UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

For the transition period from           to

 

Commission File Number 1-13873

 

 

 

 

STEELCASE INC.

(Exact name of registrant as specified in its charter)

 

 

(Registrant’s telephone number, including area code) (616) 247-2710

None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of January 6, 2009, Steelcase Inc. had 78,127,932 shares of Class A Common Stock and 55,604,152 shares of Class B Common Stock outstanding.

 

 

STEELCASE INC.
FORM 10-Q

FOR THE QUARTER ENDED NOVEMBER 28, 2008

INDEX

 

 

 

STEELCASE INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in millions, except per share data)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

 

 

See accompanying notes to the condensed consolidated financial statements.

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 contained in our Annual Report on Form 10-K for the fiscal year ended February 29, 2008 (“Form 10-K”).

 

The Condensed Consolidated Balance Sheet at February 29, 2008 was derived from the audited Consolidated Balance Sheet included in our Form 10-K. During Q2 2009, we determined that we had not appropriately recorded deferred tax liabilities on certain intangible assets acquired prior to February 29, 2008. Accordingly, we restated our February 29, 2008 balance sheet to correct goodwill and deferred tax liabilities related to prior acquisitions. These corrections increased goodwill by $35.4 ($32.8 in our Other category, $1.4 in our North America segment and $1.2 in our International segment) as reported in the Condensed Consolidated Balance Sheet as Goodwill and other intangibles, net and decreased deferred tax assets by a corresponding amount as reported in the Condensed Consolidated Balance Sheet as Other assets. We did not amend our February 29, 2008 Form 10-K or any other prior period filing, as these corrections were not considered material to the Consolidated Balance Sheet and had no impact on our Consolidated Statements of Income, earnings per share, retained earnings or our cash flows from operating, financing or investing activities.

 

As used in this Report, unless otherwise expressly stated or the content otherwise requires, all references to “Steelcase,” “we,” “our,” “Company” and similar references are to Steelcase Inc. and its majority-owned subsidiaries. In addition, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the 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.

 

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation.

 

 

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS No. 141(R)”), to create greater consistency in the accounting and financial reporting of business combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any controlling interest, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies to fiscal years beginning after December 15, 2008. Earlier adoption is prohibited.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51 (“SFAS No. 160”), to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented on the balance sheet within equity, but separate from the parent’s equity, (ii) the amount of net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the statement of income and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently. SFAS No. 160 applies to fiscal years beginning after December 15, 2008. Earlier adoption is prohibited.

 

 

In February 2008, the FASB issued FASB Staff Position on Statement 157, Effective Date of FASB Statement No. 157 (“FSP No. 157-2”). FSP No. 157-2 delays the effective date of SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), for all nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis, to fiscal years beginning after November 15, 2008. Although we believe the adoption of SFAS No. 157 for nonfinancial assets and liabilities may impact the way in which we calculate fair value of goodwill, indefinite-lived intangible assets, and other long-lived assets, we do not believe the adoption of FSP No. 157-2 will have a material impact on our consolidated financial statements. We applied SFAS No. 157 to all other fair value measurements effective March 1, 2008. See Note 6 for additional information.

 

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB Statement No. 133 (“SFAS No. 161”), to improve financial reporting of derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 applies to fiscal years and interim periods beginning after November 15, 2008. We do not believe the adoption of this statement will have a material impact on our future disclosures.

 

 

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP No. 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of FSP No. 142-3 is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. FSP No. 142-3 applies to fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. We do not believe the adoption of this statement will have a material impact on our financial statements.

 

 

In October 2008, the FASB issued FASB Staff Position on Statement 157, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP No. 157-3”), which clarifies the application of SFAS No. 157 and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. FSP No. 157-3 was effective on October 10, 2008, the date of issuance. The provisions of FSP No. 157-3 did not have

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

a significant impact on the techniques used to value the fair value of our investments in auction rate securities and Canadian asset-backed commercial paper during Q3 2009 and did not have a material impact on our financial statements. See Note 6 for additional information.

 

 

In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities, to provide additional disclosures about transferors’ continuing involvements with transferred financial assets and involvement with variable interest entities. This pronouncement applies to fiscal years and interim periods beginning after December 15, 2008. We have not determined the effect, if any, the adoption of this statement will have on our future disclosures.

 

 

During Q2 2009, we sold Custom Cable Industries, Inc. (“Custom Cable”), a wholly-owned subsidiary in our North America segment. Total proceeds including limited seller financing are expected to aggregate $17.7. In connection with the sale, we recorded an operating loss of $1.8 within our Corporate costs during Q2 2009 and expect to record net tax benefits of approximately $2 during fiscal 2009. Our Condensed Consolidated Statement of Income for the nine months ended November 28, 2008 includes $11.2 of revenue, $3.9 of gross profit, $2.1 of operating expenses and $1.8 of operating income related to Custom Cable.

 

 

Basic earnings per share is based on the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share also includes the effects of shares and potential shares issued under our stock incentive plans. However, diluted earnings per share does not reflect the effects of 4.4 million options for 2009 and 3.4 million options for 2008 because those potential shares were not dilutive.

 

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

Comprehensive (loss) income is comprised of net income and all changes to shareholders’ equity except those due to investments by, and distributions to, shareholders.

 

 

 

Foreign currency translation adjustments of $36.7 and $39.6 for the three and nine months ended November 28, 2008, respectively, reflect the impact of the decline in certain foreign currency values relative to the U.S. dollar during each period. As of November 28, 2008, approximately 30% of our net assets were denominated in currencies other than the U.S. dollar, the majority of which are denominated in Euros.

 

 

We adopted SFAS No. 157 as of March 1, 2008. SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. SFAS No. 157 also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. In accordance with SFAS No. 157, fair value measurements are classified under the following hierarchy:

 

Level 1 — Quoted prices for identical instruments in active markets.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Level 2 — 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 — Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

 

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 in our Condensed Consolidated Balance Sheet as of November 28, 2008 are summarized below:

 

 

 

Our managed investment portfolio consists of short-term investments in U.S. Treasury, U.S. Government agency and corporate debt instruments. Fair values for investments in our managed investment portfolio and our available-for-sale securities are based upon valuations for identical instruments in active markets.

 

 

As of November 28, 2008, we held auction rate securities (“ARS”) totaling $26.5 of par value for which the auction market remains effectively shut-down. We have the intent and ability to hold these securities until a recovery in market value occurs given our current liquidity and capital structure. Our estimates of the fair value of these securities have been based on assumptions we believe market participants would use in pricing the assets in a current transaction, which could change significantly over time based on market conditions.

 

During Q3 2009, we determined through published reports and other data that the issuer of one of our ARS invested a material portion of their investment portfolio in asset-backed securities and other low-grade investments. The parent of this issuer carries a non-investment grade credit rating from Standard & Poor’s. The par value of this security was $3.3 and we estimated the market value as of November 28, 2008 to approximate $2.5 based on a discounted cash flow model using a risk premium and discount rate commensurate with the risk related to the security. As a result of our analysis, we recorded a $0.8 other-than-temporary impairment to this ARS during Q3 2009.

 

During Q3 2009, we reduced our reserve for unrealized losses on our other ARS investments by $0.6 based on an increase in the estimated fair value of these securities. As of November 28, 2008, we have unrealized losses related to these securities of $2.0 recorded in Accumulated other comprehensive

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

(loss) income on the Condensed Consolidated Balance Sheet, as we believe the impairments are temporary. We concluded no other-than-temporary impairment loss occurred on these securities as of the end of Q3 2009 as we believe the decline in market value is due to general market conditions and not specific underlying credit issues.

 

 

As of November 28, 2008, we held one investment in Canadian asset-backed commercial paper (“ABCP”) with an original par value of Canadian $5.0. As a result of a lack of liquidity in the Canadian ABCP market, the ABCP did not settle on maturity and is considered to be in default. We recorded an impairment of our investment in Q4 2008 of Canadian $0.9. A restructuring plan was approved by the Superior Court of Ontario in June 2008. Under the restructuring, we will exchange our ABCP for a bundle of new long-term floating-rate notes. Consummation of the restructuring has been delayed as a result of additional legal actions and turmoil in global financial markets. As a result of a recent agreement by the Canadian federal government and some Canadian provincial governments to provide financial support to the restructuring, we now expect to receive replacement securities under a revised restructuring plan during Q4 2009.

 

Using a discounted cash flow analysis, based on the types of securities we expect to receive from the restructuring plan, we evaluated our investment for impairment as of November 28, 2008. Our analysis concluded that no additional impairment was necessary.

 

 

From time to time, we enter into forward contracts to mitigate the risk of translation into U.S. dollars of certain foreign-denominated net income, assets and liabilities. We primarily hedge intercompany working capital loans and certain forecasted currency flows from intercompany transactions. The fair value of foreign exchange forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.

 

 

Privately-held equity investments are carried at the lower of cost or estimated fair value. For these non-quoted investments, we review the underlying performance of the privately-held companies to determine if potential declines in estimated fair value exist and are other than temporary.

 

Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for the nine months ended November 28, 2008.

 

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

Following is a summary of inventories as of November 28, 2008 and February 29, 2008:

 

 

The portion of inventories determined by the LIFO method aggregated $57.4 as of November 28, 2008 and $54.4 as of February 29, 2008.

 

 

Investments in company-owned life insurance policies (“COLI”) were made with the intention of utilizing them as a long-term funding source for post-retirement medical benefits, deferred compensation and supplemental retirement plan obligations, which at November 28, 2008 aggregated $207.7, with a related deferred tax asset of $79.6. However, they do not represent a committed funding source for these obligations. They are subject to claims from creditors, and we can designate them to another purpose at any time.

 

Following is a summary of COLI as of November 28, 2008 and February 29, 2008:

 

 

During Q3 2009, significant declines in global equity markets had the effect of reducing the cash surrender value of our variable life insurance policies by $(28.8). During that same period, the cash surrender value associated with our whole life policies increased by $1.3. The net changes in cash surrender value, normal insurance expenses and any death benefit gains are generally allocated 60% to Cost of sales and 40% to Operating expenses on the Condensed Consolidated Statements of Income. This allocation is consistent with the costs associated with the long-term employee benefit obligations that COLI is intended to fund.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

 

 

We expect to contribute approximately $3 to our pension plans and $12 to our post-retirement benefit plans during 2009. As of November 28, 2008, contributions of approximately $1.7 and $8.8 have been made to the respective plans.

 

We expect to receive approximately $1.2 in Medicare Part D subsidy reimbursements during 2009 of which we have received $0.5 during the first three quarters of 2009.

 

 

The accrued liability for warranty costs, included within Accrued expenses: Other on the Condensed Consolidated Balance Sheets, is based on an estimated amount needed to cover future warranty obligations for products sold as of the balance sheet date and is determined by historical product data and management’s knowledge of current events and actions.

 

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

Our year-to-date effective tax rate increased to 42.5% at November 28, 2008 from 33% at August 29, 2008, primarily as a result of the large, non-tax deductible COLI losses incurred during Q3 2009.

 

We recorded $9.0 of income tax expense in Q3 2009 which included:

 

 

Our effective tax rate estimate does not assume any significant change (positive or negative) in cash surrender value of COLI during the fourth quarter. Non-deductible COLI losses have the effect of increasing our effective tax rate, while non-taxable COLI income has the opposite effect.

 

Our federal income tax returns for fiscal years 2004 through 2008 are currently under examination by the Internal Revenue Service (“IRS”) in connection with our participation in the Compliance Assurance Process. We expect the IRS examination to close in Q4 2009; however, at this time it is not possible to estimate any potential impact on fiscal 2009 income tax expense.

 

 

We operate within two reportable segments (North America and International), plus an “Other” category. Our Other category includes the Coalesse Group (formerly the Premium Group), PolyVision and IDEO subsidiaries. Unallocated corporate expenses are reported as Corporate.

 

Prior to 2009, the Other category also included our Financial Services subsidiary. In recent years, we have significantly reduced the capital invested in, and related operations of, Financial Services. We now use third parties to provide lease funding to customers and have reduced the nature and level of financing services provided to our dealers. As a result, we integrated the remaining operations of Financial Services into the North America segment beginning in Q1 2009. Due to the change in the nature of the operations, we have not reclassified prior year financial results of Financial Services to North America; accordingly, the 2008 financial results remain in the Other category.

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Revenue and operating income (loss) for the three and nine months ended November 28, 2008 and November 23, 2007 and total assets as of November 28, 2008 and February 29, 2008 by segment are presented below:

 

 

 

 

We announced specific actions in March 2008 targeted toward further modernizing our industrial system, rebalancing our workforce to better align with our growth opportunities and improving the profitability at PolyVision. We currently estimate these actions to cost approximately $30, or $10 less than initially estimated. However, we continue to estimate the related savings will approximate $40 on an annualized basis. The March 2008 announcement includes the following actions:

 

 

 

STEELCASE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

 

 

In December 2008, we announced a series of new actions to consolidate additional manufacturing and distribution facilities in North America, reduce our white-collar workforce and other operating costs globally, and continue and expand our white-collar reinvention initiatives. We expect these recently announced restructuring initiatives to cost between $20 and $25 and generate up to $40 of annualized savings once completed. The majority of these actions are expected to be completed during the next six months, while the white-collar reinvention initiatives are expected to take place throughout fiscal 2010. In Q3 2009, we incurred $0.7 in employee termination costs associated with these actions.

 

These restructuring costs and other less significant items are summarized in the following table:

 

 

Below is a summary of the net additions, payments and adjustments to the restructuring reserve balance during 2009:

 

The reserve balance as of November 28, 2008 is primarily related to employee termination costs associated with our restructuring activities announced in March 2008.

 

 

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our February 29, 2008 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on April 28, 2008. Unless the context otherwise indicates, reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the 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.

 

Financial Summary

 

Results of Operations

 

 

Overview

 

Q3 2009 net income decreased to $0.4, or $0.00 per share, compared to $31.3, or $0.22 per share, in the same quarter last year. The decrease in the quarter was largely the result of lower volume within our North America segment and Other category and a $27.5 charge related to a reduction in cash surrender value of our company-owned life insurance policies (“COLI”). Higher commodity cost inflation which continues to out-pace recent pricing actions, increased restructuring costs and lower interest income also contributed to the decline in net income, but to a smaller extent. Q3 2008 included a $21.1 impairment charge at PolyVision, which is included in the Other category. Net income decreased by $48.6 during the first three quarters of 2009 to $54.0, or $0.40 per diluted share, compared to $102.6, or $0.71 per diluted share, in the same period last year primarily due to the same factors noted above for the Q3 2009 decrease in net income.

 

Revenue was $811.3 in Q3 2009, compared to $885.9 in the same quarter last year. The overall global economic slowdown and factors contributing to the turmoil in the capital markets are influencing the current demand for office furniture. During the quarter, the rapid acceleration of the credit crisis in North America contributed to revenue decreasing by 11.4% in our North America segment and 14.8% in our Other category. Revenue in our International segment increased 2.3%, despite negative currency translation effects compared to the prior year. In total, third quarter revenue included approximately $18

of unfavorable currency translation effects versus the same quarter last year and a minimal net impact from acquisitions and dispositions during the last four quarters.

 

Year-to-date revenue increased slightly compared to the same period last year. Revenue increased by 20.5% in our International segment offset in part by decreases of 6.1% and 6.4% in our North America segment and Other category, respectively, compared to the same period last year. Year-to-date revenue included approximately $35 of net favorable currency translation effects and an unfavorable impact of $15 related to net dispositions during the last four quarters.

 

Cost of sales, which is reported separately from restructuring costs, increased as a percentage of revenue by 460 basis points during Q3 2009 and 200 basis points year-to-date, compared to the same periods last year, primarily due to a significant decline in the cash surrender value of COLI in Q3 2009 and higher commodity cost inflation, which has out-paced recent pricing actions for the last two quarters. Additionally, lower fixed cost absorption related to lower volume also had the effect of increasing cost of sales as a percentage of revenue in Q3 2009 compared to the prior year.

 

Operating expenses, which are reported separately from restructuring costs, decreased by $29.6 in Q3 2009 and by $9.3 year-to-date compared to the same periods last year. The decrease in the quarter was primarily due to $21.1 of impairment charges recorded in the Other category in Q3 2008 and lower variable compensation expense, partially offset by declines in the cash surrender value of COLI. For year-to-date 2009, the decrease in operating expenses in Q3 2009 was partially offset by increases during the first half of 2009, which included unfavorable currency translation effects, increased product development and showroom spending, increased spending related to the launch of our Coalesse brand and additional growth-related spending in Asia.

 

Q3 2009 operating income was $15.0, a decrease of $37.7 compared to the prior year. Year-to-date operating income was $97.8, a decrease of $58.2 compared to the prior year.

 

Restructuring costs of $4.7 incurred in Q3 2009 and $20.9 year-to-date primarily related to the restructuring activities we announced in March 2008. See Note 13 to the condensed consolidated financial statements for additional information.

 

We increased our year-to-date effective tax rate in Q3 2009 to 42.5% reflecting the impact of the significant non-deductible COLI losses during Q3 2009. In addition, we recorded favorable tax adjustments totaling $2.6 resulting from changes in estimates associated with our fiscal 2008 U.S. tax returns and the retroactive reinstatement of the U.S. research tax credit to January 1, 2008. We currently expect our effective tax rate to approximate 42.5% in Q4 2009; however, continued volatility in COLI results and the potential finalization of a multi-year audit with the Internal Revenue Service in the U.S. could impact this estimate.

Interest Expense and Other (Expense) Income, Net

 

 

Interest income in Q3 2009 and year-to-date was lower than the prior year due to lower average cash balances resulting from the payment of a $1.75 per share special cash dividend in Q4 2008 and lower interest rates earned on those balances. Foreign exchange losses in Q3 2009 and year-to-date resulted from the strengthening of the U.S. dollar compared to European and Canadian currencies, whereas foreign exchange gains in 2008 occurred when the U.S. dollar weakened compared to those currencies.

 

Business Segment Review

 

See additional information regarding our business segments in Note 12 to the condensed consolidated financial statements.

 

North America