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 February 28, 1998 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 March 27,1998--89,662,206 shares.
The Exhibit Index appears at page 16.
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HERMAN MILLER, INC. FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 1998
INDEX
Page No.
--------
Part I---Financial Information
Condensed Consolidated Balance Sheets--
February 28, 1998, and May 31, 1997 3
Condensed Consolidated Statements of Income--
Three and Nine Months Ended February 28, 1998,
and March 1, 1997 4
Condensed Consolidated Statements of Cash Flows--
Nine Months Ended February 28, 1998,
and March 1, 1997 5
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)
Feb. 28, May 31,
1998 1997
-------- -------
(unaudited) (audited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $137,711 $106,161
Accounts receivable, net 194,977 179,242
Inventories--
Finished goods 22,317 23,552
Work in process 9,961 8,074
Raw materials 20,109 22,251
-------- --------
Total inventories 52,387 53,877
-------- --------
Prepaid expenses and other 43,517 46,584
-------- --------
Total current assets 428,592 385,864
-------- --------
PROPERTY AND EQUIPMENT, AT COST: 577,293 555,582
Less-accumulated depreciation 307,740 290,355
-------- --------
Net property and equipment 269,553 265,227
-------- --------
OTHER ASSETS:
Notes receivable, net 34,745 47,431
Other noncurrent assets 60,973 57,065
-------- --------
Total assets $793,863 $755,587
======== ========
Feb. 28, May 31,
1998 1997
-------- -------
(unaudited) (audited)
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Unfunded checks $ 23,162 $ 25,730
Current portion of long-term debt 176 173
Notes payable 17,084 17,109
Accounts payable 84,117 76,975
Accruals 196,785 165,624
-------- --------
Total current liabilities 321,324 285,611
-------- --------
LONG-TERM DEBT, less current portion 110,579 110,087
OTHER LIABILITIES 78,351 72,827
SHAREHOLDERS' EQUITY:
Common stock $.20 par value 17,932 9,207
Retained earnings 281,056 292,237
Cumulative translation adjustment (10,603) (10,863)
Key executive stock programs (4,776) (3,519)
-------- --------
Total shareholders' equity 283,609 287,062
-------- --------
Total liabilities and
shareholders' equity $793,863 $755,587
======== ========
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 Nine Months Ended
--------------------------- -------------------------------
Feb. 28, March 1, Feb. 28, March 1,
1998 1997 1998 1997
--------- --------- ----------- -----------
NET SALES $436,708 $365,060 $1,253,339 $1,084,681
COST AND EXPENSES:
Cost of goods sold 271,812 233,127 789,799 700,176
Operating expenses 111,406 96,271 317,595 284,883
International restructuring
charges -- 13,736 -- 19,236
Interest expense 1,984 2,017 6,016 6,227
Other income, net (2,567) (1,426) (6,566) (2,474)
-------- -------- ---------- ----------
382,635 343,725 1,106,844 1,008,048
-------- -------- ---------- ----------
INCOME BEFORE TAXES ON INCOME 54,073 21,335 146,495 76,633
PROVISION FOR TAXES ON INCOME 21,100 7,800 56,600 29,660
-------- -------- ---------- ----------
NET INCOME $ 32,973 $ 13,535 $ 89,895 $ 46,973
NET INCOME PER COMMON ======== ======== ========== ==========
SHARE--BASIC $ .37 $ .14 $ .99 $ .49
NET INCOME PER COMMON ======== ======== ========== ==========
SHARE--DILUTED $ .36 $ .14 $ .97 $ .49
DIVIDENDS PER SHARE OF COMMON ======== ======== ========== ==========
STOCK $ .036 $ .033 $ .109 $ .098
======== ======== ========== ==========
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)
Nine Months Ended
-----------------
Feb. 28, March 1,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 89,895 $ 46,973
Depreciation and amortization 39,950 35,848
Restructuring charges -- 19,236
Changes in current assets and liabilities 21,526 62,101
Other, net 10,775 7,968
-------- --------
Net cash provided by operating activities 162,146 172,126
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable repayments 438,751 329,599
Notes receivable issued (427,763) (328,979)
Capital expenditures, net (41,675) (34,298)
Net cash paid for acquisitions (3,769) (9,743)
Other, net (4,126) (701)
-------- --------
Net cash used for investing activities (38,582) (44,122)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term debt borrowings (repayments) 634 2,719
Net long-term debt borrowings (repayments) (31) (258)
Capital lease repayment (109) --
Dividends paid (9,926) (9,389)
Net common stock issued 22,260 6,926
Common stock purchased and retired (106,187) (45,139)
-------- --------
Net cash used for financing activities (93,359) (45,141)
-------- --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 1,345 206
-------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 31,550 83,069
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 106,161 57,053
-------- --------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 137,711 $ 140,122
======== ========
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 May 31, 1997.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The company adopted this SOP
during the third quarter of fiscal 1998, retroactive to the beginning of the
fiscal year. The adoption of this SOP did not have a material effect on the
financial statements. The company is also in compliance with Emerging
Issues Task Force (EITF) Issue 97-13, "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that Combines
Business Process Reengineering and Information Technology Transformation."
FISCAL YEAR
The company's fiscal year ends on the Saturday closest to May 31. Accordingly,
the year ended May 31, 1997, and the year ending May 30, 1998, contain 52
weeks.
INTERNATIONAL RESTRUCTURING CHARGES
During the second quarter of fiscal 1997, declining sales and continuing losses
at our German subsidiary led us, in accordance with our accounting policies, to
assess the realizability of the subsidiary's long-lived assets. At that time,
estimates of expected future cash flows under various options to improve our
operating results in Germany were evaluated to determine if any potential
impairment existed. Although none of the options was developed to the extent
required to enable us to reach a decision and plan for implementation, based on
the results of our various evaluations of potential impairment, we determined
at the enterprise level, the goodwill and intangibles associated with the
acquisition were no longer recoverable. As a result, a pretax charge of $5.5
million ($4.5 million, or $.04 per share after tax) was recorded for the
write-offs of the goodwill and brand-name assets of the subsidiary.
During the third quarter of fiscal 1997, we authorized and committed to a plan
to restructure the manufacturing component of our German operations. The plan
involved closing the manufacturing facility in Germany and was expected to be
completed in fiscal 1998. Based on the information available at that time, we
believed that closing the facility was the most viable option. As a result, a
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pretax restructuring charge of $13.7 million ($5.4 million, or $.06 per share
after tax) was recorded. The German subsidiary was subsequently sold to an
unrelated third party in the fourth quarter of fiscal 1997.
SHAREHOLDER EQUITY
On January 20, 1998, the Board of Directors approved a 2-for-1 stock split
effected in the form of a 100 percent dividend to shareholders of record on
February 27, 1998, payable on March 16, 1998. All per share information
reflects this stock split.
EARNINGS PER SHARE
Effective February 28, 1998, the company adopted the Statement of Financial
Accounting Standards No. 128, "Earnings per Share." This statement establishes
standards for computing and presenting "basic" and "diluted" earnings per share
("EPS"). Basic EPS excludes the dilutive effect of common shares that could
potentially be issued (i.e., stock options in the case of Herman Miller) and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed by dividing net income by
the weighted average number of shares outstanding plus all shares that could
potentially be issued. All prior period EPS data has been restated to conform
to this statement.
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted EPS:
Three Months Ended Nine Months Ended
---------------------- ----------------------
Feb. 28, March 1, Feb. 28, March 1,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Numerators:
- -----------
Net income numerators for both
basic and diluted EPS $ 32,973 $ 13,535 $ 89,895 $ 46,973
========== ========== ========== ==========
Denominators:
- -------------
Denominators for basic EPS:
Weighted average common shares
outstanding 89,711,867 94,351,530 90,828,057 95,161,786
Potentially dilutive shares
resulting from stock options 1,783,485 1,857,186 1,868,735 1,349,804
---------- ---------- ---------- ----------
Denominators for diluted EPS 91,495,352 96,208,716 92,696,792 96,511,590
========== ========== ========== ==========
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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:
Nine Months Ended
------------------------
Feb. 28, March 1,
1998 1997
-------- --------
Interest paid $ 4,534 $ 6,227
Income taxes paid $48,497 $42,199
CONTINGENCIES
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 February 28, 1998, and the results of
its operations and cash flows for the nine 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 unless otherwise noted. Dollars are shown in thousands.
Three Months Nine Months
-------------------- ----------------------
$ % $ %
-------- ------- -------- --------
NET SALES 71,648 19.6% 168,658 15.5%
COST OF GOODS SOLD 38,685 16.6% 89,623 12.8%
OPERATING EXPENSES 15,135 15.7% 32,712 11.5%
RESTRUCTURING CHARGES (13,736) (100%) (19,236) (100%)
INTEREST EXPENSE (33) (1.6%) (211) (3.4%)
OTHER INCOME NET* (1,141) (80.0%) (4,092) (165.4%)
INCOME BEFORE TAXES ON INCOME 32,738 153.4% 69,862 91.2%
PROVISION FOR TAXES ON INCOME 13,300 170.5% 26,940 90.8%
NET INCOME 19,438 143.6% 42,922 91.4%
*Represents an increase in other income.
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B. Results of Operations
Third Quarter FY 1998 versus Third Quarter FY 1997
Net sales increased $71.6 million, or 19.6 percent to $436.7 million, for
the three months ended February 28, 1998, compared to $365.1 million a
year ago. For the first nine months of fiscal 1998, the company had net
sales of $1,253.3 million, compared with net sales of $1,084.7 million
in the first nine months of last year. The increase was primarily due to
unit volume increases in our domestic, Canadian, and European operations.
We believe the very strong industry growth is due to the positive macro
factors of a strong economy, strong corporate profits, rapidly changing
work styles, and the continued growth in white collar workers.
United States net sales were up 16.3 percent for the first nine months.
Excluding the impact of acquisitions, the domestic business grew 15.7
percent in the first nine months. We are benefiting from the accelerated
demand for office furniture in the United States. In the eight months
ended January 1998, the Business and Institutional Furniture
Manufacturer's Association (BIFMA) reported the market grew 14.2 percent.
BIFMA is currently estimating the industry will grow 10.0 percent in
calendar 1998.
For the first nine months, all of our domestic business units had
double-digit growth. Miller SQA and Meridian had very strong order and
sales growth in the third quarter. Coro completed one acquisition in the
third quarter, which increased the network to 9 owned and 22 affiliated
dealers.
From a product segment standpoint, our largest percentage growth for the
nine months was in the seating and filing and storage categories. The
most significant growth came from our Aeron and Ambi seating and the
Meridian filing and storage solutions.
Net sales of international operations and export sales from the United
States in the third quarter ended February 28, 1998, totaled $69.4
million compared with $52.7 million last year. For the first nine months
of fiscal 1998, net sales were $195.8 million, compared with net sales of
$175.3 million in the prior year.
Our international sales increased 11.7 percent for the first nine months
and 31.8 percent for the quarter. Most of the growth has been in the UK
and continental European markets. The UK market has been particularly
strong, with a good mix of large projects and base business. The
increases from the continental market have been driven by one large
project with the European Parliament.
During the third quarter, we completed the realignment of our Italian
operation. This resulted in a reduction in our Italian work force and the
outsourcing of nonvalue-adding activities. This reorganization did not
result in any significant charges to income.
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In the third quarter, our International operations earned $3.3 million,
compared to a net loss of $.6 million in the same period of last year.
Net income of $7.8 million was recorded for the first nine months of
fiscal 1998 compared with a net loss of $1.5 million in the same period
of last year. All amounts are presented excluding the loss from the
restructuring of the company's previously owned German subsidiary. The
improvement reflects the changes made in Germany and Mexico coupled with
very strong demand for product in the UK. While not growing as rapidly
as last year, we also continue to have solid performance in Canada. This
is the fourth consecutive quarter in which our international operations
have been profitable.
New orders for the third quarter increased 15.1 percent to $412.8
million. For the first nine months of fiscal 1998, new orders were
$1,285.3 million compared with new orders of $1,128.3 million in the
first nine months of last year. The backlog of unfilled orders at
February 28, 1998, was $233.5 million, compared with $200.2 million a
year earlier, and $203.1 million at May 31, 1997.
Gross margin, as a percent of sales, increased to 37.8 percent during the
third quarter of 1998, compared to a gross margin of 36.1 percent in the
third quarter of 1997. The improvement reflects increased leverage of
manufacturing overheads, value enhancement engineering projects, and a
favorable product mix. We have also experienced very little change in per
unit material costs and discounts given to customers. Going forward, we
expect gross margins will be in the range of 36.0 percent to 37.0
percent. The lower end of the range reflects the uncertainty as to the
impact of disruptions that may be caused by the implementation of the new
manufacturing information systems over the next 12 to 24 months.
Operating expenses, as a percent of net sales, decreased to 25.5 percent
compared with 26.4 percent, excluding the restructure charges in the
third quarter of last year. Total operating expenses increased $15.1
million from $96.3 million in the first nine months of last year to
$111.4 million. This increase is primarily due to investments in and
maintenance of information systems, an average wage increase of 4
percent, and increases in variable incentive plans, such as EVA gain
sharing and executive incentives, and sales commissions.
Interest expense of $6.0 million was comparable to the first nine months
of fiscal 1997. Total interest-bearing debt was $127.8 million at the end
of the third quarter of fiscal 1998, compared with $127.4 million at May
31, 1997, and $132.3 million at March 1, 1997.
The effective tax rate for the third quarter was 39.0 percent compared
with 36.6 percent in the same period of last year. The prior year rate
was positively impacted by the German restructuring.
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Net income increased 91.4 percent to $89.9 million in the first nine
months of fiscal 1998, compared to $47.0 million for the same period last
year. As discussed in the footnotes, the prior year results included a
restructuring charge of $19.2 million pre-tax and $9.9 million after-tax
for our previously owned German subsidiary.
Year 2000
During fiscal year 1997, the company performed an analysis of the work
necessary to assure that the information systems will be able to address
the issues surrounding the advent of the year 2000. The company has a
comprehensive, written plan, which is regularly updated and monitored by
technicial personnel. Plan status is regularly reviewed by management of
the company and reported upon to the Board of Directors. The company
is now in active renovation with the costs of the year 2000
modification being expensed in the period incurred. Management believes
these costs will not have a material adverse impact on the company's
financial statements.
The company is also in the process of verifying year 2000 conversion
plans with its vendors. If any significant vendors are identified that
do not have appropriate or timely year 2000 conversion plans, the
company will immediately begin to make contingency plans with those
vendors, or seek to find alternative vendors in order to minimize
potential adverse affects on business operations.
C. Financial Condition, Liquidity, and Capital Resources
Third Quarter FY 1998 versus Third Quarter FY 1997
1. Cash flow from operating activities was $162.1 million versus
$172.1 million in the first nine months of 1997.
2. Days sales in accounts receivable plus days sales in
inventory decreased to 59.9 days versus 62.3 days on March 1, 1997,
and 63.3 days on May 31, 1997.
3. Total interest-bearing debt increased to $127.8 million
compared to $127.4 million at May 31, 1997. Debt-to-total capital
now stands at 31.1 percent versus 30.7 percent on May 31, 1997. We
expect total interest-bearing debt to be in the range of $125 to
$145 million for the remainder of the year.
4. Capital expenditures for the first nine months were $42.1
million versus $40.3 million for the first nine months of 1997.
Capital expenditures for the year are expected to be in the range of
$75 to $80 million. The expenditures in 1998 will primarily be for
the implementation of an enterprise-wide information system,
continued implementation of our electronic sales platform, and new
products in the systems segment. We also expect to spend $10 to $15
million for the continued development of the Coro network. These
expenditures are offset by the cash flow generated from the expected
sale of certain facilities and land in the fourth quarter.
5. During the first nine months of fiscal 1998, the company
repurchased 2,112,580 shares of common stock for $106.2 million.
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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 February
28, 1998.
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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.
April 7, 1998 \s\ Michael A. Volkema
-------------------------
Michael A. Volkema
(President and
Chief Executive Officer)
April 7, 1998 \s\ Brian C. Walker
-------------------------
Brian C. Walker
(Chief Financial Officer)
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Exhibit Index
(27) Financial Data Schedule (Exhibit available upon request)
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1,000
9-MOS
MAY-30-1998
JUN-01-1997
FEB-28-1998
137,711
0
210,340
15,363
52,387
428,592
577,293
307,740
793,863
321,324
0
0
0
17,932
265,677
793,863
1,253,339
1,253,339
789,799
789,799
306,607
4,422
6,016
146,495
56,600
89,895
0
0
0
89,895
.99
.97
