Steelcase Restructuring Corporately

December 29, 2003
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GRAND RAPIDS — Coming out of what’s now commonly considered an industrywide depression, Steelcase Inc. is working on producing “stable, predictive and positive results.”

Steelcase is already in the midst of a three-year corporate restructuring that would have come despite the downturn in the office furniture industry that began three years ago, and is planning a restructuring for the North American operations beginning early next year.

President and Chief Executive Officer James Hackett told brokerage analysts last week that management is now putting greater focus on broader strategic questions facing the company. For starters, Steelcase is working to remove complexity from its vertically integrated business structure and become more competitive globally, including being “where our customers are” around the world, Hackett said.

“It’s not just about improving profitability, but it’s been about improving our global competitiveness for the long haul and this requires fundamental changes in our business,” Hackett said during the Dec. 19 conference call to discuss Steelcase’s third-quarter financial results.

The call provided no specifics as to what executives may have in store for the North American division that accounts for nearly 55 percent of corporate revenues and experienced a 9.7 percent sales slide in the most recent period.

Overall, Steelcase posted a $9.5 million loss on a 3 percent sales decrease for the third quarter that ended Nov. 28.

The company anticipates posting a loss for the current fourth quarter of fiscal year 2004, before returning to profitability sometime during the following fiscal year as business picks up with the economic recovery and further costs are driven out.

Steelcase’s third-quarter sales of $614.5 million were down 3.3 percent from $635.6 million a year earlier.

The company’s $9.5 million, or 6 cents per share, net loss for the quarter compares with a net loss of $31.1 million, or 22 cents per share, in the same period a year ago. The quarterly loss includes after-tax charges of $5.7 million.

On a year-to-date basis, Steelcase’s revenues of $1.78 billion are down 6.5 percent from the $1.9 billion recorded through the first nine months of the prior fiscal year. Year-to-date net losses of $4.8 million for FY 2004 compare with losses of $53.8 million at this point in FY2003.

In the current fourth quarter, and following seasonal trends, Steelcase expects revenues to fall 3 percent to 5 percent sequentially from the third quarter and a loss of 6 cents to 11 cents per share, including after-tax charges of $3 million to $8 million.

Steelcase anticipates revenues growing 5 percent in the 2005 fiscal year that begins in March and estimates earnings of 5 cents to 10 cents per share, with pre-tax restructuring charges of $15 million to $20 million. The company is planning for the next three years based on single-digit volume growth, Chief Financial Officer James Keane said.

Hackett called the planning assumptions the “intersection of what’s possible and what’s acceptable” that combines a conservative improvement in sales and “further refinement in costs.”

“There’s a fair amount of uncertainty about the economy,” he said.

And there’s still much work to do to further cut costs, Hackett and Keane told analysts.

Steelcase continues to implement lean manufacturing and strategic sourcing that will continue beyond that point. Steelcase’s three-year plan targets a longer-term gross margin of 35 percent and operating income of 10 percent of net sales, assuming modest top-line growth.

“We still have a lot of work to do,” Keane said.

On the positive side, key economic factors for the office furniture industry — corporate profits, white-collar job growth and capital spending — are looking up. Steelcase also has seen an increase in customer visits, although they’ve yet to translate into orders, and a “significant” upturn in activity in large client accounts that represents “the sweet spot of our business,” Hackett said.     

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