Viccarbe Habitat

Sep 23, 2022

09/23/2022 | 12:43pm EDT Message : For the quarterly period ended August 26, 2022 or For the transition period from to Commission File Number 1-13873 Michigan (Zip Code) None Securities registered pursuant to Section 12(b) of the Act: Title of each class Class A Common Stock New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer (Unaudited) 1.BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended February 25, 2022 ("Form 10-K"). The Condensed Consolidated Balance Sheet as of February 25, 2022 was derived from the audited Consolidated Balance Sheet included in our Form 10-K. As used in this Quarterly Report on Form 10-Q ("Report"), unless otherwise expressly stated or the context otherwise requires, all references to "Steelcase," "we," "our," "Company" and similar references are to Steelcase Inc. and its subsidiaries in which a controlling interest is maintained. Unless the context otherwise indicates, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than a calendar year. Additionally, Q1, Q2, Q3 and Q4 reference the first, second, third and fourth quarter, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated. 2.NEW ACCOUNTING STANDARDS We evaluate all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board 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. 6 4.EARNINGS (LOSS) PER SHARE Earnings (loss) per share is computed using the two-class method. The two-class method determines earnings (loss) 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 (loss) 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 (Loss) Per Share Three Months Ended August 26, 2022 Three Months Ended August 27, 2021 Net Income (Loss) 6.FAIR VALUE The carrying amounts for many of our financial instruments, including cash and cash equivalents, accounts and notes receivable, accounts payable, short-term borrowings 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 Condensed Consolidated Balance Sheets. Our total debt is carried at cost and was $563.5 and $482.5 as of August 26, 2022 and February 25, 2022, 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 $538.3 and $516.7 as of August 26, 2022 and February 25, 2022, respectively. The estimation of the fair value of our total debt is based on Level 2 fair value measurements. We periodically use derivative financial instruments to manage exposures to movements in foreign exchange rates and interest rates. The use of these financial instruments modifies the exposure of these risks with the intention to reduce our risk of short-term volatility. We do not use derivatives for speculative or trading purposes. Assets and liabilities measured at fair value as of August 26, 2022 and February 25, 2022 are summarized below: August 26, 2022 8.SHORT-TERM BORROWINGS 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 $125.0 by obtaining at least one commitment from one or more lenders. As of August 26, 2022, total availability under the facility was limited to $203.2 as a result of covenant constraints. In Q2 2023, we borrowed $68.0 under the facility to fund a portion of our acquisition of Halcon, and we also borrowed under the facility to support our global operating requirements. As of August 26, 2022, our total borrowings outstanding under the facility were $79.8, which had an effective interest rate of 3.75%. The facility does not include any restrictions on cash dividend payments or share repurchases. As of August 26, 2022, we were in compliance with all covenants under the facility. 13 9. SHARE-BASED COMPENSATION Performance Units We have issued performance units ("PSUs") to certain employees which are earned over a three-year performance period based on performance conditions established annually by the Compensation Committee within the first three months of the 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 August 26, 2022, the following PSUs have been issued and remained outstanding: •428,700 PSUs to be earned over the period of 2023 through 2025 (the "2023 PSUs"), •448,300 PSUs to be earned over the period of 2022 through 2024 (the "2022 PSUs") and •529,500 PSUs to be earned over the period of 2021 through 2023 (the "2021 PSUs"). Once granted, the PSUs are expensed and recorded in Additional paid-in capitalon the Condensed 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. As of August 26, 2022, the 2023 PSUs, 2022 PSUs and 2021 PSUs were considered granted as follows: •In Q1 2023, the performance conditions were established for Tranche 1 of the 2023 PSUs, Tranche 2 of the 2022 PSUs and Tranche 3 of the 2021 PSUs, and accordingly, such tranches were considered granted in Q1 2023. •In Q1 2022, the performance conditions were established for Tranche 1 of the 2022 PSUs and Tranche 2 of the 2021 PSUs, and accordingly, such tranches were considered granted in Q1 2022. •In Q1 2021, the performance conditions were established for Tranche 1 of the 2021 PSUs. These performance conditions involved a qualitative assessment which was made by the Compensation Committee in Q4 2021. Accordingly, such tranche was considered granted in Q4 2021. 14 12.72 As of August 26, 2022, there was $1.2 of remaining unrecognized compensation expense related to nonvested PSUs, which is expected to be recognized over a remaining weighted-average period of 2.0 years. Restricted Stock Units During the six months ended August 26, 2022, we awarded 1,068,507 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 the RSUs will be issued as unrestricted shares of Class A Common Stock. RSUs are expensed and recorded in Additional paid-in capitalon the Condensed Consolidated Balance Sheets over the requisite service period based on the value of the shares on the grant date. Generally, RSUs awarded are not forfeitable upon a qualifying retirement. For participants of those awards who are or become retirement-eligible during the service period, the RSUs are expensed over the period ending on the date that the participant becomes retirement-eligible. The total RSU expense and associated tax benefit for the three and six months ended August 26, 2022 and August 27, 2021 are as follows: Three Months Ended 11.69 As of August 26, 2022, there was $19.2 of remaining unrecognized compensation expense related to nonvested RSUs, which is expected to be recognized over a remaining weighted-average period of 1.7 years. 10. LEASES We have operating leases for corporate offices, sales offices, showrooms, manufacturing and distribution facilities, vehicles and equipment that expire at various dates through 2036. Certain lease agreements include contingent rental payments based on per unit usage over contractual levels (e.g., miles driven or machine hours operated) 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 for the three and six months ended August 26, 2022 and August 27, 2021 are as follows: Three Months Ended _______________________________________ (1)Lease payments includeoptions 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. 11.ACQUISITIONS Viccarbe In Q3 2022, we acquired Viccarbe Habitat, S.L. ("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 revenue and operating income targets over a three-year period. This amount was determined 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 is being 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 intentions 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 are being 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 August 26, 2022, as we are evaluating certain deferred tax balances which will be finalized in Q3 2023. The following table summarizes the purchased identified intangible assets and the respective fair value and useful life of each asset at the date of acquisition: Other Intangible Assets Halcon In Q2 2023, we acquired Halcon, a Minnesota-based designer and manufacturer of precision-tailored wood furniture for the workplace. The transaction included the purchase of all the outstanding membership interests of Halcon for $127.5 less customer deposits of $24.3, plus an adjustment of $1.9 for working capital. The acquisition was funded using a combination of cash on-hand and borrowings under our global committed bank facility. Up to an additional $7.5 is payable to the sellers based upon the achievement of certain revenue and gross margin targets over a six-month period. This amount was determined 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. Based upon the results of the calculation, we did not record a liability for the contingent consideration. An additional amount of $2.0 is also payable to a seller based upon continued employment over a three-year period, which is being expensed over the service period on a straight-line basis. Tangible assets and liabilities of Halcon 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 $51.8 related to identifiable intangible assets, $36.9 related to goodwill and $16.4 related to tangible assets. The tangible assets mainly consisted of property, plant, and equipment of $30.8, working capital (primarily inventory of $12.3) and customer deposits of $24.3. The goodwill was recorded in the Americas segment and is deductible for U.S. income tax purposes. The goodwill resulting from the acquisition is primarily related to the growth potential of Halcon expected to be driven by new product development, geographic expansion and the integration of Halcon products into our dealer network. Intangible assets are principally related to dealer relationships, the Halcon trade name and internally developed know-how and designs, which are being amortized over periods ranging from 9 to 10 years from the date of acquisition. We also acquired a backlog of orders which are expected to ship throughout the remainder of 2023. The purchase price allocation for the acquisition was incomplete as of August 26, 2022, as we are evaluating certain deferred tax balances and working capital adjustments. 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 purchased identified intangible assets and the respective fair value and useful life of each asset at the date of acquisition: Other Intangible Assets 12. 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 and architectural products marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Coalesse, AMQ, Smith System, Orangebox, Viccarbe and Halcon 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 and architectural 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 and architectural 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. 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 expenses include unallocated portions of shared service functions such as information technology, corporate facilities, finance, human resources, research, legal and customer aviation, plus deferred compensation expense and income or losses associated with COLI. 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. 19 13. RESTRUCTURING ACTIVITIES In Q4 2022, our Board of Directors approved restructuring actions related to the exit of our technology business in connection with our strategy to shift from offering a portfolio of technology products toward partnering with technology companies to create integrated collaborative solutions. The restructuring actions primarily included involuntary terminations of the majority of salaried employees of the business and the termination of supplier and customer contracts related to the business. We incurred $4.7 in restructuring costs in the Americas segment related to these actions, primarily consisting of cash severance payments and payment of other business exit costs. We recorded $1.8 related to employee termination costs and $2.4 related to business exit and other related costs during Q1 2023. In Q2 2023, we recorded a charge of $0.5 related to the impairment of a right-of-use operating lease asset which was utilized by our technology business. These restructuring actions are complete. The following table details the changes in the restructuring reserve balance as of August 26, 2022: Workforce Reductions 14. SUBSEQUENT EVENTS On September 21, 2022, our Board of Directors authorized a series of actions to reduce operational spending across certain functions. The actions may include the elimination of up to 180 salaried positions in the Americas segment and Corporate functions. As a result of these actions, we currently expect to incur approximately $8 in restructuring costs, consisting of cash severance payments and other separation-related benefits. We expect these actions to be completed in Q3 2023. 21 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations: This management's discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 25, 2022. 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 specific date. 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. This item contains certain non-GAAP financial measures. A "non-GAAP financial measure" is defined as a numerical measure of a company's financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the condensed consolidated statements of operations, balance sheets or statements of cash flows of the company. The non-GAAP financial measures used are (1) organic revenue growth, (2) adjusted operating income (loss) and (3) adjusted earnings per share. Pursuant to the requirements of Regulation G, we have provided a reconciliation of each of the non-GAAP financial measures to the most directly comparable GAAP financial measure in the tables below. These measures are supplemental to, and should be used in conjunction with, the most comparable GAAP measures. Management uses these non-GAAP financial measures to monitor and evaluate financial results and trends. See Non-GAAP Financial Measuresfor a description of these measures and why management believes they are also useful to investors. Financial Summary Our reportable segments consist of the Americas segment, the EMEA segment and the Other category. Unallocated corporate expenses are reported as Corporate. Results of Operations Overview In Q2 2023, our revenue increased 19% compared to the prior year, driven by strong beginning order backlog, significant pricing benefits and our acquisition of Halcon. We continued to experience significant inflation in steel, other commodities, fuel and logistics costs during the quarter, but year-over-year pricing benefits of approximately $80 exceeded year-over-year inflation by approximately $30. While we expect inflationary pressure to remain, we believe that year-over-year benefits from our pricing actions will continue to exceed year-over-year inflation in the second half of 2023. 23 Tableof Contents Our orders grew 5% in Q2 2023 compared to the prior year, driven by pricing benefits in the Americas and EMEA, partially offset by a decline in order volume in the Americas. In response to the volume decline and lower-than-expected return-to-office trends in the Americas, we have adjusted our planned levels of operational spending while we expect to continue to prioritize our investments in strategic growth initiatives. As a result, we have announced plans to eliminate up to 180 salaried positions in the Americas segment and Corporate functions in Q3 2023 and expect to maintain other cost reduction efforts during the remainder of 2023. Q2 2023 Compared to Q2 2022 We recorded net income of $19.6 and earnings per share of $0.17 in Q2 2023 compared to net income of $24.7 and earnings per share of $0.21 in the prior year. Operating income of $28.9 in Q2 2023 represented a decrease of $5.0 compared to operating income of $33.9 in the prior year, which included a $15.4 gain from the sale of land. Excluding the land gain in the prior year, the increase in operating income was primarily driven by higher volume and higher pricing benefits, which improved gross margin, partially offset by higher operating expenses. We reported adjusted operating income of $35.8 and adjusted earnings per share of $0.21 in Q2 2023, and we had adjusted operating income of $37.5 and adjusted earnings per share of $0.23 in the prior year. Revenue of $863.3 in Q2 2023 represented an increase of $138.5 or 19% compared to the prior year. Approximately $80 of the increase was related to higher pricing benefits, and approximately $75 was related to higher volume (including acquisitions), partially offset by approximately $20 of unfavorable currency translation effects, primarily in EMEA. Revenue growth was driven by the Americas, in part by Smith System and our acquisition of Halcon. Revenue increased by 25% in the Americas and by 18% in the Other category, while EMEA revenue decreased by 1%. Organic revenue growth was $141.2 or 20% compared to the prior year, with 21% growth in the Americas, 12% growth in EMEA and 21% growth in the Other category. Cost of sales as a percentage of revenue improved by 60 basis points in Q2 2023 compared to the prior year. The improvement was driven by approximately $30 of higher pricing benefits, net of inflation, and the benefits of higher volume, partially offset by approximately $10 of higher fixed overhead costs and labor inefficiencies. Cost of sales as a percentage of revenue improved by 120 basis points in the Americas and 90 basis points in the Other category but increased by 340 basis points in EMEA. Operating expenses increased by $48.5 in Q2 2023, or 190 basis points as a percentage of revenue, compared to the prior year, which included a $15.4 gain from the sale of land. Compared to the prior year, operating expenses in Q2 2023 included: •$13.6 of higher marketing, product development and sales expenses, •$8.4 of higher variable compensation expense, •$7.9 from acquisitions and •partially offset by $4.9 of favorable currency translation effects. Our Q2 2023 effective tax rate was 25.8% compared to a Q2 2022 effective tax rate of 16.0%, which included $3.8 of discrete tax benefits. Year-to-date 2023 Compared to Year-to-date 2022 We recorded net income of $8.2 and earnings per share of $0.07 in year-to-date 2023 compared to a net loss of $3.4 and loss per share of $0.03 in the prior year. Operating income of $16.3 in year-to-date 2023 represented an increase of $14.2 compared to operating income of $2.1 in the prior year. The increase was driven by higher revenue and lower operating expenses as a percentage of revenue, partially offset by higher cost of sales as a percentage of revenue. Year-to-date 2023 included $4.7 of restructuring costs in the Americas related to the exit of our technology business. We reported adjusted operating income of $31.2 and adjusted earnings per share of $0.17 in year-to-date 2023, and we had adjusted operating income of $9.3 and adjusted earnings per share of $0.01 in the prior year. 24 Tableof Contents Revenue of $1,604.0 in year-to-date 2023 represented an increase of $322.6 or 25% compared to the prior year, driven by growth across all segments. Approximately $215 of the increase was related to higher volume (including acquisitions), and approximately $130 was related to higher pricing benefits, partially offset by approximately $30 of unfavorable currency translation effects, primarily in EMEA. Revenue increased by 30% in the Americas, 12% in EMEA and 15% in the Other category. Organic revenue growth was $334.4 or 26% compared to the prior year, with 28% growth in the Americas, 24% growth in EMEA and 17% growth in the Other category. Cost of sales as a percentage of revenue increased by 60 basis points in year-to-date 2023 compared to the prior year. The increase was driven by approximately $103 of higher inflation and $18 of higher fixed overhead costs and labor inefficiencies, partially offset by the benefits of higher volume and approximately $130 of higher pricing benefits. Cost of sales as a percentage of revenue increased by 40 basis points in the Americas and 190 basis points in EMEA but improved by 90 basis points in the Other category. Operating expenses increased by $62.9 in year-to-date 2023, but decreased by 170 basis points as a percentage of revenue, compared to the prior year, which included a $15.4 gain from the sale of land. Compared to the prior year, operating expenses in year-to-date 2023 included: •$25.3 of higher marketing, product development and sales expenses, •$11.6 of higher spending in other functional areas, primarily information technology, aviation and strategy, •$9.7 from acquisitions and •$8.6 of higher variable compensation expense, •partially offset by a $4.0 gain from the sale of land and $8.5 of favorable currency translation effects. We recorded restructuring costs of $4.7 in the Americas in year-to-date 2023 related to the exit of our technology business. See Note 13 to the condensed consolidated financial statements for additional information. Our year-to-date 2023 effective tax rate was 22.6% compared to a year-to-date 2022 effective tax rate of 63.8%. The year-to-date 2022 effective tax rate reflected the impact of lower earnings and included $3.4 of discrete tax benefits. Interest Expense, Investment Income and Other Income (Expense), Net Three Months Ended (11.5) Interest expense increased in Q2 2023 and year-to-date 2023 compared to the prior year as a result of borrowings under our global committed bank facility in Q2 2023. Total other income, net increased by $2.6 in Q2 2023 compared to the prior year, driven by a $2.2 increase in income recorded from our unconsolidated affiliates. Total other income, net increased by $6.5 in year-to-date 2023 compared to the prior year, driven by a $3.2 increase in income recorded from our unconsolidated affiliates and a $1.9 increase of foreign exchange gains. Business Segment Review 25 Americas The Americas segment serves customers in the U.S., Canada, the Caribbean Islands and Latin America with a comprehensive portfolio of furniture and architectural products marketed to corporate, government, healthcare, education and retail customers through the Steelcase, Coalesse, AMQ, Smith System, Orangebox, Viccarbe and Halcon brands. Three Months Ended % Operating income in the Americas decreased by $1.2 in Q2 2023 compared to the prior year, which included a $15.4 gain from the sale of land. Excluding the land gain in the prior year, the increase in operating income was primarily driven by higher volume and higher pricing benefits, which improved gross margin, partially offset by higher operating expenses. Adjusted operating income of $49.3 in Q2 2023 represented an improvement of $2.0 compared the prior year. Operating income in the Americas increased by $12.6 in year-to-date 2023 compared to the prior year. The year-to-date improvement was driven by higher revenue and lower operating expenses as a percentage of revenue. Year-to-date 2023 also included $4.7 of restructuring costs. Adjusted operating income of $54.9 in year-to-date 2023 represented an improvement of $20.0 compared the prior year. The Americas revenue represented 75.5% of consolidated revenue in Q2 2023. In Q2 2023, revenue increased by $128.3 or 25% compared to the prior year. The increase included approximately $65 related to higher volume (including acquisitions) and approximately $60 related to higher pricing benefits, and reflected strong growth at Smith System. Organic revenue growth in Q2 2023 was $113.9 or 21% compared to the prior year. The Americas revenue represented 73.1% of consolidated revenue in year-to-date 2023. Year-to-date 2023 revenue of $1,172.4 represented an increase of $272.8 or 30% compared to the prior year. Approximately $175 of the increase related to higher volume, and approximately $100 related to higher pricing benefits. Organic revenue growth in year-to-date 2023 was $257.9 or 28% compared to the prior year. Cost of sales as a percentage of revenue decreased by 120 basis points in Q2 2023 compared to the prior year. The improvement was driven by the benefits of higher volume, and approximately $23 of higher pricing benefits, net of inflation, partially offset by approximately $11 of higher fixed overhead costs and labor inefficiencies. Cost of sales as a percentage of revenue increased by 40 basis points in year-to-date 2023 compared to the prior year. The increase was driven by approximately $83 of higher inflation and approximately $17 of higher fixed overhead costs and labor inefficiencies, partially offset by the benefits of higher volume and approximately $100 of higher pricing benefits. 26 Tableof Contents Operating expenses increased by $45.7 in Q2 2023, or 290 basis points as a percentage of revenue, compared to the prior year, which included a $15.4 gain from the sale of land. The current year included $10.6 of higher marketing, product development and sales expenses, $6.4 from acquisitions, $6.4 of higher variable compensation expense and $5.3 of higher spending in other functional areas. Operating expenses in year-to-date 2023 increased by $54.7, but decreased by 110 basis points as a percentage of revenue, compared to the prior year, which included a $15.4 gain from the sale of land. The current year included $19.8 of higher marketing, product development and sales expenses, $9.0 of higher spending in other functional areas, $6.7 from acquisitions and $6.0 of higher variable compensation expense, partially offset by a $4.0 gain from the sale of land. EMEA 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 and architectural products. Three Months Ended % Operating results in EMEA decreased by $5.2 in Q2 2023 compared to the prior year. The decline was driven by higher cost of sales as a percentage of revenue as a result of higher inflation compared to the prior year. The operating results in EMEA improved by $1.8 in year-to-date 2023 compared to the prior year. The improvement was driven by higher revenue and lower operating expenses as a percentage of revenue, partially offset by higher cost of sales as a percentage of revenue. EMEA revenue represented 16.0% of consolidated revenue in Q2 2023. In Q2 2023, revenue decreased by $1.1 or 1% compared to the prior year. Approximately $13 of higher pricing benefits were more than offset by approximately $18 of unfavorable currency translation effects, while volume remained flat. Organic revenue growth was $14.5 or 12% compared to the prior year. EMEA revenue represented 18.3% of consolidated revenue in year-to-date 2023. In year-to-date 2023, revenue of $294.2 represented an increase of $31.7 or 12% compared to the prior year, driven by growth across most markets. Approximately $30 of the increase was related to higher volume, and approximately $25 was related to higher pricing benefits, partially offset by approximately $30 of unfavorable currency translation effects. Organic revenue growth year-to-date 2023 was $56.3 or 24% compared to the prior year. Cost of sales as a percentage of revenue increased by 340 basis points in Q2 2023 compared to the prior year. The increase was driven by approximately $10 of higher inflation and approximately $1 in higher labor inefficiencies, partially offset by higher pricing benefits. Cost of sales as a percentage of revenue increased by 190 basis points in year-to-date 2023 compared to the prior year. The increase was driven by approximately $16 of higher inflation, approximately $2 of unfavorable currency impacts and approximately $2 in higher overhead costs and labor inefficiencies, partially offset by the benefits of higher volume and approximately $25 of higher pricing benefits. 27 Tableof Contents Operating expenses increased by $0.2 in Q2 2023, or 30 basis points as a percentage of revenue, compared to the prior year. The current year included $1.9 of higher marketing, product development and sales expenses, $1.4 from an acquisition and $1.1 of higher variable compensation expense, partially offset by $4.9 of favorable currency translation effects. Operating expenses increased by $1.4 in year-to-date 2023, but decreased by 280 basis points as a percentage of revenue, compared to the prior year. The current year included $4.5 of higher marketing, product development and sales expenses, $2.8 from an acquisition and $1.5 of higher variable compensation expense, partially offset by $8.5 of favorable currency translation effects. Other 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 and architectural 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. Three Months Ended % Operating results in the Other category improved by $2.9 in Q2 2023 compared to the prior year. The improvement was driven by higher revenue, lower cost of sales as a percentage of revenue and lower operating expenses as a percentage of revenue. Year-to-date 2023 operating results improved by $5.3 compared to the prior year, driven by the same factors as the quarter. Revenue in the Other category represented 8.5% of consolidated revenue in Q2 2023. In Q2 2023, revenue increased by $11.3 or 18% compared to the prior year, driven by India, Southeast Asia, Designtex and Japan, partially offset by China and Australia. Approximately $7 of the increase was related to higher volume, and approximately $4 was related to higher pricing benefits. Organic revenue growth was $12.8 or 21% compared to the prior year, driven by the same factors as the quarter. Year-to-date 2023 revenue of $137.4 represented an increase of $18.1 or 15% compared to the prior year. Approximately $12 of the increase was related to higher volume, and approximately $6 was related to higher pricing benefits. Organic revenue growth was $20.2 or 17% compared to the prior year. Cost of sales as a percentage of revenue decreased by 90 basis points in Q2 2023 compared to the prior year. The improvement was driven by the benefits of higher volume and approximately $2 of higher pricing benefits, net of inflation, partially offset by a $1.7 charge related to aged inventory. Cost of sales as a percentage of revenue decreased by 90 basis points in year-to-date 2023 compared to the prior year, driven by the same factors as the quarter. Operating expenses increased by $1.1 in Q2 2023, but decreased by 400 basis points as a percentage of revenue, compared to the prior year. The increase was driven by $1.0 of higher marketing, product development and sales expenses. Operating expenses increased by $1.3 in year-to-date 2023, but decreased by 400 basis points as a percentage of revenue, compared to the prior year. The increase was driven by the same factors as the quarter. Corporate Corporate expenses include unallocated portions of shared service functions such as information technology, corporate facilities, finance, human resources, research, legal and customer aviation, plus deferred compensation expense and income or losses associated with COLI. 28 10.8 Operating expenses increased by $1.5 in Q2 2023 compared to the prior year. The increase was driven by $3.0 of lower COLI income, partially offset by $1.9 of lower deferred compensation expense. Operating expenses increased by $5.5 in year-to-date 2023 compared to the prior year, driven by $7.8 of lower COLI income and $3.4 of higher spending, partially offset by $5.9 of lower deferred compensation expense. Non-GAAP Financial Measures The non-GAAP financial measures used in this MD&A are: (1) organic revenue growth, (2) adjusted operating income (loss) and (3) adjusted earnings per share. Organic Revenue Growth We define organic revenue growth as revenue growth excluding the impact of acquisitions and divestitures and foreign currency translation effects. Organic revenue growth is calculated by adjusting prior year revenue to include revenues of acquired companies prior to the date of the company's acquisition, to exclude revenues of divested companies and to use current year average exchange rates in the calculation of foreign-denominated revenue. We believe organic revenue growth is a meaningful metric to investors as it provides a more consistent comparison of our revenue to prior periods as well as to industry peers. Adjusted Operating Income (Loss) and Adjusted Earnings Per Share We define adjusted operating income (loss) as operating income (loss) excluding amortization of purchased intangible assets and restructuring costs. We define adjusted earnings per share as earnings (loss) per share excluding amortization of purchased intangible assets and restructuring costs, net of related income tax effects. •Amortization of purchased intangible assets:We may record intangible assets (such as backlog, dealer relationships, trademarks, know-how and designs and proprietary technology) when we acquire companies. We allocate the fair value of purchase consideration to net tangible and intangible assets acquired based on their estimated fair values. The fair value estimates for these intangible assets require management to make significant estimates and assumptions, which include the useful lives of intangible assets. We believe that adjusting for amortization of purchased intangible assets provides a more consistent comparison of our operating performance to prior periods as well as to industry peers. As our business strategy in recent years has included an increased number of acquisitions, intangible asset amortization has become more significant. •Restructuring costs: Restructuring costs may be recorded as our business strategies change or in response to changing market trends and economic conditions. We believe that adjusting for restructuring costs, which are primarily associated with business exit and workforce reduction costs, provides a more consistent comparison of our operating performance to prior periods as well as to industry peers. 29 Liquidity and Capital Resources Cash and cash equivalents are used to fund day-to-day operations, including seasonal disbursements, particularly the annual payment of accrued variable compensation and retirement plan contributions in Q1 of each fiscal year. During normal business conditions, we target a range of $75 to $175 in cash and cash equivalents to fund operating requirements. In addition, we may carry additional liquidity for potential investments in strategic initiatives and as a cushion against economic volatility, and from time to time, we may allow our cash and cash equivalents to temporarily fall below our targeted range to fund acquisitions and other growth initiatives. Liquidity Sources 630.9 As of August 26, 2022, we held a total of $52.2 in cash and cash equivalents. Of that total, 32% was located in the U.S., and 68% was located outside of the U.S., primarily in China (including Hong Kong), Mexico, Malaysia, Canada and the United Kingdom. COLI investments are recorded at their net cash surrender value. Our investments in COLI policies are intended to be utilized as a long-term funding source for long-term benefit obligations. However, COLI can also be used as a source of liquidity. We believe the financial strength of the issuing insurance companies associated with our COLI policies is sufficient to meet their obligations. Availability under credit facilities may be reduced related to compliance with applicable covenants. See Liquidity Facilitiesfor more information. The following table summarizes our Condensed Consolidated Statements of Cash Flows for the six months ended August 26, 2022 and August 27, 2021: Six Months Ended (61.6) Annual payments related to accrued variable compensation and retirement plan contributions totaled $32.4 in year-to-date 2023 compared to $50.4 in the prior year. The remaining change in employee compensation liabilities was driven by higher variable compensation expense in year-to-date 2023 compared to the prior year. In year-to-date 2023, we used cash in working capital, driven by increased inventory levels to mitigate the impact of supply chain disruptions and increased accounts receivable due to revenue growth. In year-to-date 2023, we received $29.7 related to the carryback of our fiscal year 2021 tax loss in the U.S. Cash used in investing activities Six Months Ended (59.9) We paid dividends of $0.145 per common share in Q1 2023 and Q2 2023, and $0.10 and $0.145 per common share in Q1 2022 and Q2 2022, respectively. 31 Tableof Contents In year-to-date 2023, we repurchased 279,301 shares of Class A common stock, all of which were repurchased to satisfy participants' tax withholding obligations upon the issuance of shares under equity awards, pursuant to the terms of our Incentive Compensation Plan. In year-to-date 2022, we repurchased 2,227,000 shares of Class A common stock, 359,527 of which were repurchased to satisfy participants' tax withholding obligations upon the issuance of shares under equity awards, pursuant to the terms of our Incentive Compensation Plan. As of August 26, 2022, we had $6.4 of remaining availability under the $150 share repurchase program approved by our Board of Directors in 2016. Liquidity Facilities 136.4 We have a $250.0 global committed bank facility in effect through 2025. As of August 26, 2022, total availability under the facility was limited to $203.2 as a result of covenant constraints, there were $79.8 borrowings outstanding under the facility, and we were in compliance with all covenants under the facility. We have an $8.0 committed bank facility related to a subsidiary. As of August 26, 2022, total availability under the facility was limited to $5.9 based on eligible accounts receivable of the subsidiary, and $3.3 was outstanding under the facility. We have unsecured uncommitted short-term credit facilities available for working capital purposes with various financial institutions with a total U.S. dollar borrowing capacity of up to $3.7 and a total foreign currency borrowing capacity of up to $7.3 as of August 26, 2022. These credit facilities have no stated expiration date but may be changed or canceled by the banks at any time. As of August 26, 2022, $0.6 was outstanding under these facilities. Total consolidated debt as of August 26, 2022 was $563.5. In addition to borrowings under our credit facilities, we have $445.1 in term notes due in 2029 with an effective interest rate of 5.6%, and a term loan with a balance of $33.5 as of August 26, 2022, which has a floating interest rate based on 30-day LIBOR plus 1.20% and is due in Q1 2024. The term notes are unsecured, and the term loan is secured by our two corporate aircraft. The term notes and the term loan contain no financial covenants and are not cross-defaulted to our other debt facilities. Liquidity Outlook As of August 26, 2022, our total liquidity, which is comprised of cash and cash equivalents and the cash surrender value of COLI, aggregated to $213.9. Our liquidity position, funds available under our credit facilities and cash generated from future operations are expected to be sufficient to finance our known or foreseeable liquidity needs, including our material cash requirements. During Q2 2023, there have been no significant changes in the items that we have identified as our material committed cash requirements in our Annual Report on Form 10-K for the fiscal year ended February 25, 2022. We also have other planned material usages of cash which we consider discretionary. This includes plans for capital expenditures which are expected to total approximately $50 to $60 in 2023 compared to $60.5 in 2022. In addition, we fund dividend payments declared by our Board of Directors. On September 21, 2022, we announced a quarterly dividend on our common stock of $0.10 per share, or approximately $11, to be paid in Q3 2023. On September 21, 2022, we announced plans to eliminate up to 180 salaried positions in the Americas segment and Corporate functions, which we estimate will result in approximately $8 of cash severance and other separation-related benefit payments in Q3 2023. Our material cash requirements are subject to fluctuation based on business requirements, economic volatility or investments in strategic initiatives. We anticipate the cash expected to be generated from future operations and current cash and cash equivalents, funds available under our credit facilities and funds available from COLI will be sufficient to fulfill our existing material cash requirements. 32 Critical Accounting Estimates During Q2 2023, there have been no changes in the items that we have identified as critical accounting estimates in our Annual Report on Form 10-K for the fiscal year ended February 25, 2022. Recently Issued Accounting Standards Forward-looking Statements From time to time, in written and oral statements, we discuss our expectations regarding future events and our plans and objectives for future operations. These forward-looking statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on current beliefs of management as well as assumptions made by, and information currently available to, us. Forward-looking statements generally are accompanied by words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "possible," "potential," "predict," "project," "target" or other similar words, phrases or expressions. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements and vary from our expectations because of factors such as, but not limited to, competitive and general economic conditions domestically and internationally; acts of terrorism, war, governmental action, natural disasters, pandemics and other Force Majeure events; cyberattacks; the COVID-19 pandemic and the actions taken by various governments and third parties to combat the pandemic; changes in the legal and regulatory environment; changes in raw material, commodity and other input costs; currency fluctuations; changes in customer demand; and the other risks and contingencies detailed in this Report, our most recent Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. We undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Item 3.Quantitative and Qualitative Disclosures About Market Risk: The nature of market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) faced by us as of August 26, 2022 is the same as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 25, 2022. We are exposed to market risks from foreign currency exchange, interest rates, commodity prices and fixed income and equity prices, which could affect our operating results, financial position and cash flows. Foreign Exchange Risk Interest Rate Risk Commodity Price Risk Fixed Income and Equity Price Risk During Q2 2023, no material change in fixed income and equity price risk occurred. 33 Item 4.Controls and Procedures: (a) Disclosure Controls and Procedures.Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of August 26, 2022. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of August 26, 2022, our disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (2) ensuring that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. (b) Internal Control Over Financial Reporting.There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our second fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 34