UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
| X |
ANNUAL 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 Fiscal Year Ended June 1, 2002 |
Commission File No. 0-5813 |
|
Herman Miller, Inc. (Exact name of registrant as specified in its charter) |
|
Michigan (State or other jurisdiction of incorporation or organization) |
38-0837640 (I.R.S. Employer Identification No.) |
|
855 East Main Avenue PO Box 302 Zeeland, Michigan (Address of principal executive offices) |
49464-0302 (Zip Code) |
Registrant's telephone number, including area code: (616) 654 3000
Securities registered pursuant to Section 12(b) of the Act: None
| Securities registered pursuant to Section 12(g) of the Act: |
Common Stock, $.20 Par Value (Title of Class) |
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___.
The aggregate market value of the voting stock held by “nonaffiliates” of the registrant (for this purpose only, the affiliates of the registrant have been assumed to be the executive officers and directors of the registrant and their associates) as of August 9, 2002, was $1,161,714,579 (based on $15.68 per share which was the closing sale price as reported by NASDAQ).
The number of shares outstanding of the registrant's common stock, as of August 9, 2002:
Common stock, $.20 par value--75,884,122 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on September 30, 2002, are incorporated into Part III of this report.
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PART 1
Item 1 BUSINESS
(a) General Development of Business
The company researches, designs, manufactures and distributes interior furnishings and provides related services that support companies all over the world. The company’s products are sold primarily to or through independent contract office furniture dealers. Through research, the company seeks to define and clarify customer needs and problems existing in its markets and to design, through innovation where appropriate and feasible, products, systems, and services as solutions to such problems. Ultimately, the company seeks to assist its customers in creating great places to work.
Herman Miller, Inc., was incorporated in Michigan in 1905. One of the company's major plants and its corporate offices are located at 855 East Main Avenue, PO Box 302, Zeeland, Michigan, 49464-0302, and its telephone number is (616) 654-3000. Unless otherwise noted or indicated by the context, the term "company" includes Herman Miller, Inc., its predecessors and subsidiaries.
(b) Financial Information About Industry Segments
The company’s operations are in a single industry segment___the design, manufacture, and sale of office furniture systems and furniture, and related products and services. Accordingly, no separate industry segment information is presented.
(c) Narrative Description of Business
The company’s principal business consists of the research, design, development, manufacture, and sale of office systems, products and related services. Most of these systems and products are coordinated in design so that they may be used both together and interchangeably.
The company is a leader in design and development of furniture and furniture systems. This leadership is exemplified by the innovative concepts introduced by the company in its modular systems known as Action Office®, Q™ System, Ethospace®, and Resolve®. Action Office, the company’s series of three freestanding office partition and furnishing systems, is believed to be the first such system to be introduced and nationally marketed and, as such, popularized the “open plan” approach to office space utilization. Ethospace interiors is a system of movable full- and partial-height walls, with panels and individual wall segments that interchangeably attach to wall framework. It includes wall-attached work surfaces and storage/display units, electrical distribution, lighting, organizing tools, and freestanding components. Resolve is a more flexible systems solution that is based on 120 degree angles around a steel pole and uses fabric screens and canopies for office definition. The company also offers a broad array of seating (including Aeron®, Equa®, Ergon®, Ambi®, and Reaction® office chairs), storage (including Meridian® filing products), wooden casegoods (including Geiger products), and freestanding furniture products (including Passage®).
The company’s products are marketed worldwide by its own sales staff, its owned dealer network, independent dealers, and via the Internet. Salespersons work with dealers, the design and architectural community, as well as directly with end-users. Seeking and strengthening the various distribution channels within the marketplace is a major focus of the company. Independent dealerships concentrate on the sale of Herman Miller products and some complementary product lines of other manufacturers. Approximately 71 percent of the company’s sales in the fiscal year ended June 1, 2002, were made to or through independent dealers. The remaining sales were made directly to end-users, including federal, state, and local governments, and several major corporations, by either the company’s own sales staff or its owned dealer network.
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The company is also a recognized leader within its industry for the use, development, and integration of customer-centered technologies that enhance the reliability, speed, and efficiency of its operations. This includes proprietary sales tools, interior design and product specification software, order entry and manufacturing scheduling and production systems, and direct connectivity to the company’s suppliers.
The company’s furniture systems, seating, storage, casegoods and freestanding furniture products, and related services are used in (1) office/institution environments including offices and related conference, lobby and lounge areas, and general public areas including transportation terminals; (2) health/science environments including hospitals and other healthcare facilities; (3) clinical, industrial, and educational laboratories; and (4) residential and other environments.
New Product and Industry Segment Information
During the past 12 months, the company has not made any public announcement of, or otherwise made public information about, a new product or a new industry segment which would require the investment of a material amount of the company’s assets or which would otherwise result in a material cost.
Raw Materials
The company’s manufacturing materials are available from a significant number of sources within the United States, Canada, Europe, and Asia. To date, the company has not experienced any difficulties in obtaining its raw materials. The raw materials used are not unique to the industry nor are they rare.
Patents, Trademarks, Licenses, Etc.
The company has approximately 152 active United States utility patents on various components used in its products and approximately 110 active United States design patents. Many of the inventions covered by the United States patents also have been patented in a number of foreign countries. Various trademarks, including the name and style “Herman Miller,” and the “Herman Miller Symbol” trademark, are registered in the United States and many foreign countries. The company does not believe that any material part of its business is dependent on the continued availability of any one or all of its patents or trademarks, or that its business would be materially adversely affected by the loss of any thereof, except the “Herman Miller,” “Action Office,” “Aeron,” “Ergon,” “Equa,” “Ethospace,” “Q,” “Resolve,” “Geiger”, and “Herman Miller Symbol” trademarks.
Working Capital Practices
The company does not believe that it or the industry in general has any special practices or special conditions affecting working capital items that are significant for an understanding of the company’s business.
Customer Base
No single dealer accounted for more than 3 percent of the company’s net sales in the fiscal year ended June 1, 2002. For fiscal 2002, the largest single end-user customer accounted for approximately 8 percent of the company’s net sales with the 10 largest of such customers accounting for approximately 16 percent of net sales. The company does not believe that its business is dependent on any single or small number of customers, the loss of which would have a materially adverse effect upon the company.
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Backlog of Orders
As of June 1, 2002, the company’s backlog of unfilled orders was $200.6 million. At June 2, 2001, the company’s backlog totaled $224.0 million. It is expected that substantially all the orders forming the backlog at June 1, 2002, will be filled during the current fiscal year. Many orders received by the company are reflected in the backlog for only a short period while other orders specify delayed shipments and are carried in the backlog for up to one year. Accordingly, the amount of the backlog at any particular time is not necessarily indicative of the level of net sales for a particular succeeding period.
Government Contracts
Other than standard price reduction and other provisions contained in contracts with the United States Government, the company does not believe that any significant portion of its business is subject to material renegotiation of profits or termination of contracts or subcontracts at the election of various government entities.
Competition
All aspects of the company’s business are highly competitive. The principal methods of competition utilized by the company include design, product and service quality, speed of delivery, and product pricing. The company is one of the largest office furniture manufacturers in the world. However, in several of the markets served by the company, it competes with many smaller companies and with several manufacturers that have significantly greater resources and sales.
Research, Design and Development
One of the competitive strengths of the company is its research, design and development programs. Accordingly, the company believes that its research and design activities are of significant importance. Through research, the company seeks to define and clarify customer needs and problems and to design, through innovation where feasible and appropriate, products and services as solutions to these customer needs and problems. The company utilizes both internal and independent research and design resources. Exclusive of royalty payments, approximately $33.9 million, $37.2 million, and $35.1 million was spent by the company on design and research activities in 2002, 2001, and 2000, respectively. Royalties are paid to designers of the company’s products as the products are sold and are not included in research and development costs since they are variable based on product sales.
Environmental Matters
The company does not believe, based on current facts known to management, that existing environmental laws and regulations have had or will have any material effects upon the capital expenditures, earnings, or competitive position of the company. Further, the company continues to rigorously reduce, recycle, and reuse the solid wastes generated by its manufacturing processes. Its accomplishments and these efforts have been widely recognized.
Human Resources
The company considers another of its major competitive strengths to be its human resources. The company stresses individual employee participation and incentives, and believes that this emphasis has helped to attract and retain a capable work force. The company has a human resources group to provide employee recruitment, education and development, and compensation planning and counseling. There have been no work stoppages or labor disputes in the company’s history, and its relations with its employees are considered good. Approximately 404 of the company’s employees are represented by collective bargaining agents, most of whom are employees of its Integrated Metal Technology, Inc., and Herman Miller Limited (U.K.) subsidiaries. As such, these subsidiaries are parties to collective bargaining agreements with these employees.
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As of June 1, 2002, the company employed 7,056 full-time and 235 part-time employees, representing a 29.1 percent decrease in full-time employees and a 25.2 percent decrease in part-time employees compared with June 2, 2001. In addition to its employee work force, the company uses purchased labor to meet uneven demand in its manufacturing operations.
(d) Information About International Operations
The company’s sales in international markets primarily are made to office/institutional customers. Foreign sales mostly consist of office furniture products such as Ethospace and Action Office systems, seating, and storage products. The company is in the following major markets: Canada, Europe, Latin America, and the Asia/Pacific region. In certain other foreign markets, the company’s products are offered through licensing of foreign manufacturers on a royalty basis.
At the present time, the company’s products sold in international markets are manufactured by wholly owned subsidiaries in the United States and the United Kingdom. Sales are made through wholly owned subsidiaries in Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, and the United Kingdom. The company’s products are offered in the Middle East, South America, and Asia through dealers.
In several other countries, the company licenses manufacturing and selling rights. Historically, these licensing arrangements have not required a significant investment of funds or personnel by the company, and in the aggregate, have not produced material net earnings for the company.
Additional information with respect to operations by geographic area appears in the note “Operating Segments” of the notes to the Consolidated Financial Statements set forth on page 45. Fluctuating exchange rates and factors beyond the control of the company, such as tariff and foreign economic policies, may affect future results of international operations.
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Item 2 PROPERTIES
The company owns or leases facilities located throughout the United States and several foreign countries, including Canada, France, Germany, Italy, Japan, Mexico, and the United Kingdom. The location, square footage, and use of the most significant facilities at June 1, 2002, were as follows.
Square
Owned Locations Footage Use
- --------------- ------- -----------------------
Spring Lake, Michigan 921,700 Manufacturing, Warehouse, and Office
Holland, Michigan 850,500 Manufacturing, Distribution, Warehouse, and Office
Zeeland, Michigan 749,000 Manufacturing, Warehouse, and Office
Rocklin, California 338,100 Manufacturing and Warehouse
Holland, Michigan 238,300 Design Center and Office
Leased Locations
- ----------------
Holland, Michigan 347,300 Manufacturing, Distribution, and Warehouse
Canton, Georgia 327,800 Manufacturing and Warehouse
Zeeland, Michigan 399,900 Manufacturing, Warehouse, and Office
Fulton, Georgia 176,700 Manufacturing, Warehouse, and Office
England, U.K. 160,500 Manufacturing and Warehouse
Atlanta, Georgia 115,000 Warehouse and Distribution
The company also maintains showrooms or sales offices near most major metropolitan areas throughout North America, Europe, Asia/Pacific, and Latin America. The company considers its existing facilities to be in excellent condition, efficiently utilized, well suited, and adequate for its design, production, distribution, and selling requirements.
Item 3 PENDING LEGAL PROCEEDINGS
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. At any point in time, a number of GSA audits are either scheduled or in progress. Management does not expect resolution of the audits to have a material adverse effect on the company’s consolidated financial statements.
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.
Item 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the year ended June 1, 2002.
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ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information relating to Executive Officers of the company is as follows.
Year Elected an Position with
Name Age Executive Officer the Company
James E. Christenson 55 1989 Senior Vice President, Legal Services, and Secretary
David M. Knibbe 47 1997 Executive Vice President, Sales and Distribution
Gary S. Miller 52 1984 Chief Development Officer
Elizabeth A. Nickels 40 2000 Chief Financial Officer
Gary VanSpronsen 46 1998 Executive Vice President, eBusiness
Michael A. Volkema 46 1995 Chairman, President and Chief Executive Officer
Brian C. Walker 40 1996 President, Herman Miller North America
Except as discussed in this paragraph, each of the named officers has served the company in an executive capacity for more than five years. Mr. Knibbe was the vice president of sales and distribution for Herman Miller, Inc., from March 1996 to May 1997; president of Workplace Resource, Inc., from March 1995 to April 1996; and vice president of sales and distribution for Meridian, Inc., from April 1990 to March 1995. Ms. Nickels joined Herman Miller, Inc., in February 2000, and prior to 2000 was chief financial officer of Universal Forest Products, Inc., for seven years. Mr. VanSpronsen was the president of Miller SQA from January 1998 to September 1998, and vice president and general manager of Miller SQA from June 1992 to December 1997. Mr. Walker was the Chief Financial Officer of Herman Miller, Inc. from March 1996 to February 2000, and before that he served in various finance roles with the company.
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PART II
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Herman Miller, Inc., common stock is quoted in the NASDAQ-National Market System (NASDAQ-NMS Symbol: MLHR). As of August 9, 2002, there were approximately 20,500 shareholders of record of the company's common stock.
Per Share and Unaudited Market Market Market Earnings Dividends
Price Price Price Per Share- Per
High Low Close Diluted2 Share
Year Ended June 1, 2002
First quarter $26.91 $22.82 $22.82 $(.04) $.03625
Second quarter 23.00 18.25 21.86 (.30) .03625
Third quarter 25.65 21.76 24.85 (.15) .03625
Fourth quarter 25.41 21.53 23.46 (.25) .03625
Year $26.91 $18.25 $23.46 $(.74) $.14500
Year Ended June 2, 2001
First quarter1 $32.813 $25.875 $32.000 $.41 $.03625
Second quarter 32.250 23.625 24.000 .54 .03625
Third quarter 29.375 22.625 25.938 .43 .03625
Fourth quarter 28.050 23.000 26.900 .43 .03625
Year $32.813 $22.625 $26.900 $1.81 $.14500
1The first quarter of 2001 includes a pre-tax charge of $5.4 million ($3.5 million after tax, or $.05 per diluted share) for the cumulative effect of a change in accounting principle for pensions. Previous to the restatement, diluted earnings per share for the first quarter were $.46.
2As the company reported a loss for each quarter of fiscal 2002, shares resulting from stock option plans would be anti-dilutive to earnings per share and have not been included in diluted earnings per share.
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Item 6 SELECTED FINANCIAL DATA
Review of Operations
(In Millions, Except Per Share Data) 2002 2001 2000 1999 1998
Operating Results
Net Sales 3 $1,468.7 $2,236.2 $2,010.2 $1,828.4 $1,773.0
Gross Margin 3 440.3 755.7 680.4 641.6 613.0
Selling, General, and Administrative 3 399.7 475.4 404.4 379.3 370.9
Design and Research Expense 38.9 44.3 41.3 38.0 33.8
Operating Earnings (79.9) 236.0 234.7 224.3 208.3
Earnings Before Income Taxes (91.0) 225.1 221.8 229.9 209.5
Net Earnings (56.0) 140.6 139.7 141.8 128.3
Cash Flow from Operating Activities 54.6 211.8 202.1 205.6 268.7
Depreciation and Amortization 112.9 92.6 77.1 62.1 50.7
Capital Expenditures 52.4 105.0 135.7 103.4 73.6
Common Stock Repurchased plus
Cash Dividends Paid $30.3 $105.3 $101.6 $179.7 $215.5
Key Ratios
Sales Growth (Decline) 3 (34.3) 11.2 9.9 3.1 14.8
Gross Margin 1,3 30.0 33.8 33.8 35.1 34.6
Selling, General, and Administrative 1,3 27.3 21.3 20.1 20.7 20.9
Design and Research Expense 1,3 2.6 2.0 2.1 2.1 1.9
Operating Earnings 1,3 (5.4) 10.6 11.7 12.3 11.7
Net Earnings Growth (Decline) (139.8) 0.6 (1.5) 10.5 72.4
After-Tax Return on Net Sales 3 (3.8) 6.3 6.9 7.8 7.2
After-Tax Return on Average Assets (6.3) 14.5 16.5 18.5 16.7
After-Tax Return on Average Equity (18.2) 43.5 55.5 64.4 49.5
Share and Per Share Data 2
Earnings per Share-Diluted $(.74) $1.81 $1.74 $1.67 $1.39
Cash Dividends Declared per Share .15 .15 .15 .15 .15
Book Value per Share at Year End 3.45 4.63 3.76 2.63 2.66
Market Price per Share at Year End $23.46 $26.90 $29.75 $20.19 $27.69
Weighted Average Shares Outstanding-
Diluted 75.9 77.6 80.5 84.8 92.0
Financial Condition
Total Assets $788.0 $996.5 $941.2 $751.5 $784.3
Working Capital 4 188.7 191.6 99.1 55.5 77.2
Current Ratio 1.8 1.5 .9 1.0 1.1
Interest-Bearing Debt 235.1 259.3 225.6 147.6 130.7
Shareholders' Equity 263.0 351.5 294.5 209.1 231.0
Total Capital 498.1 610.8 520.1 356.7 361.7
EBITDA $40.1 $334.5 $312.3 $299.3 $268.5
Debt-to-EBITDA Ratio5 5.9 .8 .7 .5 .5
EBITDA-to-Interest Expense Ratio5 2.2 19.9 23.3 41.0 32.3
1 Shown as a percent of net sales.
2 Retroactively adjusted to reflect two-for-one stock splits occurring in 1998 and 1997.
3 Amounts for 1992-2000 were restated in 2001 to reflect reclassification of certain expenses.
4 Calculated using current assets less non-interest bearing current liabilities.
5 Includes the effect of Special Charges in fiscal 2002.
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1997 1996 1995 1994 1993 1992
$1,543.8 $1,325.0 $1,117.8 $983.7 $883.1 $830.5
509.5 418.4 362.0 322.9 285.7 265.0
335.2 299.5 287.4 230.9 217.4 217.3
29.1 27.5 33.7 30.2 24.5 20.7
130.7 74.9 9.1 61.8 43.8 2.0
125.9 70.1 4.0 63.5 42.4 (1.0)
74.4 45.9 4.3 40.4 22.1 (14.1)
218.2 124.5 29.9 69.8 82.6 77.0
48.0 45.0 39.7 33.2 31.6 30.5
54.5 54.4 63.4 40.3 43.4 32.0
$110.4 $38.1 $13.6 $38.5 $21.2 $23.6
16.5 18.5 13.6 11.4 6.3 (8.4)
33.0 31.6 32.4 32.8 32.4 31.9
21.7 22.6 25.7 23.5 24.6 26.2
1.9 2.1 3.0 3.1 2.8 2.5
8.5 5.7 0.8 6.3 5.0 0.2
62.1 967.4 (89.4) 82.8 256.7 (200.0)
4.8 3.5 0.4 4.1 2.5 (1.7)
10.3 6.8 0.7 7.9 4.6 (2.9)
25.0 15.4 1.5 13.9 7.8 (4.7)
$ .77 $ .46 $ .04 $ .40 $ .22 $( .14)
.13 .13 .13 .13 .13 .13
3.12 3.12 2.89 3.01 2.84 2.78
$17.88 $7.72 $5.42 $6.22 $6.41 $4.75
96.1 100.5 99.2 101.0 100.0 100.7
$755.6 $694.9 $659.0 $533.7 $484.3 $471.3
135.7 151.8 133.7 106.6 87.8 93.4
1.4 1.6 1.2 1.3 1.5 1.5
127.4 131.7 144.2 70.0 39.9 54.0
287.1 308.1 286.9 296.3 283.9 280.1
414.5 439.8 431.1 366.3 323.8 334.1
$182.7 $123.0 $50.1 $98.5 $76.0 $36.4
.7 1.1 2.9 .7 .5 1.5
20.7 15.6 7.9 54.7 38.0 5.3
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Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis
You should read the issues discussed in Management's Discussion and Analysis in conjunction with the company's
consolidated financial statements and the notes to the consolidated financial statements included in the
company's Form 10-K.
Overview
The past year presented the worst business environment the contract furniture industry has experienced in
decades, perhaps since the early 1930s. The marketplace became extraordinarily competitive, with many players
fighting to remain profitable. Over the year we made tough decisions that we believe have served to strengthen
our business model going forward. Our company held to its strategy, integrity, and overall operational
excellence. We have, and continue to, become a leaner and stronger organization positioned to deliver stronger
returns in the future.
Business attitudes related to investments in capital expansion and improvements changed radically as the economy fell into a state of uncertainty. Timing of current and potential customer projects remained volatile and difficult to predict. Customer interest remained healthy, but some major projects were deferred or put on hold indefinitely. We are seeing signs of recovery, but timing will be the main issue.
We put a considerable amount of effort into re-aligning our cost structures and increasing their variable nature. We believe that this will improve the economics of the company, regardless of short-term business levels. Steady cash generation, disciplined capital expenditures, and increased returns on invested capital remain at the forefront of our decisions.
We feel that the key to future success lies in focusing our efforts on revenue growth, which we seek to achieve by (1) new product developments that meet customers' more traditional and immediate needs, and (2) the expansion of our markets through innovative changes to workplace environments. Continued investment in innovation, brand equity, and our distribution channels will strengthen the core factors that improve our ability to compete, regardless of the size of our industry. In fact, our spending on research and development has remained consistent with recent levels and significantly increased as a percentage of revenue.
Business Model Re-alignment Actions
Significant changes were necessary to withstand the abrupt decline in revenues and the unpredictable timing of an
industry turnaround. Our ability to produce positive cash flow and remain profitable at lower short-term sales
levels became critical. Lowering our breakeven point was another goal to withstand market volatility. More
importantly, our ability to serve our existing and new customers with the highest degree of reliability is a
competitive strength that must be maintained. We made difficult decisions that significantly impacted the entire
company, both economically and emotionally.
The following objectives were identified before we took action.
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Our restructuring actions addressed fixed costs. The actions involved adjustments to both overhead costs
impacting gross margin and operating expense levels. The items outlined below only relate to action plans covered
under the special charges. We continued to scale back costs in all areas and simplify certain business operations
to improve short-term results, limit capital expenditures, and focus on balancing cash flows with investment
opportunities.
Below is a summary of the actions taken to reduce our costs and increase the variability of our business model.
The major restructuring activities are now complete and position us for significant benefits as revenues grow.
We incurred special charges related to our restructuring actions totaling $81.6 million before taxes for the
year. We estimate that $1 million to $3 million of pretax special charges that cannot be accrued will occur
during the first half of next fiscal year. Benefits related to these actions are estimated to total between $80
million and $85 million on an annualized basis. Although some of the benefits began to appear during the second
half of this year, the full impact should be realized next year and, more importantly, as revenues increase.
Cash outlays related to these actions are estimated to be in the range of $40 million to $45 million. The cash
impact does not include expected proceeds from the sale of facilities totaling $24 million. Part of this amount
includes our facility located in West Michigan previously used for powder coating, which sold for approximately
$3 million in July of 2002. Although interest in our other properties remains strong, we have no binding
commitments for the sale of these assets and the timing of proceeds remains uncertain.
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The special charges fall into five major categories. These groupings with the respective charge are shown in the table below. Further discussion and information related to the charges and remaining accruals can be found in the notes to the Consolidated Financial Statements.
In Millions
Severance, retirement enhancements, and outplacement $30.5
Pension effect of workforce reductions 8.1
Lease and supplier contract cancellation 6.1
Facility exit costs 8.9
Asset impairment 28.0
----
Total $81.6
=====
Consolidated Net Sales
In fiscal 2002, our sales
contracted as capital spending and corporate facility and employment levels
declined throughout the world. Lower sales volumes across all geographic areas
and product lines resulted in revenues of $1,469 million, a 34.3 percent decline
from fiscal 2001. The year began with a fairly strong backlog of orders but
quickly diminished. New orders did not replenish at a pace equal to shipments.
Customers delayed projects, producing highly inconsistent and unpredictable
order patterns. Adding to the timing delays, competitive activity heightened as
industry levels declined.
Domestic Operations
Our domestic sales this
year totaled $1,249 million, a decline of $640.0 million or 33.9 percent from
the prior year. In fiscal 2001 sales increased 9.6 percent after growing 10.1
percent in 2000. In fiscal 2000, we acquired Geiger, a wood case-goods
manufacturer, to complement our product offerings. Geiger sales accounted for 3
to 4 percent of the total domestic sales during the past three fiscal years.
Discounting became more severe during the year. From a pricing strategy standpoint, we continued to manage away from deep discounting by focusing on product differentiation and other incentives. Unfortunately, as weak economic conditions persisted, prospective customers focused heavily on price. We responded when necessary, giving incremental discounts that reduced revenues by approximately $21.1 million domestically. To put this in perspective, discounts reduced net sales in 2001 by $7.9 million and $16.5 million in 2000. Competitive pricing will most likely continue to place pressure on margins in the near term.
The Business and Institutional Furniture Manufacturers Association (BIFMA) reported that U.S. sales declined approximately 25 percent in the 12 months ended May 2002, after increasing 1.9 percent in 2001 and 4.4 percent in 2000. According to BIFMA, the decline in contract furniture shipments was the worst in the last 30 years.
We believe demand for office furniture in the U.S. is most closely correlated to three primary factors in the macro economy: corporate profits, service-sector employment, and nonresidential fixed investments. At the end of May 2002, BIFMA estimated that industry shipments will decline 13.3 percent in calendar 2002, but the anticipated turnaround will produce 8.8 percent growth in calendar 2003. Considering the quarterly forecasts that correspond to our fiscal quarters, BIFMA projects industry shipments will increase 3.6 percent during our fiscal 2003. Given the state of the economy and low corporate confidence levels, this forecast may be overly optimistic.
International Operations and Exports from the United States Furniture demand contracted throughout most of our international markets. For the fiscal year, international sales levels decreased 36.7 percent or $127.5 million and totaled $219.5 million. International revenue accounted for 14.9 percent of consolidated sales, similar to the past several years.
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Included in the business model realignments previously discussed were certain actions aimed at affecting our International operation cost structures and market opportunities. The overriding goals of business simplification and increased cost variability were key to the decisions. The objectives were accomplished in three ways. First, we improved the utilization of our domestic infrastructure and customer service capabilities to support the export business, allowing us to decrease overhead previously dedicated to the international business. Second, the depth and strength of the leadership team throughout the world has improved dramatically in the past three years. As a result, we eliminated certain positions and now rely on fewer people, reducing overall compensation costs. Third, we strengthened the distribution channels and increased the use of dealer relationships, lowering our fixed direct selling costs. Full-support, owned business operations were exited in Asia, South America, and Europe. We believe growth exists in these markets, but our cost structure should more closely mirror revenue generation.
International operations posted a loss of $7.5 million for 2002, versus income of $12.5 million last year and $11.8 million in 2000. Excluding charges related to the restructure actions, the loss in 2002 totaled $3.9 million.
Gross Margin
Gross margin, as a percent
of net sales, for 2002 was 30 percent compared to 33.8 percent for the past two
years. The margin decline was primarily driven by under-absorbed overhead costs
from the rapid volume declines, combined with increased discounting. We managed
our direct product costs, such as material and labor, very effectively as volume
declined. As a percentage of revenue, direct costs were equal to last year as we
were able to sustain the improvements we achieved in 2000.
We reduced our production overhead costs, both fixed and variable, by over 24 percent from 2001 levels. We lowered costs in almost all categories of spending. Our manufacturing teams achieved significant overhead savings, reduced material costs, and held labor rates steady. In addition, the task of consolidating several of our facilities was accomplished ahead of schedule without any significant shipment delays, displaying the excellence and dedication of the people within our organization. Despite these remarkable achievements, the effect of volume declines could not be totally offset by our actions taken this year.
We employ variable compensation incentive plans tied to reaching EVA improvement targets. As a result of the unprecedented declines in volumes, EVA targets were not hit and incentives were not paid. This reduced the overhead costs, affecting gross margin by $8.9 million compared to 2001. Offsetting the majority of this reduction was higher depreciation related to production assets. As facility consolidation plans are fully completed and as we begin to see the effects of limiting capital expenditures, depreciation expense will be reduced. Additionally, as revenues grow and profits increase on a lower capital base, our EVA should improve, reestablishing some level of variable compensation.
As previously mentioned, incremental discounting eroded margins by $21.1 million this year. However, we offset the impact of increased competitive pricing through material price and usage savings. We continued to develop programs that extend our efficient manufacturing techniques to our suppliers. This activity consistently produces stronger relationships and lower costs for all parties involved. Our Purchasing, Manufacturing, and Product development teams partnered with key suppliers to produce roughly $27 million of incremental price and usage savings, more than offsetting the incremental discounting. However, the overall economic pressures of the past year have added more risk to some suppliers’ financial strength. In some cases, material sources have been changed to improve our ability to maintain supplier reliability. Overall, we have not experienced any significant difficulty in maintaining sourcing requirements at current or reduced prices, nor do we expect to. Current tariffs on steel imports are expected to have some adverse impact, but overall should not materially affect our margins going forward. We are aggressively pursuing activities to offset the potential impact of increased steel prices.
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Investments in improved production capabilities over the past two years have shown positive effects on our margin. Ongoing implementation of the Herman Miller Production System, which promotes efficiency techniques, directly added to these improvements. Many of the rapid and reliable processes employed by our Greenhouse facility focused on the SQA discipline were incorporated into other areas of the company. Improvements in lean manufacturing allowed us to accelerate plans to reduce overhead costs. Restructure actions relied heavily on the ability to fully employ these techniques, effectively maintaining capacity while reducing facilities and floor space. By reducing facilities and increasing efficiencies, we have started to re-balance our fixed versus variable cost structure. Of course, volume will remain the key driver of margin improvements
Operating Expenses
For the year, operating
expenses totaled $520.2 million, including $81.6 million of special charges
related to our restructure plan. Excluding the special charges, operating
expenses were $438.6 million in 2002, an $81.1 million or 15.6 percent decrease
from 2001. In addition to the special charges, we accelerated the depreciation
on certain sales technology assets that were replaced at the end of 2002. This
acceleration increased operating expenses by $15.6 million. Without this added
expense and the special charges, our operating expenses decreased by 18.6
percent from last year. Our restructuring actions occurred throughout the year
and were a major driver in decreasing costs. The annualized impact from our
actions was not fully realized in 2002. Reduced costs also resulted from the
reduction in variable compensation tied to EVA improvement targets. Incentive
payments did not occur this year, lowering operating expenses by $15.6 million
compared to 2001. Offsetting these reductions during the year was a $4.3 million
(pretax) legal judgment related to a 1999 lawsuit filed against one of our
wholly-owned dealers. This matter is currently on appeal and we have fully
reserved the amount of the judgment.
The reduction in volume placed significant pressure on the level of operating expenses we could support. We made tough decisions to prioritize our spending. As stated above, our key decisions focused on balancing operating cash flows with business re-investment. Maintaining our customer service levels and selling capacity while continuing to execute long-term strategies took priority. We challenged past initiatives and made several decisions to prioritize and simplify our approach to the market. We eliminated the RED initiative and SQA brand, focusing our investments on the Herman Miller brand. Our facility consolidations, completion of certain technology initiatives, and administrative cost reductions produced savings that can be used to continue product and workplace environment developments. We continued to make investments to strengthen our distribution channels, selling capacity, and relationships with the architectural and design community.
Herman Miller built its place in the market through innovation. We have and will continue to build on this tradition. Our history holds numerous examples of improvements to the workplace through extensive research that led to revolutionary product designs and workplace environment changes. Research and design costs, excluding royalty payments, were $33.9 million in 2002, compared to $37.2 million in 2001, and $35.1 million in 2000. Royalty payments made to designers of the company’s products as the products are sold are not included in research and development costs, since they are considered to be a variable cost of the product. As a percentage of net sales, research and development costs were 2.3 percent in 2002, 1.7 percent in 2001, and 1.7 percent in 2000. As discussed earlier, new product design and development has been, and continues to be, a key business strategy. We have prioritized certain initiatives but believe that continuing to invest in development is critical to strengthening our competitive position, growing our share in traditional markets, and expanding into related markets.
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We continued to make targeted investments to further strengthen our products and services. New innovations and market opportunities are in development. The short-term challenges of today’s economy have focused our efforts but have not changed the overall mission of creating great places to work. We will continue to protect and maximize the investments of our stakeholders. We believe the path we are now taking will lead to significant gains as the economy improves.
Operating Income
Operating income in 2002
was a loss of $79.9 million. This included $81.6 million of special charges
related to our restructure plans. Excluding these charges, our operating income
for 2002 was positive, totaling $1.7 million. Comparatively, operating income in
2001 was $236.0 million and $234.7 million in 2000. Obviously the abrupt
reduction in revenues could not be offset in the short-term, resulting in the
significant decrease.
Other Expenses and Income
Other expense was $11.1
million in fiscal 2002, while in 2001 we incurred other expense of $10.9
million. The rise is primarily attributable to higher interest expense due to
higher debt levels and lower income on interest-bearing investments, offset in
part by gains related to the sale of certain dealerships. To fund future
investments, attain capital structure objectives, and provide for financial
flexibility, interest-bearing debt increased through the issuance of a long-term
public debt offering executed during the fourth quarter of fiscal 2001. An
expanded explanation of our improved debt structure appears in the Liquidity and
Capital Resources section of this report. Interest expense increased to $18.2
million, as compared to $16.8 million last year.
Income Taxes
Our effective tax rate was
38.5 percent in 2002, compared to 36.0 percent and 37.0 percent in 2001 and
2000, respectively. The change in tax rate was primarily the result of our
pretax loss position, permanent deferred tax items, and the impact of state
income taxes. We expect the effective tax rate for fiscal 2003 to be between 34
and 35 percent due to international tax planning strategies and lower state
taxes.
During fiscal 2002, we entered into a settlement agreement with the Internal Revenue Service (“IRS”) primarily related to the disallowance of deductions for corporate-owned life insurance (“COLI”) policy loan interest and administrative fees for all years of the insurance programs since their inception in fiscal 1994. The IRS has been pursuing an adverse position regarding similar COLI programs in a considerable number of corporations. The IRS position has been supported by judicial rulings in a limited number of court proceedings unrelated to our company, with no favorable decisions to the taxpayers. Tax expenses will not be affected, since we had previously reserved for this contingency. The settlement with the IRS provided for the surrender of our COLI program life insurance policies, thereby eliminating any material future tax exposure.
Net Earnings Net earnings for the year were a loss of $56.0 million or ($.74) per share compared to a profit of $140.6 million or $1.81 per share in fiscal 2001. Excluding the special charges taken this year, earnings totaled a loss of $4.5 million or ($.06) per share.
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Liquidity and Capital Resources
The table below shows certain key cash flow and capital highlights:
(In Millions) 2002 2001 2000 Cash and cash equivalents $124.0 $138.3 $83.1 Short term investments $11.1 $13.5 $12.7 Cash from operating activities $ 54.6 $ 211.8 $ 202.1 Capital expenditures $52.4 $105.0 $135.7 Interest-bearing debt $235.1 $259.3 $225.6 Debt-to-EBITDA ratio - exc. special charges 1.9 .8 .7 EBITDA-to-interest expense ratio - exc. special charges 6.7 19.9 23.3 Stock repurchased or retired $19.3 $94.2 $90.1
The unprecedented decline in our industry and general economic uncertainty has focused our efforts on maintaining a strong cash position. Our operations continued to generate positive cash flows even after funding $68.7 million related to pension plan contributions and cash charges associated with the restructuring activities. We continued to generate and conserve cash to solidify our financial position. During 2002, we significantly reduced capital expenditures to levels below operating cash generation. Although we are not abandoning our repurchase strategy, we significantly curtailed our repurchases in the middle of the second quarter to provide financial flexibility. Our cash and short-term investments ended the year at $135.1 million, a $16.7 million decline from 2001.
During the fourth quarter of fiscal 2001, we completed an initial public debt offering, raising $175 million through 10-year notes with a 7.125 percent coupon rate. The proceeds from the debt offering were used primarily to repay borrowings on a $300 million revolving credit facility. During the fourth quarter of this fiscal year, we renegotiated debt covenants with our banks and private placement note holders. The covenant formulas were amended to exclude the special charges related to restructuring actions incurred during the year. Our available credit, combined with our existing cash and expected cash flow, is adequate to fund our day-to-day operations, strategic investments, debt commitments, and share repurchases.
Debt-to-EBITDA and EBITDA-to-interest expense ratios changed significantly during fiscal 2002. (EBITDA stands for Earnings Before Interest Expense, Taxes, Depreciation, and Amortization.) EBITDA calculations shown above exclude the effect of special charges related to our fiscal 2002 restructuring activity. During fiscal 2002 we incurred special charges of $81.6 million. If special charges were included in EBITDA for 2002, debt-to-EBITDA ratio was 5.9 and EBITDA-to-interest expense ratio was 2.2. At the end of fiscal 2002, interest-bearing debt was $235.1 million, a decrease of $24.2 million from May 2001.
Cash Flow Results
Our cash flow from
operations totaled $54.6 million in 2002. Comparatively, cash flow from
operations was $211.8 million in 2001 and $202.1 in 2000. Reduced volume and
related lower earnings were the major factors behind the decline. Cash flow from
operations this year was also reduced by pension contributions of $37.4 million
and $31.3 million of cash payments related to our restructure actions. Excluding
the pension contribution and cash impact of restructuring, cash flow from
operations was $123.3 million, a 42 percent decrease from 2001.
We significantly reduced our capital expenditures in 2002. Each quarter we lowered capital investments as revenue levels declined. Capital expenditures totaled $52.4 million in 2002 compared to $105 million and $135.7 million in 2001 and 2000, respectively. Major changes in investments from prior periods include a re-pacing of information technology enhancements and fewer facility expansions previously needed during high growth periods. Investments in new product developments and customer-related selling platforms were consistent with prior periods. Our restructuring efforts and business model simplification focuses our investments toward future growth initiatives and market expansions, while balancing our cash with the current business environment.
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We expect capital expenditures to be between $55 million and $65 million in fiscal 2003. The largest planned expenditures will be for expanded customer-development channel enhancements, manufacturing improvements, and new product tooling.
During the past year, we sold two dealerships in the United States, one dealership in the Asian market, and one dealership in South America. These actions are consistent with our intent to increase the variability of our cost structure in certain markets by selling owned dealers to independent owners. We may acquire dealerships from time to time in the future to maintain the strength of our distribution network or facilitate the orderly transition of our dealers to new owners. We established two alliances in 2002, adding to the two alliances developed in 2001, to capitalize on our distribution channels, complement our product offerings, and increase profits. During 2001 we increased our owned dealer network through one acquisition. In 2000, we acquired Geiger, a manufacturer of wood casegood products; this acquisition included sales offices in the United Kingdom and Canada. We also acquired a privately owned North American dealer as part of our service strategy. We will continue to investigate acquisitions and alliances to fill strategically identified gaps in our product offering and service capabilities.
Common Stock Transactions
(In Millions, Except Share and Per Share Data) 2002 2001 2000
---- ---- ----
Shares acquired 800,721 3,322,174 3,734,623
Cost of shares acquired $19.3 $ 94.2 $ 90.1
Weighted average cost per share acquired $24.10 $28.35 $24.12
Shares issued 939,628 1,283,358 2,227,154
Weighted average price per share issued $19.05 $17.92 $21.75
Cash dividends $11.0 $11.1 $11.5
Dividends per share $.15 $.15 $.15
In fiscal 2002, repurchases of common stock totaled .8 million shares for $19.3 million compared to 3.3 million shares for $94.2 million in 2001 and 3.7 million shares for $90.1 million in 2000. Management and the Board of Directors believe the share repurchase program is an excellent, tax efficient means of returning value to our shareholders and preventing dilution from employee-ownership programs and shares issued in acquisitions. In July 2001, our Board authorized a new $100 million share repurchase plan, bringing the remaining amount authorized for repurchase to $113.6 million, as of June 1, 2002.
We use various stock option plans as an incentive to align executive performance with shareholder interests. Further information related to stock option plans can be found in the notes to the Consolidated Financial Statements.
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Key Measurement
At Herman Miller, we use
Economic Value Added (EVA) to determine whether we are creating value for our
employee-owners and shareholders. We evaluate all our business decisions in this
manner to ensure we are investing resources in opportunities that create the
highest long-term return. We also use EVA as the basis for calculating our
incentive compensation. Making EVA such an important part of our overall
compensation structure has driven a higher level of business literacy and
decision-making capabilities throughout our work force.
Even though cost-containment programs were implemented during the year, we were unable to offset the magnitude and pace of order declines, resulting in lower EVA for the full fiscal year. Our compensation programs were tied to achieving EVA growth targets. Because the decline in business was so abrupt, we made no variable compensation payments. We continue to believe that EVA is the best method of rewarding our employees in a manner consistent with the rewards we provide to our shareholders, and market research validates this perspective. Our belief in the future potential of our strategic initiatives continues to drive us toward investments that create long-term value, even if EVA results suffer in the short run. We have presented a summarized calculation of our EVA for fiscal 2002, 2001, and 2000.
Calculation of Economic Value Added
(In Millions) 2002 2001 2000
Operating income $(79.9) $ 236.0 $ 234.7
Interest expense on noncapitalized leases(1) 7.8 7.6 5.3
Goodwill amortization 3.1 3.6 2.9
Special Charges & Other 96.6 9.2 3.3
Increase (decrease) in reserves (8.9) (6.7) 1.1
Change in capitalized design and research .5 3.1 4.4
-- --- ---
Adjusted operating profit 19.2 252.8 251.7
Cash taxes(2) (1.1) (91.7) (91.7)
----- ------ ------
Net operating profit after taxes (NOPAT) 18.1 161.1 160.0
Weighted-average capital employed(3) 856.7 818.4 693.3
Weighted-average cost of capital(4) 10.4% 10.4% 10.4%
----- ----- -----
Cost of capital 89.1 85.1 72.1
---- ---- ----
Economic Value Added $(71.0) $76.0 $87.9
======= ===== =====
(1) Imputed interest as if the total noncancelable lease payments were capitalized.
(2) The reported current tax provision is adjusted for changes in deferred tax assets and liabilities.
(3) Total assets less noninterest-bearing liabilities plus the LIFO, doubtful accounts and notes
receivable reserves, warranty reserve, amortized goodwill, deferred taxes, and capitalized design
and research expense. Design and research expense is capitalized and amortized over five years.
(4) Management's estimate of the weighted average of the minimum equity and debt returns required by
the providers of capital. Reevaluated every year and adjusted when necessary to reflect the
current rate environment and capital structure.
We generated a negative $71.0 million of EVA this year. Comparatively, EVA totaled a positive $76.0 million last year and $87.9 million in 2000. Lower earnings on reduced volumes drove the majority of the decrease. Our average capital base increased by $38.3 million, driven by higher levels of cash held for financial flexibility and capitalized charges related to restructuring actions. This increase was partially offset by lower working capital requirements, notes receivable, and COLI-related assets. Our pension contribution resulted in a substantial positive effect on cash taxes in 2002. Net Operating Profit after Taxes declined substantially and ended the year at $18.1 million.
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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. At
any point in time, a number of GSA audits are either scheduled or in progress.
Management does not expect resolution of the audits to have a material adverse
effect on the company’s consolidated financial statements.
We are not aware of any other litigation or threatened litigation that would have a material impact on the company's consolidated financial statements.
Conclusion
The economic recession and
resulting industry contraction led to a revenue decline of over $760 million
this year. This required significant adjustments to our business model and cost
structure to strengthen the company and protect the interests of its
stakeholders. The eroding business conditions also called for decisive action
and rapid implementation of changes. Many of the choices we made were difficult.
These actions were taken with care and in a manner consistent with Herman
Miller’s reputation for integrity and ethical business practice.
We want to assure our investors that when we conduct business, integrity and ethical behavior are not an option but a requirement – in both our strategic business decision-making and our financial reporting. While business ethics have come under intense scrutiny in the past year, they have been an integral part of our corporate culture since our founding and will continue to guide our actions in the future.
Looking back, fiscal 2002 demonstrated our organization’s resilience and the power of our business model to withstand a dramatic decline in volume. We believe the company’s financial strength and flexibility will enhance our ability to compete effectively. While fiscal 2002 held many challenges, Herman Miller will continue to lead in design-focused innovation, expanding our market opportunity and establishing new reference points for the industry.
Basis of Presentation
When considering
year-over-year growth statistics, it is important to note that Herman
Miller’s fiscal year 2002 and 2001 contained 52 weeks, compared to 53 weeks
in fiscal 2000.
Critical Accounting Policies
We strive to report our
financial results in a clear and understandable manner. We follow generally
accepted accounting principles in the U.S. in preparing our consolidated
financial statements, which require us to make certain estimates and apply
judgments that affect our financial position and results of operations. We
continually review our accounting policies and financial information
disclosures. Following is a summary of our more significant accounting policies
that require the use of estimates and judgments in preparing the financial
statements.
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Accounts Receivable Allowances
We base our allowances
related to receivables on known customer exposures, historical credit
experience, and the specific identification of other potential problems,
including the economic climate. These methods are applied to all major
receivables, including trade, lease, and notes receivables. In addition to known
or judgmental components of our allowances, we follow a policy that consistently
applies reserve rates based on the age of outstanding accounts receivables.
Actual collections can differ, requiring adjustments to the reserves.
Warranty Reserve
We stand behind our
products and keep our promises to customers. In some situations, issues arise
resulting in the need to incur costs to correct or replace problems with
products or services. We have established warranty reserves for the various
costs associated with these guarantees. General warranty reserves are based on
historical claims experience and periodically adjusted for business levels.
Specific reserves are established once an issue is identified, and the amount of
such reserves are based on the estimated costs to correct the problem. Actual
costs may vary and result in an adjustment to our reserves.
Inventory Reserves
Inventories are valued at
the lower of cost or market. The inventories of certain subsidiaries are valued
using the last-in, first-out (LIFO) method. We establish reserves for excess and
obsolete inventory, based on material movement and a component of judgment for
consideration of current events, such as economic conditions, that may affect
inventory. The amount of reserve required may be adjusted as conditions change.
Self-Insurance Reserves
With the assistance of
independent actuaries, we provide reserves for health, worker’s
compensation, long-term disability, and general liability exposures. The
reserves are established based on actuarially determined expected future claims.
The methods and variable component used to determine the liabilities are applied
consistently, although actual claim experience can vary. We maintain certain
insurance coverage for risk exposures through traditional premium based
insurance policies.
Pension and other Post-Retirement Benefits
The determination of the
obligation and expense for pension and other post retirement benefits is
dependent on the selection of certain actuarial assumptions used in calculating
such amounts. Some of the assumptions include the discount rate, expected
long-term rate of return on plan assets, and expected rate of increases in
compensation and healthcare costs. These assumptions are reviewed annually based
on internal and external factors. Adjustments to the assumptions could result in
changes to the future expense and liabilities. See the notes to the Consolidated
Financial Statements for more information regarding costs and assumptions used
for employee benefit plans.
Long-Lived Assets
We evaluate long-lived
assets and acquired businesses for indicators of impairment when events or
circumstances indicate that this risk may be present. Our judgments regarding
the existence of impairment are based on market conditions, operational
performance, and estimated future cash flows. If the carrying value of a
long-lived asset is considered impaired, an impairment charge is recorded to
adjust the asset to its fair value.
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Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. We will be adopting Statement No.
141 and No. 142 in the first quarter of fiscal 2003.
Based on preliminary impairment testing for goodwill, we do not believe that the adoption of these standards will result in any impairment charges related to our goodwill assets. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. After applying the provisions of the Statements, our pretax income is expected to increase by approximately $3.1 million in fiscal 2003.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes previous statements issued. We will adopt this statement during the first quarter of fiscal 2003. We do not believe this adoption will have any material impact on our consolidated financial statements.
Forward-Looking
Statements
This discussion and other
sections of our Summary Annual Report contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act, as amended, that are based on
management’s beliefs, assumptions, current expectations, estimates, and
projections about the office furniture industry, the economy, and the company
itself. Words like “anticipates,” “believes,”
“confident,” “estimates,” “expects,”
“forecasts,” “likely,” “plans,”
“projects,”
“should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what we express or forecast. Furthermore, Herman Miller, Inc., undertakes no obligation to update, amend, or clarify forward-looking statements.
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company manufactures, markets and sells its products throughout the world and, as a result, is subject to changing economic conditions, which could reduce the demand for its products.
Foreign currency exchange rate fluctuations related to the company’s international operations did not have a material impact on the financial results of the company during fiscal 2002 or 2001. Because the company conducts business internationally, however, it will continue to be subject to related currency exchange rate fluctuations.
The company maintains fixed-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. The company does not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until the company would be required to refinance it. The company entered into an interest rate swap agreement on May 21, 2002, to convert $40 million of fixed-rate debt to a variable rate basis. This debt is subject to changes in interest rates, which could have a material impact on the company’s financial results. The interest rate swap derivative instrument is held and used by the company as a tool for managing interest rate risk. It is not used for trading or speculative purposes.
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The counterparty to this swap instrument is a large major financial institution which the company believes is of high-quality creditworthiness. While the company may be exposed to potential losses due to the credit risk of non-performance by this counterparty, such losses are not anticipated. The fair value of the swap instrument as of June 1, 2002, was approximately $.2 million. For further information, refer to the Fair Value of Financial Instruments and Financial Instruments with Off-Balance-Sheet Risk disclosures in the Notes to the Consolidated Financial Statements filed as part of this report.
Expected cash flows (notional amounts) over the next five years related to debt instruments are as follows:
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Long-term Debt:
Fixed Rate $10.6 $13.6 $13.6 $13.6 $3.0 $178.0 $232.4
Wtd. Average Interest Rate = 6.95%
Derivative Financial Instrument Related to Debt
- - Interest Rate Swap
Pay Variable/Receive Fixed $10.0 $10.0 $10.0 $10.0 $ -- $ -- $ 40.0
Pay Interest Rate = 4.27% (at June 1, 2002)
Received Interest Rate = 6.37%
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Summary of the quarterly operating results on a consolidated basis:
June 1, 2002; June 2, 2001; June 3, 2000 First Second Third Fourth
(In Millions, Except Per Share Data) Quarter Quarter Quarter Quarter
2002 Net sales $410.3 $395.0 $340.7 $322.6
Gross margin 125.8 118.9 98.5 97.0
Net earnings (2.9) (22.7) (11.6) (18.8)
Earnings per share-diluted $(.04) $(.30) $(.15) $(.25)
2001 Net sales 1 $547.9 $616.3 $561.0 $511.0
Gross margin 1 182.0 210.0 184.8 178.9
Net earnings 2 32.5 42.3 33.0 32.8
Earnings per share-diluted 2 $ .41 $ .54 $ .43 $ .43
2000 Net sales 1 $490.0 $481.4 $497.9 $540.9
Gross margin 1 169.7 165.3 162.0 183.4
Net earnings 35.2 33.0 31.8 39.7
Earnings per share-diluted $ .43 $ .41 $ .40 $ .50
1 Amounts have been restated as a result of adopting Emerging Issues Task Force Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs” (“EITF 00-10”). Adoption of EITF 00-10 took place in the fourth quarter of fiscal 2001 and involved the reclassification to cost of sales of certain shipping & handling-related costs which were previously reported as components of net sales and operating expenses.
2 The first quarter of 2001 includes a pre-tax charge of $5.4 million ($3.5 million after tax, or $.05 per diluted share) for the cumulative effect of a change in accounting principle for pensions. Previously reported net earnings and diluted earnings per share for the first quarter were $36.0 million and $.46, respectively.
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Consolidated Statements Of Operations
June 1, 2002 June 2, 2001 June 3, 2000
------------ ------------ ------------
(In Millions, Except Per Share Data)
Net Sales $1,468.7 $2,236.2 $2,010.2
Cost of Sales 1,028.4 1,480.5 1,329.8
------- ------- -------
Gross Margin 440.3 755.7 680.4
----- ----- -----
Operating Expenses:
Selling, general, and administrative 399.7 475.4 404.4
Design and research 38.9 44.3 41.3
Special charges 81.6 -- --
---- ---- ----
Total Operating Expenses 520.2 519.7 445.7
----- ----- -----
Operating Earnings (79.9) 236.0 234.7
------ ----- -----
Other Expenses (Income):
Interest expense 18.2 16.8 13.4
Interest income (6.2) (7.0) (6.4)
Other, net (.9) 1.1 5.9
---- ------ ------
Net Other Expenses 11.1 10.9 12.9
---- ------ ------
Earnings from Continuing Operations
Before Income Taxes (91.0) 225.1 221.8
Income Taxes on Earnings from
Continuing Operations (35.0) 81.0 82.1
------ ------ ------
Earnings Before Cumulative Effect of a Change
In Accounting Principle (56.0) 144.1 139.7
Cumulative Effect of a Change in Accounting
Principle for Pensions, net of tax of $1.9 -- 3.5 --
------ ------ ------
Net Earnings $(56.0) $140.6 $139.7
======= ====== ======
Earnings Per Share--Basic:
Earnings Before Cumulative Effect of a Change
In Accounting Principle $ (.74) $ 1.88 $ 1.76
Cumulative Effect of a Change in Accounting
Principle, net of tax -- (.05) --
------- ------- ------
Earnings Per Share--Basic $ (.74) $ 1.83 $ 1.76
======= ====== ======
Earnings Per Share--Diluted:
Earnings Before Cumulative Effect of a Change
In Accounting Principle $ (.74) $ 1.86 $ 1.74
Cumulative Effect of a Change in Accounting
Principle, net of tax -- (.05) --
------- ------- ------
Earnings Per Share--Diluted $ (.74) $ 1.81 $ 1.74
======= ====== ======
Pro Forma Amounts Assuming Retroactive Application
of a Change in Accounting Principle for Pensions:
Net Earnings N/A $144.1 $138.1
Earnings Per Share--Basic N/A $1.88 $1.74
Earnings Per Share--Diluted N/A $1.86 $1.71
The accompanying notes are an integral part of these statements.
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Consolidated Balance Sheets
(In Millions, Except Share and Per Share Data) June 1, 2002 June 2, 2001
------------ ------------
Assets
Current Assets:
Cash and cash equivalents $124.0 $138.3
Short-term investments 11.1 13.5
Accounts receivable, less allowances of $16.3 in 2002, and
$19.1 in 2001 142.1 212.6
Inventories 39.6 55.9
Assets held for sale 2.6 --
Prepaid expenses and other 67.0 54.5
---- ----
Total Current Assets 386.4 474.8
----- -----
Property and Equipment:
Land and improvements 18.9 28.8
Buildings and improvements 133.7 163.2
Machinery and equipment 554.0 615.6
Construction in progress 12.8 32.3
---- ----
719.4 839.9
Less: accumulated depreciation 404.0 430.9
----- -----
Net Property and Equipment 315.4 409.0
----- -----
Notes Receivable, less allowances of $2.0 in 2002, and $2.6 in 2001 6.9 13.3
Other Assets 79.3 99.4
---- ----
Total Assets $788.0 $996.5
====== ======
Liabilities and Shareholders' Equity
Current Liabilities:
Unfunded checks $5.9 $21.2
Current portion of long-term debt 10.6 23.3
Notes payable 2.7 3.1
Accounts payable 70.6 95.6
Accrued liabilities 121.2 166.4
----- -----
Total Current Liabilities 211.0 309.6
Long-Term Debt, less current portion above 221.8 232.9
Other Liabilities 92.2 102.5
---- -----
Total Liabilities 525.0 645.0
----- -----
Shareholders' Equity:
Preferred stock, no par value (10,000,000 shares authorized, none issued) -- --
Common stock, $.20 par value (240,000,000 shares authorized, 76,158,482 and
76,019,575 shares issued and outstanding in 2002 and 2001) 15.2 15.2
Additional paid-in capital -- --
Retained earnings 295.8 365.6
Accumulated other comprehensive loss (34.3) (17.4)
Key executive stock programs (13.7) (11.9)
------ ------
Total Shareholders' Equity 263.0 351.5
----- -----
Total Liabilities and Shareholders' Equity $788.0 $996.5
====== ======
The accompanying notes are an integral part of these statements.
-25-
Consolidated Statements of Shareholders' Equity
Accumulated
(In Millions, Additional Other Key Exec. Total
Except Share and Common Paid-In Retained Comprehensive Stock Shareholders'
Per Share Data) Stock Capital Earnings Loss Programs Equity
Balance May 29, 1999 $15.9 $ -- $210.1 $(10.7) $(6.2) $209.1
----- --------- ------ ------ ----- ------
Net earnings -- -- 139.7 -- -- 139.7
Current year translation adjustment -- -- -- (2.8) -- (2.8)
------
Total comprehensive income 136.9
Cash dividends ($.145 per share) -- -- (11.5) -- -- (11.5)
Issuance of 1,312,187 shares of
common stock for Geiger Brickel,
Inc., acquisition .3 32.3 -- -- -- 32.6
Exercise of stock options .1 10.9 -- -- -- 11.0
Employee stock purchase plan -- 4.4 -- -- -- 4.4
Tax benefit relating to
stock options -- 1.5 -- -- -- 1.5
Repurchase and retirement of
3,734,623 shares of common stock (.7) (52.6) (36.8) -- -- (90.1)
Directors' fees -- .1 -- -- -- .1
Stock grants earned -- -- -- -- .7 .7
Stock grants issued -- .2 -- -- (.3) (.1)
Deferred compensation plan -- 3.2 -- -- (3.2) --
Stock purchase assistance plan -- -- -- -- (.1) (.1)
----- --------- ------ ------ ----- ------
Balance June 3, 2000 $15.6 $ -- $301.5 $(13.5) $(9.1) $294.5
----- --------- ------ ------ ----- ------
Net earnings -- -- 140.6 -- -- 140.6
Current year translation adjustment -- -- -- (3.9) -- (3.9)
------
Total comprehensive income 136.7
Cash dividends ($.145 per share) -- -- (11.1) -- -- (11.1)
Exercise of stock options .3 16.1 -- -- -- 16.4
Employee stock purchase plan -- 4.5 -- -- -- 4.5
Tax benefit relating to
stock options -- 3.6 -- -- -- 3.6
Repurchase and retirement of
3,322,174 shares of common stock (0.7) (28.1) (65.4) -- -- (94.2)
Directors' fees -- .2 -- -- -- .2
Stock grants earned 1.1 1.1
Stock grants issued -- 1.5 -- -- (1.7) (.2)
Deferred compensation plan -- 2.2 -- -- (2.2) --
----- --------- ------ ------ ----- ------
Balance June 2, 2001 $15.2 $ -- $365.6 $(17.4) $(11.9) $351.5
----- --------- ------ ------ ------ ------
Net earnings -- -- (56.0) -- -- (56.0)
Current year translation adjustment -- -- -- (1.6) -- (1.6)
Minimum pension liability
(net of tax of $8.8 million) -- -- -- (16.2) -- (16.2)
Unrealized holding gain on investments
available-for-sale -- -- -- .9 -- .9
--
Total comprehensive loss (72.9)
Cash dividends ($.145 per share) -- -- (11.0) -- -- (11.0)
Exercise of stock options .1 7.9 -- -- -- 8.0
Employee stock purchase plan .1 3.8 -- -- -- 3.9
Tax benefit relating to
stock options -- 1.4 -- -- -- 1.4
Repurchase and retirement of
800,721 shares of common stock (.2) (16.3) (2.8) -- -- (19.3)
Stock grants earned -- -- -- -- 1.4 1.4
Stock grants issued -- 4.6 -- -- (4.7) (.1)
Deferred compensation plan -- (1.4) -- -- 1.4 --
Stock purchase assistance plan -- -- -- -- .1 .1
----- --------- ------ ------ ------ ------
Balance June 1, 2002 $15.2 $ -- $295.8 $(34.3) $(13.7) $263.0
===== ========= ====== ======= ======= ======
The accompanying notes are an integral part of these statements.
-26-
Consolidated Statements Of Cash Flows
(In Millions) June 1, 2002 June 2, 2001 June 3, 2000
Cash Flows from Operating Activities:
Net Earnings $(56.0) $140.6 $139.7
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Cumulative effect of a change in accounting
principle for pensions, net of tax -- 3.5 --
Other 110.6 67.7 62.4
----- ---- ----
Net Cash Provided by Operating Activities 54.6 211.8 202.1
---- ----- -----
Cash Flows from Investing Activities:
Notes receivable repayments 341.3 639.4 486.7
Notes receivable issued (334.4) (628.4) (490.6)
Short-term investment purchases (38.9) (113.7) (12.8)
Short-term investment sales 42.3 113.0 --
Property and equipment additions (52.4) (105.0) (135.7)
Proceeds from sales of property and equipment .7 .1 .4
Net cash paid for acquisitions -- -- (5.9)
Surrender of COLI policies 14.0 -- --
Other, net 1.6 (5.5) (5.8)
--- ----- -----
Net Cash Used for Investing Activities (25.8) (100.1) (163.7)
------ ------- -------
Cash Flows from Financing Activities:
Short-term debt borrowings 1.8 499.9 782.3
Short-term debt repayments (2.4) (618.9) (710.8)
Long-term debt borrowings -- 175.0 --
Long-term debt repayments (23.2) (25.0) (17.9)
Dividends paid (11.0) (11.1) (11.5)
Common stock issued 11.9 20.9 15.4
Common stock repurchased and retired (19.3) (94.2) (90.1)
------ ------ -----
Net Cash Used for Financing Activities (42.2) (53.4) (32.6)
------ ------ -----
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (.9) (3.0) (2.8)
---- ----- ----
Net Increase (Decrease) in Cash and
Cash Equivalents (14.3) 55.3 3.0
Cash and Cash Equivalents, Beginning of Year 138.3 83.0 80.0
----- ---- ----
Cash and Cash Equivalents, End of Year $124.0 $138.3 $83.0
====== ====== =====
The accompanying notes are an integral part of these statements.
-27-
Significant Accounting and Reporting Policies
The following is a summary
of significant accounting and reporting policies not reflected elsewhere in the
accompanying financial statements.
Principles of Consolidation The consolidated financial statements include the accounts of Herman Miller, Inc., and its wholly owned domestic and foreign subsidiaries (the company). All significant intercompany accounts and transactions have been eliminated.
Description of Business The company researches, designs, manufactures and distributes interior furnishings and provides related services that support companies all over the world. The company’s products are sold primarily to or through independent contract office furniture dealers. Accordingly, accounts and notes receivable in the accompanying balance sheets are principally amounts due from the dealers.
Fiscal Year The company’s fiscal year ends on the Saturday closest to May 31. The years ended June 1, 2002, and June 2, 2001, each contained 52 weeks. The year ended June 3, 2000, contained 53 weeks.
Foreign Currency Translation The functional currency for foreign subsidiaries is the local currency. The cumulative effects of translating the balance sheet accounts from the functional currency into the United States dollar at current exchange rates and revenue and expense accounts using average exchange rates for the period are included as a separate component of shareholders’ equity. Gains or losses arising from remeasuring all foreign currency transactions into the appropriate currency are included in determining net earnings.
Cash Equivalents The company primarily utilizes money market and time deposit investments as part of its cash management function. Due to the relative short-term maturities and high liquidity of these securities, they are included in the accompanying consolidated balance sheets as cash equivalents at market value and totaled $97.9 million and $106.8 million as of June 1, 2002, and June 2, 2001, respectively. The company’s cash equivalents are considered “available-for-sale.” As of June 2, 2001, and June 3, 2000, the market value approximated the securities’ cost. All cash and cash equivalents are high-credit quality financial instruments, and the amount of credit exposure to any one financial institution or instrument is limited.
Short-Term Investments The company maintains a portfolio of short-term investments comprised of investment grade fixed-income and equity securities. These investments are held at the company’s wholly-owned insurance captive and are considered “available-for-sale” as defined in Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Accordingly, they have been recorded at fair market value with the resulting net unrealized holding gains reflected as a component of comprehensive income/(loss) in the Consolidated Statements of Shareholders’ Equity. Net investment income recognized in the Consolidated Statements of Operations resulting from these investments totaled $.9 million for each of the years ended June 1, 2002, and June 2, 2001.
-28-
The following is a summary of the carrying and market values of the company’s short-term investments as of June 1, 2002:
(In Millions)
Market
Cost Value
---- -----
U.S. Federal agency obligations $ 3.2 $ 4.2
State & Municipal securities 5.1 4.8
Corporate bonds 1.9 2.1
--- ---
10.2 11.1
Unrealized gains 0.9 --
--- ----
Total $11.1 $ 11.1
===== ======
Maturities of short-term investments as of June 1, 2002, are as follows:
(In Millions)
Market
Cost Value
---- -----
Due within one year $ 0.5 $ 0.5
Due after one year through five years 8.5 9.2
Due after five years 1.2 1.4
--- ---
Total $ 10.2 $11.1
====== =====
Property, Equipment, and Depreciation Property and equipment are stated at cost. The cost is depreciated over the estimated useful lives of the assets, using the straight-line method. Estimated useful lives range from 3 to 10 years for machinery and equipment and do not exceed 40 years for buildings. Leasehold improvements are depreciated over the lesser of the lease term or 10 years.
The company capitalizes certain external and internal costs incurred in connection with the development, testing, and installation of software for internal use. Software for internal use is included in property and equipment and is depreciated over an estimated useful life of 5 years or less.
Notes Receivable The notes receivable are primarily from certain independent contract office furniture dealers. The notes are collateralized by the assets of the dealers and bear interest based on the prevailing prime rate. Interest income relating to these notes was $.8 million, $2.2 million, and $1.9 million in 2002, 2001, and 2000, respectively.
Long-Lived Assets The company assesses the recoverability of its long-lived assets whenever events or circumstances such as current and projected future operating losses or changes in the business climate indicate that the carrying amount may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are independent and identifiable cash flows. The company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows (undiscounted and without interest charges) expected to result from the use of the asset. If the carrying amount of the asset exceeds the expected future cash flows, the company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value. The estimation of fair value is made by discounting the expected future cash flows at the rate the company uses to evaluate similar potential investments based on the best information available at that time. If the assets being tested for recoverability were acquired in a purchase business combination, the goodwill that arose in that transaction is included in the asset group’s carrying values on a pro-rata basis using the relative fair values.
-29-
In situations where goodwill and intangible balances remain after applying the impairment measurements to business unit asset groupings under Statement of Financial Accounting Standards (SFAS) No. 121, the company assesses the recoverability of the remaining balances at the enterprise level under the provisions of Accounting Principles Board (APB) Opinion 17. Applying these provisions, when the estimated undiscounted future operating earnings (before interest and amortization) for individual business units is not sufficient to recover the remaining carrying value over the remaining amortization period, the company recognizes an impairment loss for the excess.
Refer to “Special Charges” footnote for discussion on impairments recognized in fiscal 2002 in connection with the company’s restructuring activities. No significant impairments were provided for in 2001 or 2000.
Intangible assets included in other assets consist mainly of goodwill, patents, and other acquired intangibles, and are carried at cost, less applicable amortization of $28.6 million and $24.9 million in 2002 and 2001, respectively. These assets are amortized using the straight-line method over periods of 5 to 20 years.