1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 30, 1996 Commission File No. 0-5813
HERMAN MILLER, INC.
A Michigan Corporation ID No. 38-0837640
855 East Main Avenue, Zeeland, MI 49464-0302 Phone (616) 654 3000
Herman Miller, Inc.
(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
Yes X No
---- ----
(2) has been subject to such filing requirements for the past 90
days.
Yes X No
---- ----
Common Stock Outstanding at December 20, 1996--23,551,643 shares.
The Exhibit Index appears at page 16.
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HERMAN MILLER, INC. FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 1996
INDEX
Page No.
--------
Part I---Financial Information
Condensed Consolidated Balance Sheets-- 3
November 30, 1996, and June 1, 1996
Condensed Consolidated Statements of Income-- 4
Three and Six Months Ended November 30, 1996,
and December 2, 1995
Condensed Consolidated Statements of Cash Flows-- 5
Six Months Ended November 30, 1996,
and December 2, 1995
Notes to Condensed Consolidated Financial Statements 6-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Part II---Other Information
Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
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HERMAN MILLER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
Nov. 30, June 1,
1996 1996
----------- -----------
(unaudited) (audited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 82,782 $ 57,053
Accounts receivable, net 186,613 170,116
Inventories--
Finished goods 22,859 24,787
Work in process 9,442 10,896
Raw materials 26,892 30,047
-------- --------
Total inventories 59,193 65,730
-------- --------
Prepaid expenses and other 34,803 42,006
-------- --------
Total current assets 363,391 334,905
-------- --------
PROPERTY AND EQUIPMENT, AT COST: 553,353 536,108
Less-accumulated depreciation 284,124 267,343
-------- --------
Net property and equipment 269,229 268,765
-------- --------
OTHER ASSETS:
Notes receivable, net 35,373 39,212
Other noncurrent assets 44,453 52,029
-------- --------
Total assets $712,446 $694,911
======== ========
Nov. 30, June 1,
1996 1996
------------ -----------
(unaudited) (audited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Unfunded checks $ 11,601 $ 2,867
Current portion of long-term debt 159 317
Notes payable 27,677 21,148
Accounts payable 66,099 59,208
Accruals 136,709 135,487
-------- --------
Total current liabilities 242,245 219,027
-------- --------
LONG-TERM DEBT, less current portion 110,166 110,245
OTHER LIABILITIES 56,780 57,494
SHAREHOLDERS' EQUITY:
Common stock $.20 par value 5,058 4,934
Additional paid-in capital -- 14,468
Retained earnings 310,839 303,578
Cumulative translation adjustment (10,031) (11,633)
Key executive stock programs (2,611) (3,202)
-------- --------
Total shareholders' equity 303,255 308,145
-------- --------
Total liabilities and
shareholders' equity $712,446 $694,911
======== ========
See accompanying notes to condensed consolidated financial statements.
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HERMAN MILLER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
Nov. 30, Dec. 2, Nov. 30, Dec. 2,
1996 1995 1996 1995
---- ---- ---- ----
NET SALES $377,137 $328,393 $719,621 $629,481
COST AND EXPENSES:
Cost of goods sold 242,837 215,740 467,049 413,949
Operating expenses 97,430 86,003 188,612 169,339
Patent litigation settlements -- 16,515 -- 16,515
Intangible write-off 5,500 -- 5,500 --
Interest expense 2,029 1,589 4,210 3,690
Other loss (income), net (371) 36 (1,048) (1,436)
-------- -------- -------- --------
INCOME BEFORE TAXES ON INCOME 29,712 8,510 55,298 27,424
PROVISION FOR TAXES ON INCOME 11,860 3,555 21,860 10,455
-------- -------- -------- --------
NET INCOME $ 17,852 $ 4,955 $ 33,438 $ 16,969
======== ======== ======== ========
NET INCOME PER SHARE $ .74 $ .20 $ 1.38 $ .68
======== ======== ======== ========
DIVIDENDS PER SHARE OF COMMON STOCK $ .13 $ .13 $ .26 $ .26
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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HERMAN MILLER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
----------------
Nov. 30, Dec. 2,
1996 1995
------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,438 $ 16,969
Depreciation and amortization 23,976 22,836
Litigation accrual -- 33,000
Intangible write-off 5,500 --
Changes in current assets and liabilities 18,004 (23,006)
Other, net 6,133 7,619
--------- ---------
Net cash provided by operating activities 87,051 57,418
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable repayments 219,603 239,300
Notes receivable issued (216,499) (230,262)
Capital expenditures (27,128) (26,403)
Net cash paid for acquisitions (9,743) (3,428)
Other, net 6,841 3,862
--------- ---------
Net cash used for investing activities (26,926) (16,931)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net common stock issued 3,635 5,690
Net long-term debt borrowings (repayments) 6,296 (51,008)
Net short-term debt borrowings (repayments) (237) 13,871
Dividends paid (6,311) (6,461)
Common stock purchased and retired (37,932) (1,122)
Other, net -- (103)
--------- ---------
Net cash used for financing activities (34,549) (39,133)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 153 1,521
--------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 25,729 2,875
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 57,053 16,488
--------- ---------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 82,782 $ 19,363
========= =========
See accompanying notes to condensed consolidated financial statements.
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HERMAN MILLER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOOTNOTE DISCLOSURES
The condensed consolidated financial statements have been prepared by the
company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The company believes that the disclosures made in this document
are adequate to make the information presented not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the company's Annual Report
on Form 10-K for the year ended June 1, 1996.
FISCAL YEAR
The company's fiscal year ends on the Saturday closest to May 31. Accordingly,
the years ended June 1, 1996, and May 31, 1997, contain 52 weeks.
RESTRUCTURING CHARGES
In the fiscal year ended June 3, 1995, the company recorded $31.9 million in
pretax restructuring charges, which reduced net income by $20.3 million, or
$.82 per share. A charge of $15.5 million was taken in the second quarter of
fiscal 1995, to account for the closure of certain of the company's
manufacturing and logistics facilities prior to the relocation of their
production activities to other U.S. Herman Miller facilities. In addition, the
charge also included the costs associated with the closure of and
discontinuance of wood casegoods manufacturing in the Sanford, North Carolina,
facility and the transfer of products produced there to Geiger International of
Atlanta, Georgia, a respected contract provider of quality wood casegoods.
The $16.4 million charge recorded in the fourth quarter of fiscal 1995 included
charges in the United States for reductions in employment and the
discontinuation of a product development program at the company's healthcare
subsidiary, Milcare.
The $31.9 million total pretax restructuring charge consisted of facilities and
equipment write-offs ($15.5 million), termination benefits ($14.1 million), and
other exit costs associated with the restructuring ($2.3 million).
Approximately 535 employees were terminated or took voluntary early retirement
as a result of the facility closings and job elimination process. The closure
of the manufacturing and logistics facilities was substantially complete at the
end of fiscal 1995. The job elimination process was completed in July 1995.
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Amounts paid or charged against these reserves during the first six months of
fiscal 1997 were as follows:
June 1, 1996 Costs paid Ending
In Thousands Balance or charged Balance
------------ ---------- -------
Facilities and equipment $5,330 $2,412 $2,918
Termination benefits 1,885 678 1,207
Other exit costs 278 185 93
------ ------ ------
$7,493 $3,275 $4,218
====== ====== ======
INTANGIBLE WRITE-OFF
Due to the declining sales and continuing losses at the company's German
subsidiary, management, according to the company's accounting policies,
reevaluated the realizability of the subsidiary's intangible assets. The
intangible assets of the subsidiary were determined to be impaired after
comparing the undiscounted projected future cash flows of the subsidiary to the
carrying value of the intangible assets of that subsidiary. The projected
future cash flows were estimated based on historical earnings, market
conditions, and assumptions reflected in internal operating plans and
strategies. As a result, a pretax charge of $5.5 million was recorded for the
write-off of the goodwill and brand name assets of the subsidiary.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents include all highly liquid debt instruments purchased
as part of the company's cash management function. Due to the short maturities
of these items, the carrying amount approximates fair value.
Cash payments for income taxes and interest (in thousands) were as follows:
Six Months Ended
-----------------
Nov. 30, Dec. 2,
1996 1995
--------- -------------
Interest paid $5,565 $3,614
Income taxes paid $30,569 $12,504
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CONTINGENCIES
On January 7, 1992, Haworth, Inc. ("Haworth") filed a lawsuit against the
company, alleging that the electrical systems used in the creation of the
company's products infringed one or more of Haworth's patents. The lawsuit
against the company followed a lawsuit filed by Haworth in 1985 against
Steelcase, Inc., the industry's leader in market share, alleging violation of
the same two patents. In 1989, Steelcase was held to infringe the patents and
the matter was returned to private dispute resolution. The patents at issue
expired prior to December 1, 1994.
During the second quarter ended December 2, 1995, the company's Board of
Directors authorized management to engage in settlement discussions with
Haworth. In January 1996, the company and Haworth agreed to terms of a
settlement. The company continues to believe, based upon written opinion of
counsel, that its products do not infringe Haworth's patents and the company
would, more likely than not, have prevailed on the merits. However, based on
the mounting legal costs, distraction of management focus, and the uncertainty
present in any litigation, we concluded settlement was in the best interest of
our shareholders. The settlement included a one-time cash payment of $44.0
million in exchange for a complete release. The companies also exchanged
limited covenants not to sue with respect to certain existing and potential
patent designs.
The company simultaneously reached a settlement with one of its suppliers. The
supplier agreed to pay the company $11.0 million and, over the next seven
years, to rebate a percentage of its sales to Herman Miller which are in excess
of current levels.
The company recorded a net litigation settlement expense of $16.5 million after
applying previously recorded reserves and the settlement with the supplier.
The company, for a number of years, has sold various products to the United
States Government under General Services Administration (GSA) multiple award
schedule contracts. The GSA is permitted to audit the company's compliance with
the GSA contracts. As a result of its audits, the GSA has asserted a refund
claim under the 1982 contract for approximately $2.7 million and has other
contracts under audit review. Management has been notified that the GSA has
referred the 1988 contract to the Justice Department for consideration of a
potential civil False Claims Act case. Management disputes the audit result for
the 1982 contract and does not expect resolution of that matter to have a
material adverse effect on the company's consolidated financial statements.
Management does not have information which would indicate a substantive basis
for a civil False Claims Act under the 1988 contract.
The company is not aware of any other litigation or threatened litigation which
would have a material impact on the company's financial statements.
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REPORT OF MANAGEMENT
In the opinion of the company, the accompanying unaudited condensed
consolidated financial statements taken as a whole contain all adjustments,
which are of a normal recurring nature, necessary to present fairly the
financial position of the company as of November 30, 1996, and the results of
its operations and cash flows for the six months then ended. Interim results
are not necessarily indicative of results for a full year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the company's financial condition and earnings
during the periods included in the accompanying condensed consolidated
financial statements.
A. Financial Summary
A summary of the period-to-period changes is shown below. All amounts
are increases (decreases) unless otherwise noted. Dollars are shown in
thousands.
Three Months Six Months
------------ ----------
$ % $ %
------- ------ ---------- -------
NET SALES 48,744 14.8% 90,140 14.3%
COST OF GOODS SOLD 27,097 12.6% 53,100 12.8%
OPERATING EXPENSES 11,427 13.3% 19,273 11.4%
PATENT LITIGATION SETTLEMENTS (16,515) (100%) (16,515) (100%)
INTANGIBLE WRITE-OFF 5,500 100% 5,500 100%
INTEREST EXPENSE 440 27.7% 520 14.1%
OTHER INCOME/EXPENSE NET (407) (1,130.6%) 388 27.0%
INCOME BEFORE TAXES ON INCOME 21,202 249.1% 27,874 101.6%
PROVISION FOR TAXES ON INCOME 8,305 233.6% 11,405 109.1%
NET INCOME 12,897 260.3% 16,469 97.1%
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B. Results of Operations
Second Quarter FY 1997 versus Second Quarter FY 1996
Net sales increased $48.7 million, or 14.8 percent, to a record $377.1
million for the three months ended November 30, 1996, compared to
$328.4 million a year ago. Net sales of $719.6 million were recorded
for the first six months of fiscal 1997 compared with net sales of
$629.5 million in the same period of last year. The increase
primarily was due to strong demand for our products in both domestic
and international markets and acquisitions during the past year.
Our domestic United States sales continued to increase at a faster
rate than the contract office furniture industry as a whole. Our
domestic United States sales for the first six months increased 15.4
percent to $597.0 million compared to $517.5 million in the same
period of last year. Excluding the impact of acquisitions, sales
increased 11.7 percent. The Business and Institute Furniture
Manufacturers Association (BIFMA) has estimated that the U.S. market
grew approximately 7.9 percent for the five-month period ended October
1996. The strong domestic growth is reflected in the double-digit
growth at HMNA and Meridian.
Net sales of international operations and export sales from the United
States totaled $122.6 million for the six months ended November 30,
1996, compared with $112.0 million last year. The increase was
primarily due to strong growth in the United Kingdom and Canada.
New orders increased 14.5 percent, to $398.0 million for the second
quarter and were the highest ever recorded in a three-month period.
The backlog of unfilled orders at November 30, 1996, was $206.7
million, compared with $197.1 million a year earlier, and $156.6
million at June 1, 1996.
Gross margin increased to 35.6 percent during the second quarter of
1997, compared to gross margin of 34.3 percent in the second quarter
of 1996. The increase from the prior year second quarter is primarily
attributable to lower overhead spending and better leveraging of
overhead at HMNA and a realized price increase at Meridian. Further,
the effect of owning part of our distribution network, through our
subsidiary, Coro, has added approximately .6 percent to the
consolidated gross margin in the second quarter.
Operating expenses as a percent of sales decreased to 25.8 percent,
excluding the intangible write-off, compared with 26.2 percent,
excluding the patent litigation settlements, in the second quarter of
last year. Total operating expenses increased $11.4 million from
$86.0 million, excluding the patent litigation settlements in the
second quarter of last year to $97.4 million, excluding the intangible
write-down. The increase in operating expenses is attributable to
acquisitions and new ventures, a 4.0 percent year-over-year increase
in compensation and benefits, variable compensation plans, and
additional warranty costs at HMNA.
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Interest expense increased $.4 million over second quarter fiscal
1996. Total interest-bearing debt was $138.0 million at the end of the
second quarter of fiscal 1997, compared with $131.7 million at June 1,
1996, and $106.6 million at December 2, 1995.
As discussed in the footnotes, declining sales and continuing losses
at our German subsidiary led management, in accordance with the
company's accounting policies, to reevaluate the realizability of the
subsidiary's intangible assets. The intangible assets were determined
to be impaired after comparing the undiscounted projected cash flows
of the subsidiary to the carrying value of the intangible assets of
the subsidary. The intangible write-off resulted in a pretax charge of
$5.5 million and an after-tax impact of $4.5 million, or $.19 per
share. After recording the charge, net income for the quarter and six
months ended November 30, 1996, was $17.9 million ($.74 per share) and
$33.4 million ($1.38 per share), respectively.
The net impact of the litigation settlements, after giving effect to
previously recorded reserves and settlements with third parties, was a
$16.5 million charge to pretax income. The $16.5 million pretax charge
had an after-tax impact of $10.6 million, or $.42 per share. After
recording the charge, net income for the quarter and six months ended
December 2, 1995, was $4.9 million ($.20 per share) and $16.9 million
($.68 per share), respectively.
The effective tax rate for the six-month period was 39.5 percent
compared with 38.1 percent in the same period of last year. The higher
rate reflects both the tax law change which reduced the benefit of the
Corporate Owned Life Insurance program and the write-off of the German
subsidiary's intangible assets.
Net loss from the company's international operations and export sales
from the United States for the six months ended November 30, 1996,
decreased $2.9 million to a $.9 million loss, compared with net loss
of $3.8 million for the same period last year. Including the German
intangible write-off, the net loss for the first six months of fiscal
1997 was $5.4 million.
The management team has continued to focus on improving the
performance of our international operations. During the first six
months of 1997, we have had strong performance in both our Canadian
and UK operations.
C. Financial Condition, Liquidity, and Capital Resources
Second Quarter FY 1997 versus Second Quarter FY 1996
1. Cash flow from operating activities increased to $87.1 million
for the six months ended November 30, 1996, from $57.4 million
in the same period a year ago. The $29.7 million increase in
cash provided by operating activities was due to the improved
profitability and a reduction in cash used for working capital
items.
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2. Days sales in accounts receivable plus days sales in inventory
decreased to 69.5 days versus 90.5 days on December 2, 1995,
and 75.6 days on June 1, 1996.
3. Total interest-bearing debt increased to $138.0 million
compared to $131.7 million at June 1, 1996. Debt-to-total
capital now stands at 31.3 percent versus 29.9 percent on June
1, 1996. We expect total interest-bearing debt to be in the
range of $125 to $145 for the remainder of the year with a
debt-to-total-capital ratio of between 30 and 35 percent.
4. Capital expenditures for the first six months were $27.1
million versus $26.4 million for the first six months of 1996.
The expenditures were primarily for new facilities at our
fastest growing subsidiaries and new or improved internal
processes. Capital expenditures for the year are expected to be
in the range of $65 to $70 million.
5. The company repurchased 1,094,700 shares of common stock for
$37.9 million during the first six months of fiscal 1997.
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Part II
Item 6: Exhibits and Reports on Form 8-K
1. Exhibits
See Exhibit Index
2. Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
November 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
HERMAN MILLER, INC.
December 27, 1996 /s/ MICHAEL A. VOLKEMA
--------------------------------------
Michael A. Volkema
(President and
Chief Executive Officer)
December 27, 1996 /s/ BRIAN C. WALKER
--------------------------------------
Brian C. Walker
(Chief Financial Officer)
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Exhibit Index
(11) Computations of earnings per common share.
(27) Financial Data Schedule (Exhibit available upon request)
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EXHIBIT 11
HERMAN MILLER, INC.
COMPUTATIONS OF EARNINGS PER COMMON SHARE
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
Nov. 30, Dec. 2, Nov. 30, Dec. 2,
1996 1995 1996 1995
------- -------- -------- --------
NET INCOME APPLICABLE
TO COMMON SHARES $17,852 $4,955 $33,438 $16,969
======= ====== ======= =======
Weighted Average Common
Shares Outstanding 23,808,613 25,061,652 23,936,729 24,970,351
Net Common Shares
Issuable Upon Exercise
of Certain Stock Options 357,622 126,389 274,028 92,473
------- ------- ------- ------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING AS ADJUSTED 24,166,235 25,188,041 24,210,757 25,062,824
========== ========== ========== ==========
NET INCOME PER SHARE $.74 $.20 $1.38 $.68
==== ==== ===== ====
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1,000
6-MOS
MAY-31-1997
SEP-01-1996
NOV-30-1996
82,782
0
198,377
11,764
59,193
363,391
553,353
284,124
712,446
242,245
0
0
0
5,058
298,197
712,446
719,621
719,621
467,049
467,049
190,066
2,998
4,210
55,298
21,860
33,438
0
0
0
33,438
1.38
1.38
