10-K 1 scs-02222019x10k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________ 
FORM 10-K
        þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 22, 2019
OR
        ¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13873
____________________________ 
STEELCASE INC.
(Exact name of registrant as specified in its charter)
Michigan
 
38-0819050
(State or other jurisdiction of
incorporation or organization)
 
(IRS employer identification number)
 
 
 
901 44th Street SE
Grand Rapids, Michigan
 
49508
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (616) 247-2710
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
Title of each class
Name of each exchange on which registered
Class A Common Stock
New York Stock Exchange
 
 
 
 
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  þ         No  ¨
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  ¨        No  þ
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   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ        No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.   þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ      Accelerated filer ¨      Non-accelerated filer ¨      Smaller reporting company ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨         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 24, 2018 (the last day of the registrant’s most recently completed second fiscal quarter) was approximately $1.2 billion. 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 9, 2019, 88,249,395 shares of the registrant’s Class A Common Stock and 29,064,360 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 2019 Annual Meeting of Shareholders, to be held on July 10, 2019, are incorporated by reference in Part III of this Form 10-K.
 



STEELCASE INC.
FORM 10-K
YEAR ENDED FEBRUARY 22, 2019
TABLE OF CONTENTS
 
  
  
Page No.   
Part I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Part II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
 
 
Item 15.
Item 16.



PART I
Item 1.
Business:
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., a Michigan corporation, 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.
Overview
At Steelcase, our purpose is to unlock human promise by transforming work, worker and workplace. Through our family of brands that include Steelcase®, Coalesse®, Designtex®, PolyVision®, Turnstone®, Smith System®, Orangebox® and AMQ™, we offer a comprehensive portfolio of furniture, architectural products and technology solutions that support people at work. Our solutions are inspired by the insights gained from our human-centered research process. We are a globally integrated enterprise, headquartered in Grand Rapids, Michigan, U.S.A., with approximately 12,700 employees. Steelcase was founded in 1912 and became publicly traded in 1998, and our Class A Common Stock is listed on the New York Stock Exchange under the symbol “SCS”.
Our growth strategy focuses on translating our research-based insights into products, applications and experiences that will help the world’s leading organizations amplify the performance of their people, teams and enterprise. We help our customers create workplace, healthcare and educational environments that support the physical, cognitive and emotional needs of their people, while also optimizing the value of their real estate investments.
We focus on growth by leveraging our global scale. Our global reach allows us to provide local differentiation, as we serve customers around the globe.  We remain committed to our strategy as a globally integrated enterprise and growing our presence in emerging markets alongside our global and local customers.
We market our products and services primarily through a network of independent and company-owned dealers and also sell directly to end-use customers. We extend our reach with a limited presence in retail and web-based sales channels.
Our Offerings
Our brands provide an integrated portfolio of furniture settings, user-centered technologies and interior architectural products for both individual and collaborative work across a range of price points. We have expanded our offerings through investments in product development and our recent acquisitions and marketing partnerships. Our furniture portfolio includes panel, fence and beam-based furniture systems, storage, fixed and height-adjustable desks, benches and tables and complementary products such as worktools. Our seating products include task 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 by integrating furniture and technology. Our interior architectural products include full and partial height walls and architectural pods. We also offer services designed to reduce costs and enhance the performance of people, space and real estate. Among these services are workplace strategy consulting, data-driven space measurement, lease origination services, furniture and asset management and hosted event experiences.

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Steelcase
Steelcase takes our insights from user-centered research and delivers high performance and sustainable work environments. We strive to be a trusted partner to our customers and partners who seek to use space as a strategic asset to elevate their performance and as a tool to attract and retain talent. The Steelcase brand's core customers are leading organizations (such as corporations, healthcare organizations, colleges/universities and government entities) that are forward-thinking, often large with ever-changing complex needs and have an increasingly global reach. We strive to meet their diverse needs while minimizing complexity by using a platform approachfrom product components to common processeswherever possible.
Steelcase sub-brands include:
Steelcase Health works with leading healthcare organizations to create places that deliver greater connection, empathy and well-being for everyone involved in the experience of health.
Steelcase Education works with leading educational institutions to create places that enhance the success and well-being of students and educators.
Coalesse
Led by intuition, backed by research and driven by design, Coalesse creates thoughtful furnishings that bring new life to the modern workplace. The brand blends beauty and utility into their designs to help customers make great spaces that inspire great work, by empowering social connection, creative collaboration, focus and rejuvenation.
Designtex
Designtex offers applied materials that enhance environments and is a leading resource for applied surface knowledge, innovation and sustainability. Designtex products include premium fabrics and surface materials and imaging solutions designed to enhance seating, walls, workstations and floors. These materials provide privacy, way-finding, motivation, communications and artistic expression.
PolyVision
PolyVision is a leading supplier of ceramic steel surfaces for use in various applications including static whiteboards and chalkboards used in educational institutions and architectural panels or special applications for commercial or infrastructure projects.
Turnstone
From education to entrepreneurship to enterprise, Turnstone makes cleverly simple furnishings that are expertly made, quick to deploy and highly adaptable. These furnishings help organizations create invigorating places where people can work, learn and start something new.
Smith System
Smith System is a designer and manufacturer of high quality furniture for the pre-K-12 education market. Smith System offers desking, seating and storage products through an independent dealer network. Smith System aims to help schools create outstanding learning environments where students thrive through the use of collaboration spaces, makerspaces and tech labs.
Orangebox
Orangebox is a United Kingdom (“U.K.”)-based designer and manufacturer of furniture for the changing workplace with a focus on "Smartworking" solutions: innovative products that enable organizations to work more collaboratively and help to transform both the culture and efficiency of any organization.
AMQ
AMQ offers high quality, affordable height-adjustable desking, benching, storage, tables and seating for workstations in the open plan, collaborative environments and training rooms.


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Reportable Segments
We operate on a worldwide basis within our Americas and EMEA 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, Note 4 and Note 21 to the consolidated financial statements.
Americas Segment
Our Americas segment serves customers in the United States (“U.S.”), Canada, the Caribbean Islands and Latin America. Our portfolio of integrated architecture, furniture and technology products is marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Coalesse, Turnstone, Smith System, AMQ and Orangebox brands.
We serve Americas customers mainly through approximately 400 Steelcase independent and company-owned dealer locations and other non-aligned dealers, and we also sell directly to end-use customers. Our end-use customers tend to be larger multinational, regional or local companies and are distributed across a broad range of industries and vertical markets, including higher education, financial services, healthcare, insurance, government, information technology and manufacturing.
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 Steelcase dealer in the Americas accounted for approximately 5% of the segment’s revenue in 2019, and the five largest independent Steelcase dealers collectively accounted for approximately 17% of the segment’s revenue in 2019.
The Americas 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 HNI Corporation, Herman Miller, Inc., Haworth, Inc. and Knoll, Inc. Together with Steelcase, domestic revenue from these companies represents approximately one-half of the U.S. office furniture industry.
EMEA Segment
Our EMEA segment serves customers in Europe, the Middle East and Africa primarily under the Steelcase, Orangebox and Coalesse brands, with an emphasis on freestanding furniture systems, storage and seating solutions. Our largest presence is in Western Europe, where we believe we are among the market leaders in Germany, France and Spain.
We serve EMEA customers mainly through approximately 350 independent and company-owned Steelcase dealer locations and other non-aligned dealers, and we also sell directly to end-use customers. No single independent Steelcase dealer in the EMEA segment accounted for more than 3% of the segment’s revenue in 2019. The five largest Steelcase independent dealers collectively accounted for approximately 10% of the segment’s revenue in 2019. Our end-use customers tend to be larger multinational, regional or local companies spread across a broad range of industries and vertical markets, including financial services, higher education, healthcare, government and information technology.
The EMEA office furniture market is highly competitive and fragmented. We compete with many local and regional manufacturers in many different markets. In several cases, these competitors focus on specific product categories.

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Other Category
The Other category includes Asia Pacific, Designtex and PolyVision.
Asia Pacific serves customers in India, the People’s Republic of China (including Hong Kong), Japan, Australia, Singapore, Korea, Taiwan, Malaysia and other countries in Southeast Asia primarily under the Steelcase brand with an emphasis on freestanding furniture systems, seating and storage solutions. We primarily sell directly to end-use customers as well as through approximately 50 Steelcase independent dealer locations. Our end-use customers tend to be larger multinational or regional companies spread across a broad range of industries and are located in both mature and emerging markets. Our competition in Asia Pacific is fragmented and includes large global competitors as well as many regional and local manufacturers.
Designtex primarily sells textiles, wall coverings and surface imaging solutions specified by architects and designers directly to end-use customers through a direct sales force primarily in North America.
PolyVision manufactures ceramic steel surfaces for use in various applications globally, including static whiteboards and chalkboards sold through third party fabricators and distributors to the primary and secondary education markets and architectural panels and other special applications sold through general contractors for commercial and infrastructure projects.
Corporate
Corporate costs include unallocated portions of shared service functions such as information technology, corporate facilities, finance, research, legal, human resources and customer aviation, plus deferred compensation expense and income or losses associated with company-owned life insurance ("COLI"). Corporate assets consist primarily of unallocated cash and cash equivalents and COLI balances.
Marketing Partnerships
We have entered into marketing partnerships with a number of other companies, including Bolia, Blu Dot, Michell Gold + Bob Williams, SnapCab Pods, West Elm, FLOS, Viccarbe, Officebricks, m.a.d. furniture design, Microsoft and Extremis, that are intended to allow us to offer additional products and services to our dealers and customers which are complementary to our products and services.  These partnerships take several forms, the most common of which involves us purchasing and reselling the partner’s products to our dealers and customers.  In other situations, we market the partner’s products to our dealers and customers and receive a fee from the partner, and we typically transport and deliver those products to our dealers and customers for a fee.  We also have marketing partnerships where we co-develop products with our partner that we manufacture or source from third parties or where we and our partner agree to co-market our products and services to customers. Most of our marketing partnerships are on a regional basis. 
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 new business ventures, complementary products or services. As of February 22, 2019, our investment in these unconsolidated joint ventures and other equity investments totaled $56.9. Our share of the earnings from joint ventures and other equity investments is recorded in Other income, net on the Consolidated Statements of Income. See Note 12 to the consolidated financial statements for additional information.
Customer and Dealer Concentrations
Our largest customer accounted for approximately 1% of our consolidated revenue in 2019, and our five largest customers collectively accounted for approximately 5% of our consolidated revenue. However, these percentages do not include revenue from various U.S. federal government agencies. In 2019, our sales to U.S. federal government agencies represented approximately 3% 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 Steelcase dealer accounted for more than 4% of our consolidated revenue in 2019. The five largest independent Steelcase dealers collectively accounted for approximately 12% of our consolidated revenue in 2019. We do not believe our business is dependent on any single dealer, the loss of which would have a sustained material adverse effect on our business.

4


Working Capital
Our accounts receivable are from our dealers and direct-sale customers. Payment terms vary by country, region and customer. The terms of our Americas segment, and certain markets within the EMEA 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, inventories 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 an order; however, in recent years our mix of project business has increased and customer-requested shipment dates have increasingly extended beyond historical averages. Nevertheless, 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 (in the U.S. and Mexico), Europe (in France, Germany, Spain, the U.K., the Czech Republic and Belgium) and Asia (in China, Malaysia and India). Our global manufacturing operations are centralized under a single organization to serve our customers’ needs across multiple brands and geographies.
Our manufacturing model is predominately make-to-order with lead times typically ranging from two to six weeks.  We manufacture our products using lean manufacturing principles, including continuous one-piece flow and platformed processes and products, which allow us to achieve efficiencies and cost savings and minimize the amount of inventory on hand. We largely purchase direct materials and components from a global network of integrated suppliers as needed to meet demand. We also purchase finished goods manufactured by third parties predominantly on a make-to-order basis.
We focus on enhancing the efficiency of our manufacturing operations, and we also seek to reduce costs through our global sourcing effort. We focus on platforming our product offering and capturing raw material and component cost savings available through lower cost suppliers around the globe. These efforts enhance our leverage with supply sources, and we have been able to reduce cycle times through improvements with our partners throughout our global supply chain.
Our physical distribution system utilizes commercial transport, dedicated fleet and company-owned delivery services. We utilize a network of regional distribution centers in the Americas and EMEA to maintain efficient freight costs and improve service to our dealers and customers.
Raw Materials
Our material costs represented approximately 60% of our cost of sales in 2019 and included raw materials and components from a significant number of suppliers around the world. Those raw materials include steel, petroleum-based products, aluminum, other metals, wood, particleboard 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, petroleum-based products, aluminum, other metals, wood and particleboard have fluctuated in recent years due to changes in global supply and demand, and the costs of these commodities can be impacted by changes in import tariffs and trade barriers. Our global supply chain team continually evaluates current market conditions, the financial viability of our suppliers and available supply options on the basis of quality, reliability of supply and cost.

5


Research, Design and Development
Our extensive global research—a combination of user observations, feedback sessions and sophisticated analyses—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 and higher education. Organizationally, global design leadership directs strategy and project work, which is distributed to design studios around the world and sometimes 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.
We incurred $53.7, $44.0 and $35.8 in research, design and development expenses in 2019, 2018 and 2017, respectively. In addition, we sometimes pay royalties to external designers of our products as the products are sold, and these costs are not included in research and development expenses.
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,” “Coalesse,” “Turnstone,” “Designtex,” “PolyVision,” “AMQ,” “Smith System” and “Orangebox” 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.
Employees
As of February 22, 2019, we had approximately 12,700 employees, of which approximately 7,700 work in manufacturing. Additionally, we had approximately 1,700 temporary workers who primarily work in manufacturing. Approximately 100 employees in the U.S. are covered by collective bargaining agreements. Outside of the U.S., approximately 2,900 employees are represented by unions or workers' councils that operate to promote the interests of workers. Management promotes positive relations with employees based on empowerment and teamwork.

6


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 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; the loss of other potentially responsible parties that are financially capable of contributing toward cleanup costs and other factors increasing the cost of remediation.
Available Information
We file annual reports, quarterly reports, current reports, proxy statements and other documents with the U.S. Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). 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, Corporate Business Development and Nominating and Corporate Governance Committees are available free of charge through our website or by writing to Steelcase Inc., Investor Relations, GH-3E-12, PO Box 1967, Grand Rapids, Michigan, U.S.A. 49501-1967.
We are not including the information contained on our website as a part of, or incorporating it by reference into, this Report.

7


Item 1A.
Risk Factors:
The following risk factors and other information included in this Report 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 by cyclical macroeconomic factors and future downturns may adversely affect our revenue and profits.
Our revenue is generated predominantly from the office furniture industry, and demand for office furniture is influenced by macroeconomic factors such as corporate profits, non-residential fixed investment, white-collar employment and commercial office construction and vacancy rates. The U.S. and European office furniture industries went through two major declines in demand in the past two decades, driven by global economic downturns.  During these downturns, our revenue declined and our profitability was significantly reduced. Although we have made a number of changes to adapt our business model to weather these types of events and we believe that demand for office furniture is not as heavily influenced by macroeconomic factors today as it has been historically, our revenues and profitability could be impacted in the future by adverse changes in these macroeconomic factors. These macroeconomic factors are difficult to predict, and if we are unsuccessful in further adapting our business as economic cyclical changes occur, our results may be adversely affected.
Failure to respond to changes in workplace trends and the competitive landscape may adversely affect our revenue and profits.
Advances in technology, the globalization of business, changing workforce demographics and shifts in work styles and behaviors have been changing the world of work and having an impact on the types of workplace products and services purchased by our customers.  In recent years, these trends have resulted in (1) a reduction in the number, size and price of typical workstations, (2) an increase in demand for residential and lounge-type settings, and for products with a broader range of price points, quality levels and warranty coverage, (3) shifting demand among product categories and (4) more frequent refreshment of workplace settings.  These trends have also had an impact on our competitive landscape, leading to the emergence of smaller furniture competitors, diversification by some of our larger competitors into other industries and the entry of new competitors from outside the traditional office furniture industry, such as real estate management service firms, flexible workspace providers, technology-based firms, general construction contractors and retail and online residential furniture providers.
We compete on a variety of factors, including: brand recognition and reputation; insights from our research; product design and features; price, lead time, delivery and service; product quality; strength of dealers and other distributors and relationships with customers and key influencers, such as architects, designers and facility managers. If we are unsuccessful in developing and offering a wide variety of solutions which respond to changes in workplace trends and generate revenue to offset the impact of reduced numbers, size and price of typical workstations, or we or our dealers are unsuccessful in competing with existing competitors and new competitive offerings which could arise from outside our industry, our revenue and profits may be adversely affected.
We may not be able to successfully develop, implement and manage our diversification and growth strategies.
Our longer-term success depends on our ability to successfully develop, implement and manage 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 diversification and growth strategies include:
translating our research regarding the world of work into innovative solutions which address market and user needs,
growing our market share with existing dealers and customers and new customers,
realizing the value from recent acquisitions and investing in new acquisitions and business ventures,
continuing our expansion into adjacent markets such as healthcare clinical spaces, classrooms, libraries and other educational settings and smaller companies,

8


growing our market share in markets such as China, India and central, eastern and southern Europe, the Middle East and Africa,
expanding our product categories to include additional architecture and technology product offerings and
developing and realizing growth from marketing partnerships and additional channels of distribution.
If these strategies to diversify and increase our revenues are not sufficient, or if we do not execute these strategies successfully, our profitability may be adversely affected.
Changes in tariffs, global trade agreements or government procurement could adversely affect our business.
We manufacture most of our products on a regional basis, and as a result, we often export products from where they are manufactured to where they are sold. We also source raw materials, components and finished goods from a global network of suppliers. In particular in 2019, more than 40% of the products we sold to customers in the U.S., including U.S. government agencies, were manufactured outside of the U.S., predominantly by our subsidiaries in Mexico, which operate as maquiladoras. Changes in tariffs or trade agreements could impact the cost of importing our products into the countries where they are sold and the cost of raw materials and components sourced from other countries, which in turn could adversely impact our gross margins and our price competitiveness. In addition, changes in U.S. government procurement rules requiring a certain amount of domestic content in goods, or requiring goods to be produced in the U.S., could have an adverse impact on our business, operating results or financial condition.
We may be adversely affected by changes in raw material, commodity and other input costs.
We procure raw materials (including steel, petroleum-based products, aluminum, other metals, wood and particleboard) from a significant number of sources globally. These raw materials are not rare or unique to our industry. The costs of these commodities, as well as fuel, energy, freight, labor and other input costs can fluctuate due to changes in global, regional or local supply and demand, larger currency movements and changes in import tariffs and trade barriers, which can also cause supply interruptions. In the short-term, significant increases in raw material, commodity and other input costs can be very difficult to offset with price increases because of existing contractual commitments with our customers, and it is difficult to find effective financial instruments to hedge against such changes. As a result, our gross margins can be adversely affected in the short-term by significant increases in these costs. If we are not successful in passing along higher raw material, commodity and other input costs to our customers over the longer-term because of competitive pressures, our profitability could be negatively impacted.
Our global presence subjects us to risks that may negatively affect our profitability and financial condition.
We have manufacturing facilities, sales locations and offices in many countries, and as a result, we are subject to risks associated with doing business globally. Our success depends on our ability to manage the complexity associated with designing, developing, manufacturing and selling our solutions in a variety of countries. Our global presence is also subject to market risks, which in turn could have an adverse effect on our business, operating results or financial condition, including:
differing business practices, cultural factors and regulatory requirements,
political, social and economic instability, natural disasters, security concerns, including terrorist activity, armed conflict and civil or military unrest and global health issues and
intellectual property protection challenges.

9


Our global footprint makes us vulnerable to currency exchange rate fluctuations and currency controls.
We primarily sell our products in U.S. dollars and euros, but we generate some of our revenues and pay some of our expenses in other currencies. While we seek to manage our foreign exchange risk largely through operational means by matching revenue with same-currency costs, our results are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold. We use foreign currency derivatives to hedge some of the short-term volatility of these exposures. There can be no assurance that such hedging will be economically effective. If we are not successful in managing currency exchange rate fluctuations, it could have an adverse effect on our business, operating results or financial condition.
We operate globally in multiple currencies, but we translate our results into U.S. dollars for reporting purposes, and thus our reported results may be positively or negatively impacted by the strengthening or weakening of the other currencies in which we operate against the U.S. dollar.
In addition, we face restrictions in certain countries that limit or prevent the transfer of funds to other countries or the exchange of the local currency to other currencies, which could have a negative impact on our profitability. We also face risks associated with fluctuations in currency exchange rates that may lead to a decline in the value of the funds held in certain jurisdictions, as well as the value of intercompany balances denominated in foreign currencies.
We are increasingly reliant on a global network of suppliers that exposes us to certain risks outside of our control.
We are reliant on the timely flow of raw materials, components and finished goods from a global network of third-party suppliers. The flow of such materials, components and goods may be affected by:
fluctuations in the availability and quality of raw materials,
the financial solvency of our suppliers and their supply chains,
disruptions caused by labor activities and
damage and loss of production from accidents, natural disasters, severe weather events, systems and equipment failures and other causes.
Any disruptions or fluctuations in the supply and delivery of raw materials, component parts and finished goods or deficiencies in our ability to manage our global network of suppliers could have an adverse impact on our business, operating results or financial condition.
The lack of redundant capabilities among our regional manufacturing facilities could adversely affect our business.
Many of our products are currently produced in only one location in each of the three geographic regions in which we operate (the Americas, EMEA and Asia Pacific), and our manufacturing model is predominately make-to-order.  As a result, any issue which impacts the production capabilities of one of our manufacturing locations, such as natural disasters, severe weather events, disruptions in the supply of materials or components, systems and equipment failures or disruptions caused by labor activities, could have an adverse impact on our business, operating results or financial condition.

10


We rely largely on a network of independent dealers to market, deliver and install our products, and disruptions and increasing consolidations within our dealer network could adversely affect our business.
Our business is dependent on our ability to manage our relationships with our independent dealers. From time to time, we or a dealer may choose to terminate our relationship, or the dealer could face financial insolvency or difficulty in transitioning to new ownership, and establishing a new dealer in a market can take considerable time and resources. 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 or the inability to establish new 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. Alternatively, we may elect to purchase and operate dealers in certain markets which also would require use of our capital and increase our financial exposure.
Our diversification and growth strategies into adjacent markets, such as healthcare and education, and the increasing complexity of our technology and architectural products are driving the need for our dealers to develop additional capabilities and invest in additional resources to support such products and markets. Some of our smaller dealers do not have the scale to leverage such investments, and as a result, we have seen and may continue to see increased consolidation within our dealer network. This increased concentration and size of dealers could increase our exposure to the risks discussed above.
We may be adversely impacted by losses and reputational damage related to 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 and manufacturing 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. While we have made significant investments to improve product quality and our warranty reserve has declined over the past three years based on historical claims experience, 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.
We have net goodwill of $240.8 and indefinite-lived intangible assets of $12.8 as of February 22, 2019. Goodwill and other acquired intangible assets with indefinite lives are not amortized but are evaluated for impairment annually in Q4 or whenever an event occurs or circumstances change such that it is more likely than not that an impairment may exist. Poor performance in portions of our business where we have goodwill or intangible assets, including failure to achieve projected performance from acquisitions, or declines in the market value of our equity, may result in impairment charges, which would adversely affect our results of operations.
Changes in corporate tax laws could adversely affect our business. 
We are subject to income taxes in the U.S. and various foreign jurisdictions, and more than 39% of our income tax expense in 2019 related to the U.S. federal corporate income tax. As of February 22, 2019, we had deferred tax assets of $135.8 based on the effective rates in the jurisdictions where the deferred tax assets are held. The future effective tax rate could be affected by changes in mix of earnings in countries with differing statutory tax rates, changes in valuation of deferred tax assets and liabilities or changes in tax laws or their interpretation which are being considered in many jurisdictions.  Such tax law changes, if enacted, could have a material adverse effect on our business, operating results or financial position.  Specifically, a reduction in applicable tax rates may require us to revalue and write-down our deferred tax assets.

11


There may be significant limitations to our utilization of net operating loss and tax credit carryforwards to offset future taxable income.
We have deferred tax assets related to net operating loss ("NOL") and tax credit carryforwards totaling $46.5 and $38.7, respectively, against which valuation allowances totaling $7.9 have been recorded.  NOL carryforwards are primarily related to foreign jurisdictions. Tax credit carryforwards consist of U.S. foreign tax credits and foreign investment tax credits. We may be unable to generate sufficient taxable income from future operations in the jurisdictions in which we maintain deferred tax assets related to NOL and tax credit carryforwards, or implement tax, business or other planning strategies, to fully utilize the recorded value of our NOL and tax credit carryforwards. These deferred tax assets are recorded 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 NOL and tax credit carryforwards.
Costs related to our participation in a multi-employer pension plan could increase.
Our subsidiary SC Transport Inc. contributes to the Central States, Southeast and Southwest Areas Pension Fund ("the Fund"), a multi-employer pension plan, based on obligations arising under a collective bargaining agreement with our SC Transport Inc. employees. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules.  In Q3 2019, the Fund asserted that SC Transport Inc.'s absence of hiring additional union employees over the past ten years, coupled with restructuring of SC Transport Inc.'s business, constituted an adverse selection practice under the Fund and, if not remedied, will result in the assessment of a withdrawal liability. As a result of the Fund’s assertion, SC Transport Inc. recorded an $11.2 charge related to its estimated future obligations under a withdrawal liability. 
In Q1 2020, we finalized a new collective bargaining agreement ("CBA") with our SC Transport Inc. employees that no longer requires us to contribute to the fund after March 31, 2019. We have notified the Fund of our CBA and we expect the Fund to issue a final assessment of our withdrawal liability from the Fund during 2020. The amount that may ultimately be required to settle any potential obligation may be lower or higher than the estimated liability, which will be adjusted as needed, if and when additional information becomes available.  If actual settlements are significantly lower or higher than the estimated reserve, our results of operations may be materially affected. In addition, if the Fund were to experience a mass withdrawal within three years from the date of our withdrawal, our liability could increase by approximately $13. A mass withdrawal could occur if all participating employers in the Fund withdraw at the same time, if the trustees terminate the Fund or if all union employees decertify the union.

12


Item 1B.
Unresolved Staff Comments:
None.
Item 2.
Properties:
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 sufficient to meet our 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 100,000 square feet are as follows:
Segment/Category Primarily Supported
Number of Principal
Locations
Owned
Leased
Americas
13

 
5

 
8

 
EMEA
8

 
6

 
2

 
Other category
4

 
2

 
2

 
Total
25

 
13

 
12

 
Item 3.
Legal Proceedings:
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.
Item 4.
Mine Safety Disclosures:
Not applicable.

13


Supplementary Item.    Executive Officers of the Registrant:
Our executive officers are:
Name
Age
Position
Guillaume M. Alvarez
59
Senior Vice President, EMEA
Sara E. Armbruster
48
Vice President, Strategy, Research and Digital Transformation
Ulrich H. E. Gwinner
55
President, Asia Pacific
James P. Keane
59
President and Chief Executive Officer, Director
Robert G. Krestakos
57
Vice President, Global Operations
James N. Ludwig
55
Vice President, Global Design and Product Engineering
Lizbeth S. O’Shaughnessy
57
Senior Vice President, Chief Administrative Officer, General Counsel and Secretary
Eddy F. Schmitt
47
Senior Vice President, Americas
Allan W. Smith, Jr.
51
Vice President, Global Marketing
David C. Sylvester
54
Senior Vice President, Chief Financial Officer
Guillaume M. Alvarez has been Senior Vice President, EMEA since March 2014 and has been employed by Steelcase since 1984.
Sara E. Armbruster has been Vice President, Strategy, Research and Digital Transformation since February 2018. Ms. Armbruster was Vice President, Strategy, Research and New Business Innovation from January 2014 to February 2018 and has been employed by Steelcase since 2007.
Ulrich H. E. Gwinner has been President, Asia Pacific since March 2014 and has been employed by Steelcase since 2000.
James P. Keane has been President and Chief Executive Officer since March 2014 and has been employed by Steelcase since 1997.
Robert G. Krestakos has been Vice President, Global Operations since February 2015. Mr. Krestakos was Vice President, Chief Information Officer and Operations-Americas from December 2013 to February 2015 and has been employed by Steelcase since 1992.
James N. Ludwig has been Vice President, Global Design and Product Engineering since March 2014 and has been employed by Steelcase since 1999.
Lizbeth S. O’Shaughnessy has been Senior Vice President, Chief Administrative Officer, General Counsel and Secretary since June 2014. Ms. O'Shaughnessy was Senior Vice President, Chief Legal Officer and Secretary from April 2011 to June 2014 and has been employed by Steelcase since 1992.
Eddy F. Schmitt has been Senior Vice President, Americas since March 2014 and has been employed by Steelcase since 2003.
Allan W. Smith, Jr. has been Vice President, Global Marketing since September 2013 and has been employed by Steelcase since 1991.
David C. Sylvester has been Senior Vice President, Chief Financial Officer since April 2011 and has been employed by Steelcase since 1995.

14


PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities:
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 and there is no established public trading market. See Note 16 to the consolidated financial statements for additional information. As of the close of business on April 9, 2019, we had outstanding 117,313,755 shares of common stock with 5,543 shareholders of record. Of these amounts, 88,249,395 shares are Class A Common Stock with 5,466 shareholders of record and 29,064,360 shares are Class B Common Stock with 77 shareholders of record.
Fourth Quarter Share Repurchases
The following is a summary of share repurchase activity during Q4 2019:
Period
(a)
Total Number of
Shares Purchased
(b)
Average Price
Paid per Share
(c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs (1)
(d)
Approximate Dollar
Value of Shares
that May Yet be
Purchased
Under the Plans
or Programs (1)
11/24/2018 - 12/28/2018

$


$
99.0

12/29/2018 - 01/25/2019
11,920

$
14.01

11,920

$
98.9

01/26/2019 - 02/22/2019

$


$
98.9

Total
11,920

(2)
11,920

 

_______________________________________
(1)
In January 2016, the Board of Directors approved a share repurchase program permitting the repurchase of up to $150 of shares of our common stock. This program has no specific expiration date. On October 30, 2018, we entered into a stock repurchase agreement with an independent third party broker under which the broker was authorized to repurchase up to 1,000,000 shares of our common stock on our behalf during the period from October 30, 2018 through January 18, 2019, subject to certain price, market and volume constraints specified in the agreement. On January 30, 2019, we entered into a stock repurchase agreement with an independent third party broker under which the broker was authorized to repurchase up to 1,000,000 shares of our common stock on our behalf during the period from January 30, 2019 through June 25, 2019, subject to certain price, market and volume constraints specified in the agreement. The agreements were established in accordance with Rule 10b5-1 of the Exchange Act. Shares purchased under the agreements are part of our share repurchase program approved in January 2016.
(2)
None of these shares were repurchased to satisfy participants’ tax withholding obligations upon the vesting of restricted stock unit grants, pursuant to the terms of our Incentive Compensation Plan.

15


Item 6.
Selected Financial Data:
  
Year Ended
Financial Highlights
February 22,
2019
February 23,
2018
February 24,
2017
February 26,
2016
February 27,
2015
Operating Results:
 
 
 
 
 
 
 
 
 
 
Revenue
$
3,443.2

 
$
3,055.5

 
$
3,032.4

 
$
3,060.0

 
$
3,059.7

 
Gross profit (1)
1,087.9

 
1,005.2

 
1,007.6

 
968.4

 
912.7

 
Operating income (1)
183.6

 
155.2

 
196.2

 
169.6

 
137.3

 
Income before income tax expense
163.9

 
161.5

 
196.3

 
174.8

 
137.0

 
Net income
126.0

 
80.7

 
124.6

 
170.3

 
86.1

 
Supplemental Operating Data:
 
 
 
 
 
 
 
 
 
 
Effective tax rate
23.1
%
 
50.0
%
 
36.5
%
 
2.6
%
 
37.2
%
 
Restructuring costs
$

 
$

 
$
(5.1
)
 
$
(19.9
)
 
$
(40.6
)
 
Capital expenditures
(81.4
)
 
(87.9
)
 
(61.1
)
 
(93.4
)
 
(97.5
)
 
Share Data:
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.06

 
$
0.68

 
$
1.03

 
$
1.37

 
$
0.69

 
Diluted earnings per common share
$
1.05

 
$
0.68

 
$
1.03

 
$
1.36

 
$
0.68

 
Weighted average shares outstanding - basic
119.1

 
119.2

 
120.7

 
124.3

 
124.4

 
Weighted average shares outstanding - diluted
119.5

 
119.4

 
121.2

 
125.3

 
126.0

 
Dividends paid per common share
$
0.54

 
$
0.51

 
$
0.48

 
$
0.45

 
$
0.42

 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
261.3

 
$
283.1

 
$
197.1

 
$
181.9

 
$
176.5

 
Short-term investments

 

 
73.4

 
84.1

 
68.3

 
Company-owned life insurance ("COLI")
156.1

 
172.2

 
168.8

 
160.4

 
159.5

 
Working capital (2)
353.4

 
299.2

 
295.8

 
266.4

 
264.9

 
Total assets
2,142.4

 
1,859.2

 
1,792.0

 
1,808.6

 
1,719.6

 
Total debt
487.0

 
295.0

 
297.4

 
299.1

 
282.1

 
Total liabilities
1,292.6

 
1,045.9

 
1,025.5

 
1,071.7

 
1,055.8

 
Total shareholders’ equity
849.8

 
813.3

 
766.5

 
736.9

 
663.8

 
Statement of Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
$
131.2

 
$
227.0

 
$
170.7

 
$
186.4

 
$
84.2

 
Investing activities
(271.6
)
 
(47.5
)
 
(48.4
)
 
(87.8
)
 
(14.3
)
 
Financing activities
122.3

 
(97.5
)
 
(105.9
)
 
(90.1
)
 
(89.8
)
 

(1)
Reflects the reclassification of net expenses from Cost of Sales and Operating expenses to Other income, net of $0.8, $4.0, $5.0 and $7.6 for the years ended February 23, 2018, February 24, 2017, February 26, 2016, and February 27, 2015, respectively, as a result of our adoption of Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715), which was issued by the Financial Accounting Standards Board in March 2017.
(2)
Working capital equals current assets minus current liabilities, as presented in the Consolidated Balance Sheets.

16


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
The following review of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere within this Report.
Non-GAAP Financial Measure
This item contains a non-GAAP financial measure. A “non-GAAP financial measure” is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the consolidated statements of income, balance sheets or statements of cash flows of the company. Pursuant to the requirements of Regulation G, we have provided a reconciliation below of the non-GAAP financial measure to the most directly comparable GAAP financial measure.
The non-GAAP financial measure used is organic revenue growth (decline), which represents the change in revenue over the prior year excluding estimated currency translation effects and the impacts of acquisitions and divestitures. This measure is presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors.
Financial Summary
Results of Operations
Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate expenses are reported as Corporate.
Statement of Operations Data—
Consolidated
Year Ended
February 22,
2019
 
February 23,
2018
 
February 24,
2017
 
Revenue
$
3,443.2

 
100.0
 %
 
$
3,055.5

 
100.0
 %
 
$
3,032.4

 
100.0
 %
 
Cost of sales
2,355.3

 
68.4

 
2,050.3

 
67.1

 
2,020.6

 
66.6

 
Restructuring costs

 

 

 

 
4.2

 
0.2

 
Gross profit
1,087.9

 
31.6

 
1,005.2

 
32.9

 
1,007.6

 
33.2

 
Operating expenses
904.3

 
26.3

 
850.0

 
27.8

 
810.5

 
26.7

 
Restructuring costs

 

 

 

 
0.9

 

 
Operating income
183.6

 
5.3

 
155.2

 
5.1

 
196.2

 
6.5

 
Interest expense
(37.5
)
 
(1.0
)
 
(17.5
)
 
(0.6
)
 
(17.2
)
 
(0.5
)
 
Investment income
2.9

 
0.1

 
1.5

 

 
1.4

 

 
Other income, net
14.9

 
0.4

 
22.3

 
0.8

 
15.9

 
0.5

 
Income before income tax expense
163.9

 
4.8

 
161.5

 
5.3

 
196.3

 
6.5

 
Income tax expense
37.9

 
1.1

 
80.8

 
2.7

 
71.7

 
2.4

 
Net income
$
126.0

 
3.7
 %
 
$
80.7

 
2.6
 %
 
$
124.6

 
4.1
 %
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.06

 
 
 
$
0.68

 
 
 
$
1.03

 
 
 
Diluted
$
1.05

 
 
 
$
0.68

 
 
 
$
1.03

 
 
 

17


Organic Revenue Growth—Consolidated
Year Ended
February 22,
2019
February 23,
2018
Prior year revenue
$
3,055.5

 
$
3,032.4

 
Acquisitions
121.5

 
4.5

 
Divestitures
(17.1
)
 
(12.5
)
 
Currency translation effects*
(2.7
)
 
28.1

 
   Prior year revenue, adjusted
3,157.2

 
3,052.5

 
Current year revenue
3,443.2

 
3,055.5

 
Organic growth $
$
286.0

 
$
3.0

 
Organic growth %
9
%
 
%
 
________________________
* Currency translation effects represent the net effect of translating prior year foreign currency revenues using the average exchange rate on a monthly basis during the current year.
Overview
In 2019, we reported strong revenue growth compared to the prior year across all segments, driven by overall industry growth and increased project opportunities, improvements in our competitive win rates, recent acquisitions and benefits from recent list price adjustments. Revenue grew by 13% compared to the prior year, with an increase of 13% in the Americas, 18% in EMEA and 5% in the Other category. We believe that this growth is better than global trends in our industry and that we gained market share in many major markets around the world in 2019. We attribute these gains to our increased investments in product development and other growth strategies over the past two years, which expanded our offerings and strengthened our position as the global industry leader. In addition, we continued to invest in sales deployment, research, customer-facing facilities, product training and other areas, which we believe have strengthened our differentiation during a period when work, worker and workplace are undergoing significant changes.
Our operating income of $183.6 in 2019 represented an increase of $28.4, or 18% compared to the prior year. The improved performance was due to higher revenue and lower operating expenses as a percentage of revenue, partially offset by higher cost of sales as a percentage of revenue. Higher commodity, freight and labor costs, net of pricing benefits, negatively impacted our gross margin during the year. In addition, changes in our business mix had a negative impact on our gross margin, including (1) higher revenue from new products, which have a lower gross margin than our portfolio average as costs are not fully optimized or absorbed early in their life cycles, (2) strong growth from a few product categories that currently generate lower than average gross margins and (3) lower growth from one of our product categories with the highest gross margins.
2019 compared to 2018
We recorded net income of $126.0 and diluted earnings per share of $1.05 in 2019 compared to net income of $80.7 and diluted earnings per share of $0.68 in 2018. In 2019, the results included (1) a charge related to a multi-employer pension plan, which had the effect of decreasing net income by $5.5 after taking into account the related variable compensation and tax effects, and (2) charges related to the redemption of debt, which had the effect of decreasing net income by $12.3 after taking into account the related tax effects. In 2018, net income included $27.9 of income tax charges, primarily related to a reduction in the value of our deferred tax assets recorded in connection with the U.S. Tax Cuts and Jobs Act (the "Tax Act"). Operating income of $183.6 in 2019 represented an increase of $28.4 compared to the prior year. The increase was driven by higher revenue across all segments and lower operating expenses as a percentage of revenue, partially offset by higher cost of sales as a percentage of revenue.
Revenue of $3,443.2 in 2019 represented an increase of $387.7, or 13%, compared to the prior year. The increase reflected growth of 13% in the Americas, 18% in EMEA and 5% in the Other category. The growth in 2019 was driven primarily by overall industry growth and increased project opportunities, improvements in our competitive win rates, recent acquisitions and benefits from recent list price adjustments. After adjusting for a $121.5 year-over-year impact of acquisitions, a $17.1 unfavorable impact from divestitures, and $2.7 of unfavorable currency translation effects, organic revenue growth was 9% compared to the prior year. Organic revenue growth was 9% in the Americas, 10% in EMEA and 6% in the Other category.

18


Cost of sales as a percentage of revenue increased by 130 basis points to 68.4% of revenue in 2019 compared to 2018, with 30 basis points of the increase attributable to the pension charge. Costs of sales as a percentage of revenue increased by 160 basis points in the Americas and 100 basis points in the Other category, while EMEA improved 20 basis points compared to the prior year. The increase in the Americas was primarily due to unfavorable shifts in business mix, approximately $43 of higher commodity, freight and labor (excluding merit) costs and the pension charge, partially offset by approximately $32 of benefits from pricing actions and approximately $9 of benefits associated with cost reduction efforts, net of additional overhead investments and annual merit labor cost increases.
Operating expenses of $904.3 in 2019 represented an increase of $54.3 but declined by 150 basis points as a percentage of revenue compared to the prior year. The increase was driven primarily by $40.5 from acquisitions (including $11.9 of amortization expense), net of divestitures, $9.9 of higher variable compensation expense and $6.2 of higher spending in Asia Pacific as a result of continued investment in the region, partially offset by $3.5 of higher property gains ($7.5 in the Americas in the current year compared to $4.0 in EMEA in the prior year). Operating expenses increased by $25.2 in the Americas, $18.9 in EMEA and $10.1 in the Other category. Operating expenses as a percentage of revenue declined by 180 basis points in the Americas and 140 basis points in EMEA but increased 130 basis points in the Other category.
Our 2019 effective tax rate was 23.1% compared to a 2018 effective tax rate of 50.0%. The 2019 rate was lower than the 2018 rate primarily due to impacts from the Tax Act.  The 2019 rate also reflected $6.1 of net discrete tax benefits, primarily related to an increase of $3.3 in foreign tax credits and a $1.7 reversal of a valuation allowance in the Czech Republic. See further discussion in Note 17 to the consolidated financial statements.
2018 compared to 2017
We recorded net income of $80.7 and diluted earnings per share of $0.68 in 2018 compared to net income of $124.6 and diluted earnings per share of $1.03 in 2017. In 2018, net income included $27.9 of income tax charges, primarily related to a reduction in the value of our deferred tax assets, recorded in connection with the Tax Act. Operating income decreased from $196.2 in 2017 to $155.2 in 2018, a decline of $41.0. The decline was driven by higher cost of sales as a percentage of revenue and higher operating expenses, partially offset by higher sales volume in the Other category.
Revenue of $3,055.5 in 2018 represented an increase of $23.1, or 1%, compared to the prior year. The increase in revenue was driven by higher revenue in the Other category and EMEA, mostly offset by a decline in the Americas. In the Americas, the revenue decline was driven by subdued demand from large customers. Additionally, growth from new products and solutions was partially offset by declines in legacy furniture applications. After adjusting for a $4.5 impact of an acquisition, a $12.5 unfavorable impact from divestitures, and $28.1 of favorable currency translation effects, revenue was flat on an organic basis compared to the prior year. Organic growth of 13% in the Other category and flat results in EMEA were offset by a 2% organic decline in the Americas.
Cost of sales as a percentage of revenue increased by 50 basis points to 67.1% of revenue in 2018 compared to 2017. The increase was primarily due to an 80 basis point increase in the Americas, partially offset by a decrease in EMEA and the Other category. The increase in the Americas was driven by higher commodity costs and unfavorable shifts in business mix, partially offset by benefits associated with cost reduction efforts. The decrease in EMEA was driven by favorable impacts from cost reduction efforts and shifts in business mix. The decrease in the Other category was driven by the impact of higher sales volume.
Operating expenses of $850.0 in 2018 represented an increase of 110 basis points as a percentage of revenue compared to the prior year. Operating expenses increased by $27.4 in the Americas, $4.9 in EMEA and $9.6 in the Other category. The increase in the Americas was driven by higher investments in product development, sales, marketing and information technology that support our growth strategies, partially offset by lower variable compensation expense. The increase in EMEA reflected unfavorable currency translation effects and higher costs related to product development, partially offset by a gain related to the sale of property. Operating expenses as a percentage of revenue decreased 80 basis points in the Other category compared to the prior year.
There were no restructuring costs in 2018 compared to net restructuring costs of $5.1 in 2017. The 2017 amount included $2.6 of costs related to the closure of a manufacturing facility in High Point, North Carolina, and $2.5 of costs related to the closure of a manufacturing facility in Durlangen, Germany, and the establishment of our Learning + Innovation Center in Munich, Germany.

19


Our 2018 effective tax rate was 50.0% compared to a 2017 effective tax rate of 36.5%. The 2018 rate was higher than the 2017 rate primarily due to impacts from the Tax Act.  The 2018 effective tax rate also reflected discrete tax expense of $4.0 in Q4 2018 associated with a change in the statutory tax rate in France, which was offset by a $3.9 favorable discrete tax adjustment in Q2 2018. See further discussion in Note 17 to the consolidated financial statements.
Interest Expense, Investment Income and Other Income, Net
Interest Expense, Investment Income and Other Income, Net
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Interest expense
$
(37.5
)
 
$
(17.5
)
 
$
(17.2
)
 
Investment income
2.9

 
1.5

 
1.4

 
Other income (expense), net:
 
 
 
 
 
 
Equity in income of unconsolidated affiliates
13.7

 
12.8

 
9.7

 
Foreign exchange gain (loss)
0.3

 
(4.8
)
 
3.4

 
Net periodic pension and post-retirement credit, excluding service cost
3.7

 
0.8

 
4.0

 
Miscellaneous, net
(2.8
)
 
13.5

 
(1.2
)
 
Total other income, net
14.9

 
22.3

 
15.9

 
Total interest expense, investment income and other income, net
$
(19.7
)
 
$
6.3

 
$
0.1

 
Interest expense increased $20.0 in 2019 compared to the prior year primarily due to $16.9 of charges related to the redemption of debt. Net periodic pension and post-retirement credit, excluding service cost in 2018 included $7.1 of charges related to the annuitizations of three small defined benefit plans in Q1 2018. Miscellaneous, net in 2018 included gains of $13.9 related to the partial sale of an investment in an unconsolidated affiliate and the receipt of a premium related to a change in control of the affiliate.

20


Business Segment Disclosure
See Note 21 to the consolidated financial statements for additional information regarding our business segments.
Americas
The Americas segment serves customers in the U.S., Canada, the Caribbean Islands and Latin America with a portfolio of integrated architecture, furniture and technology products marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Coalesse, Turnstone, Smith System, AMQ and Orangebox brands.
Statement of Operations Data—
Americas
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Revenue
$
2,470.2

 
100.0
%
 
$
2,193.8

 
100.0
%
 
$
2,231.9

 
100.0
%
 
Cost of sales
1,673.5

 
67.7

 
1,450.8

 
66.1

 
1,456.2

 
65.3

 
Restructuring costs

 

 

 

 
2.6

 
0.1

 
Gross profit
796.7

 
32.3

 
743.0

 
33.9

 
773.1

 
34.6

 
Operating expenses
586.8

 
23.8

 
561.6

 
25.6

 
534.2

 
23.9

 
Operating income
$
209.9

 
8.5
%
 
$
181.4

 
8.3
%
 
$
238.9

 
10.7
%
 

Organic Revenue Growth (Decline)—Americas
Year Ended
February 22,
2019
February 23,
2018
Prior year revenue
$
2,193.8

 
$
2,231.9

 
Acquisitions
84.4

 
4.5

 
Divestiture
(13.6
)
 
(8.3
)
 
Currency translation effects*
(2.3
)
 
2.0

 
   Prior year revenue, adjusted
2,262.3

 
2,230.1

 
Current year revenue
2,470.2

 
2,193.8

 
Organic growth (decline) $
$
207.9

 
$
(36.3
)
 
Organic growth (decline) %
9
%
 
(2
)%
 
________________________
* Currency translation effects represent the net effect of translating prior year foreign currency revenues using the average exchange rate on a monthly basis during the current year.
2019 compared to 2018
Operating income in the Americas increased by $28.5 in 2019 compared to the prior year. The comparison was negatively impacted by $8.4 related to the pension charge and favorably impacted by a $5.0 gain on the sale of property, net of the related variable compensation effects. The increase in 2019 operating income was driven by higher revenue and lower operating expenses as a percentage of revenue, partially offset by higher cost of sales as a percentage of revenue.
The Americas revenue represented 71.7% of consolidated revenue in 2019. Revenue for 2019 of $2,470.2 represented an increase of $276.4 or 13% compared to 2018. The growth in 2019 was driven primarily by overall industry growth and increased project opportunities, improvements in our competitive win rates, recent acquisitions and benefits from recent list price adjustments. After adjusting for an $84.4 year-over-year impact of acquisitions, a $13.6 unfavorable impact of a divestiture and $2.3 of unfavorable currency translation effects, the organic revenue growth in 2019 was $207.9 or 9% compared to the prior year.

21


Cost of sales in 2019 was 67.7% of revenue which compared to 66.1% of revenue in 2018. Cost of sales as a percentage of revenue increased by 160 basis compared to the prior year, with 40 basis points attributable to the pension charge. The year-over-year comparison reflected the following:
unfavorable shifts in business mix,
approximately $43 of higher commodity, freight and labor (other than annual merit increases) costs, partially offset by approximately $32 of benefits from pricing actions,
approximately $9 of benefits associated with cost reduction efforts, net of additional overhead investments and annual merit labor cost increases, and
higher absorption of fixed costs.
Operating expenses in 2019 increased by $25.2, but decreased 180 basis points as a percentage of revenue, compared to the prior year. The increase was due to $27.2 from acquisitions (including $9.4 of amortization expense), net of a divestiture and $8.9 of higher variable compensation expense, partially offset by a $7.5 gain on the sale of property, $3.7 of lower severance costs and $2.6 of lower product development expenses.
2018 compared to 2017
Operating income in the Americas decreased by $57.5 in 2018 compared to the prior year. The decline was driven by lower sales volume, higher cost of sales as a percentage of revenue and higher operating expenses.
The Americas revenue represented 71.8% of consolidated revenue in 2018. Revenue for 2018 of $2,193.8 represented a decrease of $38.1 or 2% compared to 2017, reflecting ongoing shifts in demand patterns. The decrease in revenue was driven by subdued demand from large customers. Growth from our new products and solutions was partially offset by a decline in demand for legacy furniture applications. After adjusting for an $8.3 unfavorable impact of a divestiture, a $4.5 impact of an acquisition and $2.0 of favorable currency translation effects, the organic revenue decline in 2018 was $36.3 or 2% compared to the prior year.
Cost of sales in 2018 was 66.1% of revenue which compared to 65.3% of revenue in 2017. The year-over-year comparison reflected the following:
approximately $10 of higher commodity costs,
higher investments in support of product development and manufacturing agility,
unfavorable shifts in business mix,
approximately $17 of benefits associated with ongoing cost reduction efforts,
favorability related to improvements in negotiated customer pricing, and
approximately $5 of lower warranty costs compared to the prior year.
Operating expenses in 2018 increased by $27.4, or 170 basis points as a percentage of revenue, compared to the prior year. The increase was driven by approximately $34 of higher investments in product development, sales, marketing and information technology that support our growth strategies, $3.8 of severance costs in 2018 and a $1.5 impairment related to an asset held for sale, partially offset by approximately $9 of lower variable compensation expense.

22


EMEA
The EMEA segment serves customers in Europe, the Middle East and Africa primarily under the Steelcase, Orangebox and Coalesse brands, with an emphasis on freestanding furniture systems, storage and seating solutions.
Statement of Operations Data—EMEA
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Revenue
$
617.0

 
100.0
 %
 
$
524.2

 
100.0
 %
 
$
503.9

 
100.0
 %
 
Cost of sales
448.7

 
72.7

 
381.9

 
72.9

 
370.7

 
73.6

 
Restructuring costs

 

 

 

 
1.6

 
0.3

 
Gross profit
168.3

 
27.3

 
142.3

 
27.1

 
131.6

 
26.1

 
Operating expenses
175.2

 
28.4

 
156.3

 
29.8

 
151.4

 
30.0

 
Restructuring costs

 

 

 

 
0.9

 
0.2

 
Operating loss
$
(6.9
)
 
(1.1
)%
 
$
(14.0
)
 
(2.7
)%
 
$
(20.7
)
 
(4.1
)%
 

Organic Revenue Growth—EMEA
Year Ended
February 22,
2019
February 23,
2018
Prior year revenue
$
524.2

 
$
503.9

 
Acquisition
37.1

 

 
Divestitures
(3.5
)
 
(4.2
)
 
Currency translation effects*
2.4

 
22.7

 
   Prior year revenue, adjusted
560.2

 
522.4

 
Current year revenue
617.0

 
524.2

 
Organic growth $
$
56.8

 
$
1.8

 
Organic growth %
10
%
 
%
 
________________________
* Currency translation effects represent the net effect of translating prior year foreign currency revenues using the average exchange rate on a monthly basis during the current year.
2019 compared to 2018
Operating results in EMEA improved by $7.1 in 2019 compared to the prior year. Operating income in 2019 included $2.5 of amortization expense related to an acquisition. Operating income in 2018 included a $4.0 gain on the sale of property. The improved performance was primarily due to higher revenue and lower operating expenses as a percentage of revenue.
EMEA revenue represented 17.9% of consolidated revenue in 2019. Revenue increased by $92.8 or 18% compared to the prior year. The growth was driven primarily by higher revenue in Western Europe, partially offset by a decline in the rest of EMEA as a group. The remaining growth was due to benefits from an acquisition, net of divestitures, and recent list price adjustments. After adjusting for a $37.1 year-over-year impact of the acquisition, a $3.5 unfavorable impact from divestitures and $2.4 of favorable currency translation effects, the organic revenue growth in 2019 was $56.8 or 10% compared to the prior year.
Cost of sales as a percentage of revenue decreased 20 basis points to 72.7% in 2019 compared to the prior year. The decrease was driven by higher absorption of fixed costs, approximately $5 of benefits associated with cost reduction efforts, net of additional overhead investments and annual merit labor cost increases, and approximately $6 of pricing benefits net of inflation, partially offset by unfavorable shifts in business mix.
Operating expenses in 2019 increased by $18.9 but decreased by 140 basis points as a percentage of revenue compared to the prior year, which included a $4.0 gain on the sale of property. The increase was driven by $13.3 from the acquisition (including $2.5 of amortization expense).

23


2018 compared to 2017
Operating results in EMEA improved by $6.7 in 2018 compared to the prior year. The improvement included a $4.0 gain on the sale of a property in Rosenheim, Germany and lower cost of sales as a percentage of revenue, partially offset by higher operating expenses.
EMEA revenue represented 17.2% of consolidated revenue in 2018. Revenue increased by $20.3 or 4% compared to the prior year. The increase was driven primarily by favorable currency translation effects and higher revenue in Iberia and the U.K., partially offset by declines in France, Germany and central Europe. After adjusting for $22.7 of favorable currency translation effects and a $4.2 unfavorable impact from divestitures, revenue was flat on an organic basis compared to the prior year.
Cost of sales as a percentage of revenue decreased 70 basis points to 72.9% in 2018 compared to the prior year. The decrease was driven by approximately $9 of favorable impacts from cost reduction efforts and shifts in business mix.
Operating expenses in 2018 increased by $4.9 compared to the prior year. The increase was driven by $6.7 of unfavorable currency translation effects and $3.5 of higher costs related to product development, partially offset by a $4.0 gain on the sale of the Rosenheim property.
Other
The Other category includes Asia Pacific, Designtex and PolyVision. Asia Pacific serves customers in Asia and Australia primarily under the Steelcase brand with an emphasis on freestanding furniture systems, seating and storage solutions. Designtex primarily sells textiles, wall coverings and surface imaging solutions specified by architects and designers directly to end-use customers through a direct sales force primarily in North America. PolyVision manufactures ceramic steel surfaces for use in various applications globally, including static whiteboards and chalkboards sold through third party fabricators and distributors to the primary and secondary education markets and architectural panels and other special applications sold through general contractors for commercial and infrastructure projects.
Statement of Operations Data—Other
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Revenue
$
356.0

 
100.0
%
 
$
337.5

 
100.0
%
 
$
296.6

 
100.0
%
 
Cost of sales
233.1

 
65.5

 
217.6

 
64.5

 
193.7

 
65.3

 
Gross profit
122.9

 
34.5

 
119.9

 
35.5

 
102.9

 
34.7

 
Operating expenses
108.6

 
30.5

 
98.5

 
29.2

 
88.9

 
30.0

 
Operating income
$
14.3

 
4.0
%
 
$
21.4

 
6.3
%
 
$
14.0

 
4.7
%
 

Organic Revenue Growth—Other
Year Ended
February 22,
2019
February 23,
2018
Prior year revenue
$
337.5

 
$
296.6

 
Currency translation effects*
(2.8
)
 
3.4

 
   Prior year revenue, adjusted
334.7

 
300.0

 
Current year revenue
356.0

 
337.5

 
Organic growth $
$
21.3

 
$
37.5

 
Organic growth %
6
%
 
13
%
 
________________________
* Currency translation effects represent the net effect of translating prior year foreign currency revenues using the average exchange rate on a monthly basis during the current year.

24


2019 compared to 2018
Operating income in the Other category declined by $7.1 in 2019 compared to the prior year, driven by lower operating income in Asia Pacific and at Polyvision, partially offset by better performance at Designtex. In Asia Pacific, benefits from revenue growth were more than offset by $6.2 of higher operating expenses due to continued investment in the region and $2.1 of inventory charges related to a cancelled order.
Revenue in the Other category represented 10.4% of consolidated revenue in 2019. Revenue in 2019 increased by $18.5 or 5% compared to the prior year due to strong broad-based growth in Asia Pacific as well as growth at Designtex.
Cost of sales as a percentage of revenue increased 100 basis points in 2019 compared to the prior year, driven primarily by the $2.1 of inventory charges in Asia Pacific.
Operating expenses as a percentage of revenue increased 130 basis points in 2019 compared to the prior year, due primarily to the impact of increased investments in Asia Pacific.
2018 compared to 2017
Operating results in the Other category improved in 2018 compared to the prior year, driven by higher operating income in Asia Pacific and PolyVision, partially offset by an operating loss at Designtex. The 2018 performance in Asia Pacific represented record sales and operating income levels.
Revenue in the Other category represented 11.0% of consolidated revenue in 2018. Revenue in 2018 increased by $40.9 or 14% compared to the prior year due to strong growth from all three businesses, with particular strength coming from Asia Pacific (led by India and China).
Cost of sales as a percentage of revenue decreased 80 basis points in 2018 compared to the prior year, driven by the impact of higher volume from all three businesses, offset in part by unfavorable foreign currency impacts in Asia Pacific.
Operating expenses as a percentage of revenue declined by 80 basis points in 2018 compared to the prior year, as the impacts of approximately $5 of increased investments in Asia Pacific were more than offset by the impact from revenue growth compared to the prior year.

25


Corporate
Corporate expenses include unallocated portions of shared service functions, such as information technology, corporate facilities, finance, human resources, research, legal and customer aviation, plus deferred compensation expense and income or losses associated with COLI.
Statement of Operations Data—Corporate
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Operating expenses
$
33.7

 
$
33.6

 
$
36.0

 
The decrease in operating expenses in 2018 was primarily due to higher COLI income and lower deferred compensation expense compared to the prior year. COLI income remained high in 2019 in part due to gains related to policy maturities.
Liquidity and Capital Resources
Liquidity
Based on current business conditions, we target a range of $75 to $175 in cash and cash equivalents and short-term investments to fund day-to-day operations, including seasonal disbursements, particularly the annual payment of accrued variable compensation and retirement plan contributions in Q1 of each fiscal year. In addition, we may carry additional liquidity for potential investments in strategic initiatives and as a cushion against economic volatility, and from time to time, we may allow our cash and cash equivalents and short-term investments to temporarily fall below our targeted range to fund acquisitions and other growth initiatives.
Liquidity Sources
February 22,
2019
February 23,
2018
Cash and cash equivalents
$
261.3

 
$
283.1

 
Company-owned life insurance
156.1

 
172.2

 
Availability under credit facilities
227.9

 
152.2

 
Total liquidity
$
645.3

 
$
607.5

 
As of February 22, 2019, we held a total of $261.3 in cash and cash equivalents. Of our total cash and cash equivalents, 83% was located in the U.S. and the remaining 17%, or $44.1, was located outside of the U.S., primarily in Mexico, Hong Kong, Malaysia and China. The Tax Act imposes a mandatory transition tax on accumulated foreign earnings and eliminates U.S. taxes on foreign subsidiary distributions. As a result, earnings in foreign jurisdictions are available for distribution to the U.S. without incremental U.S. taxes.
COLI investments are recorded at their net cash surrender value. A portion of our investments in COLI policies are intended to be utilized as a long-term funding source for long-term benefit obligations. However, COLI can also be used as a source of liquidity. We believe the financial strength of the issuing insurance companies associated with our COLI policies is sufficient to meet their obligations. See Note 10 to the consolidated financial statements for more information.
Availability under credit facilities may be reduced related to compliance with applicable covenants. See Liquidity Facilities for more information.

26


The following table summarizes our consolidated statements of cash flows:
Cash Flow Data
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Net cash flow provided by (used in):
 
 
 
 
 
 
Operating activities
$
131.2

 
$
227.0

 
$
170.7

 
Investing activities
(271.6
)
 
(47.5
)
 
(48.4
)
 
Financing activities
122.3

 
(97.5
)
 
(105.9
)
 
Effect of exchange rate changes on cash and cash equivalents
(2.7
)
 
4.0

 
(1.2
)
 
Net increase (decrease) in cash, cash equivalents and restricted cash
(20.8
)
 
86.0

 
15.2

 
Cash, cash equivalents and restricted cash, beginning of period
285.6

 
199.6

 
184.4

 
Cash, cash equivalents and restricted cash, end of period
$
264.8

 
$
285.6

 
$
199.6

 
Cash provided by operating activities
Cash Flow Data—Operating Activities
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Net income
$
126.0

 
$
80.7

 
$
124.6

 
Depreciation and amortization
81.6

 
65.9

 
60.3

 
Deferred income taxes
(0.8
)
 
52.9

 
26.8

 
Loss on derivative instruments
(13.0
)
 

 

 
Changes in accounts receivable, inventories and accounts payable
(81.9
)
 
9.3

 
16.3

 
Long-term income taxes receivable

 
18.7

 
(18.5
)
 
Changes in employee compensation liabilities
21.1

 
(13.8
)
 
(8.8
)
 
Other
(1.8
)
 
13.3

 
(30.0
)
 
Net cash provided by operating activities
$
131.2

 
$
227.0

 
$
170.7

 
The decrease in cash provided by operating activities in 2019 compared to 2018 is primarily due to increases in working capital as a result of the strong revenue growth. Additionally, accounts receivable associated with our direct customers (who have longer payment terms) increased by $31.1. Inventory also increased as a result of a significant number of new product launches, some of which include long distance supply chains. Amounts accrued for variable compensation payments made in Q1 2020 were higher than amounts paid in 2019, driven by our improved financial results. In 2019, we paid $16.3 of interest as a make-whole premium due upon the redemption of our senior notes due in February 2021. Additionally in 2019, we paid $13.0 to settle an interest rate lock contract to hedge interest rate movement on 10-year U.S. Treasury notes in anticipation of the issuance of our senior notes due in January 2029. Depreciation and amortization increased during 2019 primarily due to $11.2 of higher intangible asset amortization related to our recent acquisitions.
The increase in cash provided by operating activities in 2018 compared to 2017 was primarily due to a number of income tax items, as well as favorable timing related to customer deposits at owned dealers, promotional payments and other accrued liabilities in the Americas. Tax payments in 2018 were lower than 2017 due in part to a lower tax rate in the U.S. and an overpayment of taxes in 2017, as well as the receipt of an $18.7 U.S. tax refund in 2018 related to the amendment of previously filed tax returns.

27


Cash used in investing activities
Cash Flow Data—Investing Activities
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Capital expenditures
$
(81.4
)
 
$
(87.9
)
 
$
(61.1
)
 
Changes in short-term investments, net

 
73.5

 
14.0

 
Acquisitions, net of cash acquired
(226.2
)
 
(68.3
)
 
(4.0
)
 
Other
36.0

 
35.2

 
2.7

 
Net cash used in investing activities
$
(271.6
)
 
$
(47.5
)
 
$
(48.4
)
 
Capital expenditures in 2019, 2018 and 2017 were primarily related to investments in manufacturing operations, customer-facing facilities and product development.
We did not hold any short-term investments in 2019, as we liquidated these investments in 2018 to fund an acquisition.
In 2019, we completed (1) the acquisition of Orangebox Group Limited for a purchase price of $78.9 less a $0.5 adjustment for working capital and (2) the acquisition of Smith System Manufacturing Company for a purchase price of $140.0 plus an $8.4 adjustment for working capital. In 2018, we completed the acquisition of AMQ Solutions for a purchase price of $69.9 plus measurement period adjustments of $0.3. See Note 20 for additional information.
In 2019, other investing activities primarily includes $22.1 of proceeds related to maturities of COLI policies and $20.5 of proceeds from the sale of fixed assets, primarily a corporate aircraft and land in the Americas. In 2018, other investing activities included $19.0 of proceeds on the partial sale of an unconsolidated affiliate and $7.9 of proceeds from the sale of fixed assets, primarily land in EMEA.
Cash provided by (used in) financing activities
Cash Flow Data—Financing Activities
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Dividends paid
$
(64.3
)
 
$
(61.0
)
 
$
(58.5
)
 
Common stock repurchases
(4.2
)
 
(33.8
)
 
(48.4
)
 
Repayments of long-term debt
(252.7
)
 
(2.7
)
 
(2.3
)
 
Borrowings of long-term debt
450.0

 

 

 
Debt issuance costs and other financing activities
(6.5
)
 

 
3.3

 
Net cash provided by (used in) financing activities
$
122.3

 
$
(97.5
)
 
$
(105.9
)
 
In 2019, we issued $450 of unsecured unsubordinated senior notes due in January 2029. The bond discount of $3.5 and direct debt issuance costs of $4.0 were deferred and are being amortized over the life of the notes. We used a portion of the proceeds to redeem our $250 unsecured unsubordinated senior notes due in February 2021.
We paid dividends of $0.135, $0.1275 and $0.12 per common share during each quarter in 2019, 2018 and 2017, respectively. On March 19, 2019, our Board of Directors declared a dividend of $0.145 per common share to be paid in Q1 2020.
During 2019, 2018 and 2017, we made common stock repurchases of $4.2, $33.8, and $48.4, respectively, all of which related to our Class A Common Stock. As of February 22, 2019, we had $98.9 of remaining availability under the $150 share repurchase program approved by our Board of Directors in 2016.
Share repurchases of Class A Common Stock to enable participants to satisfy tax withholding obligations upon vesting of restricted stock, restricted stock units and performance units, pursuant to the terms of our Incentive Compensation Plan, were $3.9, $6.5, and $6.9 in 2019, 2018 and 2017, respectively.

28


Capital Resources
Off-Balance Sheet Arrangements
In certain cases, we 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. As of February 22, 2019 and February 23, 2018, there were no reserves for guarantees recorded on our Consolidated Balance Sheets.
Contractual Obligations
Our contractual obligations as of February 22, 2019 were as follows:
Contractual Obligations
Payments Due by Period
Total
Less than
1 Year
1-3
Years
3-5
Years
After 5
Years
Long-term debt and short-term borrowings
$
487.0

 
$
4.1

 
$
5.2

 
$
34.8

 
$
442.9

 
Estimated interest on debt obligations
234.8

 
24.7

 
48.9

 
47.6

 
113.6

 
Operating leases
264.9

 
46.0

 
82.2

 
64.5

 
72.2

 
Committed capital expenditures
33.2

 
33.2

 

 

 

 
Purchase obligations
40.5

 
29.8

 
10.4

 
0.3

 

 
Other liabilities
0.5

 
0.5

 

 

 

 
Employee benefit and compensation obligations
272.8

 
130.3

 
45.6

 
23.7

 
73.2

 
Total
$
1,333.7

 
$
268.6

 
$
192.3

 
$
170.9

 
$
701.9

 
Total consolidated debt as of February 22, 2019 was $487.0. Of our total debt, $442.6 is in the form of term notes due in 2029 and $42.7 is related to financing secured by two of our corporate aircraft due in 2024.
We have commitments related to certain sales offices, showrooms, warehouses and equipment under non-cancelable operating leases that expire at various dates through 2029. Minimum payments under operating leases, net of sublease rental income, are presented in the contractual obligations table above.
Committed capital expenditures represent obligations we have related to property, plant and equipment purchases.
Purchase obligations represent obligations under non-cancelable contracts to purchase goods or services beyond the needs of meeting current backlog or production.
Other liabilities represent obligations for foreign exchange forward contracts.
Employee benefit and compensation obligations represent contributions and benefit payments expected to be made for our post-retirement, pension, deferred compensation, defined contribution, severance arrangements and variable compensation plans. Our obligations related to post-retirement benefit plans are not contractual, and the plans could be amended at the discretion of the Compensation Committee of our Board of Directors. We limited our disclosure of post-retirement and pension contributions and benefit payments to 10 years as information beyond this time period was not available. See Note 15 to the consolidated financial statements for additional information.
The contractual obligations table above is presented as of February 22, 2019. 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. We anticipate the cash expected to be generated from future operations, current cash and cash equivalents and short-term investment balances, funds available under our credit facilities and funds available from COLI will be sufficient to fulfill our existing contractual obligations.

29


Liquidity Facilities
Our total liquidity facilities as of February 22, 2019 were:
Liquidity Facilities
February 22,
2019
Global committed bank facility
$
200.0

Various uncommitted lines
29.3

Total credit lines available
229.3

Less: borrowings outstanding
(1.4
)
Available capacity
$
227.9

We have a $200 global committed five-year bank facility in effect through 2022. As of February 22, 2019, there were no borrowings outstanding under the facility, our availability was not limited, and we were in compliance with all covenants under the facility.
The various uncommitted lines may be changed or canceled by the applicable lenders at any time. There was $1.4 of outstanding borrowings with an interest rate of 0.65% under uncommitted facilities as of February 22, 2019.
In addition, we have credit agreements of $48.5 which can be utilized to support letters of credit, bank guarantees or foreign exchange contracts. Letters of credit and bank guarantees of $13.4 were outstanding under these facilities as of February 22, 2019. We had no draws against our letters of credit during 2019 or 2018.
Total consolidated debt as of February 22, 2019 was $487.0. Our debt primarily consists of $442.6 in term notes due in 2029 with an effective interest rate of 5.6%. In addition, we have a term loan with a balance as of February 22, 2019 of $42.7. This term loan has a floating interest rate based on 30-day LIBOR plus 1.20% and is due in 2024. The term notes are unsecured, and the term loan is secured by our corporate aircraft. The term notes and the term loan contain no financial covenants and are not cross-defaulted to our other debt facilities.
See Note 13 to the consolidated financial statements for additional information.
Liquidity Outlook
Our current cash and cash equivalents, funds available under our credit facilities, funds available from COLI and cash generated from future operations are expected to be sufficient to finance our known or foreseeable liquidity needs. In addition, we have flexibility over significant uses of cash including our capital expenditures, growth strategies and discretionary operating expenses.
Our significant funding requirements include operating expenses, non-cancelable operating lease obligations, capital expenditures, variable compensation and retirement plan contributions, dividend payments and debt service obligations.
We expect capital expenditures to total approximately $85 to $95 in 2020 compared to $81 in 2019. This amount includes investments in manufacturing operations, product development and our customer-facing facilities.
On March 19, 2019, we announced a quarterly dividend on our common stock of $0.145 per share, or $17.3, to be paid in Q1 2020. Future dividends will be subject to approval by our Board of Directors.

30


Critical Accounting Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 our Board of Directors and affect all of our segments.
Income Taxes
Our annual effective tax rate is based on income, statutory tax rates and tax planning strategies 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.
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. Tax positions are reviewed regularly for state, local and non-U.S. tax liabilities associated with uncertain tax positions.
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 deferred tax assets within the jurisdiction from which they arise, we consider all positive and negative evidence. These expectations require significant judgment and are developed using forecasts of future taxable income that are consistent with the internal plans and estimates we are using to manage the underlying business. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.
Future tax benefits of tax losses are recognized to the extent that realization of these benefits is considered more likely than not. As of February 22, 2019, we recorded tax benefits from net operating loss carryforwards of $46.5. We also have recorded valuation allowances totaling $6.4 against these assets, which reduced our recorded tax benefit to $40.1. It is considered more likely than not that a $40.1 cash benefit 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 would be established or adjusted. A change in judgment regarding our expected ability to realize deferred tax assets would be accounted for as a discrete tax expense or benefit in the period in which it occurs.
Additionally, we have deferred tax assets related to tax credit carryforwards of $38.7 comprised primarily of United States foreign tax credits and investment tax credits granted by the Czech Republic. The U.S. foreign tax credit carryforward period is 10 years, and utilization of foreign tax credits is restricted to 21% of foreign source taxable income in that year. We have projected our pretax domestic earnings and foreign source income and expect to utilize $30.0 of excess foreign tax credits within the allowable carryforward period. The carryforward period for the Czech Republic investment tax credits is also 10 years. We have projected our pretax earnings in the Czech Republic and expect to utilize the entire $7.2 of credits within the allowable carryover period. We have established a valuation allowance in the current year on the credit carryforwards where available evidence raised doubt about their expected realization.
A 10% decrease in the expected amount of cash benefit to be realized on the net operating loss and foreign tax credit carryforwards would have resulted in a decrease in net income for 2019 of approximately $7.7.
See Note 17 to the consolidated financial statements for additional information.

31


Business Combinations, Goodwill and Other Intangible Assets
We allocate the fair value of purchase consideration to tangible assets, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill. The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates are reviewed with our advisors and can include, but are not limited to, future expected cash flows related to acquired dealer relationships, trademarks and know-how/designs and require estimation of useful lives and discount rates.  Our estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable, and as a result, actual results may differ from these estimates. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. During 2019, we acquired Smith System and Orangebox.
See Note 20 to the consolidated financial statements for more information.
Annually in Q4, or earlier if conditions indicate it is necessary, the carrying value of each reporting unit is compared to an estimate of its fair value. If the estimated fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss. Goodwill is assigned to and the fair value is tested at the reporting unit level. In 2019, we evaluated goodwill and intangible assets using ten reporting units: the Americas, AMQ, Red Thread, Smith System, Orangebox US, EMEA, Orangebox UK, Designtex, PolyVision and Asia Pacific.
Annually in Q4, or earlier if conditions indicate it is necessary, we also 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. An impairment loss is recognized if the carrying amount of a long-lived asset exceeds its estimated 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.
During Q4 2019, 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 (“DCF”) valuation method. The DCF analysis calculated the present value of projected cash flows and a residual value using discount rates that ranged from 11% to 15%. 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, expected levels of operating income and estimated capital investment, are consistent with our current internal projections. These assumptions could change over time, which may result in future impairment charges.
There were no impairments for any reporting units in 2019.
As of February 22, 2019, we had remaining goodwill and net intangible assets recorded on our Consolidated Balance Sheet as follows:
Reportable Segment
Goodwill
Other Intangible
Assets, Net
Americas
$
203.6

 
$
79.3

 
EMEA
18.7

 
36.1

 
Other category
18.5

 
3.9

 
Total
$
240.8

 
$
119.3

 
As of the valuation date, the enterprise value available for goodwill determined as described above is in excess of the underlying reported value of goodwill as follows:
Reportable Segment
Enterprise Value
Available in Excess
of Goodwill
Americas
$
1,404.8

EMEA
40.5

Other category
53.3


32


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:
Reportable Segment
Enterprise Value
Available in Excess
of Goodwill
Americas
$
1,230.3

EMEA
29.9

Other category
43.3

As of February 22, 2019, no reporting unit had goodwill balances in excess of enterprise value available for goodwill based on the sensitivity analysis above.
See Note 2 and Note 11 to the consolidated financial statements for additional information.
Pension and Other Post-Retirement Benefits
We sponsor a number of domestic and foreign plans to provide pension, medical and life insurance benefits to retired employees. As of February 22, 2019 and February 23, 2018, the fair value of plan assets, benefit plan obligations and funded status of these plans were as follows:
 
Defined Benefit
Pension Plans
Post-Retirement
Plans
February 22,
2019
February 23,
2018
February 22,
2019
February 23,
2018
Fair value of plan assets
$
30.0

 
$
33.1

 
$

 
$

 
Benefit plan obligations
76.2

 
80.1

 
40.7

 
43.4

 
Funded status
$
(46.2
)
 
$
(47.0
)
 
$
(40.7
)
 
$
(43.4
)
 
The post-retirement medical and life insurance plans are unfunded. As of February 22, 2019, approximately 68% of our unfunded defined benefit pension obligations is related to our non-qualified supplemental retirement plan that is limited to a select group of management approved by the Compensation Committee. A portion of our investments in whole life and variable life COLI policies with a net cash surrender value of $156.1 as of February 22, 2019 are intended to be utilized as a long-term funding source for post-retirement medical benefits, deferred compensation and defined benefit pension plan obligations. The asset values of the COLI policies are not segregated in a trust specifically for the plans and thus are not considered plan assets. Changes in the values of these policies have no effect on the post-retirement benefits expense, defined benefit pension expense or benefit obligations recorded in the consolidated financial statements.
We recognize the cost of benefits provided during retirement over the employees’ active working lives. Inherent in this approach is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Key actuarial assumptions that require significant management judgment and have a material impact on the measurement of our consolidated benefits expense and benefit obligations include, among others, the discount rate and health care cost trend rates. These and other assumptions are reviewed with our actuaries and updated annually based on relevant external and internal factors and information, including, but not limited to, benefit payments, expenses paid from the plan, rates of termination, medical inflation, regulatory requirements, plan changes and governmental coverage changes.
To conduct our annual review of discount rates, we perform a matching exercise of projected plan cash flows against spot rates on a yield curve comprised of high quality corporate bonds as of the measurement date (the Ryan ALM Top Third curve). The measurement dates for our retiree benefit plans are consistent with the last day in February. Accordingly, we select discount rates to measure our benefit obligations that are consistent with market indices at the end of February.
Based on consolidated benefit obligations as of February 22, 2019, a one percentage point decline in the weighted-average discount rate used for benefit plan measurement purposes would have changed the 2019 consolidated benefits expense by less than $1 and the consolidated benefit obligations by less than $15. All obligation-related experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants.

33


To conduct our annual review of healthcare cost trend rates, we model our actual claims cost data over a historical period, including an analysis of the pre-65 age group and other important demographic components of our covered retiree population. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the underlying cost inflation trends. Our initial healthcare cost trend rate is reviewed annually and adjusted as necessary to remain consistent with recent historical experience and our expectations regarding short-term future trends. As of February 22, 2019, our initial rate of 6.75% for pre-age 65 retirees was trended downward by each year, until the ultimate trend rate of 4.50% was reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate healthcare cost premium. Post-age 65 trend rates are not applicable as our plan provides a fixed subsidy for post-age 65 benefits.
Based on consolidated benefit obligations as of February 22, 2019, a one percentage point increase or decrease in the assumed healthcare cost trend rates would have changed the 2019 consolidated benefits expense by less than $1 and changed the consolidated benefit obligations by less than $1. All experience gains and losses are amortized using a straight-line method, over at least the minimum amortization period prescribed by accounting guidance.
Despite the previously described policies for selecting key actuarial assumptions, we periodically experience material differences between assumed and actual experience. Our consolidated net unamortized prior service credits and net experience losses are recorded in Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.
See Note 15 to the consolidated financial statements for additional information.
Forward-Looking Statements
From time to time, in written and oral statements, we discuss our expectations regarding future events and our plans and objectives for future operations. These forward-looking statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on current beliefs of management as well as assumptions made by, and information currently available to, us. Forward-looking statements generally are accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to vary from our expectations because of factors such as, but not limited to, competitive and general economic conditions domestically and internationally; acts of terrorism, war, governmental action, natural disasters and other Force Majeure events; changes in the legal and regulatory environment; changes in raw material, commodity and other input costs; currency fluctuations; changes in customer demands; and the other risks and contingencies detailed in this Report and our other filings with the SEC. We undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
Recently Issued Accounting Standards
See Note 3 to the consolidated financial statements for information regarding recently issued accounting standards.

34


Item 7A.
Quantitative and Qualitative Disclosures About Market Risk:
We are exposed to market risks from foreign currency exchange, interest rates, commodity prices and fixed income and equity prices, which could affect our operating results, financial position and cash flows.
Foreign Currency Exchange Risk
We are exposed to foreign currency exchange rate risk primarily on sales commitments, anticipated sales and purchases and assets and liabilities denominated in currencies other than the U.S. dollar. We seek to manage our foreign exchange risk largely through operational means, including matching revenue with same-currency costs and assets with same-currency liabilities. In 2019, 2018 and 2017, we transacted business in 17 primary currencies worldwide, of which the most significant were the U.S. dollar, the euro, the Canadian dollar, the U.K. pound sterling, the Mexican peso, the Chinese renminbi, the Malaysian ringgit and the Indian rupee. Revenue from foreign locations represented approximately 31% of our consolidated revenue in 2019, 33% in 2018 and 31% in 2017. We actively manage the foreign currency exposures that are associated with committed foreign currency purchases and sales created in the normal course of business at the local entity level. Exposures that cannot be naturally offset within a local entity to an immaterial amount are often netted with offsetting exposures at other entities or hedged with foreign currency derivatives. We do not use foreign currency derivatives for trading or speculative purposes. Our results are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold.
We estimate that an additional 10% strengthening of the U.S. dollar against local currencies would have increased operating income by less than $5 in each of 2019, 2018 and 2017. These estimates assume no changes other than the exchange rate itself. However, this quantitative measure has inherent limitations. The sensitivity analysis disregards the possibility that rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency.
The translation of the assets and liabilities of our international subsidiaries is made using the foreign currency exchange rates as of the end of the fiscal year. Translation adjustments are not included in determining net income but are included in Accumulated other comprehensive income (loss) within shareholders’ equity on the Consolidated Balance Sheets until a sale or substantially complete liquidation of the net investment in the international subsidiary takes place. In certain markets, we could recognize a significant gain or loss related to unrealized cumulative translation adjustments if we were to exit the market and liquidate our net investment. As of February 22, 2019 and February 23, 2018, the cumulative net currency translation adjustments reduced shareholders’ equity by $47.4 and $24.7, respectively.
Foreign currency exchange gains and losses reflect transaction gains and losses, which arise from monetary assets and liabilities denominated in currencies other than a business unit’s functional currency and are recorded in Other income, net on the Consolidated Statements of Income. In 2019, net foreign currency exchange gains were $0.3. In 2018, net foreign currency exchange losses were $4.8 and in 2017, net foreign currency exchange gains were $3.4.
See Note 2 to the consolidated financial statements for additional information.
Interest Rate Risk
We are exposed to interest rate risk primarily on our cash equivalents, long-term investments and short-term and long-term borrowings. Our cash is primarily held in money market funds invested in U.S. government debt securities. The risk on our short-term and long-term borrowings is primarily related to a floating interest rate loan with a balance of $42.7 and $45.4 as of February 22, 2019 and February 23, 2018, respectively. This loan bears a floating interest rate based on 30-day LIBOR plus 1.20%.
We estimate a 1% increase in interest rates would have increased our net income by less than $1 in 2019, 2018 and 2017, mainly as a result of higher interest income on our cash equivalents and investments. Significant changes in interest rates could have an impact on the market value of our investment portfolio. However, this quantitative measure has inherent limitations since not all of our investments are in similar asset classes.
See Note 7 and Note 13 to the consolidated financial statements for additional information.

35


Commodity Price Risk
We are exposed to commodity price risk primarily on our raw material purchases. These raw materials are not rare or unique to our industry. The cost of steel, petroleum-based products, aluminum, other metals, wood, particleboard and other commodities, such as fuel and energy, has fluctuated in recent years due to changes in global supply and demand. Our gross margins could be affected if these types of costs continue to fluctuate. We actively manage these raw material costs through global sourcing initiatives and price increases on our products. However, in the short-term, rapid increases in raw material costs can be very difficult to offset with price increases because of contractual agreements with our customers, and it is difficult to find effective financial instruments to hedge against such changes.
As a result of changes in commodity costs, cost of sales increased approximately $36 during 2019, increased approximately $13 during 2018, and decreased approximately $6 in 2017. The increase in commodity costs during 2019 and 2018 was driven primarily by higher steel and fuel costs. The decrease in commodity costs during 2017 was driven primarily by lower fuel and other costs, partially offset by higher steel costs. We estimate that a 1% increase in commodity prices, assuming no offsetting benefit of price increases, would have decreased our operating income by approximately $13 in 2019, and approximately $12 in 2018 and 2017. This quantitative measure has inherent limitations given the likelihood of implementing pricing actions to offset significant increases in commodity prices.
Fixed Income and Equity Price Risk
We are exposed to fixed income and equity price risk primarily on the cash surrender value associated with our investments in variable life COLI policies, which totaled $47.5 as of February 22, 2019. Our variable life COLI policies were allocated at approximately 25% fixed income and 75% equity investments as of February 22, 2019.
We estimate a 10% adverse change in the value of the equity portion of our variable life COLI investments would reduce our net income by approximately $3 in 2019, 2018 and 2017. However, given that a portion of the investments in COLI policies are intended to be utilized as a long-term funding source for deferred compensation obligations and the related earnings associated with these obligations are driven by participant investment elections that often include equity market allocations, any adverse change in the equity portion of our variable life COLI investments may be partially offset by favorable changes in deferred compensation liabilities. We estimate that the risk of changes in the value of the variable life COLI investments due to other factors, including changes in interest rates, yield curve and portfolio duration, would not have a material impact on our results of operations or financial condition. This quantitative measure has inherent limitations since not all of our investments are in similar asset classes.
See Note 7 and Note 10 to the consolidated financial statements for additional information.

36


Item 8.
Financial Statements and Supplementary Data:
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining effective internal control over financial reporting. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect all misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
Management assessed the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that our system of internal control over financial reporting was effective as of February 22, 2019.
Deloitte & Touche LLP, the independent registered certified public accounting firm that audited our financial statements included in this annual report on Form 10-K, also audited the effectiveness of our internal control over financial reporting, as stated in their report which is included herein.


37


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Steelcase Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Steelcase Inc. and subsidiaries (the “Company”) as of February 22, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 22, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended February 22, 2019, of the Company and our report dated April 12, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/    Deloitte & Touche LLP
 
 
 
Grand Rapids, Michigan
 
April 12, 2019
 

38


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Steelcase Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Steelcase Inc. and subsidiaries (the "Company") as of February 22, 2019 and February 23, 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows, for each of the three years in the period ended February 22, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 22, 2019 and February 23, 2018, and the results of its operations and its cash flows for each of the three years in the period ended February 22, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 22, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 12, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/    Deloitte & Touche LLP
 
 
 
Grand Rapids, Michigan
 
April 12, 2019
 

We have served as the Company's auditor since 2009.


39


STEELCASE INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
 
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Revenue
$
3,443.2

 
$
3,055.5

 
$
3,032.4

 
Cost of sales
2,355.3

 
2,050.3

 
2,020.6

 
Restructuring costs

 

 
4.2

 
Gross profit
1,087.9

 
1,005.2

 
1,007.6

 
Operating expenses
904.3

 
850.0

 
810.5

 
Restructuring costs

 

 
0.9

 
Operating income
183.6

 
155.2

 
196.2

 
Interest expense
(37.5
)
 
(17.5
)
 
(17.2
)
 
Investment income
2.9

 
1.5

 
1.4

 
Other income, net
14.9

 
22.3

 
15.9

 
Income before income tax expense
163.9

 
161.5

 
196.3

 
Income tax expense
37.9

 
80.8

 
71.7

 
Net income
$
126.0

 
$
80.7

 
$
124.6

 
Earnings per share:
 
 
 
 
 
 
Basic
$
1.06

 
$
0.68

 
$
1.03

 
Diluted
$
1.05

 
$
0.68

 
$
1.03

 

See accompanying notes to the consolidated financial statements.
40


STEELCASE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
Year Ended
February 22,
2019
February 23,
2018
February 24,
2017
Net income
$
126.0

 
$
80.7

 
$
124.6

 
 
 
 
 
 
 
 
Other comprehensive income (loss), gross:
 
 
 
 
 
 
Unrealized gain (loss) on investments
0.4

 

 
(1.4
)
 
Pension and other post-retirement liability adjustments
(6.6
)
 
1.1

 
4.7

 
Derivative adjustments
(12.9
)
 

 

 
Foreign currency translation adjustments
(22.7
)
 
38.6

 
(12.4
)
 
Total other comprehensive income (loss), gross
(41.8
)
 
39.7

 
(9.1
)
 
 


 


 


 
Other comprehensive income (loss), tax (expense) benefit:
 
 
 
 
 
 
Unrealized gain (loss) on investments
(0.1
)
 

 
0.5

 
Pension and other post-retirement liability adjustments
1.6

 
0.6

 
(2.4
)
 
Derivative adjustments
3.3

 

 

 
Foreign currency translation adjustments

 

 

 
Total other comprehensive income (loss), tax (expense) benefit
4.8

 
0.6

 
(1.9
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net:
 
 
 
 
 
 
Unrealized gain (loss) on investments
0.3

 

 
(0.9
)
 
Pension and other post-retirement liability adjustments
(5.0
)
 
1.7

 
2.3

 
Derivative adjustments
(9.6
)
 

 

 
Foreign currency translation adjustments
(22.7
)
 
38.6

 
(12.4
)
 
Total other comprehensive income (loss), net
(37.0
)
 
40.3

 
(11.0
)
 
Comprehensive income
$
89.0

 
$
121.0

 
$
113.6

 


See accompanying notes to the consolidated financial statements.
41


STEELCASE INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
February 22,
2019
February 23,
2018
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
$
261.3

 
$
283.1

 
Accounts receivable, net of allowances of $8.7 and $11.1
390.3

 
300.3

 
Inventories
224.8

 
184.6

 
Prepaid expenses
19.5

 
19.2

 
Assets held for sale

 
13.4

 
Other current assets
52.7

 
53.3

 
Total current assets
948.6

 
853.9

 
Property, plant and equipment, net of accumulated depreciation of $1,009.3 and $998.1
455.5

 
435.1

 
Company-owned life insurance ("COLI")
156.1

 
172.2

 
Deferred income taxes
135.8

 
135.4

 
Goodwill
240.8

 
138.2

 
Other intangible assets, net of accumulated amortization of $55.8 and $44.6
119.3

 
45.6

 
Investments in unconsolidated affiliates
56.9

 
48.4

 
Other assets
29.4

 
30.4

 
Total assets
$
2,142.4

 
$
1,859.2

 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current liabilities:
 
 
 
 
Accounts payable
$
241.2

 
$
223.1

 
Short-term borrowings and current portion of long-term debt
4.1

 
2.8

 
Accrued expenses:
 
 
 
 
Employee compensation
168.1

 
145.0

 
Employee benefit plan obligations
37.1

 
39.2

 
Accrued promotions
27.7

 
25.5

 
Customer deposits
20.0

 
28.2

 
Product warranties
16.4

 
18.1

 
Other
80.6

 
72.8

 
Total current liabilities
595.2

 
554.7

 
Long-term liabilities:
 
 
 
 
Long-term debt less current maturities
482.9

 
292.2

 
Employee benefit plan obligations
141.6

 
130.8

 
Other long-term liabilities
72.9

 
68.2

 
Total long-term liabilities
697.4

 
491.2

 
Total liabilities
1,292.6

 
1,045.9

 
Shareholders’ equity:
 
 
 
 
Preferred stock-no par value; 50,000,000 shares authorized, none issued and outstanding

 

 
Class A common stock-no par value; 475,000,000 shares authorized, 87,594,913 and 85,728,770 issued and outstanding

 

 
Class B common stock-no par value, convertible into Class A common stock on a one-for-one basis; 475,000,000 shares authorized, 29,171,697 and 30,428,673 issued and outstanding

 

 
Additional paid-in capital
16.4

 
4.6

 
Accumulated other comprehensive loss
(47.3
)
 
(10.3
)
 
Retained earnings
880.7

 
819.0

 
Total shareholders’ equity
849.8

 
813.3

 
Total liabilities and shareholders’ equity
$
2,142.4

 
$
1,859.2

 

See accompanying notes to the consolidated financial statements.
42


STEELCASE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in millions, except share and per share data)
 
Common
Shares
Outstanding
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Shareholders’
Equity
February 26, 2016
 
119,370,766

 
$

 
$

 
$

 
$
(39.6
)
 
$
776.5

 
$
736.9

 
Common stock issuance
 
48,045

 
 
 

 
0.7

 

 

 
0.7