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 29, 1997 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 31, 1997--44,864,915 shares.
The Exhibit Index appears at page 14.
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HERMAN MILLER, INC. FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 29, 1997
INDEX
Page No.
--------
Part I--Financial Information
Condensed Consolidated Balance Sheets-- 3
November 29, 1997, and May 31, 1997
Condensed Consolidated Statements of Income-- 4
Three and Six Months Ended November 29, 1997,
and November 30, 1996
Condensed Consolidated Statements of Cash Flows-- 5
Six Months Ended November 29, 1997,
and November 30, 1996
Notes to Condensed Consolidated Financial Statements 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
Part II--Other Information
Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
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HERMAN MILLER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
Nov. 29, May 31,
1997 1997
-------- --------
(unaudited) (audited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $111,385 $106,161
Accounts receivable, net 184,630 179,242
Inventories--
Finished goods 23,579 23,552
Work in process 11,155 8,074
Raw materials 21,775 22,251
-------- --------
Total inventories 56,509 53,877
-------- --------
Prepaid expenses and other 42,034 46,584
-------- --------
Total current assets 394,558 385,864
-------- --------
PROPERTY AND EQUIPMENT, AT COST: 570,802 555,582
Less-accumulated depreciation 308,001 290,355
-------- --------
Net property and equipment 262,801 265,227
-------- --------
OTHER ASSETS:
Notes receivable, net 38,888 47,431
Other noncurrent assets 50,922 57,065
-------- --------
Total assets $747,169 $755,587
======== ========
Nov. 29, May 31,
1997 1997
-------- --------
(unaudited) (audited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Unfunded checks $ 22,955 $ 25,730
Current portion of long-term debt 217 173
Notes payable 18,718 17,109
Accounts payable 82,669 76,975
Accruals 172,585 165,624
-------- --------
Total current liabilities 297,144 285,611
-------- --------
LONG-TERM DEBT, less current portion 110,583 110,087
OTHER LIABILITIES 76,105 72,827
SHAREHOLDERS' EQUITY:
Common stock $.20 par value 8,988 9,207
Retained earnings 269,590 292,237
Cumulative translation adjustment (10,222) (10,863)
Key executive stock programs (5,019) (3,519)
-------- --------
Total shareholders' equity 263,337 287,062
-------- --------
Total liabilities and
shareholders' equity $747,169 $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 Six Months Ended
-------------------- --------------------
Nov. 29, Nov. 30, Nov. 29, Nov. 30,
1997 1996 1997 1996
--------- --------- --------- ---------
NET SALES $415,086 $377,137 $816,631 $719,621
COST AND EXPENSES:
Cost of goods sold 263,443 242,837 517,987 467,049
Operating expenses 103,556 97,430 206,189 188,612
Intangible write-off -- 5,500 -- 5,500
Interest expense 1,843 2,029 4,032 4,210
Other income, net (1,654) (371) (3,999) (1,048)
-------- -------- -------- --------
367,188 347,425 724,209 664,323
-------- -------- -------- --------
INCOME BEFORE TAXES ON INCOME 47,898 29,712 92,422 55,298
PROVISION FOR TAXES ON INCOME 18,250 11,860 35,500 21,860
-------- -------- -------- --------
NET INCOME $ 29,648 $ 17,852 $ 56,922 $ 33,438
======== ======== ======== ========
NET INCOME PER SHARE $ .64 $ .37 $ 1.22 $ .69
======== ======== ======== ========
DIVIDENDS PER SHARE OF COMMON STOCK $ .073 $ .065 $ .145 $ .13
======== ======== ======== ========
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. 29, Nov. 30,
1997 1996
------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,922 $ 33,438
Depreciation and amortization 27,102 23,976
Intangible write-off -- 5,500
Changes in current assets and liabilities 4,610 18,004
Other, net 6,670 6,133
------------ --------
Net cash provided by operating activities 95,304 87,051
------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable repayments 297,593 219,603
Notes receivable issued (289,910) (216,499)
Capital expenditures (22,588) (27,128)
Net cash paid for acquisitions -- (9,743)
Other, net 4,184 6,841
------------ --------
Net cash used for investing activities (10,721) (26,926)
------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term debt repayments 2,082 (237)
Net long-term debt repayments (23) 6,296
Capital lease repayment (72) --
Dividends paid (6,668) (6,311)
Net common stock issued 18,265 3,635
Common stock purchased and retired (93,302) (37,932)
------------ --------
Net cash used for financing activities (79,718) (34,549)
------------ --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 359 153
------------ --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 5,224 25,729
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 106,161 57,053
------------ --------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 111,385 $ 82,782
============ ========
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.
During February 1997 the Financial Accounting Standards Board issued statements
of Financial Accounting Standards (FAS) Nos. 128 and 129, "Earnings Per Share"
and "Disclosure of Information about Capital Structure." Both standards are
effective for periods ending after December 15, 1997. The company will adopt
these standards in its third quarter of fiscal 1998. Following the guidance in
FAS No. 128, basic earnings per share for the six months ended November 29,
1997, and November 30, 1996, would be $.65 and $.37, respectively, and $1.25
and $.70 for the six-month period.
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.
INTANGIBLE WRITE-OFF
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 $.10 per share after tax) was recorded for the
write-offs of the goodwill and brand-name assets of the subsidiary. The German
subsidiary was subsequently sold to an unrelated third party in the fourth
quarter of fiscal 1997.
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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:
Six Months Ended
------------------
Nov. 29, Nov. 30,
1997 1996
-------- --------
Interest paid $ 4,425 $ 5,565
Income taxes paid $31,116 $30,569
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.
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 29, 1997, 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 unless otherwise noted. Dollars are shown in thousands.
Three Months Six Months
----------------- -----------------
$ % $ %
------- -------- ------- --------
NET SALES 37,949 10.1% 97,010 13.5%
COST OF GOODS SOLD 20,606 8.5% 50,938 10.9%
OPERATING EXPENSES 6,126 6.3% 17,577 9.3%
INTANGIBLE WRITE-OFF (5,500) (100.0%) (5,500) (100.0%)
INTEREST EXPENSE (186) (9.2%) (178) (4.2%)
OTHER INCOME NET* (1,283) (350.8%) (2,951) (281.6%)
INCOME BEFORE TAXES ON INCOME 18,186 61.2% 37,124 67.1%
PROVISION FOR TAXES ON INCOME 6,390 53.9% 13,640 62.4%
NET INCOME 11,796 66.1% 23,484 70.2%
*Represents an increase in other income.
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B. Results of Operations
Second Quarter FY 1998 versus Second Quarter FY 1997
Net sales increased $37.9 million, or 10.1 percent, for the three months
ended November 29, 1997, compared to $377.1 million a year ago. For the
first six months of fiscal 1998, the company had net sales of $816.6
million, compared with net sales of $719.6 million in the first six
months of last year. The increase was primarily due to unit volume
increases in both our domestic 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 15.6 percent for the first six months.
Excluding the impact of acquisitions, the domestic business grew 15.0
percent in the first six months. Acquisitions did not impact the second
quarter. We are benefiting from the accelerated demand for office
furniture in the United States. In the five months ended October 1997,
the Business and Institutional Furniture Manufacturer's Association
(BIFMA) reported the market grew 14.0 percent. BIFMA is currently
estimating the industry will grow 8 percent in calendar 1998.
For the first six months, all of our domestic business units had
double-digit growth. Miller SQA, Coro, and Meridian had very strong order
and sales growth in the second quarter. We have also made good progress
toward building the Coro network with the addition of 13 new affiliated
dealers during the second quarter. We now have 8 owned and 21 affiliated
dealers in the network.
From a product segment standpoint, our largest growth for the six 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 second quarter ended November 29, 1997, totaled $67.3
million compared with $64.2 million last year.
Our international sales increased 3.1 percent over the first six months
and 4.9 percent for the quarter. The comparisons were impacted by the
sale of our German manufacturing operations in the fourth quarter of last
year. Excluding the impact of that change, our international sales grew
approximately 7.7 percent for the six months and 9.0 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.
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We continue to experience operating losses in Italy. We have completed
the plan to realign these operations, and we are in the early stages of
implementation. We expect the changes, which will involve a reduction in
employment and the outsourcing of nonvalue-adding activities will be
completed early in the fourth quarter. We do not expect to record any
significant charges related to these changes.
In the second quarter, our International operations earned $2.3 million,
bringing our year-to-date earnings to $4.6 million. 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.
New orders for the second quarter increased 16.8 percent to $464.7
million. For the first six months of fiscal 1998, new orders were $872.4
million compared with new orders of $769.7 million in the first six
months of last year. The backlog of unfilled orders at November 29, 1997,
was $258.9 million, compared with $206.7 million a year earlier, and
$203.1 million at May 31, 1997.
Gross margin, as a percent of sales, increased to 36.5 percent during the
second quarter of 1998, compared to a gross margin of 35.6 percent in the
second 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 35.5 percent to 36.5
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 24.9 percent
compared with 25.8 percent, excluding the intangible write-off, in the
second quarter of last year. Total operating expenses increased $17.6
million from $188.6 million in the first six months of last year to
$206.2 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, EVA executive incentives, and sales commissions.
Interest expense of $4.0 million was comparable to the first six months
of fiscal 1997. Total interest-bearing debt was $129.5 million at the end
of the second quarter of fiscal 1998, compared with $127.4 million at May
31, 1997, and $138.0 million at November 30, 1996.
The effective tax rate for the second quarter was 38.1 percent compared
with 39.9 percent in the same period of last year. The prior year rate
was negatively impacted by the intangible write-off at our German
subsidiary.
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Net income increased 70.2 percent to $56.9 million in the first six
months of fiscal 1998, compared to $33.4 million for the same period last
year. As discussed in the footnotes, the prior year results included a
charge of $5.5 million pre-tax and $4.5 million after-tax to write off
the intangible assets of our German subsidiary.
C. Financial Condition, Liquidity, and Capital Resources
Second Quarter FY 1998 versus Second Quarter FY 1997
1. Cash flow from operating activities was $95.3 million versus
$87.1 million in the first six months of 1997.
2. Days sales in accounts receivable plus days sales in
inventory decreased to 60.3 days versus 69.5 days on November 30,
1996, and 63.3 days on May 31, 1997.
3. Total interest-bearing debt increased to $129.5 million
compared to $127.4 million at May 31, 1997. Debt-to-total capital
now stands at 33.0 percent versus 30.7 percent on May 31, 1997. We
expect total interest-bearing debt to be in the range of $125 to
$145 for the remainder of the year.
4. Capital expenditures for the first six months were $22.6
million versus $27.1 million for the first six months of 1996.
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 expected to spend $15 and
$20 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 six months of fiscal 1998, the company
repurchased 1,864,154 shares of common stock for $92.9 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 November
29, 1997.
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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.
January 9, 1998 \s\ Michael A. Volkema
-------------------------------
Michael A. Volkema
(President and
Chief Executive Officer)
January 9, 1998 \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. 29, Nov. 30, Nov. 29, Nov. 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON $ 29,648 $ 17,852 $ 56,922 $ 33,438
SHARES
Weighted Average Common Shares
Outstanding 45,361,638 47,617,226 45,693,076 47,873,458
Net Common Shares Issuable Upon
Exercise of Certain Stock Options 887,201 715,244 910,429 548,056
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ADJUSTED 46,248,839 48,332,470 46,603,505 48,421,514
========== ========== ========== ==========
NET INCOME PER SHARE $ .64 $ .37 $ 1.22 $ .69
========== ========== ========== ==========
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1,000
6-MOS
MAY-30-1998
AUG-31-1997
NOV-29-1997
111,385
0
199,226
14,596
56,509
394,558
570,802
308,001
747,169
297,144
0
0
0
8,998
254,339
747,169
816,631
816,631
517,987
517,987
199,514
2,676
4,032
92,422
35,500
56,922
0
0
0
56,922
1.22
1.22
