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 August 29, 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 September 30, 1998--85,977,622 shares.
The Exhibit Index appears at page 16.
-1-
2
HERMAN MILLER, INC. FORM 10-Q
FOR THE QUARTER ENDED AUGUST 29, 1998
INDEX
Page No.
--------
Part I -- Financial Information
Condensed Consolidated Balance Sheets--
August 29, 1998, and May 30, 1998 3
Condensed Consolidated Statements of Income--
Three Months Ended August 29, 1998,
and August 30, 1997 4
Condensed Consolidated Statements of Cash Flows--
Three Months Ended August 29, 1998,
and August 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Part II -- Other Information
Exhibits and Reports on Form 8-K 13-14
Signatures 15
Exhibit Index 16
-2-
3
HERMAN MILLER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
August 29, May 30, August 29, May 30,
1998 1998 1998 1998
----------- --------- ----------- --------
(unaudited) (audited) (unaudited) (audited)
ASSETS LIABILITIES & SHAREHOLDERS' EQUITY
- ------ ----------------------------------
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents $109,003 $115,316 Unfunded checks $ 27,348 $ 35,241
Accounts receivable, net 183,522 192,384 Current portion of long-term debt 10,184 10,203
Inventories-- Notes payable 11,871 19,542
Finished goods 20,594 19,807 Accounts payable 84,495 92,241
Work in process 8,045 8,844 Accruals 224,257 221,105
-------- --------
Raw materials 17,123 19,006 Total current liabilities 358,155 378,332
-------- -------- -------- --------
Total inventories 45,762 47,657
Prepaid expenses and other 47,507 44,778 LONG-TERM DEBT, less current portion 100,960 100,910
-------- --------
OTHER LIABILITIES 73,505 74,102
Total current assets 385,794 400,135
--------- ------- SHAREHOLDERS' EQUITY:
PROPERTY AND EQUIPMENT, AT COST: 614,378 595,872 Common stock $.20 par value 17,232 17,397
Less-accumulated depreciation 317,694 305,208 Retained earnings 235,320 227,464
-------- --------
Net property and equipment 296,684 290,664 Cumulative translation adjustment (9,298) (9,360)
-------- --------
Key executive stock programs (7,386) (4,499)
-------- --------
OTHER ASSETS:
Notes receivable, net 21,196 27,522 Total shareholders' equity 235,868 231,002
-------- --------
Other noncurrent assets 64,814 66,025
-------- -------
Total liabilities and
Total assets $768,488 $784,346 shareholders' equity $768,488 $784,346
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
-3-
4
HERMAN MILLER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
------------------
August 29, August 30,
1998 1997
---- ----
NET SALES $ 447,503 $ 401,545
COST AND EXPENSES:
Cost of goods sold 277,291 254,544
Operating expenses (1) 115,286 102,100
Interest expense 2,276 2,189
Other income, net (3,105) (2,345)
--------- ---------
391,748 356,488
--------- ---------
INCOME BEFORE TAXES ON INCOME 55,755 45,057
--------- ---------
PROVISION FOR TAXES ON INCOME $ 21,750 17,250
--------- ---------
NET INCOME (1) $ 34,005 $ 27,807
========= =========
NET INCOME PER COMMON
SHARE--BASIC (1) $ .39 $ .30
========= =========
NET INCOME PER COMMON
SHARE--DILUTED (1) $ .39 $ .30
========= =========
DIVIDENDS PER SHARE OF
COMMON STOCK $ .036 $ .036
========= =========
(1) Fiscal 1998 amounts have been restated for the adoption of
Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use."
See accompanying notes to condensed consolidated financial statements.
-4-
5
HERMAN MILLER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended
------------------
August 29, August 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (1) $ 34,005 $ 27,807
Depreciation and amortization 14,877 13,807
Changes in current assets and liabilities (3,797) 3,801
Other, net 1,688 1,044
-------- --------
Net cash provided by operating activities 46,773 46,459
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable repayments 127,895 165,713
Notes receivable issued (121,554) (150,775)
Capital expenditures (1) (21,683) (10,518)
Other, net 626 1,515
-------- --------
Net cash provided by (used for) investing activities (14,716) 5,935
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term debt repayments (7,270) (1,535)
Net long-term debt repayments (52) (49)
Dividends paid (3,153) (3,336)
Capital lease repayment 83 0
Net common stock issued 2,328 14,298
Common stock purchased and retired (28,954) (35,993)
-------- --------
Net cash used for financing activities (37,018) (26,615)
-------- --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (1,352) 602
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (6,313) 26,381
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 115,316 106,161
-------- --------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $109,003 $132,542
======== ========
(1) Fiscal 1998 amounts have been restated for the adoption of
Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use."
See accompanying notes to condensed consolidated financial statements.
-5-
6
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 30, 1998.
FISCAL YEAR
The company's fiscal year ends on the Saturday closest to May 31. Accordingly,
the years ended May 29, 1999, and May 30, 1998, contain 52 weeks.
NEW ACCOUNTING STANDARDS
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 resulted in an increase in net income of $.5 million,
or $.01 in diluted earnings per share(EPS) for the quarter ended August 30,
1997. 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 that Combines Business Process Reengineering and Information Technology
Transformation."
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued. This statement requires the disclosure of
comprehensive income, which, for Herman Miller, includes net income and foreign
currency translation adjustments. Comprehensive income was $34.1 million for the
quarter ended August 29, 1998, and $28.1 million for the quarter ended August
30, 1997.
-6-
7
EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted EPS:
Three Months Ended
------------------
August 29, August 30,
1998 1997
---- ----
Numerators:
- -----------
Numerator for both basic and diluted EPS,
net income $ 34,005 $ 27,807
=========== ===========
Denominators:
- -------------
Denominator for basic EPS,
weighted-average common shares outstanding 86,478,364 92,049,028
Potentially dilutive shares resulting from stock 1,429,381 1,867,314
option plans ----------- -----------
Denominator for diluted EPS 87,907,745 93,916,342
=========== ===========
The following exercisable stock options were not included in the computation of
diluted EPS because the option prices were greater than average quarterly market
prices.
Three Months Ended
------------------
August 29, August 30,
Exercise Price 1998 1997
---- ----
$28.41 13,000
$29.75 1,084,249
$31.00 7,950
$32.50 132,368
$35.75 _________ 64,000
------
1,237,567 64,000
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.
-7-
8
Cash payments for income taxes and interest (in thousands) were as follows:
Three Months Ended
------------------
August 29, August 30,
1998 1997
---------- ----------
Interest paid $2,546 $1,316
Income taxes paid $1,967 $7,102
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 also involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
proceedings and litigation currently pending will not materially affect the
company's consolidated financial statements.
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 August 29, 1998, and the results of its operations and cash
flows for the three months then ended. Interim results are not necessarily
indicative of results for a full year.
-8-
9
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
------------
$ %
------ -----
NET SALES 45,958 11.4%
COST OF GOODS SOLD 22,747 8.9%
OPERATING EXPENSES 13,186 12.9%
INTEREST EXPENSE 87 4.0%
OTHER INCOME NET* 760 32.4%
INCOME BEFORE TAXES ON
INCOME 10,698 23.7%
PROVISION FOR TAXES ON 4,500 26.1%
INCOME
NET INCOME 6,198 22.3%
*Represents an increase in other income.
-9-
10
B. Results of Operations
First Quarter FY 1999 versus First Quarter FY 1998
Net sales increased $46.0 million, or 11.4 percent, to $447.5 million
for the three months ended August 29, 1998. The increase was primarily
due to unit volume increases in our domestic and European operations.
United States net sales were up 13.5 percent for the first quarter.
Excluding the impact of acquisitions, the domestic business grew 12.3
percent in the first quarter. No acquisitions were completed during the
first quarter of 1999. For the two months ended July 1998, the Business
and Institutional Furniture Manufacturer's Association (BIFMA) reported
that the industry sales grew 10.0 percent. BIFMA's growth estimate
remains at 8 percent for calendar 1998 and 5 percent for calendar 1999.
For the first quarter, Coro continues to be our fastest growing
business. Excluding acquisitions, Coro's sales increased approximately
33.0 percent over the same quarter last year. The Coro network is
currently made up of 9 owned dealers and 27 affiliated dealers.
From a product segment standpoint, our largest percentage growth for
the three months was in the seating category. The most significant
growth came from our Aeron and Ambi chairs (including the complementary
Ambi side chair). Systems furniture still represents the largest area
of dollar growth as it is the largest segment. The company's newest
systems product line, Q Systems, has continued to grow significantly.
Q Systems sales were $11.0 million in the first quarter of this year
compared to $4.8 million in the first quarter of last year.
Net sales of international operations and export sales from the United
States in the first quarter ended August 29, 1998, totaled $58.9
million compared with $59.1 million last year. This represented a
decline of .3 percent for the quarter. Most of the decline was in Asia
and Latin America where we continue to have weak demand. We are
primarily an exporter to these markets. The increased value of the U.S.
dollar makes our product more expensive in comparison to locally
produced goods. On the positive side, our European operations, led by
the U.K., continued to have solid year-over-year sales growth.
In the first quarter, our International operations earned $1.9 million
compared to $2.3 million in the same period of last year. The decline
is primarily due to lower gross product margins and lower sales.
New orders for the first quarter increased 8.8 percent to $443.7
million. The backlog of unfilled orders at August 29, 1998, was $225.3
million, compared with $209.3 million a year earlier, and $229.1
million at May 30, 1998.
Gross margin, as a percent of sales, increased to 38.0 percent during
the first quarter of 1999, compared to a gross margin of 36.6 percent
in the first quarter of 1998. The improvement reflects a favorable
product mix, improved productivity, and value enhancement engineering
projects. In addition, we have had a slight improvement in per
-10-
11
unit material cost. Going forward, we expect gross margins to be in the
range of 37.0 percent to 38.0 percent. We believe we can continue to
improve productivity; however, these improvements may be partially
offset by potential disruption costs associated with implementing our
new ERP (Enterprise Resource Planning) system and continued price
pressures.
Operating expenses, as a percent of net sales, were 25.8 percent
compared with 25.4 percent in the first quarter of last year. Total
operating expenses increased $13.2 million from $102.1 million in the
first quarter of last year to $115.3 million. This increase is
primarily due to the significant investments we are making in our ERP
systems solution, in our electronic selling platform, and in the
continued development of new and enhanced products for our customers.
Interest expense of $2.3 million was comparable to the first quarter of
fiscal 1998. Total interest-bearing debt was $123.0 million at the end
of the first quarter of fiscal 1999, compared with $130.7 million at
May 30, 1998, and $125.7 million at August 30, 1997.
The effective tax rate for the first quarter was 39.0 percent compared
with 38.3 percent in the same period of last year. We expect the tax
rate to remain in the 38.0 to 39.0 percent range.
Net income increased 22.3 percent to $34.0 million in the first three
months of fiscal 1999, compared to $27.8 million for the same period
last year. The faster growth rate in net income compared with sales
reflects our continued improvement in operating margins.
Year 2000
During fiscal year 1998, the company performed an analysis of the work
necessary to assure that its existing information systems and
manufacturing equipment for both domestic and international operations
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 technical personnel and company management,
and reported 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. To date, the company has spent $4.5 million on
year 2000 renovations. These are renovations to existing systems and
are exclusive of the implementation of our new ERP system. The company
expects to spend an additional $.5 - $1.5 million to complete the
renovation. The renovation is expected to be completed by December
1998.
The company is also in the process of verifying year 2000 conversion
plans with its vendors and independent dealers. If any significant
vendors or dealers are identified which do not have appropriate
or timely year 2000 conversion plans, the company will immediately
begin to make contingency plans in order to minimize potential adverse
affects on business operations.
-11-
12
Management believes that the probability of experiencing a material
business disruption due to the year 2000 issue is remote based on the
current status of the company's comprehensive remediation plan.
C. Financial Condition, Liquidity, and Capital Resources
First Quarter FY 1999 versus First Quarter FY 1998
1. Cash flow from operating activities was $46.8 million versus
$46.5 million in the first quarter of fiscal 1998.
2. Days sales in accounts receivable plus days sales in inventory
decreased to 55.9 days versus 57.9 days on August 30, 1997, and
56.2 days on May 30, 1998.
3. Total interest-bearing debt decreased to $123.0 million
compared to $130.7 million at May 30, 1998. Debt-to-total
capital now stands at 34.3 percent versus 36.1 percent on May
30, 1998. Going forward, we expect to be in the range of 30 to
35 percent for the debt-to-total capital ratio.
4. Capital expenditures for the first quarter of fiscal 1999 were
$21.7 million versus $10.5 million for the first quarter of
fiscal 1998. Much of the increase was related to the
implementation of our enterprise-wide information system,
continued implementation of our electronic selling platform,
and new product development. We also expect to spend $20
million during fiscal 1999 for the continued development of the
Coro network.
5. During the first three months of fiscal 1999, the company
repurchased 1.0 million shares of common stock for $29.0
million.
-12-
13
Part II
Item 4: Submission of Matters to Vote of Security Holders
At the Annual Shareholders Meeting held September 29, 1998, the shareholders
voted on various proposals presented in the company's 1998 definitive proxy
statement. The results of the votes follow:
1. Proposal to elect four directors to serve a term of three years and one
director to serve a term of two years.
a. Terms expiring in 2001
Broker
For Against Withheld Non-Vote
--- ------- -------- --------
Dr. E. David Crockett 74,131,556 0 950,808 0
C. William Pollard 74,133,035 0 949,329 0
Dorothy A. Terrell 74,131,317 0 951,047 0
Michael A. Volkema 74,114,598 0 967,766 0
b. Term expiring in 2000
David L. Nelson 74,130,305 0 952,059 0
2. Proposal to amend the Company's Articles of Incorporation to increase
the authorized common stock from 120,000,000 shares to 240,000,000
shares of common stock, $.20 par value
Broker
For Against Withheld Non-Vote
--- ------- -------- --------
72,021,690 2,806,563 254,111 0
3. Proposal to amend the company's Long-Term Incentive Plan.
Broker
For Against Withheld Non-Vote
--- ------- -------- --------
60,895,466 5,769,373 1,178,792 7,238,733
-13-
14
4. Proposal to approve and adopt the company's Incentive Cash Bonus Plan.
Broker
For Against Withheld Non-Vote
--- ------- -------- --------
70,617,671 3,332,230 1,132,463 0
5. Proposal to ratify the appointment of Arthur Andersen LLP as the
independent public accountants for the company for the fiscal year
ending May 29, 1999.
Broker
For Against Withheld Non-Vote
--- ------- -------- --------
73,847,178 107,277 1,127,909 0
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 August
29, 1998.
-14-
15
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.
October 7, 1998 \s\ Michael A. Volkema
----------------------------------------
Michael A. Volkema
(President and
Chief Executive Officer)
October 7, 1998 \s\ Brian C. Walker
----------------------------------------
Brian C. Walker
(Chief Financial Officer)
-15-
16
Exhibit Index
(27) Financial Data Schedule (Exhibit available upon request)
-16-
5
1000
3-MOS
MAY-29-1999
MAY-31-1998
AUG-29-1998
109003
0
198196
14674
45762
385794
614378
317694
768488
358155
0
0
0
17232
218636
768488
447503
447503
277291
277291
110583
1598
2276
55755
21750
34005
0
0
0
34005
.39
.39
