| STEELCASE INC Item 1A Risk Factors: The following risk factors and other information included in this Form 10-K should be carefully considered |
| The risks and uncertainties described below are not the only ones we face |
| Additional 7 _________________________________________________________________ risks and uncertainties not presently known to us or that we presently deem less significant may also adversely affect our business, operating results, cash flows, and financial condition |
| If any of the following risks actually occur, our business, operating results, cash flows and financial condition could be materially adversely affected |
| Our efforts to restructure our industrial model may not be successful |
| Over the last several years, we have been migrating to a more flexible industrial model based on lean manufacturing principles and a simpler product portfolio |
| We also began to adopt a global supply chain |
| These strategies have led to restructuring of our manufacturing operations in our North America and International segments |
| The restructuring of our manufacturing operations has involved actions such as workforce reductions, facility rationalizations and the disposition of excess assets, including real estate |
| The cost of these actions has had the effect of reducing our recent earnings until expected cost savings are achieved |
| It is likely that these kinds of actions will continue to be necessary as we pursue with our strategy |
| It is possible the scope of our restructuring efforts and the related costs will be higher than we currently anticipate |
| The success of our restructuring initiatives is dependent on several factors, including our ability to manage facility consolidation without disrupting existing customer commitments, efficient implementation of lean manufacturing techniques, simplifying our product portfolio, establishing cost effective regional distribution centers, and implementing global sourcing and supply chain initiatives |
| Such actions may not be accomplished as quickly and effectively as anticipated, and we may not realize the expected benefits of our restructuring activities, either of which would have a negative impact on our results of operations |
| We may not be able to successfully implement and manage our growth strategy |
| Our growth strategy calls for expansion in: • existing markets by leveraging our existing distribution to more fully serve existing customers and to win new customers, and • new adjacent markets such as the mid-market segment of the office furniture market, vertical markets such as healthcare and education and emerging international markets |
| We believe that our future success will depend upon our ability to deliver to our customers a great experience, which includes innovative, well-made products and world class processes |
| Our success will rely in part on our research and development and engineering efforts, our ability to manufacture or source the products, and customer acceptance of our products |
| As it relates to new markets, our success will also depend on our ability to create and implement distribution strategies to reach these markets |
| Our inability to successfully implement and manage our growth strategy could adversely affect our business and our results of operations |
| Our efforts to grow our business in emerging markets include the risk factors listed below relating to our global operations, but can also include other risks |
| In certain markets in Asia and Eastern Europe where we are expanding our business, the legal and political environment can be unstable and uncertain which could make it difficult for us to compete successfully and to protect our investments or sell our investments in the future |
| As we hire new people and establish new processes in these locations, we will implement our global business standards, but there is some risk our activities could expose us to liabilities |
| We also make investments in new business development initiatives which, like most startups, have a high failure rate |
| We limit our investments in these initiatives and establish governance procedures to contain the associated risks, but losses could result and may be material |
| In the past, we have also made minority investments in external startup companies and we continue to hold some of these investments |
| While we have established reserves related to these investments, 8 _________________________________________________________________ it is possible these companies will not be successful or that it will be difficult for us to sell our investment |
| We operate in a highly competitive environment and may not be able to compete successfully |
| The office furniture industry is highly competitive, with a number of competitors offering similar categories of product |
| We compete on a variety of factors, including: brand recognition and reputation, price, lead time, delivery and service, product design and features, product quality, strength of dealers and other distributors, and relationships with customers and key influencers, such as architects, designers and facility managers |
| In North America, our top competitors in our primary markets are Haworth, Inc, Herman Miller, Inc, HNI Corporation, Kimball International Inc |
| Some of our competitors have lower cost structures and a broader offering of moderately priced products, making it more difficult for us to compete in certain customer segments |
| In addition, such competition may prevent us from maintaining or raising the prices of our products in response to rising raw material prices and other inflationary pressures |
| Although we do not have major offshore competitors in our North America segment, there are other segments of the North America furniture industry, notably the residential furniture and made-to-stock office furniture segments, where lower-cost imports have become dominant |
| It is possible we could see increased competition from imports in our core markets |
| In international markets, we tend to compete against a larger number of smaller size competitors |
| Most of our top competitors have strong relationships with their existing customers that can be a source of significant future sales through repeat and expansion orders |
| These competitors manufacture products with strong acceptance in the marketplace and can develop products that could have a competitive advantage over Steelcase products |
| In certain markets, we compete using an import model which requires longer lead times than local competitors with domestic supply chains |
| Our continued success will depend upon many things, including our ability to continue to manufacture and market high quality, high performance products at competitive prices and our ability to evolve our business model and implement world class processes to enable us to effectively compete in the office furniture industry’s increasingly competitive environment |
| Our success is also dependent on our ability to sustain our positive brand reputation and recognition among existing and potential customers and use our brand and our trademarks effectively as we enter new markets |
| Office furniture industry revenues are impacted by a variety of cyclical macroeconomic factors such as corporate profits, non-residential fixed investment, white-collar employment growth and commercial office construction |
| Our product sales are directly tied to corporate spending which is outside of our control |
| Geopolitical uncertainties, terrorist attacks, acts of war, natural disasters, and other world events or combinations of such and other factors that are outside of our control could also have a significant effect on business confidence, the global economy, and therefore, our business |
| The global office furniture industry experienced a significant downturn in recent years which dramatically impacted our profitability because of the high level of fixed costs associated with our business |
| If another economic or industry downturn occurred in a similar magnitude as experienced during recent years, we may not be able to react fast enough to counteract the decline which could negatively impact our operating results, financial condition and access to capital |
| Other influences on our industry include technology changes, organizational change, employee health and safety concerns, and the globalization of companies |
| The trend towards outsourcing white collar jobs could cause our major customers in our core markets to shift employment growth to countries where our market share is not as strong |
| 9 _________________________________________________________________ Our global operations subject us to risks that may negatively affect our results of operations and financial condition |
| We have sales offices and manufacturing facilities in many countries, and as a result, we are subject to risks associated with doing business globally |
| Our global operations may be subject to risks that may limit our ability to manufacture, design, develop or sell products in particular countries, which could in turn have an adverse effect on our results of operations and financial condition, including: • differing employment practices and labor issues, • local business and cultural factors that differ from our normal standards and practices, • regulatory requirements and prohibitions that differ between jurisdictions, • restrictions on our operations by governments seeking to support local industries, nationalization of our operations and restrictions on our ability to repatriate earnings, and • natural disasters, security concerns, including crime, political instability, terrorist activity, armed conflict and civil or military unrest, and global health issues |
| In the United States and most countries in Europe, our revenues and costs are typically in the same currency |
| However there are some situations where we export and import products in different currencies |
| Fluctuations in the rate of exchange between the US dollar and the currencies of other countries in which we conduct business, and changes in currency controls with respect to such countries, could negatively impact our business, operating results and financial condition |
| In addition, changes in tariff and import regulations and changes to US and international monetary policies may also negatively impact our revenue |
| Varying tax rates in different jurisdictions could negatively impact our overall tax rate |
| Disruptions to the supply of raw materials, components and labor in our manufacturing operations could adversely affect our supply chain management |
| We are reliant on the timely flow of raw materials and components from third party suppliers and our own manufacturing operations |
| The flow of such materials and components may be affected by: • fluctuations in the availability and quality of the raw materials, • damage and loss or disruption of production from accidents, natural disasters and other causes, and • disruptions caused by labor activities |
| We expect to continue to migrate to a less vertically integrated manufacturing model, which will increase our reliance on an international network of suppliers |
| Any disruptions in the supply and delivery of products or deficiencies in our ability to develop and manage our international network of suppliers could have an adverse impact on our business, operating results or financial condition |
| We could be adversely affected by increasing raw material costs |
| We procure raw materials from a significant number of sources within the United States, Canada, Europe and Asia |
| These raw materials are not rare or unique to our industry |
| The absolute level and volatility in steel and other commodity costs, such as energy, have significantly increased in recent years due to changes in global supply and demand |
| These changes could also lead to supply interruptions |
| Our gross margins could be affected if these types of costs remain high or escalate further |
| In the short run, rapid changes in supply costs can be very difficult to offset because of price hold agreements we have entered into with our customers |
| It is difficult to find effective hedge markets to manage these risks |
| In the longer run, we may not be successful in passing along a portion of the higher raw materials costs to our customers because of competitive pressures |
| 10 _________________________________________________________________ Disruptions within our dealer network could adversely affect our business |
| In the United States and Canada, we rely largely on a network of independent and company-owned dealers to market our products to customers |
| Our business is influenced by our ability to initiate and manage new and existing relationships with dealers |
| We do not have written contracts with our domestic dealers; however, they are subject to a uniform set of guidelines prescribed by us |
| From time to time, an individual dealer or Steelcase may choose to terminate the relationship, or the dealership could face financial difficulty leading to failure or difficulty in transitioning to new ownership |
| In addition, our competitors or other third parties could engage in a strategy to attempt to acquire or convert a number of our dealers to carry their products |
| We do not believe our business is dependent on any single dealer, the loss of which would have a sustained material adverse effect upon our business |
| However, temporary disruption of dealer coverage within a specific local market could temporarily have an adverse impact on our business within the affected market |
| The loss or termination of a significant number of dealers could cause difficulties in marketing and distributing our products and have an adverse effect on our business, operating results or financial condition |
| In the event that a dealer in a strategic market experiences financial difficulty, we may choose to make financial investments in the dealership, thereby increasing our financial exposure |
| A portion of our international distribution network is owned because of the need for us to make financial investments in dealerships |
| If we are not able to effectively manage these dealerships, they could have a negative effect on our operating results |
| In certain cases we have adopted a direct model of distribution through which we establish a company-owned sales and service capability |
| This model involves increased customer credit risk, the risk of conflict with other distribution channels, and the risk that we will not be able to compete effectively to win business in those markets because of a more limited breadth of product offering than a dealer who carries multiple lines of products |
| We are exposed to credit risk associated with our dealer network |
| In specific situations, the Company may choose to extend credit to or guarantee the obligations of a dealer which can increase our financial exposure |
| A significant portion of our accounts receivable is due from our dealers |
| Individual dealers may not continue to be viable or profitable |
| If dealers go out of business or restructure, we may suffer losses because such dealers may not be able to pay for products already delivered to them |
| Sometimes we loan funds to, or invest funds in, dealers for project financing or to finance ownership changes |
| We carefully monitor the financial condition of dealers involved in financial and ownership transition transactions |
| While most of the dealers that have transition financing from us are able to honor their financial obligations, some individual dealers could face financial challenges |
| If these dealers experience declines in revenues, the likelihood of losses resulting from these financing transactions could increase and we may have to record additional charges or reserves, as necessary |
| Such losses could have a material adverse effect on our business, operating results or financial condition |
| We could be adversely affected by increasing healthcare costs |
| We provide healthcare benefits to the majority of our employees and certain of our retirees and their respective eligible dependents |
| The cost of providing such benefits has increased significantly in recent years and is expected to continue to increase |
| Although we have taken various actions intended to mitigate the impact of such cost increases, such as making changes in benefit plan design, changing plan administrators and increasing the portion of the cost of healthcare benefits borne by plan participants, if our actions are not effective in mitigating the cost increases, or if we are unable to continue to mitigate such increases because of contractual obligations or competitive pressures, our results of operations will be adversely affected |
| 11 _________________________________________________________________ We could incur material costs related to product defects |
| We incur various expenses related to product defects, including product warranty costs, product recall and retrofit costs and product liability costs |
| The amount of our product defect expenses relative to product sales varies from time to time and could increase in the future |
| We maintain a reserve for our product warranty costs based on certain estimates and our knowledge of current events and actions, but our actual warranty costs could exceed our reserve and we could need to increase our accruals for warranty charges |
| Any significant increase in the rate of our product defect expenses could have a material adverse effect on our results of operations |
| There may be significant limitations to our utilization of net operating losses to offset future taxable income |
| We have significant asset values related to net operating loss carryforwards (“NOLs”) in various jurisdictions |
| We may be unable to generate sufficient taxable income from future operations in the applicable jurisdiction to fully utilize our NOLs |
| Additionally, future changes in tax laws or interpretations of such tax laws may limit our ability to fully utilize our NOLs |
| Our investments in company-owned life insurance are subject to market risk which could adversely affect our results of operation and financial condition |
| We have investments in company-owned life insurance policies with the intention of utilizing them as a long-term funding source for post-retirement medical benefits, deferred compensation and supplemental retirement plan obligations |
| The cash value of these policies is based on the market value of bond and equity investments and can fluctuate as these markets fluctuate |
| In addition, the investment managers actively manage certain investments and their results could be better or worse than the broader United States equity markets returns |
| Our acquisition, joint venture, or alliance activities may not be successful |
| Our growth strategy may involve acquisitions, joint ventures, alliances and additional channels of distribution |
| Some of the risks associated with these activities are: • we may not identify attractive opportunities or be able to enter into transactions on acceptable terms and at the right price, • we may not successfully integrate acquired entities into our operations and be able to retain key employees of the acquired companies, • our business philosophy may change which could affect the business rationale for our joint ventures or alliances, and • we may not successfully implement new distribution channels, and changes could create discord in our existing channels of distribution |
| We are subject to extensive environmental regulations |
| Our operations are subject to federal, state, local and foreign environmental and occupational health and safety laws, and our financial results could be adversely affected if we fail to comply with such laws |
| We are currently liable for various investigations and remediation of environmental contamination, and we have been identified as a potentially responsible party in several Superfund site cleanups |
| Any present or future investigations and remedial efforts relating to environmental matters could entail material costs or otherwise result in material liabilities |
| The amount of future clean-up costs and other environmental liabilities could be material |
| See the discussion under “Environmental 12 _________________________________________________________________ Matters” in Item 1: Business for additional information regarding potential liabilities that we may incur in connection with environmental matters |