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 25, 2022.
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.
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 25, 2022, 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 25, 2022, 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 as of and for the year ended February 25, 2022, of the Company and our report dated April 15, 2022, 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 15, 2022 | |
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 25, 2022 and February 26, 2021, the related consolidated statements of income, comprehensive income (loss), changes in shareholders' equity, and cash flows, for each of the three years in the period ended February 25, 2022, 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 25, 2022 and February 26, 2021, and the results of its operations and its cash flows for each of the three years in the period ended February 25, 2022, 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 25, 2022, 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 15, 2022, 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill – AMQ Reporting Unit – Refer to Notes 2 and 11 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company used the discounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to discount rates, forecasted revenue growth rates and expected operating margins. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The Company corroborates the results determined using the income approach with a market-based approach that uses observable comparable company information to support the appropriateness of the fair value estimates. Based on the results of the Company’s annual goodwill impairment evaluation, the Company concluded that no goodwill impairment existed for the year ended February 25, 2022. The consolidated goodwill balance was $242.8 million as of February 25, 2022, of which $31.5 million was allocated to the AMQ Reporting Unit (“AMQ”).
We identified goodwill for AMQ as a critical audit matter because of the significant judgments made by management to estimate the fair value of AMQ given the sensitivity of operating changes on future cash flows for this reporting unit. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasted revenue growth rates and expected operating margins and the selection of the discount rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to forecasted revenue growth rates, expected operating margins and the selection of the discount rate used by management to estimate the fair value of AMQ included the following, among others:
•We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of AMQ, such as controls related to forecasted revenue growth rates and expected operating margins and the selection of the discount rate.
•We evaluated management’s ability to accurately forecast revenue growth rates and operating margins by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s forecasted revenue growth rates and expected operating margins by comparing the forecasts to:
–Historical revenues and operating margins.
–Internal communications to management and the Board of Directors.
–Forecasted information included in Company press releases as well as in analyst and industry reports.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by:
–Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.
–Developing a range of independent estimates and comparing those to the discount rate selected by management.
| | | | | |
/s/ Deloitte & Touche LLP | |
| |
Grand Rapids, Michigan | |
April 15, 2022 | |
We have served as the Company's auditor since 2009.
STEELCASE INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Revenue | $ | 2,772.7 | | | $ | 2,596.2 | | | $ | 3,723.7 | | |
Cost of sales | 2,011.2 | | | 1,822.8 | | | 2,508.5 | | |
Restructuring costs | — | | | 10.6 | | | — | | |
Gross profit | 761.5 | | | 762.8 | | | 1,215.2 | | |
Operating expenses | 741.4 | | | 684.2 | | | 958.2 | | |
Goodwill impairment charge | — | | | 17.6 | | | — | | |
Restructuring costs | — | | | 18.0 | | | — | | |
Operating income | 20.1 | | | 43.0 | | | 257.0 | | |
Interest expense | (25.7) | | | (27.1) | | | (27.3) | | |
Investment income | 0.6 | | | 1.4 | | | 5.4 | | |
Other income, net | 6.6 | | | 8.6 | | | 10.1 | | |
Income before income tax expense (benefit) | 1.6 | | | 25.9 | | | 245.2 | | |
Income tax expense (benefit) | (2.4) | | | (0.2) | | | 45.5 | | |
Net income | $ | 4.0 | | | $ | 26.1 | | | $ | 199.7 | | |
Earnings per share: | | | | | | |
Basic | $ | 0.03 | | | $ | 0.22 | | | $ | 1.67 | | |
Diluted | $ | 0.03 | | | $ | 0.22 | | | $ | 1.66 | | |
See accompanying notes to the consolidated financial statements.
37
STEELCASE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Net income | $ | 4.0 | | | $ | 26.1 | | | $ | 199.7 | | |
| | | | | | |
Other comprehensive income (loss), gross: | | | | | | |
Unrealized gain (loss) on investments | — | | | 0.5 | | | (0.1) | | |
Pension and other post-retirement liability adjustments | 15.3 | | | (4.3) | | | (16.9) | | |
Derivative adjustments | 1.3 | | | 1.3 | | | 1.3 | | |
Foreign currency translation adjustments | (23.3) | | | 31.4 | | | (10.1) | | |
Total other comprehensive income (loss), gross | (6.7) | | | 28.9 | | | (25.8) | | |
| | | | | | |
Other comprehensive income (loss), tax (expense) benefit: | | | | | | |
Unrealized gain (loss) on investments | — | | | (0.1) | | | — | | |
Pension and other post-retirement liability adjustments | (3.5) | | | 0.8 | | | 4.1 | | |
Derivative adjustments | (0.4) | | | (0.3) | | | (0.3) | | |
Foreign currency translation adjustments | — | | | — | | | — | | |
Total other comprehensive income (loss), tax (expense) benefit | (3.9) | | | 0.4 | | | 3.8 | | |
| | | | | | |
Other comprehensive income (loss), net: | | | | | | |
Unrealized gain (loss) on investments | — | | | 0.4 | | | (0.1) | | |
Pension and other post-retirement liability adjustments | 11.8 | | | (3.5) | | | (12.8) | | |
Derivative amortization | 0.9 | | | 1.0 | | | 1.0 | | |
Foreign currency translation adjustments | (23.3) | | | 31.4 | | | (10.1) | | |
Total other comprehensive income (loss), net | (10.6) | | | 29.3 | | | (22.0) | | |
Comprehensive income (loss) | $ | (6.6) | | | $ | 55.4 | | | $ | 177.7 | | |
See accompanying notes to the consolidated financial statements.
38
STEELCASE INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data) | | | | | | | | | | | | | | |
| February 25, 2022 | February 26, 2021 |
ASSETS |
Current assets: | | | | |
Cash and cash equivalents | $ | 200.9 | | | $ | 489.8 | | |
Accounts receivable | 348.4 | | | 279.0 | | |
Allowance for doubtful accounts | (8.0) | | | (8.7) | | |
Inventories | 326.2 | | | 193.5 | | |
Prepaid expenses | 24.0 | | | 20.9 | | |
Income taxes receivable | 41.7 | | | 49.5 | | |
Other current assets | 26.0 | | | 21.4 | | |
Total current assets | 959.2 | | | 1,045.4 | | |
Property, plant and equipment, net of accumulated depreciation of $1,089.0 and $1,063.2 | 392.8 | | | 410.8 | | |
Company-owned life insurance ("COLI") | 168.0 | | | 169.5 | | |
Deferred income taxes | 121.2 | | | 113.3 | | |
Goodwill | 242.8 | | | 218.1 | | |
Other intangible assets, net of accumulated amortization of $86.4 and $73.3 | 85.5 | | | 90.4 | | |
Investments in unconsolidated affiliates | 53.1 | | | 51.5 | | |
Right-of-use operating lease assets | 209.8 | | | 225.4 | | |
Other assets | 28.6 | | | 29.6 | | |
Total assets | $ | 2,261.0 | | | $ | 2,354.0 | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
Current liabilities: | | | | |
Accounts payable | $ | 243.6 | | | $ | 181.3 | | |
Short-term borrowings and current portion of long-term debt | 5.1 | | | 4.7 | | |
Current operating lease obligations | 44.2 | | | 43.8 | | |
Accrued expenses: | | | | |
Employee compensation | 75.6 | | | 90.1 | | |
Employee benefit plan obligations | 25.4 | | | 24.9 | | |
Accrued promotions | 32.9 | | | 27.8 | | |
Customer deposits | 53.4 | | | 33.7 | | |
Other | 87.0 | | | 108.7 | | |
Total current liabilities | 567.2 | | | 515.0 | | |
Long-term liabilities: | | | | |
Long-term debt less current maturities | 477.4 | | | 479.2 | | |
Employee benefit plan obligations | 126.7 | | | 152.9 | | |
Long-term operating lease obligations | 182.2 | | | 199.5 | | |
Other long-term liabilities | 55.3 | | | 46.9 | | |
Total long-term liabilities | 841.6 | | | 878.5 | | |
Total liabilities | 1,408.8 | | | 1,393.5 | | |
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, 87,186,800 and 88,646,419 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, 24,922,494 and 26,262,257 issued and outstanding | — | | | — | | |
Additional paid-in capital | 1.5 | | | 12.5 | | |
Accumulated other comprehensive income (loss) | (50.6) | | | (40.0) | | |
Retained earnings | 901.3 | | | 988.0 | | |
Total shareholders’ equity | 852.2 | | | 960.5 | | |
Total liabilities and shareholders’ equity | $ | 2,261.0 | | | $ | 2,354.0 | | |
See accompanying notes to the consolidated financial statements.
39
STEELCASE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in millions, except share and per share data)
| | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| February 25, 2022 | February 26, 2021 | February 28, 2020 |
Changes in common shares outstanding: | | | | | | |
Common shares outstanding, beginning of period | 114,908,676 | | | 117,202,000 | | | 116,766,610 | | |
Common stock issuances | 61,360 | | | 64,107 | | | 41,941 | | |
Common stock repurchases | (4,096,802) | | | (3,288,795) | | | (524,379) | | |
Performance and restricted stock units issued as common stock | 1,236,060 | | | 931,364 | | | 917,828 | | |
Common shares outstanding, end of period | 112,109,294 | | | 114,908,676 | | | 117,202,000 | | |
| | | | | | |
Changes in paid-in capital (1): | | | | | | |
Paid-in capital, beginning of period | $ | 12.5 | | | $ | 28.4 | | | $ | 16.4 | | |
Common stock issuances | 0.8 | | | 0.8 | | | 0.7 | | |
Common stock repurchases | (28.9) | | | (36.8) | | | (8.7) | | |
Performance and restricted stock units expense | 17.1 | | | 20.1 | | | 16.0 | | |
Other | — | | | — | | | 4.0 | | |
Paid-in capital, end of period | 1.5 | | | 12.5 | | | 28.4 | | |
| | | | | | |
Changes in accumulated other comprehensive income (loss): | | | | | | |
Accumulated other comprehensive income (loss), beginning of period | (40.0) | | | (69.3) | | | (47.3) | | |
Other comprehensive income (loss) | (10.6) | | | 29.3 | | | (22.0) | | |
| | | | | | |
Accumulated other comprehensive income (loss), end of period | (50.6) | | | (40.0) | | | (69.3) | | |
| | | | | | |
Changes in retained earnings: | | | | | | |
Retained earnings, beginning of period | 988.0 | | | 1,011.3 | | | 880.7 | | |
Net income | 4.0 | | | 26.1 | | | 199.7 | | |
Dividends paid | (62.6) | | | (43.5) | | | (69.1) | | |
Common stock repurchases | (26.3) | | | (5.9) | | | — | | |
Performance and restricted stock units expense (credit) | (1.8) | | | — | | | — | | |
Retained earnings, end of period | 901.3 | | | 988.0 | | | 1,011.3 | | |
Total shareholders' equity | $ | 852.2 | | | $ | 960.5 | | | $ | 970.4 | | |
(1)Shares of our Class A and Class B common stock have no par value; thus, there are no balances for common stock.
See accompanying notes to the consolidated financial statements.
40
STEELCASE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
OPERATING ACTIVITIES | | | | | | |
Net income | $ | 4.0 | | | $ | 26.1 | | | $ | 199.7 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 83.2 | | | 85.2 | | | 85.6 | | |
Goodwill impairment charge | — | | | 17.6 | | | — | | |
Restructuring costs | — | | | 28.6 | | | — | | |
Gain on business divestitures | — | | | — | | | (19.6) | | |
Deferred income taxes | (14.1) | | | 15.9 | | | 12.1 | | |
Non-cash stock compensation | 16.1 | | | 20.9 | | | 16.7 | | |
Equity in income of unconsolidated affiliates | (7.8) | | | (9.3) | | | (12.2) | | |
Dividends received from unconsolidated affiliates | 5.5 | | | 8.1 | | | 12.5 | | |
| | | | | | |
Other | (17.8) | | | (13.3) | | | (0.2) | | |
Changes in operating assets and liabilities, net of acquisitions and divestitures | | | | | | |
Accounts receivable | (74.9) | | | 120.9 | | | 7.2 | | |
Inventories | (133.4) | | | 27.1 | | | (6.2) | | |
| | | | | | |
Other assets | (1.1) | | | (22.9) | | | (1.9) | | |
Accounts payable | 62.9 | | | (69.0) | | | 10.8 | | |
Employee compensation liabilities | (19.3) | | | (138.7) | | | 36.7 | | |
Employee benefit obligations | (15.4) | | | (22.6) | | | (3.1) | | |
Customer deposits | 18.4 | | | 2.2 | | | 8.3 | | |
Accrued expenses and other liabilities | (8.9) | | | (12.0) | | | 14.4 | | |
Net cash provided by (used in) operating activities | (102.6) | | | 64.8 | | | 360.8 | | |
INVESTING ACTIVITIES | | | | | | |
Capital expenditures | (60.5) | | | (41.3) | | | (73.4) | | |
Proceeds from disposal of fixed assets | 17.4 | | | 7.4 | | | 1.8 | | |
| | | | | | |
| | | | | | |
| | | | | | |
Proceeds from business divestitures, net of costs to sell | — | | | — | | | 72.6 | | |
Acquisitions, net of cash acquired | (32.6) | | | (3.8) | | | (3.7) | | |
Other | 10.2 | | | 7.1 | | | 7.2 | | |
Net cash provided by (used in) investing activities | (65.5) | | | (30.6) | | | 4.5 | | |
FINANCING ACTIVITIES | | | | | | |
Dividends paid | (62.6) | | | (43.5) | | | (69.1) | | |
Common stock repurchases | (55.2) | | | (42.7) | | | (8.7) | | |
Borrowings on global committed bank facility | — | | | 250.0 | | | — | | |
Repayments on global committed bank facility | — | | | (250.0) | | | — | | |
| | | | | | |
| | | | | | |
Other | (2.2) | | | (1.6) | | | (4.1) | | |
Net cash used in financing activities | (120.0) | | | (87.8) | | | (81.9) | | |
Effect of exchange rate changes on cash and cash equivalents | (0.5) | | | 2.1 | | | (1.1) | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (288.6) | | | (51.5) | | | 282.3 | | |
Cash and cash equivalents and restricted cash, beginning of period (1) | 495.6 | | | 547.1 | | | 264.8 | | |
Cash and cash equivalents and restricted cash, end of period (2) | $ | 207.0 | | | $ | 495.6 | | | $ | 547.1 | | |
Supplemental Cash Flow Information: | | | | | | |
Income taxes paid, net of refunds received | $ | 2.5 | | | $ | 24.6 | | | $ | 26.7 | | |
Interest paid, net of amounts capitalized | $ | 23.2 | | | $ | 25.4 | | | $ | 24.5 | | |
_______________________________________
(1)These amounts include restricted cash of $5.8, $6.1 and $3.5 as of February 26, 2021, February 28, 2020 and February 22, 2019, respectively.
(2)These amounts include restricted cash of $6.1, $5.8 and $6.1 as of February 25, 2022, February 26, 2021 and February 28, 2020, respectively.
Restricted cash primarily represents funds held in escrow for potential future workers’ compensation and product liability claims. The restricted cash balance is included as part of Other assets on the Consolidated Balance Sheets.
See accompanying notes to the consolidated financial statements.
41
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.NATURE OF OPERATIONS
Steelcase is a global leader in furnishing the work experience in office environments. Founded in 1912, we are headquartered in Grand Rapids, Michigan, U.S.A. and employ approximately 11,800 employees. We operate manufacturing and distribution center facilities in 21 principal locations. We distribute products through various channels, including Steelcase independent and company-owned dealers in approximately 800 locations throughout the world. We operate under the Americas and EMEA reportable segments plus an “Other” category. See Note 21 for additional information related to our reportable segments.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Steelcase Inc. and its subsidiaries. We consolidate entities in which we maintain a controlling interest. All intercompany transactions and balances have been eliminated in consolidation. We also consolidate variable interest entities when appropriate.
Investments in entities where our equity ownership falls between 20% and 50%, or where we otherwise have significant influence, are accounted for under the equity method of accounting. All other investments in unconsolidated affiliates are accounted for under the cost method of accounting. These investments are reported as Investments in unconsolidated affiliates on the Consolidated Balance Sheets, and income from equity method investments and any adjustments to cost method investments are reported in Other income, net in the Consolidated Statements of Income. See Note 12 for additional information.
Fiscal Year
Our fiscal year ends on the last Friday in February, with each fiscal quarter typically including 13 weeks. The fiscal years ended February 25, 2022 and February 26, 2021 contained 52 weeks. The fiscal year ended February 28, 2020 contained 53 weeks, with Q4 2020 containing 14 weeks. Reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year, unless indicated by a month or specific date reference. 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts and disclosures 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 we may undertake in the future, actual results may differ from these estimates under different assumptions or conditions.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash and Cash Equivalents
Cash and cash equivalents include demand bank deposits and highly liquid investment securities with an original maturity of three months or less. Cash equivalents are reported at cost and approximate fair value. Outstanding checks in excess of funds on deposit are classified as Accounts payable on the Consolidated Balance Sheets. Our restricted cash balance as of February 25, 2022 and February 26, 2021 was $6.1 and $5.8, respectively, and consisted primarily of funds held in escrow for potential future workers’ compensation and product liability claims. Our restricted cash balance is classified in Other assets on the Consolidated Balance Sheets.
Allowances for Credit Losses
Allowances for credit losses related to accounts receivable and notes receivable are maintained at a level considered by management to be adequate to absorb an estimate of probable future losses existing at the balance sheet date. In estimating probable losses, we review accounts that are past due or in bankruptcy. We consider an accounts receivable or notes receivable balance past due when payment is not received within the stated terms. We review accounts that may have higher credit risk using information available about the debtor, such as financial statements, news reports and published credit ratings. We also use general information regarding industry trends, the economic environment and information gathered through our network of field-based employees. Using an estimate of current fair market value of any applicable collateral and other credit enhancements, such as third party guarantees, we arrive at an estimated loss for specific concerns and estimate an additional amount for the remainder of trade balances based on historical trends and other factors previously referenced. Receivable balances are written off when we determine the balance is uncollectible. Subsequent recoveries, if any, are credited to bad debt expense when received.
Concentrations of Credit Risk
Our trade receivables are due from independent dealers as well as direct customers. We monitor and manage the credit risk associated with individual dealers and direct customers. Dealers are responsible for assessing and assuming credit risk of their customers and may require their customers to provide deposits, letters of credit or other credit enhancement measures. Some sales contracts are structured such that the customer payment or obligation is direct to us. In those cases, we typically assume the credit risk. Whether from dealers or direct customers, our trade credit exposures are not concentrated with any particular entity or industry.
Inventories
Inventories are stated at the lower of cost or net realizable value. The Americas segment primarily uses the last in, first out (“LIFO”) method to value its inventories. The EMEA segment values inventories primarily using the first in, first out method (“FIFO”). Businesses within the Other category primarily use the FIFO or the specific identification inventory valuation methods. See Note 8 for additional information.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major improvements that materially extend the useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. See Note 9 for additional information.
Long-lived assets such as property, plant and equipment are tested for impairment when conditions indicate that the carrying value may not be recoverable. We evaluate several conditions, including, but not limited to, the following: a significant decrease in the market price of an asset or an asset group; a significant adverse change in the extent or manner in which a long-lived asset is being used, including an extended period of idleness; and a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. We review the carrying value of our held and used long-lived assets utilizing estimates of future undiscounted cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
When assets are classified as “held for sale,” losses are recorded for the difference between the carrying amount of the property, plant and equipment and the estimated fair value less estimated selling costs. Assets are considered “held for sale” when it is expected that the asset is going to be sold within twelve months.
Goodwill and Other Intangible Assets
Goodwill represents the difference between the purchase price and the related underlying tangible and identifiable intangible net asset fair values resulting from business acquisitions. Annually in Q4, or earlier if conditions indicate it is necessary, the carrying value of the reporting unit is compared to an estimate of its fair value. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written down to its estimated fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. In 2022, we evaluated goodwill and intangible assets using nine reporting units: the Americas, Red Thread, EMEA, Asia Pacific, Designtex, AMQ, Smith System, Orangebox U.K. and Viccarbe. In 2021, we evaluated goodwill and intangible assets using eight reporting units: the Americas, Red Thread, EMEA, Asia Pacific, Designtex, AMQ, Smith System and Orangebox U.K. See Note 11 for additional information.
Other intangible assets subject to amortization consist primarily of dealer relationships, trademarks, know-how/designs, proprietary technology and non-compete agreements and are amortized over their estimated useful economic lives using the straight-line method. Other intangible assets not subject to amortization are accounted for and evaluated for potential impairment using an income approach based on the cash flows attributable to the related products. See Note 11 for additional information.
Contingencies
Loss contingencies are accrued if the loss is probable and the amount of the loss can be reasonably estimated. Legal costs associated with potential loss contingencies are expensed as incurred. 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 party to any lawsuit or proceeding, individually and in the aggregate, that is likely to have a material adverse impact on the consolidated financial statements.
Self-Insurance
We are self-insured for certain losses relating to domestic workers’ compensation and product liability claims. We purchase insurance coverage to reduce our exposure to significant levels of uncertainty for these claims. Self-insured losses are accrued based upon estimates of the aggregate liability for uninsured claims incurred as of the balance sheet date using current and historical claims experience and actuarial assumptions. These estimates are subject to uncertainty due to a variety of factors, including extended lag times in the reporting and resolution of claims, and trends or changes in claim settlement patterns, insurance industry practices and legal interpretations. As a result, actual costs could differ significantly from the estimated amounts. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.
| | | | | | | | | | | | | | |
Net Reserve for Estimated Domestic Workers' Compensation Claims | Year Ended |
February 25, 2022 | February 26, 2021 |
Assets: | | | | |
Long-term - Other assets | $ | 3.8 | | | $ | 4.6 | | |
Liabilities: | | | | |
Current - Accrued expenses - other | 1.8 | | | 2.1 | | |
Long-term - Other long-term liabilities | 9.1 | | | 10.5 | | |
| 10.9 | | | 12.6 | | |
Net reserve | $ | 7.1 | | | $ | 8.0 | | |
| | | | |
| | | | |
| |
The other long-term asset balance represents the portion of claims expected to be paid by a third party insurance provider.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | |
Net Reserve for Estimated Product Liability Claims | Year Ended |
February 25, 2022 | February 26, 2021 |
Assets: | | | | |
Long-term - Other long-term assets | $ | 0.6 | | | $ | 0.7 | | |
Liabilities: | | | | |
Current - Accrued expenses - other | 0.5 | | | 0.5 | | |
Long-term - Other long-term liabilities | 1.9 | | | 2.2 | | |
| 2.4 | | | 2.7 | | |
Net reserve | $ | 1.8 | | | $ | 2.0 | | |
| | | | |
| | | | |
| |
The other long-term asset balance represents the portion of claims expected to be paid by a third party insurance provider.
Product Warranties
We offer warranties ranging from three years to lifetime for most products, subject to certain exceptions. These warranties provide for the free repair or replacement of any covered product, part or component that fails during normal use because of a defect in materials or workmanship. The accrued liability for product warranties is based on an estimated amount needed to cover product warranty costs, including product recall and retrofit costs, incurred as of the balance sheet date determined by historical claims experience and our knowledge of current events and actions. These estimates are subject to uncertainty due to a variety of factors, including changes in claim rates and patterns. As a result, actual costs could differ significantly from the estimated amounts. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.
| | | | | | | | | | | | | | |
Roll-Forward of Accrued Liability for Product Warranties | Year Ended |
February 25, 2022 | February 26, 2021 |
Balance as of beginning of period | $ | 22.5 | | | $ | 26.7 | | |
Accruals related to product warranties, recalls and retrofits | 5.9 | | | 2.8 | | |
Reductions for settlements | (6.7) | | | (2.4) | | |
Adjustments related to changes in estimates | 2.5 | | | (4.9) | | |
Currency translation adjustments | (0.2) | | | 0.3 | | |
Balance as of end of period | $ | 24.0 | | | $ | 22.5 | | |
Our reserve for estimated settlements expected to be paid beyond one year as of February 25, 2022 and February 26, 2021 was $12.8 and $11.4, respectively, and is included in Other long-term liabilities on the Consolidated Balance Sheets.
Pension and Other Post-Retirement Benefits
We sponsor a number of domestic and foreign plans to provide pension benefits and medical and life insurance benefits to retired employees. We measure the net over-funded or under-funded positions of our defined benefit pension plans and post-retirement benefit plans as of the end of each fiscal year and display that position as an asset or liability on the Consolidated Balance Sheets. Any unrecognized prior service credit (cost) or actuarial gains (losses) are reported, net of tax, as a component of Accumulated other comprehensive income (loss) in shareholders’ equity. See Note 14 for additional information.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Environmental Matters
Environmental expenditures related to current operations are expensed as incurred. Expenditures related to an existing condition allegedly caused by past operations, and not associated with current or future revenue generation, are also expensed. Generally, the timing of these accruals coincides with completion of a feasibility study or our commitment to a formal plan of action. Liabilities are recorded on a discounted basis as site-specific plans indicate the amount and timing of cash payments which are fixed and reliably determinable. We have ongoing monitoring and identification processes to assess how known exposures are progressing against the accrued cost estimates, as well as processes to identify other potential exposures.
| | | | | | | | | | | | | | |
Environmental Contingencies | Year Ended |
February 25, 2022 | February 26, 2021 |
| | | | |
Current - Accrued expenses - other | $ | 1.1 | | | $ | 0.7 | | |
| | | | |
Long-term - Other long-term liabilities | 2.3 | | | 2.0 | | |
Total environmental contingencies (discounted) | $ | 3.4 | | | $ | 2.7 | | |
| | | | |
| | | | |
| |
The environmental liabilities were discounted using a rate of 2.5% as of February 25, 2022 and February 26, 2021. Our undiscounted liabilities were $3.6 and $2.8 as of February 25, 2022 and February 26, 2021, respectively. Based on our ongoing evaluation of these matters, we believe we have accrued sufficient reserves to cover the costs of all known environmental assessments and the remediation costs of all known sites.
Asset Retirement Obligations
We record all known asset retirement obligations for which the liability’s fair value can be reasonably estimated. We also have known conditional asset retirement obligations that are not reasonably estimable due to insufficient information about the timing and method of settlement of the obligation. Accordingly, these obligations have not been recorded in the consolidated financial statements. A liability for these obligations will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability’s fair value. In addition, there may be conditional asset retirement obligations we have not yet discovered, and therefore, these obligations also have not been included in the consolidated financial statements.
Revenue Recognition
Our revenue consists substantially of product sales and related service revenue. Product sales are reported net of discounts and are recognized when control, consisting of the rights and obligations associated with the sale, passes to the purchaser. For sales to our dealers, this typically occurs when product is shipped from our manufacturing or distribution facilities. In cases where we sell directly to customers, control is typically transferred upon delivery to the customer and, in some cases, following installation and acceptance by the customer. Service revenue is recognized when the services have been rendered. We account for shipping and handling activities as fulfillment activities even if those activities are performed after the control of the product has been transferred. We expense shipping and handling costs at the time revenue is recognized. Revenue does not include sales tax or any other taxes assessed by a governmental authority that are imposed on and concurrent with a specific sale, such as use, excise, value-added and franchise taxes (collectively referred to as "consumption taxes"). We consider ourselves a pass-through entity for collecting and remitting these consumption taxes.
Cost of Sales
Cost of sales includes material, labor, freight and overhead. Included within these categories are such items as compensation expense, logistics costs (including shipping and handling costs), facilities expense, depreciation and warranty expense.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Operating Expenses
Operating expenses include selling, general and administrative expenses not directly related to the procurement, manufacturing and delivery of our products. Included in these expenses are items such as employee compensation expense, facilities expense, depreciation, research and development expense, royalty expense, information technology services, professional services and travel and entertainment expense.
Research and Development Expenses
Research and development expenses, which we define as expenses related to the investigative activities we conduct to lead to the development of new products and to improve existing products and procedures, are expensed as incurred and were $45.4 for 2022, $48.1 for 2021 and $50.6 for 2020.
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities recorded in the consolidated financial statements and their respective tax bases. These deferred income tax 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. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in the Consolidated Statements of Income in the period that includes the enactment date.
We establish valuation allowances against deferred tax assets when it is more likely than not that all or a portion of the deferred tax assets will not be realized. All evidence, both positive and negative, is identified and considered in making the determination. Future realization of the existing deferred tax asset depends, in part, on the existence of sufficient taxable income of appropriate character within the carryforward period available under tax law applicable in the jurisdiction in which the related deferred tax assets were generated.
We have net operating loss carryforwards available in certain jurisdictions to reduce future taxable income. Future tax benefits associated with net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. 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 net operating loss carryforwards. In making this determination, we consider all available positive and negative evidence. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.
We record reserves for uncertain tax positions except to the extent it is more likely than not that the tax position will be sustained on audit, based on the technical merits of the position. Periodic changes in reserves for uncertain tax positions are reflected in the provision for income taxes. See Note 16 for additional information.
Share-Based Compensation
Our share-based compensation consists of restricted stock units and performance units. Our policy is to expense share-based compensation using the fair-value based method of accounting for all awards granted, modified or settled. Restricted stock units and performance units are credited to shareholders' equity as they are expensed over the related service periods based on the grant date fair value of the shares expected to be issued or achievement of certain performance conditions. See Note 17 for additional information.
Leases
We have operating leases for corporate offices, sales offices, showrooms, manufacturing and distribution facilities, vehicles and equipment. We record a right-of-use asset and corresponding lease liability for operating leases with terms greater than one year. Lease terms utilized in determining right-of-use assets and lease liabilities include the noncancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods. Our leases do not contain any residual value guarantees or material restrictive covenants. As most of our leases do not provide an implicit discount rate, we use an estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The estimated incremental borrowing rate represents the estimated rate of interest we would have had to pay to borrow (on a collateralized basis) an amount equal to the lease payments for a
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
similar period of time.
We do not separate non-lease components of a contract from the lease components to which they relate for all classes of lease assets except for embedded leases, which were immaterial in 2022. A right-of-use asset or lease liability is not recorded for leases with an initial expected period of 12 months or less. See Note 18 for additional information.
Financial Instruments
The carrying amounts of our financial instruments, consisting of cash and cash equivalents, accounts and notes receivable, accounts and notes payable and certain other liabilities, approximate their fair value due to their relatively short maturities. Our foreign exchange forward contracts and long-term investments are measured at fair value on the Consolidated Balance Sheets. Our total debt is carried at cost and was $482.5 and $483.9 as of February 25, 2022 and February 26, 2021, respectively. The fair value of our total debt is measured using a discounted cash flow analysis based on current market interest rates for similar types of instruments and was approximately $516.7 and $568.1 as of February 25, 2022 and February 26, 2021, respectively. The estimation of the fair value of our total debt is based on Level 2 fair value measurements. See Note 7 and Note 13 for additional information.
We may use derivative financial instruments to manage exposures to movements in interest rates and foreign exchange rates. The use of these financial instruments modifies the exposure of these risks with the intention to reduce our risk of volatility. We do not use derivatives for speculative or trading purposes.
Foreign Currency
For most foreign operations, local currencies are considered the functional currencies. We translate assets and liabilities of our foreign subsidiaries to their U.S. dollar equivalents at exchange rates in effect as of the balance sheet date. Translation adjustments are not included in determining net income but are recorded in Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets unless and until a sale or a substantially complete liquidation of the net investment in the international subsidiary takes place. We translate Consolidated Statements of Income accounts at average exchange rates for the applicable period.
Foreign currency transaction gains and losses, net of derivative impacts, arising primarily from changes in exchange rates on foreign currency denominated intercompany loans and other intercompany transactions and balances between foreign locations, are recorded in Other income, net in the Consolidated Statements of Income.
Foreign Exchange Forward Contracts
A portion of our revenue and earnings is exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk largely through operational means, including matching revenues with same currency costs and assets with same currency liabilities. Foreign exchange risk is also partially managed through the use of derivative instruments. Foreign exchange forward contracts serve to reduce the risk of conversion or translation of certain foreign denominated transactions, assets and liabilities. We primarily use derivatives for intercompany transactions (including loans) and certain forecasted currency flows from foreign-denominated transactions. The foreign exchange forward contracts relate to the euro, the Mexican peso, the United Kingdom ("U.K.") pound sterling, the Canadian dollar, the Australian dollar, the Hong Kong dollar, the Malaysian ringgit and the Chinese renminbi. See Note 7 for additional information.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Assets and liabilities related to foreign exchange forward contracts as of February 25, 2022 and February 26, 2021 are summarized below:
| | | | | | | | | | | | | | |
Consolidated Balance Sheets | February 25, 2022 | February 26, 2021 |
Other current assets | $ | 1.0 | | | $ | 1.1 | | |
Accrued expenses | (0.3) | | | (0.8) | | |
Total net fair value of foreign exchange forward contracts (1) | $ | 0.7 | | | $ | 0.3 | | |
________________________
(1)The notional amounts of the outstanding foreign exchange forward contracts were $76.1 as of February 25, 2022 and $58.8 as of February 26, 2021.
Net gains recognized from foreign exchange forward contracts in 2022, 2021 and 2020 are summarized below:
| | | | | | | | | | | | | | | | | | | | |
Gain Recognized in Consolidated Statements of Income | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Cost of sales | $ | 0.6 | | | $ | 0.1 | | | $ | 1.8 | | |
Operating expenses | 0.3 | | | (0.1) | | | 0.5 | | |
Other income, net | (0.2) | | | 0.8 | | | 3.1 | | |
Total net gain | $ | 0.7 | | | $ | 0.8 | | | $ | 5.4 | | |
The net gains or losses recognized from foreign exchange forward instruments in Other income, net are largely offset by related foreign currency gains or losses on our intercompany loans and intercompany accounts payable.
3.NEW ACCOUNTING STANDARDS
Adoption of New Accounting Standards
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740), which is intended to enhance various aspects of the accounting for income taxes. The new guidance updates the calculation of income taxes in an interim period when year-to-date losses exceed the anticipated loss for the year. We adopted this guidance in Q1 2021 on a prospective basis. The adoption of this guidance did not have a material effect on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends accounting standards codification 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General. The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. We adopted this guidance in Q4 2021. The adoption of this guidance modified our disclosures included in Note 14 but did not have a material effect on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. We adopted this guidance in Q1 2021 using a modified retrospective transition approach. The adoption of this guidance did not have a material effect on our consolidated financial statements or significantly impact our accounting policies or methods utilized to determine the allowance for credit losses. See Note 2 for additional information regarding our accounting policies related to the allowance for credit losses.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting Standards Issued but Not Yet Adopted
We evaluate all ASUs issued by the FASB for consideration of their applicability to our consolidated financial statements. We have assessed all ASUs issued but not yet adopted and concluded that those not disclosed are either not applicable to us or are not expected to have a material effect on our consolidated financial statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4.REVENUE
Disaggregation of Revenue
The following table provides information about disaggregated revenue by product category for each of our reportable segments:
| | | | | | | | | | | | | | | | | | | | |
Product Category Data | Year Ended |
February 25, 2022 | | February 26, 2021 | February 28, 2020 |
Americas | | | | | | |
Desking, benching, systems and storage | $ | 903.3 | | | $ | 912.0 | | | $ | 1,377.5 | | |
Seating | 583.2 | | | 559.4 | | | 784.2 | | |
Other (1) | 418.5 | | | 377.1 | | | 511.2 | | |
EMEA | | | | | | |
Desking, benching, systems and storage | 214.0 | | | 196.4 | | | 254.4 | | |
Seating | 208.4 | | | 185.9 | | | 235.6 | | |
Other (1) | 176.1 | | | 129.0 | | | 179.6 | | |
Other | | | | | | |
Desking, benching, systems and storage | 57.0 | | | 49.8 | | | 63.6 | | |
Seating | 75.4 | | | 69.1 | | | 94.1 | | |
Other (1) | 136.8 | | | 117.5 | | | 223.5 | | |
| $ | 2,772.7 | | | $ | 2,596.2 | | | $ | 3,723.7 | | |
_______________________________________
(1)The other product category data by segment consists primarily of products sold by consolidated dealers, textiles and surface materials, worktools, architecture, technology, other uncategorized product lines and services, less promotions and incentives on all product categories. In 2020, the other product category in the Other category also included revenue from PolyVision.
In the Americas segment, no industry or vertical market individually represented more than 18%, 16% or 15% of Americas revenue in 2022, 2021 and 2020, respectively.
Reportable geographic information is as follows:
| | | | | | | | | | | | | | | | | | | | |
Reportable Geographic Revenue | Year Ended |
February 25, 2022 | | February 26, 2021 | February 28, 2020 |
United States | $ | 1,848.2 | | | $ | 1,739.5 | | | $ | 2,469.7 | | |
Foreign locations | 924.5 | | | 856.7 | | | 1,254.0 | | |
| $ | 2,772.7 | | | $ | 2,596.2 | | | $ | 3,723.7 | | |
In the EMEA segment, approximately 90%, 86% and 87% of revenue was from Western Europe in 2022, 2021 and 2020, respectively. No individual country in the EMEA segment represented more than 5% of our consolidated revenue in 2022.
No single customer represented more than 5% of our consolidated revenue in 2022, 2021 or 2020.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Contract Balances
At times, we receive deposits from customers before revenue is recognized, resulting in the recognition of a contract liability (Customer deposits) presented on the Consolidated Balance Sheets.
Changes in the Customer deposits balance during the year ended February 25, 2022 are as follows:
| | | | | | | | |
| Customer Deposits |
Balance as of February 26, 2021 | $ | 33.7 | | |
Recognition of revenue related to beginning of year customer deposits | (31.6) | | |
Customer deposits received, net of revenue recognized during the period | 51.3 | | |
Balance as of February 25, 2022 | $ | 53.4 | | |
5.EARNINGS PER SHARE
Earnings per share is computed using the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Participating securities represent restricted stock units in which the participants have non-forfeitable rights to dividend equivalents during the performance period. Diluted earnings per share includes the effects of certain performance units in which the participants have forfeitable rights to dividend equivalents during the performance period.
| | | | | | | | | | | | | | | | | | | | |
Computation of Earnings Per Share | Year Ended February 25, 2022 |
Net Income | Basic Shares (in millions) | Diluted Shares (in millions) |
Amounts used in calculating earnings per share | $ | 4.0 | | | 117.0 | | | 117.4 | | |
Impact of participating securities | (0.1) | | | (3.2) | | | (3.2) | | |
Amounts used in calculating earnings per share, excluding participating securities | $ | 3.9 | | | 113.8 | | | 114.2 | | |
| | | | | | |
Earnings per share | | | $ | 0.03 | | | $ | 0.03 | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Computation of Earnings Per Share | Year Ended February 26, 2021 |
Net Income | Basic Shares (in millions) | Diluted Shares (in millions) |
Amounts used in calculating earnings per share | $ | 26.1 | | | 117.5 | | | 117.8 | | |
Impact of participating securities | (0.6) | | | (2.6) | | | (2.6) | | |
Amounts used in calculating earnings per share, excluding participating securities | $ | 25.5 | | | 114.9 | | | 115.2 | | |
| | | | | | |
Earnings per share | | | $ | 0.22 | | | $ | 0.22 | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Computation of Earnings Per Share | Year Ended February 28, 2020 |
Net Income | Basic Shares (in millions) | Diluted Shares (in millions) |
Amounts used in calculating earnings per share | $ | 199.7 | | | 119.6 | | | 120.2 | | |
Impact of participating securities | (3.9) | | | (2.3) | | | (2.3) | | |
Amounts used in calculating earnings per share, excluding participating securities | $ | 195.8 | | | 117.3 | | | 117.9 | | |
| | | | | | |
Earnings per share | | | $ | 1.67 | | | $ | 1.66 | | |
| | | | | | |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
There were no anti-dilutive performance units excluded from the computation of diluted earnings per share for the years ended February 25, 2022, February 26, 2021 and February 28, 2020.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) during the years ended February 25, 2022 and February 26, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain (loss) on investments | Pension and other post-retirement liability adjustments | Derivative adjustments | | Foreign currency translation adjustments | Total |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance as of February 28, 2020 | $ | (0.1) | | | $ | (3.1) | | | $ | (8.6) | | | | | $ | (57.5) | | | $ | (69.3) | | |
Other comprehensive income (loss) before reclassifications | 0.4 | | | (2.7) | | | — | | | | | 31.0 | | | 28.7 | | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | (0.8) | | | 1.0 | | | | | 0.4 | | | 0.6 | | |
Net other comprehensive income (loss) during period | 0.4 | | | (3.5) | | | 1.0 | | | | | 31.4 | | | 29.3 | | |
Balance as of February 26, 2021 | $ | 0.3 | | | $ | (6.6) | | | $ | (7.6) | | | | | $ | (26.1) | | | $ | (40.0) | | |
Other comprehensive income (loss) before reclassifications | — | | | 12.0 | | | — | | | | | (23.3) | | | (11.3) | | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | (0.2) | | | 0.9 | | | | | — | | | 0.7 | | |
Net other comprehensive income (loss) during period | — | | | 11.8 | | | 0.9 | | | | | (23.3) | | | (10.6) | | |
Balance as of February 25, 2022 | $ | 0.3 | | | $ | 5.2 | | | $ | (6.7) | | | | | $ | (49.4) | | | $ | (50.6) | | |
The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for the years ended February 25, 2022 and February 26, 2021:
| | | | | | | | | | | | | | | | | | | | | |
Detail of Accumulated Other Comprehensive Income (Loss) Components | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | Affected Line in the Consolidated Statements of Income | |
Year Ended | |
February 25, 2022 | February 26, 2021 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Amortization of pension and other post-retirement actuarial losses (gains) | $ | (0.2) | | | $ | (1.1) | | | Other income, net | | |
Prior service cost (credit) | (0.1) | | | — | | | Other income, net | | |
| | | | | | | |
Income tax expense | 0.1 | | | 0.3 | | | Income tax expense (benefit) | | |
| (0.2) | | | (0.8) | | | | | |
| | | | | | | |
Derivative adjustments | 1.3 | | | 1.3 | | | Interest expense | | |
Income tax benefit | (0.4) | | | (0.3) | | | Income tax expense (benefit) | | |
| 0.9 | | | 1.0 | | | | | |
| | | | | | | |
Foreign currency translation | — | | | 0.5 | | | Operating expense | | |
| — | | | (0.1) | | | Other income, net | | |
| — | | | 0.4 | | | | | |
| | | | | | | |
Total reclassifications | $ | 0.7 | | | $ | 0.6 | | | | | |
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7.FAIR VALUE
Fair value measurements are classified under the following hierarchy:
Level 1 — Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2 — Inputs based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
Level 3 — Inputs reflect management’s best estimate of what market participants would use to price the asset or liability at the measurement date in model-driven valuations. The inputs are unobservable in the market and significant to the instrument’s valuation.
Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be other significant inputs that are readily observable.
Assets and liabilities measured at fair value within our Consolidated Balance Sheets as of February 25, 2022 and February 26, 2021 are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value of Financial Instruments | February 25, 2022 |
Level 1 | Level 2 | Level 3 | Total |
Assets: | | | | | | | | |
Cash and cash equivalents | $ | 200.9 | | | $ | — | | | $ | — | | | $ | 200.9 | | |
Restricted cash | 6.1 | | | — | | | — | | | 6.1 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Foreign exchange forward contracts | — | | | 1.0 | | | — | | | 1.0 | | |
Auction rate security | — | | | — | | | 2.6 | | | 2.6 | | |
| | | | | | | | |
| $ | 207.0 | | | $ | 1.0 | | | $ | 2.6 | | | $ | 210.6 | | |
Liabilities: | | | | | | | | |
Foreign exchange forward contracts | $ | — | | | $ | (0.3) | | | $ | — | | | $ | (0.3) | | |
| $ | — | | | $ | (0.3) | | | $ | — | | | $ | (0.3) | | |
| | | | | | | | |
Fair Value of Financial Instruments | February 26, 2021 |
Level 1 | Level 2 | Level 3 | Total |
Assets: | | | | | | | | |
Cash and cash equivalents | $ | 489.8 | | | $ | — | | | $ | — | | | $ | 489.8 | | |
Restricted cash | 5.8 | | | — | | | — | | | 5.8 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Foreign exchange forward contracts | — | | | 1.1 | | | — | | | 1.1 | | |
Auction rate security | — | | | — | | | 2.6 | | | 2.6 | | |
| | | | | | | | |
| $ | 495.6 | | | $ | 1.1 | | | $ | 2.6 | | | $ | 499.3 | | |
Liabilities: | | | | | | | | |
Foreign exchange forward contracts | $ | — | | | $ | (0.8) | | | $ | — | | | $ | (0.8) | | |
| $ | — | | | $ | (0.8) | | | $ | — | | | $ | (0.8) | | |
Foreign Exchange Forward Contracts
We occasionally enter into forward contracts to reduce the impact of foreign currency fluctuations on foreign-denominated transactions, assets and liabilities into U.S. dollars of certain foreign-denominated transactions, assets and liabilities. We primarily use derivatives for intercompany transactions (including loans) and certain forecasted currency flows from foreign-denominated transactions. The fair value of foreign exchange forward contracts is based on a valuation model that calculates the differential between the contract price and the market-based forward rate as of the balance sheet date.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Auction Rate Security
As of February 25, 2022, we held an auction rate security (“ARS”) investment with a total par value of $3.2 and a fair value of $2.6. The difference between par value and fair value is comprised of other-than-temporary impairment losses recorded in previous fiscal years and unrealized gains on our ARS investment of $0.9 and $0.3, respectively. The unrealized gains are due to changes in interest rates and are expected to fluctuate over the contractual term of the investment. Unrealized gains are recorded in Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.
The ARS investment is not widely traded and therefore does not currently have a readily determinable market value. To estimate fair value, we used an internally-developed discounted cash flow analysis which considers, amongst other factors: (i) the credit ratings of the ARS, (ii) the credit quality of the underlying securities or the credit rating of issuers, (iii) the estimated timing and amount of cash flows, (iv) the formula applicable to the security which defines the penalty interest rate and (v) discount rates equal to the sum of (a) the yield on U.S. Treasury securities with a term through the estimated workout date plus (b) a risk premium based on similarly rated observable securities.
A deterioration in market conditions or the use of different assumptions could result in a different valuation of the investment. An increase to the discount rate of 100 basis points would reduce the estimated fair value of our ARS investment by approximately $0.3.
Below is a roll-forward of assets and liabilities measured at estimated fair value using Level 3 inputs for the years ended February 25, 2022 and February 26, 2021:
| | | | | | | | |
Roll-forward of Fair Value Using Level 3 Inputs | Auction Rate Security |
Balance as of February 28, 2020 | $ | 2.1 | | |
Unrealized loss on investments | 0.5 | | |
| | |
| | |
Balance as of February 26, 2021 | $ | 2.6 | | |
Unrealized gain on investment | — | | |
Balance as of February 25, 2022 | $ | 2.6 | | |
There were no other-than-temporary impairments or transfers into or out of Level 3 during either 2022 or 2021. Our policy is to value any transfers between levels of the fair value hierarchy based on end of period fair values.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8.INVENTORIES
| | | | | | | | | | | | | | |
Inventories | February 25, 2022 | February 26, 2021 |
Raw materials and work-in-process | $ | 208.2 | | | $ | 126.0 | | |
Finished goods | 146.9 | | | 86.4 | | |
| 355.1 | | | 212.4 | | |
Revaluation to LIFO | 28.9 | | | 18.9 | | |
| $ | 326.2 | | | $ | 193.5 | | |
The portion of inventories determined by the LIFO method aggregated to $141.4 and $89.1 as of February 25, 2022 and February 26, 2021, respectively.
9.PROPERTY, PLANT AND EQUIPMENT
| | | | | | | | | | | | | | | | | | | | |
Property, Plant and Equipment | Estimated Useful Lives (Years) | February 25, 2022 | February 26, 2021 |
Land | | | $ | 33.3 | | | $ | 36.4 | | |
Machinery and equipment | 3 – 15 | | 780.1 | | | 790.4 | | |
Buildings and improvements | 10 – 40 | | 401.9 | | | 405.4 | | |
Leasehold improvements | 3 – 15 | | 81.2 | | | 77.8 | | |
Capitalized software | 3 – 10 | | 77.1 | | | 76.2 | | |
Furniture and fixtures | 5 – 8 | | 61.1 | | | 63.2 | | |
Construction in progress | | | 47.1 | | | 24.6 | | |
| | | 1,481.8 | | | 1,474.0 | | |
Accumulated depreciation | | | (1,089.0) | | | (1,063.2) | | |
| | | $ | 392.8 | | | $ | 410.8 | | |
The majority of the net book value of our property, plant and equipment relates to machinery and equipment and buildings and improvements. As of February 25, 2022 and February 26, 2021, the net book value of our machinery and equipment totaled $160.9 and $187.9, respectively, and buildings and improvements totaled $89.2 and $99.7, respectively. Depreciation expense on property, plant and equipment was $67.5, $68.8 and $73.2 for 2022, 2021 and 2020, respectively. The estimated cost to complete construction in progress was $30.4 and $26.9 as of February 25, 2022 and February 26, 2021, respectively.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10.COMPANY-OWNED LIFE INSURANCE
Our investments in company-owned life insurance (“COLI”) policies are recorded at their net cash surrender value.
Our investments in COLI 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 designation of our COLI investments as funding sources for our long-term benefit plan obligations does not result in these investments representing a committed funding source for these obligations. We can designate any portion of them to another purpose at any time.
The net returns in cash surrender value, normal insurance expenses and any maturity benefits related to our investments in COLI policies ("COLI income") are recorded in Operating expenses in the Consolidated Statements of Income. COLI income is intended to offset the expense associated with long-term benefit plan obligations which are also recorded in Operating expenses in the Consolidated Statements of Income. COLI income totaled $6.2 in 2022, $12.3 in 2021 and $6.6 in 2020.
The balances of our COLI investments as of February 25, 2022 and February 26, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Type | Ability to Choose Investments | Net Return | Target Asset Allocation as of February 25, 2022 | Net Cash Surrender Value |
February 25, 2022 | February 26, 2021 |
Whole life COLI policies | No ability | A rate of return set periodically by the insurance companies | Not applicable | $ | 108.6 | | | $ | 111.3 | | |
Variable life COLI policies | Can allocate across a set of choices provided by the insurance companies | Fluctuates depending on performance of underlying investments | 50% fixed income; 50% equity | 59.4 | | | 58.2 | | |
| | | | $ | 168.0 | | | $ | 169.5 | | |
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
11.GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of the changes in goodwill during the years ended February 25, 2022 and February 26, 2021, by reportable segment, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | Americas | EMEA | Other | Total |
Balance as of February 28, 2020 | $ | 204.4 | | | $ | 18.5 | | | $ | 10.7 | | | $ | 233.6 | | |
Acquisition (1) | 2.5 | | | — | | | — | | | 2.5 | | |
Impairment charge (2) | — | | | (17.6) | | | — | | | (17.6) | | |
Currency translation adjustments | 0.5 | | | (0.9) | | | — | | | (0.4) | | |
Goodwill | 209.1 | | | 282.6 | | | 47.9 | | | 539.6 | | |
Accumulated impairment losses | (1.7) | | | (282.6) | | | (37.2) | | | (321.5) | | |
Balance as of February 26, 2021 | $ | 207.4 | | | $ | — | | | $ | 10.7 | | | $ | 218.1 | | |
Acquisition (3) | — | | | 25.8 | | | — | | | 25.8 | | |
Currency translation adjustments | (0.2) | | | (0.9) | | | — | | | (1.1) | | |
Goodwill | 208.9 | | | 307.5 | | | 47.9 | | | 564.3 | | |
Accumulated impairment losses | (1.7) | | | (282.6) | | | (37.2) | | | (321.5) | | |
Balance as of February 25, 2022 | $ | 207.2 | | | $ | 24.9 | | | $ | 10.7 | | | $ | 242.8 | | |
________________________
(1)In 2021, we completed a small acquisition of a dealer, resulting in a goodwill addition in the Americas segment.
(2)In 2021, we recorded a goodwill impairment charge in the EMEA segment related to the Orangebox U.K. reporting unit.
(3)In 2022, we acquired Viccarbe Habitat, S.L. ("Viccarbe") resulting in a goodwill addition in the EMEA segment. See Note 19 for additional information.
We evaluate goodwill for impairment annually in Q4, or earlier if conditions such as significant adverse changes in business climate or operating results, changes in our strategy, significant declines in our stock price or other triggering events, indicate that there may be a potential for impairment. We compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment charge. We estimate the fair value of our reporting units using the income approach, which calculates the fair value of each reporting unit based on the present value of its estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rates used are based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting units' ability to execute on the projected cash flows. We corroborate the results determined using the income approach with a market-based approach that uses observable and comparable company information to support the appropriateness of the fair value estimates. The estimation of the fair value of our reporting units represents a Level 3 measurement.
In Q1 2021, we determined that a triggering event occurred which resulted in an interim impairment evaluation of goodwill for each of our reporting units. During Q1 2021, the market price of our Class A Common Stock declined significantly in connection with overall stock market trends related to the global economic impact of the COVID-19 pandemic. The reduction in revenue in Q1 2021 and changes to our forecasted revenue growth rates and expected operating margins related to the economic disruption of the COVID-19 pandemic were also factors that led to the completion of our interim impairment analysis.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As a result of our interim goodwill impairment analysis, we determined that the carrying value of the Orangebox U.K. reporting unit exceeded its fair value, resulting in a $17.6 goodwill impairment charge in Q1 2021. Following the charge, the reporting unit had no remaining goodwill. During Q1 2021, we also tested the recoverability of the Orangebox U.K. long-lived assets (other than goodwill) and concluded that those assets were not impaired.
Based on the results of our annual impairment tests, we concluded that no goodwill impairment existed as of February 25, 2022 and that no impairment to goodwill existed as of February 26, 2021.
As of February 25, 2022 and February 26, 2021, other intangible assets and related accumulated amortization consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Intangible Assets | February 25, 2022 | February 26, 2021 |
Weighted Average Useful Life (Years) | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net |
Intangible assets subject to amortization: | | | | | | | | | | | | | | |
Dealer relationships (1) | 11.1 | | $ | 61.4 | | | $ | 20.0 | | | $ | 41.4 | | | $ | 58.7 | | | $ | 14.9 | | | $ | 43.8 | | |
Trademarks (1) (2) | 8.3 | | 47.4 | | | 24.5 | | | 22.9 | | | 44.0 | | | 19.8 | | | 24.2 | | |
Know-how/designs (1) | 9.0 | | 24.2 | | | 8.5 | | | 15.7 | | | 21.4 | | | 6.1 | | | 15.3 | | |
Proprietary technology | 9.9 | | 15.8 | | | 13.9 | | | 1.9 | | | 15.8 | | | 13.6 | | | 2.2 | | |
Non-compete agreements | 6.1 | | 1.2 | | | 1.2 | | | — | | | 1.3 | | | 1.3 | | | — | | |
Other (3) | 4.6 | | 21.8 | | | 18.3 | | | 3.5 | | | 22.4 | | | 17.6 | | | 4.8 | | |
| | | 171.8 | | | 86.4 | | | 85.4 | | | 163.6 | | | 73.3 | | | 90.3 | | |
Intangible assets not subject to amortization: | | | | | | | | | | | | | | |
Trademarks and other (2) | n/a | | 0.1 | | | — | | | 0.1 | | | 0.1 | | | — | | | 0.1 | | |
| | | $ | 171.9 | | | $ | 86.4 | | | $ | 85.5 | | | $ | 163.7 | | | $ | 73.3 | | | $ | 90.4 | | |
________________________
(1)In 2022, we acquired Viccarbe, resulting in an increase of intangible assets in the EMEA segment. See Note 19 for additional information.
(2)In 2021, we transferred trademarks not subject to amortization to trademarks subject to amortization within the Americas segment.
(3)In 2021, we completed a small acquisition of a dealer, resulting in an increase of intangible assets in the Americas segment.
In 2022, 2021 and 2020, no intangible asset impairment charges were recorded. We recorded amortization expense on intangible assets subject to amortization of $14.8 in 2022, $16.3 in 2021 and $12.4 in 2020. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the following five years is as follows:
| | | | | |
Fiscal Year Ending in February | Amount |
2023 | 15.4 | |
2024 | 12.6 | |
2025 | 12.8 | |
2026 | 12.6 | |
2027 | 12.3 | |
| $ | 65.7 | |
Future events, such as acquisitions, dispositions or impairments, may cause these amounts to vary.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
12.INVESTMENTS IN UNCONSOLIDATED AFFILIATES
We occasionally enter into joint ventures and other equity investments to expand or maintain our geographic presence, support our distribution network or invest in new business ventures, complementary products and services. Our investments in unconsolidated affiliates and related direct ownership interests are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Investments in Unconsolidated Affiliates | February 25, 2022 | February 26, 2021 |
Investment Balance | Ownership Interest | Investment Balance | Ownership Interest |
Equity method investments | | | | | | | | |
Dealer relationships | $ | 29.6 | | | 25%-40% | | $ | 28.3 | | | 25%-40% | |
Manufacturing joint venture | 7.3 | | | 49% | | 7.8 | | | 49% | |
IDEO and other | 6.7 | | | 5% | | 6.0 | | | 5%-24% | |
| 43.6 | | | | | 42.1 | | | | |
Cost method investments | | | | | | | | |
Dealer relationship | 5.8 | | | Less than 10% | | 5.8 | | | Less than 10% | |
Other | 3.7 | | | Less than 10% | | 3.6 | | | Less than 10% | |
| 9.5 | | | | | 9.4 | | | | |
Total investments in unconsolidated affiliates | $ | 53.1 | | | | | $ | 51.5 | | | | |
Our equity in earnings of unconsolidated affiliates is recorded in Other income, net in the Consolidated Statements of Income and is summarized below:
| | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Unconsolidated Affiliates | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Dealer relationships | $ | 6.2 | | | $ | 8.0 | | | $ | 9.8 | | |
Manufacturing joint venture | 0.3 | | | 0.7 | | | 1.4 | | |
IDEO and other | 1.3 | | | 0.6 | | | 1.0 | | |
Total equity in earnings of unconsolidated affiliates | $ | 7.8 | | | $ | 9.3 | | | $ | 12.2 | | |
Dealer Relationships
We have occasionally invested in dealers to expand or maintain our geographic presence and support our distribution network.
Manufacturing Joint Ventures
We have occasionally entered into manufacturing joint ventures to expand or maintain our geographic presence. Our only current manufacturing joint venture is Steelcase Jeraisy Company Limited, which is located in the Kingdom of Saudi Arabia and is engaged in the manufacturing of wood and metal office furniture systems, seating, accessories and related products for the Kingdom.
IDEO
IDEO LP is an innovation and design firm that uses a human-centered, design-based approach to generate new offerings and build new capabilities for its customers. IDEO serves Steelcase and a variety of other organizations within consumer products, financial services, healthcare, information technology, government, transportation and other industries. As of February 25, 2022 and February 26, 2021, we owned a 5% equity interest in IDEO.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the combined accounts of our equity method investments in unconsolidated affiliates:
| | | | | | | | | | | | | | |
Consolidated Balance Sheets | February 25, 2022 | February 26, 2021 |
Total current assets | $ | 211.7 | | | $ | 198.7 | | |
Total non-current assets | 146.4 | | | 130.6 | | |
Total assets | $ | 358.1 | | | $ | 329.3 | | |
Total current liabilities | 162.9 | | | 141.3 | | |
Total long-term liabilities | 29.6 | | | 31.1 | | |
Total liabilities | $ | 192.5 | | | $ | 172.4 | | |
| | | | | | | | | | | | | | | | | | | | |
Statements of Income | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Revenue | $ | 578.6 | | | $ | 695.4 | | | $ | 838.0 | | |
Gross profit | 177.8 | | | 204.9 | | | 252.6 | | |
Income before income tax expense | 53.0 | | | 37.8 | | | 62.3 | | |
Net income | 47.8 | | | 35.6 | | | 58.5 | | |
| | | | | | | | | | | | | | | | | | | | |
Supplemental Information | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Dividends received from unconsolidated affiliates | $ | 5.5 | | | $ | 8.1 | | | $ | 12.5 | | |
Sales to unconsolidated affiliates | 194.2 | | | 201.5 | | | 305.7 | | |
Amount due from unconsolidated affiliates | 12.9 | | | 6.4 | | | 14.4 | | |
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Debt Obligations | Interest Rate as of February 25, 2022 | Fiscal Year Maturity | February 25, 2022 | February 26, 2021 |
U.S. dollar obligations: | | | | | | | | |
Senior notes | 5.125% | | 2029 | | $ | 444.9 | | | $ | 444.1 | | |
Notes payable | 1.43% | | 2024 | | 34.9 | | | 38.1 | | |
Other committed bank facility | 3.25% | | 2023 | | 2.4 | | | 1.4 | | |
| | | | | 482.2 | | | 483.6 | | |
Foreign currency obligations: | | | | | | | | |
Notes payable | Various | | Various | | 0.3 | | | 0.3 | | |
Total short-term borrowings and long-term debt | | | | | 482.5 | | | 483.9 | | |
Less: Short-term borrowings and current portion of long-term debt (1) | | | | | 5.1 | | | 4.7 | | |
Long-term debt | | | | | $ | 477.4 | | | $ | 479.2 | | |
____________________
(1)The weighted-average interest rate for short-term borrowings and the current portion of long-term debt was 2.3% as of February 25, 2022 and 2.6% as of February 26, 2021.
The annual maturities of short-term borrowings and long-term debt for each of the following five years are as follows:
| | | | | | | | |
Fiscal Year Ending in February | Amount |
2023 | $ | 5.1 | | |
2024 | 32.2 | | |
2025 | — | | |
2026 | — | | |
2027 | — | | |
Thereafter | 445.2 | | |
| $ | 482.5 | | |
Senior Notes
In 2019, we issued $450.0 of unsecured unsubordinated senior notes, due in January 2029 (“2029 Notes”). The 2029 Notes rank equally with all of our other unsecured unsubordinated indebtedness, and they contain no financial covenants. The 2029 Notes were issued at 99.213% of par value. 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 2029 Notes. Although the coupon rate of the 2029 Notes is 5.125%, the effective interest rate is 5.6% after taking into account the impact of the direct debt issuance costs, a deferred loss on an interest rate lock related to the debt issuance and the bond discount. During each of 2022 and 2021, amortization expense related to the discount and debt issuance costs on the 2029 Notes was $0.8.
We may redeem some or all of the 2029 Notes at any time. The redemption price would equal the greater of: (1) the principal amount of the notes being redeemed or (2) the present value of the remaining scheduled payments of principal and interest discounted to the redemption date on a semi-annual basis at the comparable U.S. Treasury rate plus 40 basis points; plus, in both cases, accrued and unpaid interest. If the notes are redeemed within 3 months of maturity, the redemption price would be equal to the principal amount of the notes being redeemed plus accrued and unpaid interest.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Notes Payable
We have the following notes payable as of February 25, 2022:
•a $34.9 note payable with an original amount of $50.0 at a floating interest rate based on 30-day LIBOR plus 1.20%. As of February 25, 2022, the interest rate was 1.43%. The loan has a term of seven years and requires fixed monthly principal payments of $0.2 on a 20-year amortization schedule with a $31.8 balloon payment due in 2024. The loan is secured by our two corporate aircraft, contains no financial covenants and is not cross-defaulted to our other debt facilities. The loan matures in 2024; and
•other foreign denominated notes payable totaling $0.3, which includes a note with an interest rate of 2.75%.
Global Committed Bank Facility
We have a $250.0 global committed bank facility, which expires in 2025. At our option, and subject to certain conditions, we may increase the aggregate commitment under the facility by up to $125 by obtaining at least one commitment from one or more lenders. We can use borrowings under the facility for general corporate purposes, including friendly acquisitions. Interest on borrowings is based on the rate, as selected by us, between the following two options:
•the applicable margin as set forth in the credit agreement, plus the greatest of (i) the prime rate, (ii) the federal funds effective rate plus 0.5%, (iii) the Adjusted LIBO rate as set forth in the credit agreement for a one-month interest period plus 1% or (iv) a 0.75% floor; or
•the Eurocurrency rate, with a floor of zero, plus the applicable margin as set forth in the credit agreement.
The facility requires us to satisfy two financial covenants as defined in the credit agreement:
•A maximum net leverage ratio covenant, which is measured by the ratio of (x) indebtedness less liquidity to (y) trailing four fiscal quarter adjusted EBITDA and is required to be less than 3.5:1. In the context of certain permitted acquisitions, we have a one-time ability, subject to certain conditions, to increase the maximum ratio to 4.0:1 for four consecutive quarters.
•A minimum interest coverage ratio covenant, which is measured by the ratio of (y) trailing four quarter adjusted EBITDA to (z) trailing four quarter interest expense and is required to be no less than 3.0:1.
The facility does not include any restrictions on cash dividend payments or share repurchases.
As of February 25, 2022, there were no borrowings outstanding under the facility, our availability to borrow under the facility was not limited, and we were in compliance with all covenants under the facility. As of February 26, 2021, there were no borrowings outstanding under the facility, we had $3.7 of guarantees which reduced our availability, and we were in compliance with all covenants under the facility.
Other Credit Facilities
We have the following other bank and credit facilities as of February 25, 2022:
•a committed bank facility of $12.5 related to a subsidiary, which has a current availability of $4.0 based on eligible accounts receivable of the subsidiary. As of February 25, 2022, $2.4 was outstanding under the facility. As of February 26, 2021, there was availability of $2.7 under the facility based on eligible accounts receivable of the subsidiary, and $1.4 was outstanding under the facility; and
•unsecured uncommitted short-term credit facilities with various financial institutions with up to $3.8 of U.S. dollar obligations and up to $6.6 of foreign currency obligations available for working capital purposes as of February 25, 2022. Interest rates are variable and determined at the time of borrowing. These credit facilities have no stated expiration date but may be changed or canceled by the banks at any time. There were no borrowings on these facilities as of February 25, 2022 or February 26, 2021.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
14. EMPLOYEE BENEFIT PLAN OBLIGATIONS
| | | | | | | | | | | | | | |
Employee Benefit Plan Obligations (net) | February 25, 2022 | February 26, 2021 |
Defined contribution retirement plans | $ | 9.1 | | | $ | 12.1 | | |
Post-retirement medical benefits | 34.1 | | | 42.7 | | |
Defined benefit pension plans | 48.5 | | | 62.5 | | |
Deferred compensation plans and agreements | 56.9 | | | 60.5 | | |
| $ | 148.6 | | | $ | 177.8 | | |
| | | | |
Employee benefit plan assets | | | | |
| | | | |
Long-term asset | $ | 3.5 | | | $ | — | | |
| $ | 3.5 | | | $ | — | | |
| | | | |
Employee benefit plan obligations | | | | |
Current portion | $ | 25.4 | | | $ | 24.9 | | |
Long-term portion | 126.7 | | | 152.9 | | |
| $ | 152.1 | | | $ | 177.8 | | |
Defined Contribution Retirement Plans
Substantially all of our U.S. employees are eligible to participate in defined contribution retirement plans, primarily the Steelcase Inc. Retirement Plan (the “Retirement Plan”). Company contributions, including discretionary profit sharing and 401(k) matching contributions, and employee 401(k) pre-tax contributions fund the Retirement Plan. All contributions are made to a trust which is held for the sole benefit of participants.
Total expense under all defined contribution retirement plans was $17.1 for 2022, $19.3 for 2021 and $37.5 for 2020. We expect to fund approximately $18.4 related to our defined contribution plans in 2023, including funding related to our 2022 discretionary profit sharing contributions.
Post-Retirement Medical Benefits
We maintain post-retirement benefit plans that provide medical and life insurance benefits to certain North American-based retirees and eligible dependents. The plans were frozen to new participants in 2003. We accrue the cost of post-retirement benefits during the service periods of employees based on actuarial calculations for each plan. These plans are unfunded. Our investments in COLI policies are intended to be utilized as a long-term funding source for these benefit obligations. See Note 10 for additional information.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Defined Benefit Pension Plans
Our defined benefit pension plans include various qualified foreign retirement plans as well as domestic non-qualified supplemental retirement plans that are limited to a select group of management approved by the Compensation Committee. The benefit plan obligations for the non-qualified supplemental retirement plans are primarily related to the Steelcase Inc. Executive Supplemental Retirement Plan. This plan, which is unfunded, was frozen to new participants in 2016, and the benefits were capped for existing participants. The funded status of our defined benefit pension plans (excluding our investments in COLI policies) is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Defined Benefit Pension Plan Obligations | February 25, 2022 | February 26, 2021 |
Qualified Plans | Non-qualified Supplemental Retirement Plans | Qualified Plans | Non-qualified Supplemental Retirement Plans |
Foreign | Foreign |
Plan assets | $ | 35.2 | | | $ | — | | | $ | 33.2 | | | $ | — | | |
Projected benefit plan obligations | 44.9 | | | 28.8 | | | 53.7 | | | 32.2 | | |
Funded status | $ | (9.7) | | | $ | (28.8) | | | $ | (20.5) | | | $ | (32.2) | | |
| | | | | | | | |
Long-term asset | 3.5 | | | — | | | — | | | — | | |
Current liability | (0.8) | | | (3.9) | | | (0.3) | | | (3.0) | | |
Long-term liability | (12.4) | | | (24.9) | | | (20.2) | | | (29.2) | | |
Total benefit plan obligations | $ | (9.7) | | | $ | (28.8) | | | $ | (20.5) | | | $ | (32.2) | | |
Accumulated benefit obligation | $ | 41.4 | | | $ | 28.8 | | | $ | 48.5 | | | $ | 32.1 | | |
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Summary Disclosures for Defined Benefit Pension and Post-Retirement Plans
The following tables summarize our defined benefit pension and post-retirement plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension Plans | Post-Retirement Plans |
February 25, 2022 | February 26, 2021 | February 25, 2022 | February 26, 2021 |
Change in plan assets: | | | | | | | | |
Fair value of plan assets, beginning of year | $ | 33.2 | | | $ | 31.3 | | | $ | — | | | $ | — | | |
Actual return on plan assets | 3.7 | | | (0.3) | | | — | | | — | | |
Employer contributions | 4.7 | | | 4.1 | | | 4.3 | | | 3.5 | | |
Plan participants’ contributions | — | | | — | | | 2.2 | | | 2.3 | | |
| | | | | | | | |
| | | | | | | | |
Currency changes | (1.7) | | | 2.9 | | | — | | | — | | |
Benefits paid | (4.7) | | | (4.8) | | | (6.5) | | | (5.8) | | |
Fair value of plan assets, end of year | 35.2 | | | 33.2 | | | — | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in benefit obligations: | | | | | | | | |
Benefit plan obligations, beginning of year | 85.9 | | | 82.5 | | | 42.7 | | | 44.3 | | |
Service cost | 1.4 | | | 1.9 | | | 0.1 | | | 0.1 | | |
Interest cost | 1.3 | | | 1.3 | | | 1.0 | | | 1.1 | | |
Amendments | — | | | 0.1 | | | — | | | — | | |
Net actuarial (gain) loss (1) | (7.2) | | | — | | | (5.4) | | | 0.5 | | |
Plan participants’ contributions | — | | | — | | | 2.2 | | | 2.3 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Currency changes | (3.0) | | | 4.9 | | | — | | | 0.2 | | |
| | | | | | | | |
Benefits paid | (4.7) | | | (4.8) | | | (6.5) | | | (5.8) | | |
Benefit plan obligations, end of year | 73.7 | | | 85.9 | | | 34.1 | | | 42.7 | | |
Funded status | $ | (38.5) | | | $ | (52.7) | | | $ | (34.1) | | | $ | (42.7) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts recognized on the Consolidated Balance Sheets: | | | | | | | | |
| | | | | | | | |
Long-term asset | 3.5 | | | — | | | — | | | — | | |
Current liability | (4.7) | | | (3.3) | | | (3.0) | | | (3.6) | | |
Long-term liability | (37.3) | | | (49.4) | | | (31.1) | | | (39.1) | | |
Net amount recognized | $ | (38.5) | | | $ | (52.7) | | | $ | (34.1) | | | $ | (42.7) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive income (loss) —pretax: | | | | | | | | |
Actuarial loss (gain) | $ | 10.6 | | | $ | 21.9 | | | $ | (15.1) | | | $ | (11.1) | | |
Prior service cost | 0.9 | | | 0.9 | | | — | | | — | | |
Total amounts recognized in accumulated other comprehensive income (loss) —pretax | $ | 11.5 | | | $ | 22.8 | | | $ | (15.1) | | | $ | (11.1) | | |
_________________________
(1) In 2022 and 2021, the net actuarial (gain) loss includes amounts resulting from changes in actuarial assumptions utilized to calculate our benefit plan obligations such as weighted-average discount rates and recent census data.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | Post-Retirement Plans |
Year Ended | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 | February 25, 2022 | February 26, 2021 | February 28, 2020 |
Components of expense: | | | | | | | | | | | | |
Service cost | $ | 1.4 | | | $ | 1.9 | | | $ | 1.8 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | |
Interest cost | 1.3 | | | 1.3 | | | 2.0 | | | 1.0 | | | 1.1 | | | 1.6 | | |
Amortization of net loss (gain) | 1.2 | | | 1.1 | | | 0.4 | | | (1.4) | | | (2.1) | | | (3.3) | | |
Amortization of prior year service credit | (0.1) | | | — | | | (0.1) | | | — | | | — | | | — | | |
Expected return on plan assets | (1.2) | | | (0.9) | | | (1.3) | | | — | | | — | | | — | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net expense (credit) recognized in Consolidated Statements of Income | 2.6 | | | 3.4 | | | 2.8 | | | (0.3) | | | (0.9) | | | (1.6) | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax): | | | | | | | | | | | | |
Net actuarial loss (gain) | (9.7) | | | 1.2 | | | 7.9 | | | (5.4) | | | 0.5 | | | 5.9 | | |
Prior service cost | — | | | 0.1 | | | — | | | — | | | — | | | — | | |
Amortization of gain (loss) | (1.2) | | | (1.1) | | | (0.4) | | | 1.4 | | | 2.1 | | | 3.4 | | |
Amortization of prior year service credit | 0.1 | | | — | | | 0.1 | | | — | | | — | | | — | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total recognized in other comprehensive income (loss) | (10.8) | | | 0.2 | | | 7.6 | | | (4.0) | | | 2.6 | | | 9.3 | | |
Total recognized in net periodic benefit cost and other comprehensive income (loss) -- pre-tax | $ | (8.2) | | | $ | 3.6 | | | $ | 10.4 | | | $ | (4.3) | | | $ | 1.7 | | | $ | 7.7 | | |
| | | | | | | | | | | | | | | | | | | | |
Pension and Other Post-Retirement Accumulated Other Comprehensive Income (Loss) Changes | Before Tax Amount | Tax (Expense) Benefit | Net of Tax Amount |
Balance as of February 28, 2020 | $ | (7.4) | | | $ | 4.3 | | | $ | (3.1) | | |
Prior service (cost) credit from plan amendment arising during period | (0.1) | | | — | | | (0.1) | | |
| | | | | | |
| | | | | | |
Net prior service (cost) credit during period | (0.1) | | | — | | | (0.1) | | |
Net actuarial gain (loss) arising during period | (1.7) | | | 0.3 | | | (1.4) | | |
Amortization of net actuarial (gain) loss included in net periodic pension cost | (1.1) | | | 0.3 | | | (0.8) | | |
| | | | | | |
Net actuarial gain (loss) during period | (2.8) | | | 0.6 | | | (2.2) | | |
| | | | | | |
Foreign currency translation adjustments | (1.4) | | | 0.2 | | | (1.2) | | |
Current period change | (4.3) | | | 0.8 | | | (3.5) | | |
Balance as of February 26, 2021 | $ | (11.7) | | | $ | 5.1 | | | $ | (6.6) | | |
| | | | | | |
| | | | | | |
Amortization of prior service cost (credit) included in net periodic pension cost | (0.1) | | | — | | | (0.1) | | |
Net prior service (cost) credit during period | (0.1) | | | — | | | (0.1) | | |
Net actuarial gain (loss) arising during period | 15.1 | | | (3.6) | | | 11.5 | | |
Amortization of net actuarial (gain) loss included in net periodic pension cost | (0.2) | | | 0.1 | | | (0.1) | | |
| | | | | | |
Net actuarial gain (loss) during period | 14.9 | | | (3.5) | | | 11.4 | | |
| | | | | | |
Foreign currency translation adjustments | 0.5 | | | — | | | 0.5 | | |
Current period change | 15.3 | | | (3.5) | | | 11.8 | | |
Balance as of February 25, 2022 | $ | 3.6 | | | $ | 1.6 | | | $ | 5.2 | | |
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-Average Assumptions | Pension Plans | Post-Retirement Plans |
Year Ended | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 | February 25, 2022 | February 26, 2021 | February 28, 2020 |
Weighted-average assumptions used to determine benefit obligations: | | | | | | | | | | | | |
Discount rate | 2.50 | % | | 1.70 | % | | 1.70 | % | | 3.38 | % | | 2.58 | % | | 2.58 | % | |
Rate of salary progression | 2.50 | % | | 3.50 | % | | 3.50 | % | | | | | | | |
Weighted-average assumptions used to determine net periodic benefit cost: | | | | | | | | | | | | |
Discount rate | 1.70 | % | | 1.70 | % | | 2.70 | % | | 2.58 | % | | 2.56 | % | | 4.06 | % | |
Expected return on plan assets | 3.70 | % | | 3.00 | % | | 3.00 | % | | | | | | | |
Rate of salary progression | 3.50 | % | | 3.40 | % | | 3.50 | % | | | | | | | |
The measurement dates for our retiree benefit plans are consistent with our fiscal year-end. Accordingly, we select discount rates to measure our benefit obligations that are consistent with market indices at the end of each year. In evaluating the expected return on plan assets, we consider the expected long-term rate of return on plan assets based on the specific allocation of assets for each plan, an analysis of current market conditions and the views of leading financial advisors and economists.
The assumed healthcare cost trend was 5.83% for pre-age 65 retirees as of February 25, 2022, gradually declining to 4.50% after nine years. As of February 26, 2021, the assumed healthcare cost trend was 5.84% for pre-age 65 retirees, gradually declining to 4.50% after seven years. Post-age 65 trend rates are not applicable as our plan provides a fixed subsidy for post-age 65 benefits.
Plan Assets
The investments of the foreign plans are managed by third-party investment managers who follow local regulations. In general, the investment strategy is designed to accumulate a diversified portfolio among markets, asset classes or individual securities in order to reduce market risk and assure that the pension assets are available to pay benefits as they come due.
Our pension plans’ weighted-average investment allocation strategies and weighted-average target asset allocations by asset category as of February 25, 2022 and February 26, 2021 are reflected in the following table. The target allocations are established by the investment committees of each plan in consultation with external advisors after consideration of the associated risk and expected return of the underlying investments.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset Category | February 25, 2022 | February 26, 2021 |
Actual Allocations | Target Allocations | Actual Allocations | Target Allocations |
Equity securities | — | % | | — | % | | 70 | % | | 40 | % | |
Debt securities | 78 | | | 50 | | | 25 | | | 30 | | |
Real estate | — | | | — | | | 4 | | | — | | |
Other (1) | 22 | | | 50 | | | 1 | | | 30 | | |
Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | |
________________________
(1)Primarily represents money market funds.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value of the pension plan assets as of February 25, 2022 and February 26, 2021, by asset category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value of Pension Plan Assets | February 25, 2022 |
Level 1 | Level 2 | Level 3 | Total |
Cash and cash equivalents | $ | 1.3 | | | $ | — | | | $ | — | | | $ | 1.3 | | |
| | | | | | | | |
Equity securities - International | — | | | — | | | — | | | — | | |
| | | | | | | | |
Fixed income securities - Bond funds and other securities | — | | | 33.7 | | | — | | | 33.7 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other investments - Property and property funds | — | | | 0.2 | | | — | | | 0.2 | | |
| | | | | | | | |
| $ | 1.3 | | | $ | 33.9 | | | $ | — | | | $ | 35.2 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value of Pension Plan Assets | February 26, 2021 |
Level 1 | Level 2 | Level 3 | Total |
Cash and cash equivalents | $ | 0.2 | | | $ | — | | | $ | — | | | $ | 0.2 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Equity securities - International | — | | | 23.5 | | | — | | | 23.5 | | |
| | | | | | | | |
Fixed income securities - Bond funds | — | | | 8.3 | | | — | | | 8.3 | | |
| | | | | | | | |
| | | | | | | | |
Other investments - Property and property funds | — | | | 1.2 | | | — | | | 1.2 | | |
| $ | 0.2 | | | $ | 33.0 | | | $ | — | | | $ | 33.2 | | |
There were no transfers between Level 1 and Level 2 of the fair value hierarchy for any periods presented.
We expect to contribute approximately $5.6 to our pension plans and fund approximately $3.0 related to our post-retirement plans in 2023. The estimated future benefit payments under our pension and post-retirement plans are as follows:
| | | | | | | | | | | | | | |
Fiscal Year Ending in February | Pension Plans | Post-retirement Plans |
|
2023 | $ | 5.6 | | | $ | 3.0 | | |
2024 | 5.0 | | | 2.8 | | |
2025 | 4.8 | | | 2.7 | | |
2026 | 5.6 | | | 2.6 | | |
2027 | 4.6 | | | 2.5 | | |
2028 - 2032 | 19.1 | | | 11.4 | | |
Multi-Employer Pension Plan
One of our subsidiaries, SC Transport Inc., previously contributed 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 that covered SC Transport Inc. employees and retirees. 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 2019, the Fund asserted that SC Transport Inc.'s absence of hiring additional union employees over the past ten years constituted an adverse selection practice under the Fund and, if not remedied, would result in an 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 from the Fund to be paid out in installments over a period of up to 20 years. The withdrawal liability was discounted using a rate of 3.5%. The balance of the liability as of February 25, 2022 was $10.0.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In 2020, SC Transport Inc. withdrew from the Fund, and the Fund issued a final assessment of our withdrawal liability. We appealed the amount of the assessment by the Fund and are awaiting arbitration proceedings. The amount that may ultimately be required to settle any potential obligation may be lower or higher than our estimated liability, which we will adjust if needed, if and when additional information becomes available. 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.
Deferred Compensation Programs
We maintain four deferred compensation programs. The first deferred compensation program is closed to new entrants. In this program, certain employees elected to defer a portion of their compensation in return for a fixed benefit to be paid in installments beginning when the participant reaches age 70. Under the second plan, certain employees may elect to defer a portion of their compensation. The third plan is intended to restore retirement benefits that would otherwise be paid under the Retirement Plan but are precluded as a result of the limitations on eligible compensation under Internal Revenue Code Section 401(a)(17). Under the fourth plan, our non-employee directors may elect to defer all or a portion of their board retainer and committee fees. The deferred amounts in the last three plans earn a return based on the investment option selected. These deferred compensation obligations are unfunded.
Deferred compensation expense, which represents annual participant earnings on amounts that have been deferred, and expense related to restoration retirement benefits, were $2.0 for 2022, $7.7 for 2021 and $3.3 for 2020.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15.CAPITAL STRUCTURE
Terms of Class A Common Stock and Class B Common Stock
The holders of common stock are generally entitled to vote as a single class on all matters upon which shareholders have a right to vote, subject to the requirements of applicable laws and the rights of any outstanding series of preferred stock to vote as a separate class. Each share of Class A Common Stock entitles its holder to one vote, and each share of Class B Common Stock entitles its holder to 10 votes. Each share of Class B Common Stock is convertible into a share of Class A Common Stock on a one-for-one basis (i) at the option of the holder at any time, (ii) upon transfer to a person or entity which is not a Permitted Transferee (as defined in our Second Restated Articles of Incorporation, as amended), (iii) with respect to shares of Class B Common Stock acquired after February 20, 1998, at such time as a corporation, partnership, limited liability company, trust or charitable organization holding such shares ceases to be controlled or owned 100% by Permitted Transferees and (iv) on the date on which the number of shares of Class B Common Stock outstanding is less than 15% of all of the then outstanding shares of common stock (calculated without regard to voting rights).
Except for the voting and conversion features described above, the terms of Class A Common Stock and Class B Common Stock are generally similar. That is, the holders are entitled to equal dividends when declared by our Board of Directors and generally will receive the same per share consideration in the event of a merger and be treated on an equal per share basis in the event of a liquidation or winding up of Steelcase Inc. In addition, we are not entitled to issue additional shares of Class B Common Stock, or issue options, rights or warrants to subscribe for additional shares of Class B Common Stock, except that we may make a pro rata offer to all holders of common stock of rights to purchase additional shares of the class of common stock held by them, and any dividend payable in common stock will be paid in the form of Class A Common Stock to Class A holders and Class B Common Stock to Class B holders. Neither class of stock may be split, divided or combined unless the other class is proportionally split, divided or combined.
Preferred Stock
Our Second Restated Articles of Incorporation, as amended, authorize our Board of Directors, without any vote or action by our shareholders, to create one or more series of preferred stock up to the limit of our authorized but unissued shares of preferred stock and to fix the designations, preferences, rights, qualifications, limitations and restrictions thereof, including the voting rights, dividend rights, dividend rate, conversion rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series.
Share Repurchases and Conversions
The 2022 and 2021 activity for share repurchases is as follows (share data in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Share Repurchases | Year ended |
February 25, 2022 | February 26, 2021 |
Total number of shares | Price Paid | Total number of shares | Price Paid |
Class A Common Stock | 4.1 | | | $ | 55.2 | | | 3.3 | | | $ | 42.7 | | |
Class B Common Stock | — | | | $ | — | | | — | | | $ | — | | |
During 2022 and 2021, 1.3 million and 1.4 million shares of our Class B Common Stock were converted to Class A Common Stock, respectively.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16.INCOME TAXES
Provision for Income Taxes
The provision for income taxes on income before income tax expense (benefit) consists of:
| | | | | | | | | | | | | | | | | | | | |
Provision for Income Tax Expense (Benefit) | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Current income tax expense (benefit): | | | | | | |
Federal | $ | — | | | $ | (30.4) | | | $ | 6.8 | | |
State and local | 1.0 | | | 1.9 | | | 10.9 | | |
Foreign | 10.0 | | | 12.9 | | | 15.4 | | |
| 11.0 | | | (15.6) | | | 33.1 | | |
Deferred income tax expense (benefit): | | | | | | |
Federal | (14.0) | | | 13.7 | | | 10.3 | | |
State and local | (1.3) | | | (1.1) | | | (2.8) | | |
Foreign | 1.9 | | | 2.8 | | | 4.9 | | |
| (13.4) | | | 15.4 | | | 12.4 | | |
Income tax expense (benefit) | $ | (2.4) | | | $ | (0.2) | | | $ | 45.5 | | |
Income taxes were based on the following sources of income (loss) before income tax expense (benefit):
| | | | | | | | | | | | | | | | | | | | |
Source of Income (Loss) Before Income Tax Expense (Benefit) | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Domestic | $ | (38.0) | | | $ | (10.1) | | | $ | 195.8 | | |
Foreign | 39.6 | | | 36.0 | | | 49.4 | | |
| $ | 1.6 | | | $ | 25.9 | | | $ | 245.2 | | |
The total income tax expense (benefit) recognized is reconciled to that computed by applying the U.S. federal statutory tax rate of 21.0%, as follows:
| | | | | | | | | | | | | | | | | | | | |
Income Tax Provision Reconciliation | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Tax expense at the U.S. federal statutory rate | $ | 0.3 | | | $ | 5.4 | | | $ | 51.5 | | |
State and local income taxes, net of federal tax effect | (0.2) | | | 0.6 | | | 6.4 | | |
Impact of the CARES Act (1) | — | | | (11.7) | | | — | | |
Sale of PolyVision (2) | — | | | — | | | (11.6) | | |
Valuation allowance provisions and adjustments (3) | (2.7) | | | 0.4 | | | (1.3) | | |
Goodwill impairment charge (4) | — | | | 3.4 | | | — | | |
COLI income (5) | (1.3) | | | (2.7) | | | (1.4) | | |
Foreign operations, less applicable foreign tax credits (6) | 3.1 | | | 5.4 | | | 4.9 | | |
Impact of change to non-U.S. federal statutory tax rates (7) | (0.3) | | | 0.4 | | | (1.2) | | |
Officer compensation limitation | 1.3 | | | 1.9 | | | 1.1 | | |
Research tax credit | (2.4) | | | (3.0) | | | (2.9) | | |
Other U.S. domestic tax credits | (0.7) | | | (0.3) | | | (0.2) | | |
Stock compensation | 0.3 | | | 0.1 | | | (0.4) | | |
Other | 0.2 | | | (0.1) | | | 0.6 | | |
Total income tax expense (benefit) recognized | $ | (2.4) | | | $ | (0.2) | | | $ | 45.5 | | |
________________________
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1)In Q1 2021, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which enabled companies to carry back tax losses to years prior to the enactment of the Tax Cuts and Jobs Act when the federal statutory income tax rate was 35%.
(2)The tax basis of PolyVision exceeded the book equity of the entity. For U.S. federal tax purposes, this generated a capital loss and related benefit, which varied from the expected U.S. federal tax expense on the financial statement gain on disposal.
(3)The valuation allowance provisions and adjustments are based on current year activity, which are further detailed below.
(4)We recorded a goodwill impairment charge related to our Orangebox U.K. reporting unit which is non-deductible for tax purposes.
(5)The increase in the cash surrender value of COLI policies, net of normal insurance expenses, plus maturity benefits are non-taxable.
(6)The foreign operations, less applicable foreign tax credits, amounts include the rate differential between local statutory rates and the U.S. rate on foreign operations.
(7)Changes to the statutory tax rates, primarily in the U.K. and France, resulted in the revaluation of certain deferred tax assets in those jurisdictions.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred Income Taxes
The significant components of deferred income taxes are as follows:
| | | | | | | | | | | | | | |
Deferred Income Taxes | February 25, 2022 | February 26, 2021 |
Deferred income tax assets: | | | | |
Employee benefit plan obligations and deferred compensation | $ | 51.6 | | | $ | 57.6 | | |
Operating lease obligations | 58.4 | | | 62.7 | | |
Foreign and domestic net operating loss carryforwards | 40.2 | | | 45.2 | | |
Reserves and accruals | 16.1 | | | 15.1 | | |
Tax credit carryforwards | 26.2 | | | 22.0 | | |
Other, net | 14.7 | | | 15.0 | | |
Total deferred income tax assets | 207.2 | | | 217.6 | | |
Valuation allowances | (3.7) | | | (6.6) | | |
Net deferred income tax assets | 203.5 | | | 211.0 | | |
Deferred income tax liabilities: | | | | |
Right-of-use operating lease assets | 54.1 | | | 57.4 | | |
Property, plant and equipment | 26.5 | | | 32.3 | | |
Intangible assets | 11.7 | | | 13.0 | | |
Prepaid expenses | — | | | 2.0 | | |
Total deferred income tax liabilities | 92.3 | | | 104.7 | | |
Net deferred income taxes | $ | 111.2 | | | $ | 106.3 | | |
Net deferred income taxes is comprised of the following components: | | | | |
| | | | |
Deferred income tax assets—non-current | 121.2 | | | 113.3 | | |
| | | | |
Deferred income tax liabilities—non-current | 10.0 | | | 7.0 | | |
As of February 25, 2022, the valuation allowance of $3.7 related to foreign deferred tax assets. In updating our assessment of the realizability of deferred tax assets, we considered the following factors:
•recent financial performance, including cumulative losses,
•the predictability of future income,
•prudent and feasible tax planning strategies that could be implemented to protect the loss of the deferred tax assets, and
•the effect of reversing taxable temporary differences.
Based on our evaluation of these factors, particularly cumulative losses, we were unable to assert that it is more likely than not that the deferred tax assets in our owned dealers and sales offices in France, Australia, Morocco and Hong Kong would be realized as of February 25, 2022. During 2022, we formalized a plan to allow for the utilization of certain of our excess U.S. foreign tax credits, which had previously been subject to a valuation allowance. This resulted in the reversal of the related valuation allowance by $3.1.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We have the ability to repatriate foreign subsidiary earnings to our U.S. parent without incurring additional U.S. federal income tax. We have recorded deferred income taxes related to withholding and other taxes where appropriate on earnings of subsidiaries not expected to be permanently reinvested. However, we have not recorded deferred taxes on any remaining historical outside basis differences in non-U.S. subsidiaries, as we continue to assert indefinite reinvestment on those basis differences which are not related to amounts previously taxed in the U.S. or undistributed earnings generated after 2018.
Taxes Payable or Receivable
Income taxes currently payable or receivable are reported on the Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | |
Income Taxes | February 25, 2022 | February 26, 2021 |
Other current assets: | | | | |
Income taxes receivable | $ | 41.7 | | | $ | 49.5 | | |
| | | | |
| | | | |
Accrued expenses: | | | | |
Income taxes payable | $ | 7.6 | | | $ | 7.4 | | |
Net Operating Loss and Tax Credit Carryforwards
Operating loss and tax credit carryforwards expire as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year Ending February | Net Operating Loss Carryforwards (Gross) | Net Operating Loss Carryforwards (Tax Effected) | Tax Credit Carryforwards |
Federal | State | International | Federal | State | International | Total |
2023 | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
2024-2042 | 0.8 | | | 64.8 | | | 3.1 | | | 0.2 | | | 4.5 | | | 0.8 | | | 5.5 | | | 26.2 | | |
No expiration | — | | | 9.8 | | | 141.0 | | | — | | | 0.5 | | | 35.2 | | | 35.7 | | | — | | |
| $ | 0.8 | | | $ | 74.6 | | | $ | 144.1 | | | 0.2 | | | 5.0 | | | 36.0 | | | 41.2 | | | 26.2 | | |
Valuation allowances | | | | | | | — | | | — | | | (2.4) | | | (2.4) | | | — | | |
Net benefit | | | | | | | $ | 0.2 | | | $ | 5.0 | | | $ | 33.6 | | | $ | 38.8 | | | $ | 26.2 | | |
Future tax benefits for net operating loss and tax credit carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. It is considered more likely than not that a benefit of $65.0 will be realized on these net operating loss and tax credit carryforwards. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies available to us will enable utilization of the carryforwards. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Valuation allowances are recorded to the extent realization of these carryforwards is not more likely than not.
Uncertain Tax Positions
We are subject to taxation in the U.S. and various states and foreign jurisdictions with varying statutes of limitation. Tax years that remain subject to examination by major tax jurisdictions include: the U.S. 2016 through 2022 (certain U.S. tax years are open to assessment due to the carryback of tax losses to those years), Canada 2018 through 2022, France 2015 through 2022 and Germany 2014 through 2022. We adjust these reserves, as well as the related interest and penalties, in light of changing facts and circumstances.
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 record minimal liabilities for U.S. federal uncertain tax positions.
We recognize interest and penalties associated with uncertain tax positions in income tax expense (benefit), and these amounts were not material in 2022, 2021 or 2020.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
Unrecognized Tax Benefits | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Balance as of beginning of period | $ | 2.3 | | | $ | 2.0 | | | $ | 2.0 | | |
| | | | | | |
Gross decreases—tax positions in prior period | — | | | — | | | — | | |
| | | | | | |
Currency translation adjustment | (0.2) | | | 0.3 | | | — | | |
Balance as of end of period | $ | 2.1 | | | $ | 2.3 | | | $ | 2.0 | | |
We have taken tax positions in a non-U.S. jurisdiction that do not meet the more likely than not test required under the uncertain tax position accounting guidance. Since the tax positions have increased net operating loss carryforwards, the underlying deferred tax asset is shown net of a $2.1 liability for uncertain tax positions as of February 25, 2022. No other material amounts are recorded as a liability for uncertain tax positions, including interest and penalties, on the Consolidated Balance Sheets.
Unrecognized tax benefits of $2.1, if favorably resolved, would be recorded as an income tax benefit. We do not expect the amount of unrecognized tax benefits to significantly change due to expiring statutes or audit activity in the next twelve months.
17.SHARE-BASED COMPENSATION
The Steelcase Inc. Incentive Compensation Plan (the “Incentive Compensation Plan”) provides for the issuance of share-based compensation awards to employees and members of our Board of Directors. As of February 25, 2022, there were 5,484,088 shares of Class A Common Stock authorized for future issuance under the Incentive Compensation Plan.
A variety of awards may be granted under the Incentive Compensation Plan, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, cash-based awards, phantom shares and other share-based awards. Our Board of Directors may amend or terminate the Incentive Compensation Plan at its discretion subject to certain provisions as stipulated within the plan.
In the event of a "change in control", as defined in the Incentive Compensation Plan,
•any performance-based conditions imposed on outstanding awards will be deemed to be, immediately prior to the change in control, the greater of (1) the applicable performance achieved through the date of the change in control or (2) the target level of performance; and
•all restrictions imposed on all outstanding awards of restricted stock units and performance units will lapse if either (1) the awards are assumed by an acquirer or successor and the awardee experiences a qualifying termination during the two-year period following the change in control or (2) the awards are not assumed by an acquirer or successor.
Share-based awards currently outstanding under the Incentive Compensation Plan are as follows:
| | | | | | | | |
Total Outstanding Awards | February 25, 2022 |
Performance units (1) | 1,205,833 | | |
Restricted stock units | 3,445,438 | | |
Total outstanding awards | 4,651,271 | | |
________________________
(1)This amount includes the maximum number of shares that may be issued under outstanding performance unit awards; however, the actual number of shares which may be issued will be determined based on the satisfaction of certain conditions, and therefore may be significantly lower.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Performance Units
Performance units ("PSUs") are earned after the applicable performance period and only if the performance conditions stated in the applicable award are achieved. After completion of the performance period, the number of PSUs earned will be issued as shares of Class A Common Stock. The aggregate number of shares of Class A Common Stock that ultimately may be issued under PSUs that have been granted where the performance period has not been completed ranged from 0 to 1,205,833 shares as of February 25, 2022. The awards will be forfeited if a participant leaves the company for reasons other than retirement, disability or death or if the participant engages in any competition with us, as defined in the Incentive Compensation Plan.
A dividend equivalent is calculated based on the actual number of PSUs earned at the end of the performance period equal to the dividends that would have been payable on the earned PSUs had they been held during the entire performance period as Class A Common Stock. At the end of the performance period, the dividend equivalents are paid in the form of cash.
The expense for PSUs is determined based on the probability that the performance conditions will be met, and if applicable, the fair value of the market condition on the grant date. The PSUs are expensed and recorded in Additional paid-in capital on the Consolidated Balance Sheets over the remaining performance period. For participants who are or become retirement-eligible during the performance period, the PSUs are expensed over the period ending on the date the participant becomes retirement-eligible.
In 2022, 2021 and 2020, we issued PSUs to certain employees as follows:
•448,300 PSUs to be earned over the period of 2022 through 2024 (the "2022 PSUs"),
•529,500 PSUs to be earned over the period of 2021 through 2023 (the "2021 PSUs") and
•296,600 PSUs to be earned over the period of 2020 through 2022 (the "2020 PSUs").
These PSUs are earned based on performance conditions established annually by the Compensation Committee within the first three months of each applicable fiscal year. The PSUs are then modified based on achievement of certain total shareholder return results relative to a comparison group of companies, which is a market condition. When the performance conditions for a fiscal year are established, or if the performance conditions involve a qualitative assessment and such assessment has been made, one-third of the PSUs issued are considered granted. Therefore, each of the three fiscal years within the performance period is considered an individual tranche of the award (referred to as "Tranche 1," "Tranche 2" and "Tranche 3," respectively).
As of February 25, 2022, the 2022 PSUs, 2021 PSUs and 2020 PSUs were considered granted as follows:
•In 2022, the performance conditions were established for Tranche 1 of the 2022 PSUs, Tranche 2 of the 2021 PSUs and Tranche 3 of the 2020 PSUs, and accordingly, such tranches were considered granted in 2022.
•In 2021, the performance conditions were established for Tranche 1 of the 2021 PSUs and Tranche 2 of the 2020 PSUs, and accordingly, such tranches were considered granted in 2021.
•In 2020, the performance conditions were established for Tranche 1 of the 2020 PSUs, and accordingly, such tranche was considered granted in 2020.
Based on actual results, the 2020 PSUs were earned at 70% of the target level, as modified, and 207,620 shares of Class A Common Stock were issued to participants under such awards.
We used the Monte Carlo simulation model to calculate the fair value of the market conditions on the respective grant dates, which resulted in a total fair value of $6.1, $3.7 and $1.6 for the PSUs with market conditions granted in 2022, 2021 and 2020, respectively. The Monte Carlo simulation was computed using the following assumptions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FY22 Award | FY21 Award | FY20 Award |
Tranche 1 | Tranche 2 | Tranche 1 | Tranche 3 | Tranche 2 | Tranche 1 |
Risk-free interest rate (1) | 0.3 | % | | 0.2 | % | | 0.2 | % | | 0.1 | % | | 0.1 | % | | 2.3 | % | |
Expected term | 3 years | | 2 years | | 2 years | | 1 year | | 1 year | | 3 years | |
Estimated volatility (2) | 53.5 | % | | 61.3 | % | | 58.1 | % | | 56.1 | % | | 74.1 | % | | 32.5 | % | |
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
________________________
(1)Based on the U.S. Government bond benchmark on the grant date.
(2)Represents the historical price volatility of our Company’s Class A Common Stock for the three-year period preceding the grant date.
The Monte Carlo simulation resulted in the following weighted-average grant date fair values per PSU with market conditions:
| | | | | | | | | | | | | | | | | | | | |
Grant Date Fair Value per PSU | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Weighted-average grant date fair value per share of PSUs granted under Monte Carlo | $ | 14.38 | | | $ | 13.29 | | | $ | 16.21 | | |
The total PSU expense and associated tax benefit recorded in 2022, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | |
Performance Units | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Expense | $ | 1.6 | | | $ | 7.7 | | | $ | 2.7 | | |
Tax benefit | 0.4 | | | 2.0 | | | 0.7 | | |
The 2022 PSU activity is as follows:
| | | | | | | | | | | | | | |
Maximum Number of Nonvested Units | Total | Weighted-Average Grant Date Fair Value per Unit |
Nonvested as of February 26, 2021 | 898,156 | | | $ | 14.06 | | |
Granted | 1,019,517 | | | 14.38 | | |
Vested | (711,840) | | | 14.26 | | |
| | | | |
| | | | |
Nonvested as of February 25, 2022 | 1,205,833 | | | $ | 14.21 | | |
As of February 25, 2022, there was $0.2 of remaining unrecognized compensation cost related to nonvested PSUs. The cost is expected to be recognized over a remaining weighted-average period of 1.4 years.
The total fair value of PSUs vested during 2022, 2021 and 2020 was $2.5, $6.4 and $1.7, respectively. The fair value was determined based upon the closing price of shares of our Class A Common Stock on the date that the Compensation Committee certified the awards.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Restricted Stock Units
During 2022, we awarded 2,064,722 restricted stock units ("RSUs") to certain employees. RSUs have restrictions on transfer which lapse one to three years after the date of grant, at which time RSUs are issued as unrestricted shares of Class A Common Stock. Typically, these awards will be forfeited if a participant leaves the company for reasons other than retirement, disability or death or if the participant engages in any competition with us, as defined in the Incentive Compensation Plan. RSUs are expensed and recorded in Additional paid-in capital on the Consolidated Balance Sheets over the requisite service period based on the value of the shares on the grant date. For participants who are or become retirement-eligible during the service period for awards that are considered retirement-eligible, the RSUs are expensed over the period ending on the date that the participant becomes retirement-eligible.
The weighted-average grant date fair value per share of RSUs granted in 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | |
Grant Date Fair Value per Share | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Weighted-average grant date fair value per share of RSUs granted | $ | 13.08 | | | $ | 9.49 | | | $ | 15.84 | | |
The total RSU expense and associated tax benefit recorded in 2022, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | |
Restricted Stock Units | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Expense | $ | 13.7 | | | $ | 12.4 | | | $ | 13.3 | | |
Tax benefit | 3.5 | | | 3.1 | | | 3.6 | | |
Holders of RSUs receive cash dividends equal to the dividends we declare and pay on our Class A Common Stock, which are included in Dividends paid in the Consolidated Statements of Cash Flows. The 2022 RSU activity is as follows:
| | | | | | | | | | | | | | |
Nonvested Units | Total | Weighted-Average Grant Date Fair Value per Share |
Nonvested as of February 26, 2021 | 2,285,965 | | | $ | 12.11 | | |
Granted | 2,064,722 | | | 13.08 | | |
Vested | (811,242) | | | 15.54 | | |
Forfeited | (94,007) | | | 12.81 | | |
Nonvested as of February 25, 2022 | 3,445,438 | | | $ | 11.86 | | |
There was $18.8 of remaining unrecognized compensation cost related to RSUs as of February 25, 2022. The cost is expected to be recognized over a weighted-average period of 1.9 years.
The total fair value of RSUs vested was $10.1, $10.7 and $12.6 during 2022, 2021 and 2020, respectively. The fair value was determined based upon the closing price of shares of our Class A Common Stock on the dates the awards vested.
Unrestricted Share Grants
Under the Incentive Compensation Plan, unrestricted shares of our Class A Common Stock may be issued to members of our Board of Directors as compensation for director’s fees. We granted a total of 61,360, 64,107 and 41,941 unrestricted shares at a weighted average grant date fair value per share of $13.81, $12.21 and $17.31 during 2022, 2021 and 2020, respectively.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
18.LEASES
We have operating leases for corporate offices, sales offices, showrooms, manufacturing and distribution facilities, vehicles and equipment that expire at various dates through 2035. Certain lease agreements include contingent rental payments based on per unit usage over contractual levels (e.g., miles driven or machine hours used) and others include rental payments adjusted periodically for inflationary indexes. Additionally, some leases include options to renew or terminate the leases which can be exercised at our discretion.
The components of lease expense are as follows:
| | | | | | | | | | | | | | | | | | | | |
| Year Ended | | | |
February 25, 2022 | February 26, 2021 | | | |
Operating lease cost | $ | 53.2 | | | $ | 51.8 | | | | | | | | |
Sublease rental income | (2.0) | | | (2.4) | | | | | | | | |
| $ | 51.2 | | | $ | 49.4 | | | | | | | | |
Supplemental cash flow and other information related to leases are as follows:
| | | | | | | | | | | | | | | | |
| Year Ended | | |
February 25, 2022 | February 26, 2021 | |
Cash flow information: | | | | | | |
Operating cash flows used for operating leases | $ | 54.1 | | | $ | 50.4 | | | | |
Leased assets obtained in exchange for new operating lease obligations | $ | 33.1 | | | $ | 21.8 | | | | |
Other information: | | | | | | |
Weighted-average remaining term | 5.9 years | | 6.6 years | | | |
Weighted-average discount rate | 3.5 | % | | 3.8 | % | | | |
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the future minimum lease payments as of February 25, 2022:
| | | | | | | | |
Fiscal year ending in February | Amount (1) |
2023 | $ | 51.6 | | |
2024 | 45.5 | | |
2025 | 43.6 | | |
2026 | 32.8 | | |
2027 | 26.1 | | |
Thereafter | 52.1 | | |
Total lease payments | $ | 251.7 | | |
Less interest | 25.3 | | |
Present value of lease liabilities | $ | 226.4 | | |
_______________________________________
(1)Lease payments include options to extend lease terms that are reasonably certain of being exercised. The payments exclude legally binding minimum lease payments for leases signed but not yet commenced.
19.ACQUISITIONS
Viccarbe
In Q3 2022, we acquired Viccarbe, a Spanish designer of contemporary furniture for high-performance collaborative and social spaces. The transaction included the purchase of all the outstanding capital stock of Viccarbe for $34.9 (or €30.0) in an all-cash transaction using cash on-hand. Up to an additional $15.1 (or €13.0) is payable to the sellers based upon the achievement of certain sales and operating income targets over a three-year period. This amount was considered to be contingent consideration and was treated for accounting purposes as part of the total purchase price of the acquisition. We used the Monte Carlo simulation model to calculate the fair value of the contingent consideration as of the acquisition date, which represents a Level 3 measurement. As a result, we recorded a related liability of $4.9 (or €4.2). An additional amount of $7.0 (or €6.0) is also payable to the sellers based upon the achievement of certain milestones and continued employment over a five-year period, which will be expensed over the service period on a straight-line basis.
Tangible assets and liabilities of Viccarbe were valued as of the acquisition date using a market analysis and intangible assets were valued using a discounted cash flow analysis, which represents a Level 3 measurement. On the acquisition date, we recorded $11.7 related to identifiable intangible assets, $25.8 related to goodwill and $5.1 related to tangible assets. The tangible assets mainly consisted of working capital (primarily accounts receivable, inventory and accounts payable) and property, plant and equipment. Additionally, we recorded a deferred tax liability in the amount of $2.9 associated with the tax basis difference in acquired book assets. The goodwill was recorded in the EMEA segment and is not deductible for income tax purposes in Spain. The goodwill resulting from the acquisition is primarily related to the growth potential of Viccarbe and our intention to expand the manufacturing of Viccarbe products in geographic regions outside of EMEA and to offer Viccarbe products through our global distribution network. Intangible assets are principally related to the Viccarbe trade name, dealer relationships and internally developed know-how and designs, which will be amortized over periods ranging from 9 to 13 years from the date of acquisition. The purchase price allocation for the acquisition was incomplete as of February 25, 2022. The amounts recognized related to the purchase price allocation will be finalized no later than one year after the acquisition date.
The following table summarizes the acquired identified intangible assets and the respective fair value and useful life of each asset at the date of acquisition:
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | |
Other Intangible Assets | Useful Life (Years) | Fair Value |
|
Trademark | 9.0 | | $ | 4.6 | | |
Dealer relationships | 13.0 | | 3.8 | | |
Know-how/designs | 9.0 | | 3.3 | | |
| | | $ | 11.7 | | |
The fair value of the acquired intangible assets will be amortized on a straight-line basis over the remaining useful lives. The estimated amortization expense for the next five years is as follows:
| | | | | | | | |
Fiscal Year Ending in February | Amount |
2023 | $ | 1.1 | | |
2024 | 1.1 | | |
2025 | 1.2 | | |
2026 | 1.1 | | |
2027 | 1.1 | | |
| $ | 5.6 | | |
20.DIVESTITURE
PolyVision
In 2020, we sold all outstanding capital stock of PolyVision for net proceeds of $72.6. The transaction resulted in the disposition of the net assets of the PolyVision operating entities in the U.S. and Belgium, which totaled $47.8. The net assets were primarily related to accounts receivable, inventory, property, plant and equipment and goodwill. In conjunction with the sale, we recorded a provision for $3.8 related to minimum purchase commitments for three years following the date of the sale. The transaction resulted in a gain of $21.0 in the Other category which reduced Operating expenses in the Consolidated Statements of Income. Subsequent to the sale, we continue to market certain PolyVision branded products to provide customers with a full suite of collaboration solutions.
Our Consolidated Statements of Income include the following in the Other category related to PolyVision:
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| Year Ended |
February 28, 2020 |
Revenue | $ | 61.5 | | |
Gross profit | 18.6 | | |
Operating income | 6.4 | | |
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
21. REPORTABLE SEGMENTS
Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate expenses are reported as Corporate.
The Americas segment serves customers in the U.S., Canada, the Caribbean Islands and Latin America with a comprehensive portfolio of furniture, architectural and technology products marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Coalesse, AMQ, Smith System, Orangebox and Viccarbe brands.
The EMEA segment serves customers in Europe, the Middle East and Africa primarily under the Steelcase, Coalesse, Orangebox and Viccarbe brands, with a comprehensive portfolio of furniture, architectural and technology products.
The Other category includes Asia Pacific and Designtex. Asia Pacific serves customers in Australia, China, India, Japan, Korea and other countries in Southeast Asia primarily under the Steelcase brand with a comprehensive portfolio of furniture, architectural and technology products. Designtex 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. In 2020, the Other category also included PolyVision, which we sold in Q4 2020.
We primarily review and evaluate revenue and operating income by segment in both our internal review processes and for our external financial reporting. We also allocate resources primarily based on revenue and operating income. Total assets by segment include manufacturing and other assets associated with each segment.
Corporate costs include unallocated portions of shared service functions such as information technology, corporate facilities, finance, human resources, research, legal and customer aviation, plus deferred compensation expense and income or losses associated with COLI. Corporate assets consist primarily of unallocated cash and cash equivalents, COLI, fixed assets, investments in unconsolidated affiliates and right-of-use assets related to operating leases.
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Operating Segment Data | Americas | EMEA | Other | Corporate | Consolidated |
2022 | | | | | | | | | | |
Revenue | $ | 1,905.0 | | | $ | 598.5 | | | $ | 269.2 | | | $ | — | | | $ | 2,772.7 | | |
Operating income (loss) | 44.4 | | | 3.3 | | | (3.2) | | | (24.4) | | | 20.1 | | |
Total assets | 1,110.4 | | | 475.2 | | | 227.6 | | | 447.8 | | | 2,261.0 | | |
Capital expenditures | 26.9 | | | 10.4 | | | 5.7 | | | 17.5 | | | 60.5 | | |
Depreciation and amortization | 52.0 | | | 22.2 | | | 6.3 | | | 2.7 | | | 83.2 | | |
2021 | | | | | | | | | | |
Revenue | $ | 1,848.5 | | | $ | 511.3 | | | $ | 236.4 | | | $ | — | | | $ | 2,596.2 | | |
Operating income (loss) | 97.0 | | | (32.3) | | | 0.2 | | | (21.9) | | | 43.0 | | |
Total assets | 1,015.3 | | | 414.4 | | | 211.3 | | | 713.0 | | | 2,354.0 | | |
Capital expenditures | 17.0 | | | 10.8 | | | 8.7 | | | 4.8 | | | 41.3 | | |
Depreciation and amortization | 54.2 | | | 22.3 | | | 6.1 | | | 2.6 | | | 85.2 | | |
2020 | | | | | | | | | | |
Revenue | $ | 2,672.9 | | | $ | 669.6 | | | $ | 381.2 | | | $ | — | | | $ | 3,723.7 | | |
Operating income (loss) | 240.0 | | | 9.9 | | | 39.4 | | | (32.3) | | | 257.0 | | |
Total assets | 1,067.3 | | | 454.5 | | | 225.6 | | | 818.0 | | | 2,565.4 | | |
Capital expenditures | 24.3 | | | 18.5 | | | 19.1 | | | 11.5 | | | 73.4 | | |
Depreciation and amortization | 54.3 | | | 21.6 | | | 6.8 | | | 2.9 | | | 85.6 | | |
The accounting policies of each of the reportable segments are the same as those described in Note 2.
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reportable geographic information is as follows:
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Reportable Geographic Data | Year Ended |
February 25, 2022 | February 26, 2021 | February 28, 2020 |
Long-lived assets: | | | | | | |
United States | $ | 844.7 | | | $ | 883.8 | | | $ | 924.1 | | |
Foreign locations | 328.0 | | | 303.0 | | | 319.0 | | |
| $ | 1,172.7 | | | $ | 1,186.8 | | | $ | 1,243.1 | | |
No country other than the U.S. represented greater than 10% of our long-lived assets in 2022, 2021 or 2020.
22. RESTRUCTURING ACTIVITIES
In 2021, we implemented a series of restructuring actions in response to continued order declines in the Americas compared to the prior year and economic uncertainty related to the COVID-19 pandemic. The restructuring actions included early retirements and voluntary and involuntary terminations of approximately 300 salaried employees and approximately 210 hourly employees. We incurred $28.6 in restructuring costs in the Americas segment in connection with these actions during 2021, consisting of cash severance payments and payment of other separation-related benefits. These restructuring actions are complete.
The following table details the changes in the restructuring reserve balance for the years ended February 25, 2022 and February 26, 2021:
| | | | | | | | |
| Workforce reductions |
Balance as of February 28, 2020 | $ | — | | |
Restructuring costs | 28.6 | | |
Payments | (28.2) | | |
Balance as of February 26, 2021 | $ | 0.4 | | |
Payments | (0.4) | | |
Balance as of February 25, 2022 | $ | — | | |
STEELCASE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
23. UNAUDITED QUARTERLY RESULTS
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Unaudited Quarterly Results | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total |
2022 | | | | | | | | | | |
Revenue | $ | 556.6 | | | $ | 724.8 | | | $ | 738.2 | | | $ | 753.1 | | | $ | 2,772.7 | | |
Gross profit | 154.7 | | | 206.8 | | | 203.6 | | | 196.4 | | | 761.5 | | |
Operating income (loss) | (31.8) | | | 33.9 | | | 15.9 | | | 2.1 | | | 20.1 | | |
Net income (loss) | (28.1) | | | 24.7 | | | 9.6 | | | (2.2) | | | 4.0 | | |
Basic earnings (loss) per share | (0.24) | | | 0.21 | | | 0.08 | | | (0.02) | | | 0.03 | | |
Diluted earnings (loss) per share | (0.24) | | | 0.21 | | | 0.08 | | | (0.02) | | | 0.03 | | |
2021 | | | | | | | | | | |
Revenue | $ | 482.8 | | | $ | 818.8 | | | $ | 617.5 | | | $ | 677.1 | | | $ | 2,596.2 | | |
Gross profit | 122.7 | | | 269.6 | | | 177.9 | | | 192.6 | | | 762.8 | | |
Operating income (loss) | (52.3) | | | 88.6 | | | — | | | 6.7 | | | 43.0 | | |
Net income (loss) | (38.1) | | | 55.5 | | | 2.1 | | | 6.6 | | | 26.1 | | |
Basic earnings (loss) per share | (0.33) | | | 0.47 | | | 0.02 | | | 0.06 | | | 0.22 | | |
Diluted earnings (loss) per share | (0.33) | | | 0.47 | | | 0.02 | | | 0.06 | | | 0.22 | | |
Operating income (loss) and net income (loss) included a goodwill impairment charge in Q1 2021 and restructuring costs in Q2 2021, Q3 2021 and Q4 2021. See Note 11 and Note 22, respectively, for additional information.