Grand Rapids, Michigan,

U.S.A., Steelcase is a global company with approximately 11,000 employees and 2010 revenue of approximately $2.3 billion.

 

Our Offerings

 

Our brands provide an integrated portfolio of furniture systems and seating, user-centered technologies and interior architectural products across a range of price points. Our furniture portfolio includes panel-based and freestanding furniture systems and complementary products such as storage, tables and ergonomic worktools. Our seating products include chairs which are highly ergonomic, seating that can be used in collaborative or casual settings and specialty seating for specific vertical markets such as healthcare and education. Our technology solutions support group collaboration with interactive whiteboards and web-based communication tools. Our interior architectural products include full and partial height walls and doors. We also offer services designed to enhance people performance and reduce costs. Among these services are workplace strategy consulting, product design and innovation services through IDEO, lease origination services, and furniture and asset management.

 

Steelcase—Insight-led performance

 

The Steelcase brand takes our insights and delivers high performance, sustainable work environments and strives to be a trusted partner. Being a trusted partner means understanding and helping our customers and partners who truly seek to elevate their performance. The Steelcase brand’s core customers are leading organizations (such as corporations, healthcare organizations, colleges/universities and government entities) that are often large with complex needs and who have an increasingly global reach. We strive to meet their diverse needs while minimizing complexity by using platforms—from product components to common processes—wherever possible.

 

Steelcase sub-brands include:

 

 

Turnstone—Insight-led simplicity

 

Turnstone is focused on making it easy and compelling for emerging companies to create great working spaces. Today, emerging companies do not have easy access to solutions that will help them work more effectively. These companies are faced with many of the same complex problems as larger established companies—but without the professional help. Turnstone strives to provide simple solutions for the complex social, spatial and informational problems of emerging companies through thoughtful products and solutions, convenient access and a great experience.

 

Coalesse—Insight-led inspiration

 

Coalesse is founded on the belief that the boundaries between work and life have blurred and seeks to design solutions that support meaningful experiences and create inspiring spaces. Coalesse offers products that knit together the rich design histories of our Brayton, Metro and Vecta brands. Coalesse collaborates with some of the world’s best design talent to create inspired solutions that challenge generic approaches to home and office environments. Coalesse’s clients desire premium performance and versatility in furnishings that can be applied in a home workplace as elegantly as a professional office environment.

Designtex, which is a sub-brand of Coalesse, is a design, marketing, sales and distribution business focused on providing insight-led environment enhancement. Designtex products are premium surface materials designed to enhance seating, walls, work stations, floors and ceilings, and can provide privacy, way-finding, motivation, communications and artistic expression.

 

PolyVision

 

PolyVision’s focus is to understand the needs of K-12 teachers and students and to develop tools that bring learning to life in an effort to provide a better learning experience for students globally. PolyVision provides a comprehensive offering of visual communication solutions, including static and interactive electronic whiteboards.

 

Reportable Segments

 

We operate on a worldwide basis within our North America and International reportable segments plus an “Other” category. Additional information about our reportable segments, including financial information about geographic areas, is contained in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 17 to the consolidated financial statements.

 

North America Segment

 

Our North America segment serves customers in the United States (“U.S.”) and Canada. Our portfolio of integrated architecture, furniture and technology products is marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Turnstone, Details and Nurture by Steelcase brands.

 

We serve North America customers mainly through approximately 230 independent and company-owned dealers and we also sell directly to end-use customers. Our end-use customers are distributed across a broad range of industries and vertical markets including healthcare, government, financial services, higher education and technology, but no industry or vertical market individually represented more than 14% of the North America segment revenue in 2010. The healthcare, government and higher education vertical markets collectively represented approximately 38% of 2010 North America revenue. These vertical markets experienced lower declines in 2010 than other vertical markets. In addition, the revenue decline in the financial services vertical market was lower than average in 2010, as this vertical market entered the downturn earlier than other markets and experienced a significant decline in 2009.

 

Each of our dealers maintains its own sales force, which is complemented by our sales representatives who work closely with our dealers throughout the selling process. The largest independent dealer in North America accounted for approximately 6% of the segment’s revenue in 2010 and the five largest independent dealers collectively accounted for approximately 16% of the segment’s revenue. We do not believe our business is dependent on any single dealer, the loss of which would have a sustained material adverse effect upon our business. From time to time, we extend financial support to our dealers. The type of involvement varies, but it most often takes the form of asset-backed lending or term notes to facilitate the transition of a dealership to owners suitable to us. Depending on the situation, accounting rules may require us to consolidate a dealer for a period of time when we extend such financing.

 

In 2010, the North America segment recorded revenue of $1,237.4, or 54.0% of our consolidated revenue, and as of the end of the year had approximately 6,000 employees, of which approximately 3,800 related to manufacturing.

 

The North America office furniture industry is highly competitive, with a number of competitors offering similar categories of products. The industry competes on a combination of insight, product performance, design, price and relationships with customers, architects and designers. Our most significant competitors in the U.S. are Haworth, Inc., Herman Miller, Inc., HNI Corporation, Kimball International Inc. and Knoll, Inc. Together with Steelcase, these companies represent more than one-half of the U.S. office furniture industry by revenue.

International Segment

 

Our International segment serves customers outside of the U.S. and Canada primarily under the Steelcase brand, with an emphasis on freestanding furniture systems, storage and seating solutions. The international office furniture market is highly competitive and fragmented. We compete with many local and regional manufacturers in many different markets. In many cases, these competitors focus on specific product categories. Our largest presence is in Western Europe, where we have the leading market share in Germany, France and Spain. In 2010, approximately 70% of International revenue was from Western Europe. The remaining revenue was from Northern, Central, Eastern and Southern Europe, Latin America, Asia Pacific, the Middle East and Africa. No individual country represents more than 8% of our consolidated revenue.

 

We serve International customers through approximately 440 independent and company-owned dealers. In certain geographic markets, we sell directly to end-use customers. No single independent dealer in the International segment accounted for more than 3% of the segment’s revenue in 2010. The five largest independent dealers collectively accounted for approximately 8% of the segment’s revenue.

 

In 2010, our International segment recorded revenue of $641.6, or 28.0% of our consolidated revenue, and as of the end of the year had approximately 3,300 employees, of which approximately 2,000 related to manufacturing.

 

Other Category

 

The Other category includes the Coalesse Group, PolyVision and IDEO.

 

The Coalesse Group is comprised of the Coalesse and Designtex brands. Coalesse serves the markets of executive office, conference, lounge, teaming environments and residential live/work solutions utilizing a commissioned sales force with revenue primarily generated through our North America dealer network. Designtex primarily sells products specified by architects and designers directly to end-use customers through a direct sales force.

 

PolyVision designs and manufactures visual communication products, such as static and interactive electronic whiteboards, including a family of interactive electronic whiteboards called çno launched in 2010. PolyVision also manufactures steel and ceramic surfaces for sale to third-party fabricators to create static whiteboards sold in the primary and secondary education markets in the U.S. and Europe. In 2010, PolyVision exited the final portion of the public bid contractor whiteboard fabrication business in the U.S. PolyVision previously manufactured and sold corporate whiteboard and certain other corporate technology products which were transferred to the Steelcase brand in the North America segment during 2009. PolyVision’s sales of visual communication products are primarily through audio-visual resellers and our North America dealer network.

 

IDEO is an innovation and design firm that uses a human-centered, design-based approach to generate new offerings and build new capabilities for its customers. IDEO serves Steelcase and a variety of other organizations within consumer products, financial services, healthcare, information technology, government, transportation and other industries. We have a collaborative relationship with IDEO which generates innovative solutions and customer experience insights.

 

In 2008, we entered into an agreement which will allow certain members of the management of IDEO to purchase a controlling equity interest in IDEO in two phases by 2013. The agreement allows us to retain a minimum 20% equity interest in IDEO, and we expect to continue our collaborative relationship with IDEO during and after this ownership transition. As of February 27, 2009, IDEO management effectively purchased 20% of IDEO under the first phase of the agreement. Phase two of the agreement began in 2010 and allows IDEO management to purchase an additional 60% equity interest to be completed by the end of 2012. Phase two also includes a variable compensation program that may provide IDEO management with a portion of the funding for the remaining purchase.

In 2010, the Other category accounted for $412.7, or 18.0% of our total revenue, and as of the end of the year had approximately 1,700 employees, of which approximately 700 related to manufacturing.

 

Corporate Expenses

 

Corporate costs include portions of shared service functions such as information technology, human resources, finance, executive, corporate facilities, legal and research. Approximately 82% of corporate expenses were charged to the operating segments in 2010 as part of a corporate allocation. Unallocated corporate expenses are reported as Corporate.

 

Joint Ventures and Other Equity Investments

 

We enter into joint ventures and other equity investments from time to time to expand or maintain our geographic presence, support our distribution network or invest in complementary products and services. As of February 26, 2010, our investment in these unconsolidated joint ventures and other equity investments was $24.3. Our portion of the income or loss from joint ventures and other equity investments is recorded in Other income, net on the Consolidated Statements of Operations.

 

Customer and Dealer Concentrations

 

Our largest direct-sale customer accounted for 0.4% of our consolidated revenue in 2010, and our five largest direct-sale customers collectively accounted for 1.6% of our consolidated revenue. However, these percentages do not include revenue from various government agencies. In aggregate, entities purchasing under our U.S. General Services Administration contract collectively accounted for approximately 4% of our consolidated revenue. We do not believe our business is dependent on any single or small number of end-use customers, the loss of which would have a material adverse effect on our business.

 

No single independent dealer accounted for more than 4% of our consolidated revenue in 2010. The five largest independent dealers collectively accounted for approximately 10% of our consolidated revenue. We do not believe our business is dependent on any single dealer, the loss of which would have a sustained material adverse effect upon our business.

 

Working Capital

 

Our accounts receivable are from our dealers and direct-sale customers. Payment terms vary by country and region. The terms of our North America segment, and certain markets within the International segment, encourage prompt payment from dealers by offering an early settlement discount. Other international markets have, by market convention, longer payment terms. We are not aware of any special or unusual practices or conditions related to working capital items, including accounts receivable, inventory and accounts payable, which are significant to understanding our business or the industry at large.

 

Backlog

 

Our products are generally manufactured and shipped within two to six weeks following receipt of order; therefore, we do not view the amount of backlog at any particular time as a meaningful indicator of longer-term shipments.

 

Global Manufacturing and Supply Chain

 

Manufacturing and Logistics

 

We have manufacturing operations throughout North America, Europe (principally in France, Germany and Spain) and in Asia (principally in China and Malaysia).

We have evolved our manufacturing and supply chain systems significantly over the past several years by implementing lean manufacturing principles. In particular, we have focused on implementing continuous one-piece flow, platforming our processes and product offerings, and developing a global network of integrated suppliers. Any operation which cannot be part of one-piece flow may be evaluated to see whether outside partners would offer better levels of service, quality and cost. Our global manufacturing operations are centralized under a single organization to serve our customers’ needs across multiple brands and geographies.

 

This approach has reduced the capital needs of our business, inventory levels and the footprint of our manufacturing space, while at the same time, allowing us to improve quality, delivery performance and the customer experience. We continue to identify opportunities to further reduce excess capacity and redundancy while remaining focused on our growth strategies. In 2010, we completed a series of actions to consolidate our manufacturing facilities globally. In 2011, we have initiated a formal procedure of discussions with local work councils regarding a project to reorganize our European manufacturing operations.

 

In addition to our ongoing focus on enhancing the efficiency of our manufacturing operations, we also seek to reduce costs through our global sourcing effort. We have capitalized on raw material and component cost savings available through lower cost suppliers around the globe. This global view of potential sources of supply has enhanced our leverage with domestic supply sources, and we have been able to reduce cycle times through improvements from all levels throughout the supply chain.

 

Our physical distribution system utilizes dedicated fleet, commercial transport and company-owned delivery services. Over the past several years, we have implemented a network of regional distribution centers to reduce freight costs and improve service to our dealers and customers. Some of these distribution centers are located within our manufacturing facilities, and we have engaged third party logistics providers to operate most of these regional distribution centers.

 

Raw Materials and Energy Prices

 

We source raw materials and components from a significant number of suppliers around the world. Those raw materials include steel and other metals, plastics, fabrics, wood, paint and other materials and components. To date, we have not experienced any significant difficulties in obtaining these raw materials.

 

The prices for certain commodities such as steel, aluminum, wood, particleboard and petroleum-based products have fluctuated significantly in recent years due to changes in global supply and demand. Our global supply chain team continually evaluates current market conditions, the financial viability of our suppliers and available supply options on the basis of cost, quality and reliability of supply.

 

Research, Design and Development

 

Our extensive global research—a combination of user observations, feedback sessions and sophisticated analysis—has helped us develop social, spatial and informational insights into work effectiveness. We maintain collaborative relationships with external world-class innovators, including leading universities, think tanks and knowledge leaders, to expand and deepen our understanding of how people work.

 

Understanding patterns of work enables us to identify and anticipate user needs across the globe. Our design teams explore and develop prototypical solutions to address these needs. These solutions vary from furniture, architecture and technology solutions to single products or enhancements to existing products and across different vertical market applications such as healthcare, higher education and professional services. Organizationally, global design leadership directs strategy and project work, which is distributed to design studios across our major businesses and often involves external design services.

 

Our marketing team evaluates product concepts using several criteria, including financial return metrics, and chooses which products will be developed and launched. Designers then work closely with engineers and suppliers to co-develop products and processes that incorporate innovative user features

with efficient manufacturing practices. Products are tested for performance, quality and compliance with applicable standards and regulations.

 

Exclusive of royalty payments, we invested $33.0, $50.0 and $60.9 in research, design and development activities in 2010, 2009 and 2008, respectively. In 2010, research, design and development spending was down due to benefits from cost reduction efforts, lower variable compensation expense and temporary reductions in employee salaries and retirement benefits. We continue to invest approximately one to two percent of our revenue in research, design and development each year. Royalties are sometimes paid to external designers of our products as the products are sold. These costs are not included in the research, design and development costs since they are variable, based on product sales.

 

Intellectual Property

 

We generate and hold a significant number of patents in a number of countries in connection with the operation of our business. We also hold a number of trademarks that are very important to our identity and recognition in the marketplace. We do not believe that any material part of our business is dependent on the continued availability of any one or all of our patents or trademarks or that our business would be materially adversely affected by the loss of any of such, except the “Steelcase,” “Turnstone,” “Coalesse,” “IDEO,” “PolyVision,” “Designtex,” “Details” and “Nurture by Steelcase” trademarks.

 

We occasionally enter into license agreements under which we pay a royalty to third parties for the use of patented products, designs or process technology. We have established a global network of intellectual property licenses with our subsidiaries. We also selectively license our intellectual property to third parties as a revenue source.

 

Employees

 

As of February 26, 2010, we had approximately 11,000 employees, including 5,200 hourly employees and 5,800 salaried employees. Additionally, we had approximately 400 temporary workers who primarily work in manufacturing. Approximately 130 employees in the U.S. are covered by collective bargaining agreements. Internationally, approximately 1,100 employees are represented by workers’ councils that operate to promote the interests of workers. Management promotes positive relations with employees based on empowerment and teamwork.

 

Environmental Matters

 

We are subject to a variety of federal, state, local and foreign laws and regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment (“Environmental Laws”). We believe our operations are in substantial compliance with all Environmental Laws. We do not believe existing Environmental Laws and regulations have had or will have any material effects upon our capital expenditures, earnings or competitive position.

 

Under certain Environmental Laws, we could be held liable, without regard to fault, for the costs of remediation associated with our existing or historical operations. We could also be held responsible for third-party property and personal injury claims or for violations of Environmental Laws relating to contamination. We are a party to, or otherwise involved in, proceedings relating to several contaminated properties being investigated and remediated under Environmental Laws, including as a potentially responsible party in several Superfund site cleanups. Based on our information regarding the nature and volume of wastes allegedly disposed of or released at these properties, the total estimated cleanup costs and other financially viable potentially responsible parties, we do not believe the costs to us associated with these properties will be material, either individually or in the aggregate. We have established reserves that we believe are adequate to cover our anticipated remediation costs. However, certain events could cause our actual costs to vary from the established reserves. These events include, but are not limited to: a change in governmental regulations or cleanup standards or requirements; undiscovered information regarding the nature and volume of wastes allegedly disposed of or released at these

properties; and other factors increasing the cost of remediation or the loss of other potentially responsible parties that are financially capable of contributing toward cleanup costs.

 

Available Information

 

We file annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, including Steelcase, that file electronically with the SEC.

 

We also make available free of charge through our internet website, www.steelcase.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, as soon as reasonably practicable after we electronically file such reports with or furnish them to the SEC. In addition, our Corporate Governance Principles, Code of Ethics, Code of Business Conduct and the charters for the Audit, Compensation and Nominating and Corporate Governance Committees are available free of charge through our website or by writing to Steelcase Inc., Investor Relations, GH-3C, PO Box 1967, Grand Rapids, Michigan 49501-1967.

 

We are not including the information contained on our website as a part of, or incorporating it by reference into, this Report.

 

 

The following risk factors and other information included in this annual report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we do not know about currently, or that we currently believe are less significant, may also adversely affect our business, operating results, cash flows and financial condition. If any of these risks actually occur, our business, operating results, cash flows and financial condition could be materially adversely affected.

 

Our industry is influenced significantly by cyclical macroeconomic factors.

 

Our revenues come predominantly from the office furniture industry, and demand for office furniture is influenced heavily by a variety of macroeconomic factors such as corporate profits, non-residential fixed investment, white-collar employment and commercial office construction and vacancy rates. During the past ten years, the U.S. office furniture industry has gone through two major downturns, with consumption declining by more than 30% from calendar year 2000 to 2003 and again from 2007 to 2009, according to the Business and Institutional Furniture Manufacturer’s Association. During these downturns, our profitability has been significantly reduced. If the magnitude and frequency of cyclical downturns continues and we are not successful in adapting our business model, our profitability could be further impacted in the future.

 

The current global recession may have a prolonged adverse effect on our business.

 

Our revenues have declined significantly since the beginning of the current global recession, from $3.4 billion in 2008 to $2.3 billion in 2010. This decline has had a negative effect on our profitability, as well as the profitability of our dealers. Historically, the office furniture industry has lagged in recovery from an overall economic recovery by two to three quarters; however, due to the global financial crisis underlying this recession, it is possible that business capital spending and employment growth, coming out of this downturn, may be slower than typical, which would extend the recovery timeline for our industry and our company. If the recovery from this recession is prolonged, our results of operations will continue to be negatively impacted. In such circumstances, we may take further action to restructure our business, which would result in additional restructuring costs, and we may delay progress on our growth

initiatives. In addition, the profitability and liquidity of our dealers, suppliers and customers could continue to be negatively impacted, which may result in increased provisions for credit losses, manufacturing delays and lower demand for our products.

 

Failure to respond to workplace trends may adversely affect our revenue and profits.

 

Changes in technology and the nature and location of work can have a significant impact on the demand for office furniture, the types of products purchased and the geographic location of the demand. For example, in recent years, workplace trends, driven largely by technology and the mobility of workers, have included a reduction in the amount of office floor space allocated per employee, a reduction in size and price of a typical workstation and an increase in telecommuting and work space hoteling. If we are unsuccessful in developing and offering products which respond to changes in the workplace, or if we fail to adapt our business to the geographic changes in where work is performed, our revenue and profits may be adversely affected.

 

We may not be able to successfully implement and manage our growth strategies.

 

We believe our future success depends on our ability to successfully implement and manage growth strategies that will preserve our position as the world’s largest office furniture manufacturer, as well as expand our offerings into adjacent and emerging markets. In particular, our strategies include:

 

 

If we do not implement our strategies successfully, or if our strategies are not sufficient to diversify and expand our revenue stream, our revenues and results of operations may be adversely affected.

 

Our continuing efforts to restructure our business will result in additional restructuring costs and may result in customer disruption.

 

Over the past decade, we have implemented significant restructuring actions at an aggregate cost of more than $300. The focus of these actions has been on reinventing our industrial system through implementation of lean manufacturing principles, manufacturing facility consolidation and simplifying our product portfolio, and on reducing our operating expenses through white collar workforce reductions, applying lean-in-the-office principles, reinventing work processes and opening shared services centers in Malaysia and Mexico. Since 2000, we have reduced our manufacturing footprint (measured in square footage) globally by more than 50%, and our total number of employees globally has declined from 20,900 to 11,000. We continue to evolve and optimize our business model to be flexible and agile in meeting changing demand, and additional restructuring actions may be necessary as we continue to evolve our cost structure.

 

The success of our restructuring initiatives is dependent on several factors, including our ability to manage these actions without disrupting existing customer commitments. Further, these actions may not be accomplished as quickly or effectively as anticipated and may distract management from other activities, and we may not realize the benefits of our restructuring activities, either of which would have a negative impact on our results of operations.

Our investments in company-owned life insurance may continue to have a material effect on our earnings.

 

We have invested in company-owned life insurance policies as a long-term funding source for certain employee post-retirement medical benefit, deferred compensation and supplemental retirement plan obligations. As of February 26, 2010, the cash surrender value of these investments was $209.6 on our Consolidated Balance Sheet. A portion of these policies are variable life insurance policies which are invested, at our direction, in equity and fixed income investments. As a result, the cash surrender values of these policies can increase or decline significantly based on volatility in the capital markets, which in turn can have a significant impact on our results of operations. During 2009, declines in the investments within our variable life insurance policies resulted in a non-tax deductible loss of $(42.1), and during 2010, we recorded non-taxable income of $33.3 from these policies.

 

Our global presence subjects us to risks that may negatively affect our profitability and financial condition.

 

We have manufacturing facilities and sales, administrative and shared services offices in many countries, and as a result, we are subject to risks associated with doing business globally. Our global presence is subject to risks that may limit our ability to design, develop, manufacture, or sell products in particular countries, which in turn could have an adverse effect on our results of operations and financial condition, including:

 

 

We may be adversely affected by changes in raw material and commodity costs.

 

We procure raw materials from a significant number of sources globally. These raw materials are not rare or unique to our industry. The cost of petroleum-based products, steel, wood, particleboard, aluminum, copper and other commodities, such as fuel and energy, has fluctuated significantly in recent years due to changes in global supply and demand. These changes can also lead to supply interruptions. Our gross margins could be affected if these types of costs continue to fluctuate. In the short term, rapid changes in raw material costs can be very difficult to offset with price increases because of contractual agreements we have entered into with our customers and are difficult to find effective financial instruments to hedge against. Also, if we are not successful in passing along higher raw material costs to our customers, because of competitive pressures, our profitability could be negatively impacted.

Disruptions to the supply of raw materials, component parts and labor in our manufacturing operations could adversely affect our supply chain management.

 

We are reliant on the timely flow of raw materials and components from third party suppliers and labor in our own manufacturing operations. The flow of such materials and components may be affected by:

 

 

Our migration to a less vertically integrated manufacturing model has increased our reliance on a global network of suppliers. Any disruptions in the supply and delivery of component parts and products or deficiencies in our ability to develop and manage our network of suppliers could have an adverse impact on our business, operating results or financial condition.

 

Disruptions within our dealer network could adversely affect our business.

 

We rely largely on a network of over 650 independent and company-owned dealers to market, deliver and install our products to customers. Our business is influenced by our ability to initiate and manage new and existing relationships with dealers. We have relatively low turnover of dealers in a typical year.

 

From time to time, we or a dealer may choose to terminate our relationship, or the dealer could face financial difficulty leading to failure or difficulty in transitioning to new ownership. In addition, our competitors could engage in a strategy to attempt to acquire or convert a number of our dealers to carry their products. We do not believe our business is dependent on any single dealer, the loss of which would have a sustained material adverse effect upon our business. However, disruption of dealer coverage within a specific local market could have an adverse impact on our business within the affected market. The loss or termination of a significant number of dealers could cause difficulties in marketing and distributing our products and have an adverse effect on our business, operating results or financial condition. In the event that a dealer in a strategic market experiences financial difficulty, we may choose to make financial investments in the dealership which would reduce the risk of disruption but increase our financial exposure. Establishing new dealers in a market can take considerable time and resources.

 

A portion of our distribution network is company-owned because of the need for us to make financial investments in dealerships in order to preserve our market share and profitability in the affected regions. In certain markets, with certain customers and, to a limited extent, in the retail sales segment, we have adopted a direct model of distribution through which we establish company-owned sales and service capabilities. Our direct-sale and owned-dealer models sell non-Steelcase products where product gaps exist. If we are not able to effectively manage these businesses, they could have a negative effect on our operating results.

 

We may be adversely impacted by product defects.

 

Product defects can occur within our own product development and manufacturing processes or through our increasing reliance on third parties for product development, manufacturing and testing activities. We incur various expenses related to product defects, including product warranty costs, product recall and retrofit costs and product liability costs, which can have an adverse impact on our results of operations. In addition, the reputation of our brands may be diminished by product defects and recalls.

 

We maintain a reserve for our product warranty costs based on certain estimates and our knowledge of current events and actions, but our actual warranty costs may exceed our reserve,

resulting in a need to increase our accruals for warranty charges. We purchase insurance coverage to reduce our exposure to significant levels of product liability claims and maintain a reserve for our self-insured losses based upon estimates of the aggregate liability using claims experience and actuarial assumptions. Incorrect estimates or any significant increase in the rate of our product defect expenses could have a material adverse effect on our results of operations.

 

We may be required to record impairment charges related to goodwill and indefinite-lived intangible assets which would adversely affect our results of operations.

 

Goodwill and other acquired intangible assets with indefinite lives are not amortized but are evaluated for impairment annually and whenever an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. Poor performance in portions of our business where we have goodwill or intangible assets, or declines in the market value of our equity, may result in impairment charges, which would adversely affect our profitability. During 2008 and 2009, we recorded goodwill and intangible asset impairments of $21.1 and 65.2, respectively. No goodwill or intangible asset impairments were recorded in 2010.

 

We test goodwill for impairment by first comparing the carrying value of net assets to the estimated fair value of the reporting unit. We estimate the fair values of the reporting units primarily using discounted cash flows. Forecasts of future cash flows are based on our best estimate of various factors. In addition, estimates of fair value are impacted by estimates of the weighted average costs of capital. Changes in these forecasts and estimates could significantly change the amount of impairment recorded, if any.

 

Our cost of borrowing may increase which could adversely affect our business, results of operations and financial condition.

 

Our cost of borrowing and ability to access the capital markets are affected by market conditions and credit ratings assigned to our long-term debt by the major credit rating agencies. These ratings are based, in significant part, on our financial performance as measured by credit metrics such as interest coverage and leverage ratios, as well our business risk profile, which captures factors such as brand strength, scale and diversification of revenues. As of February 26, 2010, our long-term debt ratings are BBB- on CreditWatch from Standard & Poor’s and Ba1 with a negative outlook from Moody’s Investor Service.

 

Although our current cash and cash equivalents and short-term investment balances, cash generated from future operations, funds available from COLI and funds available under our credit facilities are expected to be sufficient to finance our known or foreseeable needs, a prolonged or further decline in demand could impact our financial performance and associated credit metrics which could lead to downgrades of our credit ratings. Any such downgrade may increase our cost of borrowing or limit our access to the capital markets, either of which could have an adverse impact on our business, results of operations and financial condition. A ratings downgrade could also cause us to contemplate changes in our liquidity position and capital structure, including the amount of cash and cash equivalents and short-term investments or the structure and level of debt that we maintain.

 

There may be significant limitations to our utilization of net operating loss carryforwards to offset future taxable income.

 

We have deferred tax asset values related to net operating loss carryforwards (“NOLs”) totaling $55.0 which reside primarily in various non-U.S. jurisdictions and reflect a $34.6 valuation allowance. We may be unable to generate sufficient taxable income from future operations in the applicable jurisdiction or implement tax, business or other planning strategies to fully utilize the estimated value of our NOLs. We have NOLs in various currencies that are also subject to foreign exchange risk, which could reduce the amount we may ultimately realize. Additionally, future changes in tax laws or interpretations of such tax laws may limit our ability to fully utilize our NOLs.

We operate in a highly competitive environment and may not be able to compete successfully.

 

The office furniture industry is highly competitive, with a number of competitors offering similar categories of product. We compete on a variety of factors, including: brand recognition and reputation, price, lead time, delivery and service, insight from our research, product design and features, product quality, strength of dealers and other distributors and relationships with customers and key influencers, such as architects, designers and facility managers. The competitors that we face, our market share and our competitiveness on the factors stated above can vary significantly by geographic location within the U.S. and internationally. If we do not continue to compete successfully, our business could be adversely affected.

 

 

None.

 

 

We have operations at locations throughout the U.S. and around the world. None of our owned properties are mortgaged or are held subject to any significant encumbrance. We believe our facilities are in good operating condition and, at present, are in excess of that needed to meet volume needs currently and for the foreseeable future. Our global headquarters is located in Grand Rapids, Michigan, U.S.A. Our owned and leased principal manufacturing and distribution center locations with greater than 50,000 square feet are as follows:

 

 

In 2010, we closed a leased manufacturing facility in North America, and we opened two new leased manufacturing facilities, in China and Mexico, which were opened to replace other manufacturing facilities as a part of our actions to consolidate manufacturing and are included in the table above.

 

 

We are involved in litigation from time to time in the ordinary course of our business. Based on known information, we do not believe we are a party to any lawsuit or proceeding that is likely to have a material adverse effect on the Company.

 

 

None.

 

Our executive officers are:

 

 

Sara E. Armbruster has been Vice President, WorkSpace Futures and Corporate Strategy since May 2009. Ms. Armbruster was Vice President, Corporate Strategy from 2007 to May 2009. Prior to joining Steelcase in 2007, Ms. Armbruster was employed by Banta Corporation, a printing and supply chain management services company based in Menasha, Wisconsin, where she led Banta’s strategy and business development functions, serving as Vice President, Business Development from April 2006 to January 2007 and Director, Business Development from March 2003 to April 2006.

 

Mark A. Baker has been Senior Vice President, Global Operations since September 2004 and has been employed by Steelcase since 1995.

 

James P. Hackett has been President, Chief Executive Officer and Director since December 1994. Mr. Hackett also serves as a member of the Board of Trustees of the Northwestern Mutual Life Insurance Company and the Board of Directors of Fifth Third Bancorp. Mr. Hackett has been employed by Steelcase since 1981.

 

Nancy W. Hickey has been Senior Vice President, Chief Administrative Officer since November 2001 and also served as Secretary on an interim basis from March to July 2007. Ms. Hickey has been employed by Steelcase since 1986.

 

James P. Keane has been President, Steelcase Group since October 2006. Mr. Keane was Senior Vice President, Chief Financial Officer from 2001 to October 2006 and has been employed by Steelcase since 1997.

 

Frank H. Merlotti, Jr. has been President, Coalesse since October 2006 (Coalesse was known as the Premium Group from October 2007 to June 2008 and the Design Group from October 2006 to October 2007). Mr. Merlotti has been employed by Steelcase since 2002 and from 2002 to October 2006, he held the position of President, Steelcase North America.

 

James G. Mitchell has been President, Steelcase International since June 2004 and has been employed by Steelcase since 1993.

 

Mark T. Mossing has been Corporate Controller and Chief Accounting Officer since April 2008 and served as Vice President, Corporate Controller from 1999 to April 2008. Mr. Mossing has been employed by Steelcase since 1993.

 

Lizbeth S. O’Shaughnessy has been Vice President, Chief Legal Officer and Secretary since July 2007 and was Assistant General Counsel from 2000 to July 2007. From 2005 to July 2007, Ms. O’Shaughnessy also held the position of Assistant Secretary. Ms. O’Shaughnessy has been employed by Steelcase since 1992.

 

David C. Sylvester has been Vice President, Chief Financial Officer since October 2006 and was Vice President, Global Operations Finance from 2005 to October 2006. Mr. Sylvester has been employed by Steelcase since 1995.

 

 

Common Stock

 

Our Class A Common Stock is listed on the New York Stock Exchange under the symbol “SCS.” Our Class B Common Stock is not registered under the Exchange Act or publicly traded. See Note 13 to the consolidated financial statements for additional information. As of the close of business on April 23, 2010, we had outstanding 132,974,496 shares of common stock with 8,462 shareholders of record. Of these amounts, 83,899,442 shares are Class A Common Stock with 8,355 shareholders of record and 49,075,054 shares are Class B Common Stock with 107 shareholders of record.

 

 

Dividends

 

The declaration of dividends is subject to the discretion of our Board of Directors and to compliance with applicable laws. Dividends in 2010 and 2009 were declared and paid quarterly. The amount and timing of future dividends depends upon our results of operations, financial condition, cash requirements, future business prospects, general business conditions and other factors that our Board of Directors may deem relevant at the time.

 

Our global committed, syndicated credit facility contains 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 a fiscal year. We are permitted to make dividends and/or other equity-related distributions or payments of up to $25 per year provided we remain compliant with the financial covenants and other conditions set forth in the credit agreement. We are permitted to make dividends and/or other equity-related distributions or payments in excess of $25 in a fiscal year to the extent that our Liquidity (as defined in the credit agreement) and Leverage Ratio (as defined in the credit agreement) meet certain thresholds set forth in the credit agreement. Under this provision, we were permitted to make dividends and/or other equity-related distributions of up to $96 as of February 26, 2010. See Note 11 for additional information.

 

 

Fourth Quarter Share Repurchases

 

The following table is a summary of share repurchase activity during Q4 2010:

 

 

 

 

 

 

 

 

 

The following review of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere within this Report.

 

Financial Summary

 

Results of Operations

 

 

Overview

 

2010 compared to 2009

 

We recorded a net loss of $13.6 in 2010 compared to a net loss of $11.7 in 2009. The year over year comparison is significantly impacted by results from company-owned life insurance (“COLI”), which generated significant income in 2010 compared to significant losses in 2009. 2009 also included $65.2 of goodwill and intangible asset impairment charges. Beyond COLI and prior year impairment charges, the 2010 deterioration was primarily driven by lower volume, which was partially offset by benefits from restructuring activities and other cost reduction efforts, lower commodity costs, lower variable compensation expense and temporary reductions in employee salaries and retirement benefits.

 

Our revenue decreased $892.0 or 28.0% in 2010 compared to 2009. Current year revenue was negatively impacted by approximately $31 from currency translation effects and $22 of sales related to divestitures compared to 2009. The global economic slowdown and turmoil in the capital markets had the effect of significantly decreasing the demand for office furniture in 2010. 2010 revenue declines were broad-based, significantly affecting almost all of our geographies, vertical markets and product categories. However, percentage declines compared to the prior year moderated in Q4 2010, as we entered this downturn beginning in Q3 2009.

 

Cost of sales increased to 70.7% of revenue in 2010, a 40 basis point deterioration compared to 2009. The deterioration was driven largely by lower absorption of fixed costs associated with the revenue decline, partially mitigated by benefits from restructuring activities and other cost reduction efforts. The deterioration was also offset by approximately:

 

 

 

Operating expenses decreased by $194.5 compared to 2009. The decrease was primarily due to benefits from restructuring activities and other cost reduction efforts and the following:

 

 

There were no goodwill and intangible assets impairment charges in 2010. Goodwill and intangible assets impairment charges in 2009 were primarily related to PolyVision, which is included in the Other category. These charges were primarily due to the impact of the substantial decline in our stock price and market capitalization. As part of our annual goodwill impairment testing, we prepared a reconciliation of the fair value of our reporting units to our adjusted market capitalization as of February 27, 2009. Through this reconciliation process, we determined the fair value of PolyVision (using a discounted cash flow method) was less than its carrying value, resulting in non-cash impairment charges of $63.0 in Q4 2009.

 

Operating income decreased by $12.5 in 2010 compared to 2009. The North America segment declined $10.3 due to the reduction in revenue, partially offset by benefits from restructuring and other cost reduction efforts, the increase in cash surrender value of COLI, lower commodity costs, temporary reductions in employee salaries and retirement benefits, lower variable compensation expense and lower restructuring costs. The International segment declined $76.5 primarily due to the decline in revenue as well as higher restructuring costs, partially offset by lower variable compensation expense and lower commodity costs. The Other category increased by $64.7 primarily due to prior year impairment charges at PolyVision. Lower revenue in the Other category was mitigated by reductions in operating expenses and lower restructuring costs. Corporate expenses decreased by $9.6.

 

We recorded restructuring costs of $34.9 in 2010 compared to $37.9 in 2009. The 2010 charges primarily related to the consolidation of additional manufacturing and distribution facilities and employee termination costs related to the reduction of our global white-collar workforce. See further discussion and detail of these items in the Segment Disclosure analysis below and in Note 19 to the consolidated financial statements.

 

2009 compared to 2008

 

We recorded a net loss of $11.7 in 2009 compared to net income of $133.2 in 2008. The 2009 deterioration was driven by a number of factors, including lower volume within our North America segment and Other category, increased impairment charges and restructuring costs, a significant reduction in cash surrender value of COLI, lower interest income and higher commodity cost inflation which exceeded benefits from pricing actions. These factors were partially offset by lower variable compensation expense and benefits from restructuring activities and other cost reduction efforts completed during the year.

 

Our revenue decreased $237.1 or 6.9% in 2009 compared to 2008. 2009 revenue was negatively impacted by $30.8 of revenue related to net divestitures compared to 2008 and an estimated $45 from an extra week of shipments in the prior year, as our fiscal year 2008 consisted of 53 weeks. The balance of the decline in 2009 revenue was in our North America segment and Other category. The overall global economic slowdown in the last six months of 2009 and factors contributing to the turmoil in the capital markets decreased the demand for office furniture, though revenue in our International segment did not initially deteriorate as quickly as in our North American segment.

Cost of sales increased to 70.3% of revenue in 2009, a 240 basis point deterioration compared to 2008. We estimate that the majority of the deterioration was due to lower fixed cost absorption related to lower volume, which had the effect of increasing cost of sales as a percent of revenue compared to the prior year. Other factors contributing to the increase were a reduction in cash surrender value of COLI, which accounted for approximately 80 basis points of the decline, and higher commodity cost inflation, which exceeded benefits from pricing actions and occurred primarily within our North America segment, impacting consolidated cost of sales by approximately 40 basis points. The deterioration in cost of sales was partially mitigated by lower variable compensation expense, which improved cost of sales by approximately 60 basis points, and benefits from restructuring activities and other cost reduction efforts completed during the year.

 

Operating expenses decreased by $31.8 compared to 2008, with approximately $40 of lower variable compensation in 2009 and an estimated $12 of expenses associated with the additional week in 2008, partially offset by a $13.8 decline in cash surrender value of COLI and an $8.5 impairment charge related to a corporate aircraft classified as held for sale. Operating expenses increased as a percent of revenue due to reduced volume leverage.

 

Goodwill and intangible assets impairment charges were primarily related to PolyVision, which is included in the Other category. These charges in 2009 were primarily due to the impact of the substantial decline in our stock price and market capitalization. As part of our annual goodwill impairment testing, we prepared a reconciliation of the fair value of our reporting units to our adjusted market capitalization as of February 27, 2009. Through this reconciliation process, we determined the fair value of PolyVision (using a discounted cash flow method) was less than its carrying value, resulting in non-cash impairment charges of $63.0 in Q4 2009.

 

Operating income decreased by $201.8 in 2009 compared to 2008. The North America segment declined $100.0 due to the reduction in revenue, the decline in cash surrender value of COLI and increased restructuring costs, partially offset by lower variable compensation expense. The International segment declined $16.0 primarily due to a decline in revenue in Q4 2009 compared to the prior year. The Other category declined $84.7 due to higher impairment charges at PolyVision and a decline in revenue in the Coalesse Group and PolyVision, as well as inefficiencies associated with the consolidation of manufacturing activities in the Coalesse Group.

 

We recorded restructuring costs of $37.9 in 2009, compared to net restructuring credits of $0.4 in 2008. The 2009 charges primarily related to the consolidation of additional manufacturing and distribution facilities and employee termination costs related to the reduction of our global white-collar workforce. See further discussion and detail of these items in the Segment Disclosure analysis below and in Note 19 to the consolidated financial statements.

 

Other Income (Expense), Net and Effective Income Tax Rate

 

Interest expense increased in 2010 due to an increase in debt associated with the financing of our corporate aircraft. Interest income decreased in 2009 compared to 2008 due to lower average cash and investment balances and lower interest rates.

 

Within Miscellaneous, net, 2010 results included a $2.5 charge recorded in connection with the liquidation of an unconsolidated joint venture and $1.3 of demolition costs related to an idle facility, partially offset by $3.3 of net gains related to various non-operating investments. 2009 results included a gain of $6.6 related to the sale of an investment, partially offset by $2.0 of impairment charges related to our investments in auction rate securities.

 

Our 2010 effective tax rate was favorably impacted by $38.7 of non-taxable income associated with increases in cash surrender value of COLI and negatively impacted by increases in valuation allowances of $8.9. Our 2009 effective tax rate was negatively impacted by $36.6 of non-deductible losses associated with declines in cash surrender value of COLI, and favorably impacted by $7.5 of tax reserve reductions related to the completion of U.S. Internal Revenue Service examinations of 2004 through 2008. See further discussion and detail of these items in Note 14 to the consolidated financial statements.

 

Segment Disclosure

 

We operate on a worldwide basis within North America and International reportable segments plus an “Other” category. Our Other category includes the Coalesse Group, PolyVision and IDEO. Unallocated corporate expenses are reported as Corporate. Additional information about our reportable segments is contained in Item 1: Business and Note 17 to the consolidated financial statements included within this report.

 

North America

 

 

2010 compared to 2009

 

Operating income in the North America segment decreased by $10.3 in 2010 compared to 2009. The decline was primarily driven by the reduction in volume, mostly offset by benefits from restructuring activities and other cost reduction efforts, higher COLI income, lower commodity costs, temporary reductions in employee salaries and retirement benefits, lower variable compensation expense and lower restructuring costs.

 

North America revenue, which accounted for 54.0% of consolidated 2010 revenue, decreased by $502.6 or 28.9% from 2009. A divestiture in Q2 2009 and the deconsolidation of a dealer in Q3 2010 had the effect of decreasing revenue by $17 as compared to 2009. Current year revenue was also negatively impacted by an estimated $4 from currency translation effects related to our subsidiary in Canada as compared to 2009. The remaining decrease in revenue was primarily due to decreased volume across most of our vertical markets (except for the U.S. Federal government), geographic regions and product categories. The revenue declines within higher education, state and local government and healthcare were less than the declines experienced in other vertical markets. In addition, the revenue decline in the financial

services vertical market was lower than the average decline in 2010, as this vertical market entered the downturn earlier than other markets and experienced a significant decline in 2009.

 

Cost of sales as a percent of revenue decreased 130 basis points compared to the prior year. 2010 results benefited from restructuring activities and other cost reduction efforts. The improvement was also driven by approximately:

 

 

These benefits more than offset the negative effects of lower fixed cost absorption related to lower volume.

 

Operating expenses were 23.7% of revenue in 2010 compared to 22.7% of revenue in 2009. Operating expenses decreased in absolute dollars compared to 2009 primarily due to benefits from restructuring activities and other cost reduction efforts and the following:

 

 

Restructuring costs of $10.4 in 2010 primarily consisted of employee termination costs related to the reduction of our white-collar workforce and the closure of manufacturing facilities.

 

2009 compared to 2008

 

Operating income in the North America segment decreased by $100.0 in 2009 compared to 2008. The 2009 deterioration was driven by lower volume, decreases in cash surrender value of COLI, higher commodity cost inflation which exceeded benefits from pricing actions and increased restructuring costs and impairment charges, partially offset by lower variable compensation expense and benefits from restructuring activities and other cost reduction efforts completed during the year.

 

North America revenue, which accounted for 54.7% of consolidated 2009 revenue, decreased by $196.6 or 10.2% from 2008. Net divestitures had the effect of decreasing revenue by $54.3 as compared to 2008. 2009 revenue was also negatively impacted by an estimated $34 from an extra week of shipments in the prior year and approximately $6 from currency translation effects related to our subsidiary in Canada. The remaining decrease in revenue was primarily due to decreased volume across most of our vertical markets and geographic regions throughout the U.S. These declines were mitigated in part by relative stability in the federal government, healthcare, technology and higher education vertical markets. Order rates deteriorated significantly throughout the second half of 2009 as business capital spending declined in connection with the deteriorating U.S. and global economic environment, which we believe led to an increase in project deferrals and cancellations.

 

Cost of sales as a percent of revenue increased 250 basis points compared to the prior year. The deterioration was primarily the result of lower fixed cost absorption related to lower volume. Other factors contributing to the increase were a reduction in cash surrender value of COLI, which represented 130 basis points of the decline, and higher commodity cost inflation which exceeded benefits from pricing actions and represented an estimated 60 basis points of the decline. The deterioration in cost of sales was partially offset by reduced variable compensation expense, which improved cost of sales by approximately 40 basis points, and benefits from restructuring activities and other cost reduction efforts.

Operating expenses were 22.7% of revenue in 2009, compared to 21.7% of revenue in 2008. Operating expenses decreased in absolute dollars compared to 2008 primarily due to variable compensation expense which was $32.0 lower than in 2008, an $11.4 reduction resulting from net divestitures and benefits from restructuring activities and other cost reduction efforts, partially offset by a $14.1 impact from the decline in cash surrender value of COLI and an $8.5 impairment charge related to a corporate aircraft classified as held for sale.

 

Restructuring costs of $14.0 in 2009 included in gross profit primarily consisted of move and severance costs associated with the closure of three manufacturing facilities within our network. Restructuring costs of $8.4 included in operating expenses primarily consisted of employee termination costs related to the reduction of our white-collar workforce.

 

International

 

 

2010 compared to 2009

 

International reported an operating loss of $35.5 in 2010 compared to operating income of $41.0 in 2009. The 2010 deterioration was primarily driven by a significant decline in revenue and higher restructuring costs. Cost reduction efforts were only able to offset a portion of the negative effect of lower volume, as the pace of cost structure changes in our larger International markets was tempered by the process of negotiating with the related work councils.

 

In addition, our results in the United Kingdom continue to be negatively affected by unfavorable currency impacts, and we continue to fund our expansionary efforts in China and India. In the aggregate, these businesses reported an operating loss of approximately $24 in 2010 and $19 in 2009.

 

International revenue, which accounted for 28.0% of consolidated 2010 revenue, declined by $280.6 or 30.4%. Current year revenue was negatively impacted by approximately $28 from currency translation effects and $5 of sales related to divestitures as compared to 2009. The decrease in revenue was primarily due to the impact of the global economic slowdown on the demand for office furniture across all International markets. The revenue percentage declines within China, Eastern Europe, the United Kingdom and Latin America were deeper than those experienced in other geographic regions.

 

Cost of sales as a percentage of revenue increased by 260 basis points in 2010 compared to 2009. The 2010 deterioration was almost entirely due to lower fixed cost absorption related to lower volume, partially offset by benefits from restructuring activities and other cost reduction efforts. The deterioration was also partially offset by approximately 120 basis points related to lower commodity costs and 60 basis points related to lower variable compensation expense.

 

Operating expenses were 31.9% of revenue in 2010 compared to 27.2% of revenue in 2009. 2010 operating expenses decreased in absolute dollars compared to 2009 primarily due to benefits from restructuring activities and other cost reduction efforts, a reduction in variable compensation expense of $8 and favorable currency translation effects of $7.

Restructuring costs of $18.1 incurred in 2010 primarily consisted of employee termination costs related to workforce reductions, mainly in Europe, as well as consolidation of manufacturing in Asia.

 

2009 compared to 2008

 

International reported operating income of $41.0 in 2009, a decrease of $16.0 compared to 2008. The 2009 deterioration was driven by higher commodity costs, unfavorable currency impacts in the United Kingdom and significant declines in volume in Q4 2009. Operating income also decreased as a percent of revenue due to the dilutive impact of consolidating our acquisition of Ultra Group Company Limited (“Ultra”) in Asia in Q4 2008. These decreases were partially offset by improved fixed cost leverage related to higher volume during the first three quarters of 2009 and operational improvements at a small subsidiary which negatively impacted 2008 results.

 

Revenue increased $28.4 or 3.2% in 2009 compared to 2008 and represented 29.0% of consolidated 2009 revenue. 2009 revenue was positively impacted by $23.5 of incremental revenue related to net acquisitions and approximately $4 from currency translation effects as compared to 2008. Strong growth in revenue in Germany was offset by decreases in Spain, France and the United Kingdom. The increase was partially offset by a substantial drop in revenue in Q4 as the global economic slowdown and related turmoil in the capital markets dramatically decreased the demand for office furniture across all International markets.

 

Cost of sales increased by 130 basis points as a percent of revenue compared to 2008. The deterioration was primarily due to higher commodity cost inflation, unfavorable currency impacts in the United Kingdom, which represented approximately 30 basis points of the decline, and the dilutive impact of consolidating our acquisition of Ultra in Asia, which represented approximately 30 basis points of the decline.

 

Operating expenses were 27.2% of revenue in 2009 compared to 26.9% of revenue in 2008. Operating expenses increased by $9.4 in 2009 compared to 2008, primarily due to $8.5 related to net acquisitions and unfavorable currency translation impacts of approximately $3, partially offset by variable compensation expense which was approximately $3 lower than in 2008.

 

Other

 

 

2010 compared to 2009

 

Our Other category includes the Coalesse Group, PolyVision and IDEO. The Other category reported an operating loss of $14.6 in 2010 compared to an operating loss of $79.3 in 2009. The improved results were primarily due to prior year goodwill and intangible assets impairment charges at PolyVision, benefits from restructuring activities and other cost reduction efforts, lower variable compensation expense, lower restructuring costs and temporary reductions in employee salaries and retirement benefits, partially offset by the revenue decline.

We are still experiencing disruption costs associated with the consolidation of manufacturing activities in the Coalesse Group. In addition, PolyVision recently exited the final portion of the public-bid contractor whiteboard fabrication business in North America and is in the process of closing another small break-even business. Thus, we believe additional benefits may accrue over the next few quarters.

 

2010 revenue decreased by $108.8 or 20.9% compared to 2009. The Coalesse Group experienced a 29% decline, while IDEO and PolyVision posted much lower revenue declines of 13% and 11%, respectively.

 

Cost of sales as a percent of revenue increased by 270 basis points in 2010 compared to 2009 primarily as a result of lower fixed cost absorption related to lower volume. The negative volume effect was partially offset by benefits from restructuring activities and other cost reduction efforts and lower commodity costs, as well as initial benefits from the exit of the final portion of the PolyVision public-bid contractor whiteboard fabrication business in North America.

 

Operating expenses were 32.0% of revenue in 2010 compared to 33.2% of revenue in 2009. Operating expenses decreased in absolute dollars compared to 2009 primarily due to benefits from restructuring activities and other cost reduction efforts, lower variable compensation expense and temporary reductions in employee salaries and retirement benefits. There were no goodwill and intangible assets impairment charges in 2010.

 

Restructuring costs of $6.4 in 2010 primarily related to the closure of two manufacturing facilities: one within the Coalesse Group and one at PolyVision.

 

2009 compared to 2008

 

The Other category reported an operating loss of $79.3 in 2009, compared to operating income of $5.4 in 2008. The decline was primarily the result of higher goodwill and intangible assets impairment charges at PolyVision, lower volume within the Coalesse Group and PolyVision, increased restructuring costs and disruption costs associated with the consolidation of manufacturing activities, partially offset by lower variable compensation expense. Additionally, prior to 2009, the Other category also included our Financial Services subsidiary, which had $13.8 of revenue and $8.6 of operating income from Financial Services in 2008, primarily related to residual gains from early lease terminations we originated and funded in prior years.

 

2009 revenue decreased by $68.9 or 11.7% compared to 2008. The decrease in revenue includes the effects of our decisions to exit a portion of the PolyVision public bid contractor whiteboard fabrication business and to transfer corporate whiteboard and certain other corporate technology products to the Steelcase brand in the North America segment during the first six months of 2009. In addition, the weakening economy in the U.S. contributed to decreases in revenue in the Coalesse Group, PolyVision and IDEO.

 

Cost of sales as a percent of revenue increased by 350 basis points in 2009 compared to 2008 primarily due to lower fixed cost absorption related to the reduction in volume, higher commodity cost inflation which exceeded benefits from pricing actions and disruption costs associated with the consolidation of manufacturing activities.

 

Operating expenses were 33.2% of revenue in 2009 compared to 31.6% of revenue in 2008. Operating expenses decreased in absolute dollars compared to 2008 primarily due to variable compensation expense, which was approximately $3 lower than in 2008 and benefits from restructuring activities and other cost reduction efforts.

 

During the second half of 2009, there was a substantial decline in the market price of our Class A Common Stock and thus our market capitalization. As part of our annual goodwill impairment testing, we prepared a reconciliation of the fair value of our reporting units to our adjusted market capitalization as of February 27, 2009. Through this reconciliation process, we determined that the fair value of PolyVision (using a discounted cash flow method) was less than its carrying value, resulting in non-cash

goodwill and intangible assets impairment charges of $63.0 in Q4 2009. See Note 10 to the consolidated financial statements for additional information.

 

In 2008, we entered into an agreement which will allow certain members of the management of IDEO to purchase a controlling equity interest in IDEO in two phases by 2013. The agreement allows us to retain a minimum 20% equity interest in IDEO, and we expect to continue our collaborative relationship with IDEO during and after this ownership transition. As of February 27, 2009, IDEO management effectively purchased 20% of IDEO under the first phase of the agreement. Phase two of the agreement began in 2010 and allows IDEO management to purchase an additional 60% equity interest to be completed by the end of 2012. Phase two also includes a variable compensation program that may provide IDEO management with a portion of the funding for the remaining purchase. For 2010, the impact of phase two was not material to our results of operations.

 

Restructuring costs of $13.5 in 2009 primarily related to the closure of two manufacturing facilities: one within the Coalesse Group and one at PolyVision.

 

Corporate

 

 

Corporate costs include portions of shared service functions such as information technology, human resources, finance, executive, corporate facilities, legal and research. Approximately 82% of corporate expenses were charged to the operating segments in 2010 as part of a corporate allocation. Unallocated portions of these expenses are considered general corporate costs and are reported as Corporate.

 

Corporate costs decreased in 2010 compared to 2009 primarily due to temporary reductions in employee salaries and retirement benefits, lower variable compensation expense and other reductions in discretionary spending.

 

Liquidity and Capital Resources

 

Liquidity

 

As a result of a decline in the level of business activity since 2009, we currently target to maintain approximately $100 in cash and cash equivalents and short-term investments to fund the day-to-day operations of our business, to provide available liquidity for funding investments in growth initiatives and as a cushion against volatility in the economy. Our actual cash and short-term investment balances will fluctuate from quarter to quarter as we plan for and manage certain seasonal disbursements, particularly the annual payment of accrued variable compensation and retirement plan contributions in Q1 of each fiscal year, when applicable. These are general guidelines; we may modify our approach in response to changing market conditions or opportunities. As of February 26, 2010, we held a total of $111.1 in cash and cash equivalents and $68.2 in short-term investments. Our short-term investments are maintained in a managed investment portfolio which consists of short-term investments in U.S. Treasury, U.S. Government agency and corporate debt instruments.

 

We have investments in COLI with a cash surrender value of $209.6 as of February 26, 2010, with $109.3 related to whole life insurance policies and $100.3 related to variable life insurance policies. These investments, while an available source of liquidity, were made with the intention of utilizing them as a long-term funding source for post-retirement medical benefits, deferred compensation and supplemental retirement plan obligations, which as of February 26, 2010 aggregated approximately $186, with a related deferred tax asset of approximately $76. The cash surrender value of our COLI investments exceeds these long-term benefit obligations on a tax-adjusted basis and therefore, to more efficiently manage our balance sheet and liquidity position, beginning in Q1 2011 we will consider our variable life

COLI policies to be primarily a source of corporate liquidity. As a result of this change, we may adjust the target asset allocation of the investments in the variable life COLI policies. We continue our intention to utilize our whole life COLI policies as the funding source for post-retirement medical benefits and other employee obligations. We believe the whole life COLI policies, which are with highly-rated insurance companies, represent a stable source for these long-term benefit obligations. This change does not result in our investments in COLI representing a committed funding source for liquidity or long-term employee benefit obligations. They are subject to claims from creditors, and we can designate them to another purpose at any time.

 

This change will have no impact on the financial statement classification of the net returns in cash surrender value, normal insurance expenses and any death benefit gains related to our investments in whole life COLI policies, which is currently allocated between Cost of sales and Operating expenses on the Consolidated Statements of Operations consistent with the costs associated with the long-term employee benefit obligations that the investments in whole life policies are intended to fund. However, beginning in Q1 2011, the net returns in cash surrender value, normal insurance expenses and any death benefit gains related to our investments in variable life COLI policies will now be recorded in Other income (expense), net on the Consolidated Statements of Operations consistent with our other investments.

 

We also have investments in auction rate securities (“ARS”) with a par value of $26.5 and an estimated fair value of $19.6 as of February 26, 2010 and Canadian asset-backed commercial paper restructuring notes (“ABCPRN”) with a combined par value of Canadian $5.0 and an estimated combined fair value of $3.8 as of February 26, 2010. These securities are included in Other assets on the Consolidated Balance Sheets due to the tightening of the U.S. and Canadian credit markets and current lack of liquid markets for these investments. We intend to hold these investments until the market recovers and do not anticipate the need to sell these investments in order to operate our business or fund our growth initiatives. See Note 6 to the consolidated financial statements for additional information.

 

These funds, in addition to cash generated from future operations and funds available under our credit facilities, are expected to be sufficient to finance our foreseeable liquidity and capital needs.

 

The following table summarizes our consolidated statements of cash flows:

 

 

During 2010, cash and cash equivalents decreased by $6.5 to a balance of $111.1 as of February 26, 2010. Of our total cash and cash equivalents, approximately 52% was located in the U.S. and the remaining 48% was located outside of the U.S., primarily in Canada and Europe.

Cash provided by (used in) operating activities

 

 

The cash used in operating activities in 2010 and the decrease in cash provided by operating activities in 2009 was primarily due to a significant decline in net income which was driven largely by the recent effects of deteriorating global economic conditions and the related impacts on business capital spending and our revenue. The associated cash generated from reductions in working capital in 2010 and 2009 was offset by Q1 payments of variable compensation and annual funding of retirement contributions related to prior years.

 

Cash used in investing activities

 

 

During 2010, we significantly reduced capital expenditures to conserve cash and maintain liquidity as a result of the deterioration in the global economy. We closely scrutinize capital spending to ensure we are making the right investments to sustain our business and to preserve our ability to introduce innovative, new products. Capital expenditures during 2009 and 2008 included payments of $13.2 and $13.6, respectively, related to replacement corporate aircraft.

 

In Q1 2010, in connection with the delivery of the replacement corporate aircraft, we traded in an existing aircraft to the manufacturer. The trade-in value of $18.5 was partially used as credit for the final installment of $13.5 related to the replacement corporate aircraft and for a deposit of $1.0 related to an additional replacement aircraft currently scheduled for delivery in Q3 2012. Our corporate aircraft are used primarily to transport our customers to our corporate showroom and design center in Grand Rapids, Michigan. Accordingly, we believe they are an integral part of our sales process.

 

Net cash used in investing activities in 2010 resulted largely from the purchase of capital assets, partially offset by the net liquidations of short-term investments, which consists primarily of investments in U.S. Treasury, U.S. Government agency and corporate debt instruments. Net cash used in investing activities in 2009 and 2008 included the allocation of $20 and $50, respectively, of cash and cash equivalents into a managed investment portfolio, which consists of short-term investments in

U.S. Treasury, U.S. Government agency and corporate debt instruments. In 2008, we purchased ARS, certain of which we continue to hold due to a current lack of liquidity in the marketplace.

 

Proceeds from the disposal of fixed assets primarily related to the corporate aircraft and the sale of real estate, facilities and equipment.

 

Divestitures in 2009 represent the proceeds from the sale of Custom Cable Industries, Inc. and an international dealer. In 2008, the amount related to the acquisition of Ultra, partially offset by cash proceeds from the divestiture of an owned dealer.

 

Cash provided by (used in) financing activities

 

 

In Q2 2010, we completed a $47.0 financing of our corporate aircraft to further enhance our liquidity position.

 

We paid dividends of $0.08 per share in Q1 2010 and $0.04 per share in Q2, Q3 and Q4 2010. We paid dividends of $0.15 per share in Q1, Q2 and Q3 2009 and $0.08 per share in Q4 2009. Dividends in 2008 were $2.35 per share consisting of quarterly dividends of $0.15 per share and a special cash dividend of $1.75 during Q4 2008. During Q1 2011, we announced a quarterly dividend of $0.04 per share.

 

During 2010, we made common stock repurchases of $4.6, all of which related to our Class A Common Stock. During 2009 and 2008, we made common stock repurchases of $59.2 and $165.3, respectively. All of the 2009 repurchases related to our Class A Common Stock; of the 2008 repurchases, $132.3 related to the repurchase of 7.7 million shares of our Class A Common Stock and $33.0 related to the repurchase of 1.7 million shares of our Class B Common Stock. As of February 26, 2010, $210.8 remained available under our repurchase authorizations. We have no outstanding share repurchase commitments.

 

Share repurchases of Class A Common Stock to enable participants to satisfy tax withholding obligations upon vesting of restricted stock and restricted stock units, pursuant to the terms of our Incentive Compensation Plan, were $0.4 in 2010. In 2009 and 2008, the repurchases enabling participants to satisfy tax withholdings were $1.7 and $3.2, respectively.

 

In 2009 and 2008, we received proceeds of $0.5 and $11.5, respectively from the issuance of shares of Class A Common Stock as a result of the exercise of stock options. See Note 13 to the consolidated financial statements for additional information.

 

Capital Resources

 

Off-Balance Sheet Arrangements

 

We are contingently liable under loan and lease guarantees for certain Steelcase dealers and joint ventures in the event of default or non-performance of the financial repayment of a liability. In certain cases, we also guarantee completion of contracts by our dealers. Due to the contingent nature of guarantees, the full value of the guarantees is not recorded on our Consolidated Balance Sheets;

however, when necessary we record reserves to cover potential losses. See Note 16 to the consolidated financial statements for additional information.

 

Contractual Obligations

 

Our contractual obligations as of February 26, 2010 were as follows:

 

 

Total consolidated debt as of February 26, 2010 was $300.8. Of our total debt, $249.8 is in the form of term notes due in August 2011 and $45.4 is related to financing initiated in Q2 2010 which is secured by our two corporate aircraft.

 

We have commitments related to certain sales offices, showrooms, warehouses and equipment under non-cancelable operating leases that expire at various dates through 2019. Minimum payments under operating leases are presented in the contractual obligations table above.

 

Committed capital expenditures represent obligations we have related to property, plant and equipment purchases and include outstanding commitments of $27.0 to purchase one corporate aircraft that is intended to replace an existing aircraft.

 

We define purchase obligations as non-cancelable signed contracts to purchase goods or services beyond the needs of meeting current backlog or production.

 

Other liabilities represent obligations for foreign exchange forward contracts and uncertain tax positions.

 

Employee benefit and compensation obligations represent contributions and benefit payments expected to be made for our post-retirement, pension, defined contribution, variable compensation plans and our deferred compensation and severance programs. Our obligations related to post-retirement benefit plans are not contractual, and the plans can be amended at the discretion of the Compensation Committee of the Board of Directors. We limited our disclosure of contributions and benefit payments to 10 years as information beyond this time period was not available. See Note 12 to the consolidated financial statements for additional information.

 

The contractual obligations table above is current as of February 26, 2010. The amounts of these obligations could change materially over time as new contracts or obligations are initiated and existing contracts or obligations are terminated or modified.

Liquidity Facilities

 

Our total liquidity facilities as of February 26, 2010 were:

 

 

The various uncommitted lines may be changed or cancelled by the banks at any time.

 

Our $125 global committed, syndicated credit facility expires in Q4 2013. At our option, and subject to certain conditions, we may increase the aggregate commitment under the facility by up to $75 by obtaining at least one commitment from one or more lenders. Borrowings under this facility are unsecured and unsubordinated. As of February 26, 2010, there were no borrowings outstanding under the facility, although our availability was limited to $85 as a result of covenant constraints and $15 utilized through an issued letter of credit.

 

We can use borrowings under the facility for general corporate purposes, including friendly acquisitions. Interest on borrowings under the facility is based on one of the following two options, as selected by us:

 

 

The facility requires us to satisfy two financial covenants:

 

 

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 a fiscal year. We are permitted to make dividends and/or other equity-related distributions or payments of up to $25 per year provided we remain compliant with the financial covenants and other conditions set forth in the credit agreement. We are permitted to make dividends and/or other equity-related distributions or payments in excess of $25 in a fiscal year to the extent that our Liquidity and Leverage Ratio (as defined in the credit agreement) meet certain thresholds set forth in the credit agreement.

 

As of February 26, 2010, we were in compliance with all covenants under the facility.

Outstanding borrowings on uncommitted facilities of $4.6 as of February 26, 2010 were primarily related to short-term liquidity management within our International segment. In addition to those borrowings, we had $3.0 as of February 26, 2010 in outstanding standby letters of credit against these uncommitted facilities which primarily relate to our self-insured workers’ compensation programs. We had no draws on our standby letters of credit during 2010.

 

Total consolidated debt as of February 26, 2010 was $300.8. Our debt primarily consists of $249.8 in term notes due in Q2 2012 with an effective interest rate of 6.3% and a $45.4 loan at a floating interest rate based on 30-day LIBOR plus 3.35%. The term notes rank equally with all of our other unsecured unsubordinated indebtedness, and they contain no financial covenants. The $45.4 loan has a term of seven years and requires fixed monthly principal payments of $0.2 based on a 20-year amortization schedule with a $30 balloon payment due in Q2 2017. The loan is secured by our two corporate aircraft, contains no financial covenants and is not cross-defaulted to our other debt facilities.

 

Our long-term debt ratings are BBB- on CreditWatch from Standard & Poor’s and Ba1 with a negative outlook from Moody’s Investor Service as of February 26, 2010. These ratings are not a recommendation to buy, sell or hold securities, are subject to revision or withdrawal at any time by the rating organization and should be evaluated independently of any other rating. We do not have any rating downgrade triggers that would accelerate the maturity of our debt or an increase in the cost of borrowings under our credit facilities.

 

Liquidity Outlook

 

Our current cash and cash equivalents and short-term investment balances, cash generated from future operations, funds available from COLI and funds available under our credit facilities are expected to be sufficient to finance our known or foreseeable liquidity needs.

 

The deterioration in the global economy has adversely impacted our revenue and operating profitability. Accordingly, we have taken a variety of actions to improve our operating efficiencies and to conserve cash and maintain liquidity.

 

 

Critical Accounting Estimates

 

Management’s Discussion and Analysis of Results of Operations and Financial Condition is based upon our consolidated financial statements and accompanying notes. Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and accompanying notes. Although these estimates are based on historical data and management’s knowledge of current events and

actions it may undertake in the future, actual results may differ from the estimates if different conditions occur. The accounting estimates that typically involve a higher degree of judgment and complexity are listed and explained below. These estimates were discussed with the Audit Committee of the Board of Directors and affect all segments of the Company.

 

Impairment of Goodwill and Other Intangible Assets

 

Goodwill represents the difference between the purchase price and the related underlying tangible and identifiable intangible net asset values resulting from business acquisitions. Annually in Q4, or earlier if conditions indicate it is necessary, the carrying value of the reporting unit is compared to an estimate of its fair value. If the estimated fair value is less than the carrying value, goodwill is impaired and is written down to its estimated fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. We evaluated goodwill and intangible assets using seven reporting units where goodwill is recorded—specifically, North America; Europe and Asia Pacific within the International segment; and Coalesse, Designtex, PolyVision and IDEO within the Other category.

 

Annually in Q4, or earlier if conditions indicate it is necessary, we perform an impairment analysis of our intangible assets not subject to amortization using an income approach based on the cash flows attributable to the related products. We also perform an impairment analysis of our intangible assets subject to amortization during interim periods upon the occurrence of certain events or changes in circumstance. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and its carrying amount exceeds its fair value. In testing for impairment, we first determine if the asset is recoverable and then compare the discounted cash flows over the asset’s remaining life to the carrying value.

 

As of February 26, 2010, we had $183.8 of goodwill and $25.0 of net intangible assets recorded on our Consolidated Balance Sheet as follows:

 

 

During Q4 2010, we performed our annual impairment assessment of goodwill in our reporting units. In the first step to test for potential impairment, we measured the estimated fair value of our reporting units using a discounted cash flow valuation (“DCF”) method and reconciled the fair value of our reporting units to the sum of our total market capitalization plus a 25% control premium (our “adjusted market capitalization”). The control premium represents an estimate associated with obtaining control of the company in an acquisition of the outstanding shares of Class A Common Stock and Class B Common Stock. The DCF analysis used the present value of projected cash flows and a residual value. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows in measuring fair value. Assumptions used in our impairment valuations, such as forecasted growth rates and cost of capital, are consistent with our current internal projections.

 

As part of the reconciliation to our adjusted market capitalization, we made adjustments to the estimated future cash flows, as well as the discount rates used in calculating the estimated fair value of the reporting units. The discount rates ranged from 13.5% to 15.0%. Due to the subjective nature of this reconciliation process, these assumptions could change over time, which may result in future impairment charges.

As of the valuation date, the enterprise value available for goodwill determined by each method described above is in excess of the underlying reported value of the goodwill as follows:

 

 

For each reporting unit, the excess enterprise value available for goodwill is primarily driven by the residual value of future years. Thus, increasing the discount rate by 1%, leaving all other assumptions unchanged, would reduce the enterprise value in excess of goodwill to the following amounts:

 

 

Based on the sensitivity analysis above, the Asia Pacific, Coalesse and Designtex reporting units would have had goodwill balances in excess of enterprise value available for goodwill and would have triggered the second step of our impairment testing. These reporting units had recorded goodwill aggregating $11.8, $20.9 and $38.3, respectively as of February 26, 2010.

 

See Note 2 and 10 to the consolidated financial statements for more information regarding goodwill and other intangible assets.

 

Income Taxes

 

Our annual effective tax rate is based on income, statutory tax rates and tax planning strategies available in various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating tax positions. Tax positions are reviewed quarterly and balances are adjusted as new information becomes available.

 

We are audited by the U.S. Internal Revenue Service under the Compliance Assurance Process (“CAP”). Under CAP, the U.S Internal Revenue Service works with large business taxpayers to identify and resolve issues prior to the filing of a tax return. Accordingly, we expect to record minimal liabilities for U.S. Federal uncertain tax positions in future years. Tax positions are reviewed regularly for state, local and non-U.S. tax liabilities associated with uncertain tax positions. Our liability for uncertain tax positions in these jurisdictions is $0.2.

 

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all positive and negative evidence. These assumptions require significant judgment about forecasts of future taxable income and are consistent with the internal plans and estimates we are using to manage the underlying business.

 

Future tax benefits of tax losses and credit carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. As of February 26, 2010, we estimate a potential tax benefit from the operating loss carryforwards before valuation allowances of $89.6, but we have recorded a valuation allowance of $34.6, which reduced our realized tax benefit to $55.0. Additionally,

we realized a tax benefit from tax credit carryforwards of $24.8. It is considered more likely than not that a combined benefit of $79.8 will be realized on these carryforwards in future periods. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies will enable us to utilize the carryforwards. To the extent that available evidence raises doubt about the realization of a deferred tax asset, a valuation allowance is established. A 10% decrease in the expected amount of benefit to be realized on the carryforwards would have resulted in a decrease in net income for 2010 of approximately $8.

 

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. In March 2010, the U.S. enacted significant healthcare reform legislation which effectively changes the tax treatment of the federal subsidies received by employers who provide certain prescription drug benefits for retirees (the “Medicare Part D subsidy”) beginning after December 31, 2012. We are required to recognize the impact of the tax law change in the period in which the law is enacted. In Q1 2011, we expect to recognize a reduction in deferred tax assets related to the Medicare Part D subsidy with an offsetting increase in income tax expense of approximately $12. We are not aware of any other such tax law or rate changes that would have a material effect on our results of operations, cash flows or financial position.

 

Pension and Other Post-Retirement Benefits

 

The Company sponsors a number of domestic and foreign plans to provide pension, medical and life insurance benefits to retired employees. As of February 26, 2010 and February 27, 2009, the projected benefit obligation, fair value of plan assets and funded status of these plans are as follows: