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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 May 29, 1999 Commission File No. 0-5813
Herman Miller, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-0837640
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
855 East Main Avenue
PO Box 302
Zeeland, Michigan 49464-0302
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(Address of principal (Zip Code)
executive offices)
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
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(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 July 30, 1999, was $2,064,075,221 (based on $26.25 per share
which was the closing sale price in the over-the-counter market as reported by
NASDAQ).
The number of shares outstanding of the registrant's common stock, as of July
30, 1999: Common stock, $.20 par value--80,848,604 shares outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on September 27, 1999, are incorporated into Part III of
this report.
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PART 1
Item 1 BUSINESS
(a) General Development of Business
The company is engaged primarily in the design, manufacture, and sale of office
systems, products, and services principally for offices and, to a lesser extent,
for healthcare facilities and other uses. 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.
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 services. Most of these
systems and products are coordinated in design so that they may be used both
together and interchangeably. The company's products and services are purchased
primarily for offices, and, to a lesser extent, healthcare facilities and other
uses.
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, and
Ethospace. 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. The company also offers a broad
array of seating (including Aeron, Equa, Ergon, and Ambi office chairs), storage
(including Meridian filing products), and freestanding furniture products.
The company's products are marketed worldwide by its own sales staff and its
owned dealer network. These sales persons 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 a few complementary product lines of other
manufacturers. Approximately 73.6 percent of the company's sales in the fiscal
year ended May 29, 1999, were made to or through independent dealers. The
remaining sales (26.4 percent) 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's furniture systems, seating, storage, 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) 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 225 active United States utility patents on
various components used in its products and approximately 108 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,"
"Ambi," "Ergon," "Equa," "Ethospace," "Meridian," "1:1," "Passage," "Q,"
"Resolve," "SQA" (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, excluding the company's owned dealer network, accounted for
more than 3.8 percent of the company's net sales in the fiscal year ended May
29, 1999. For fiscal 1999, the largest single end-user customer accounted for
approximately 7.1 percent of the company's net sales with the 10 largest of such
customers accounting for approximately 15.0 percent of the company's 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 May 29, 1999, the company's backlog of unfilled orders was $216.0 million.
At May 30, 1998, the company's backlog totaled $229.1 million. It is expected
that substantially all the orders forming the backlog at May 29, 1999, will be
filled during the current fiscal year. Many orders received by the company are
filled from existing raw material inventories and 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 believes
that it is the second largest publicly held office furniture manufacturer in the
United States. However, in several of the markets served by the company, it
competes with over 400 smaller companies and with several manufacturers that
have significantly greater resources and sales. Price competition remained
relatively stable from 1997 through 1999.
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, 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 $33.4
million, $29.0 million, and $25.7 million was spent by the company on design and
research activities in 1999, 1998, and 1997, 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 as they are considered to be a
variable cost of the product.
Environmental Matters
The company does not believe, based on existing 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.
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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
542 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.
As of May 29, 1999, the company employed 8,185 full-time and 370 part-time
employees, representing an 8.2 percent increase in full-time employees and a 3.6
percent increase in part-time employees compared with May 30, 1998. 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/institution customers. Foreign sales mostly consist of office furniture
products such as Ethospace and Action Office systems, seating, and storage
products. The company segments its internal operations into 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, United Kingdom,
and Mexico. Sales are made through wholly owned subsidiaries in Australia,
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 income for the company.
Additional information with respect to operations by geographic area appears in
the note "Operating Segments" of the Notes to Consolidated Financial Statements
set forth on page 41. 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.
Item 2 PROPERTIES
The company owns or leases facilities which are located throughout the United
States and several foreign countries, including Australia, Canada, France,
Germany, Italy, Japan, Mexico, and the United Kingdom. The location, square
footage, and use of the most significant facilities at May 29, 1999, were as
follows:
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Location
- - --------
Square
Owned Locations Footage Use
- - --------------- ------- ---
Zeeland, Michigan 749,000 Manufacturing, Warehouse, and Office
Spring Lake, Michigan 921,700 Manufacturing, Warehouse, and Office
Holland, Michigan 355,000 Manufacturing, Distribution, and Warehouse
Rocklin, California 338,100 Manufacturing and Warehouse
Holland, Michigan 216,700 Design Center
Holland, Michigan 200,000 Manufacturing and Warehouse
Holland, Michigan 293,100 Manufacturing, Warehouse, and Office
Leased Locations
Zeeland, Michigan 392,800 Manufacturing, Warehouse, and Office
Roswell, Georgia 225,000 Manufacturing and Warehouse
Chippenham, England, U.K. 168,900 Manufacturing and Warehouse
Stone Mountain, Georgia 84,500 Manufacturing and Warehouse
Mexico City, Mexico 59,400 Manufacturing, Warehouse, and Office
The company also maintains showrooms or sales offices near most major
metropolitan areas throughout North America, Europe, the Middle East,
Asia/Pacific, and South 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 has been notified that the GSA has referred
an audit of the company to the Department of Justice for consideration of a
potential civil False Claims Act case. Management does not expect resolution of
the audits to have a material adverse effect on the company's consolidated
financial statements. Management does not have information that would indicate a
substantive basis for a civil False Claims Act case.
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 May 29, 1999.
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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 52 1989 Vice President, Legal Services, and Secretary
Robert Frey 56 1996 Executive Vice President, President, International
David M. Knibbe 44 1997 Executive Vice President, Sales and Distribution
Andrew C. McGregor 49 1988 Executive Vice President, President, Business Services Group
Gary S. Miller 49 1984 Executive Vice President, Product Research and Development
Gene Miyamoto 44 1996 Executive Vice President, Human Resources and Corporate
Communications
Christopher A. Norman 51 1996 Executive Vice President and Chief Information Officer
Dan Rosema 40 1998 Executive Vice President, Casegoods and Seating
Vicki TenHaken 48 1996 Executive Vice President, Strategic Planning
Mike Valz 47 1998 Executive Vice President, Systems and SQA
Gary VanSpronsen 43 1998 Executive Vice President, Offer Development and Marketing
Michael A. Volkema 43 1995 President and Chief Executive Officer
Brian C. Walker 37 1996 Executive Vice President, Finance and Business Development,
Chief Financial Officer
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. Frey joined
Herman Miller, Inc., in November 1996, and prior to 1996 was chairman of the
board and chief executive officer of Asian operations and an elected executive
vice president at Whirlpool Corporation. 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. Mr. Miyamoto was the president at Community Medical Center Healthcare
System from January 1995 to February 1996 and executive vice president and chief
operating officer of St. Vincent Medical Center from June 1992 to January 1995.
Prior to May 1993 to January 1998, Mr. Norman was the president of Miller SQA.
Mr. Rosema was the vice president, casegoods, of Herman Miller, Inc., from March
1997 to September 1998; president of Coro Services, Inc., from June 1995 to
March 1997; and owner of Corporate Vision Interiors, Inc., from October 1993 to
June 1995. Ms. TenHaken was vice president and general manager of Herman Miller
for the Home through May 1996. Mr. Valz was vice president of systems for Herman
Miller, Inc., from March 1997 to September 1998, and vice president and general
manager of Hardwood Products at Hillenbrand Industries, Inc., from January 1994
to March 1997. 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. From February 1995 to May 1995, Mr. Volkema was
president and chief executive officer of Coro, Inc., and prior to May 1993 to
September 1994 was president and chairman of the board of Meridian, Inc. Mr.
Walker was the vice president of finance for Herman Miller, Inc., from May 1995
to March 1996; vice president of Finance and Management Information Systems of
Milcare, Inc., from July 1994 to May 1995; and vice president of finance for
Herman Miller Europe from December 1991 to July 1994.
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PART II
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
SHARE PRICE, EARNINGS, AND DIVIDENDS SUMMARY
Herman Miller, Inc., common stock is quoted in the NASDAQ-National Market System
(NASDAQ-NMS Symbol: MLHR). As of July 30, 1999, there were approximately 24,000
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 Diluted Share
YEAR ENDED MAY 29, 1999
First quarter 30.313 23.000 23.000 .39 .03625
Second quarter 25.438 18.750 22.250 .45 .03625
Third quarter 26.875 15.875 17.000 .35 .03625
Fourth quarter 22.750 15.813 20.188 .48 .03625
Year 30.313 15.813 20.188 1.67 .14500
YEAR ENDED MAY 30, 1998
First quarter 25.875 17.344 25.875 .30 .03625
Second quarter 28.406 22.000 25.375 .33 .03625
Third quarter 31.750 23.250 30.625 .36 .03625
Fourth quarter 35.563 26.030 27.688 .40 .03625
Year 35.563 17.344 27.688 1.39 .14500
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Item 6 SELECTED FINANCIAL DATA
REVIEW OF OPERATIONS
(In Thousands, Except Per Share Data) 1999 1998 1997 1996 1995
OPERATING RESULTS
Net Sales $1,766,239 $1,718,595 $1,495,885 $1,283,931 $1,083,050
Gross Margin 669,705 638,839 533,924 434,946 378,269
Selling, General, and Administrative 407,446 396,698 359,601 316,024 303,621
Design and Research Expense 37,946 33,846 29,140 27,472 33,682
Operating Income 224,313 208,295 130,683 74,935 9,066
Income (Loss) Before Income Taxes 229,912 209,531 125,883 70,096 4,039
Net Income (Loss) 141,812 128,331 74,398 45,946 4,339
Cash Flow from Operating Activities 205,613 268,723 218,170 124,458 29,861
Depreciation and Amortization 62,054 50,748 47,985 45,009 39,732
Capital Expenditures 103,404 73,561 54,470 54,429 63,359
Common Stock Repurchased plus
Cash Dividends Paid 179,766 215,498 110,425 38,116 13,600
KEY RATIOS
Sales Growth 2.8 14.9 16.5 18.5 13.6
Gross Margin(1) 37.9 37.2 35.7 33.9 34.9
Selling, General, and Administrative(1) 23.1 23.1 24.0 24.6 28.0
Design and Research Expense(1) 2.1 2.0 1.9 2.1 3.1
Operating Income(1) 12.7 12.1 8.7 5.8 0.8
Net Income Growth 10.5 72.5 61.9 958.9 (89.3)
After-Tax Return on Net Sales 8.0 7.5 5.0 3.6 0.4
After-Tax Return on Average
Assets 18.3 16.7 10.3 6.8 0.7
After-Tax Return on Average
Equity 64.4 49.5 25.0 15.4 1.5
SHARE AND PER SHARE DATA(2)
Earnings per Share-Diluted $ 1.67 $ 1.39 $ 0.77 $ 0.46 $ 0.04
Cash Dividends Declared per Share 0.15 0.15 0.13 0.13 0.13
Book Value per Share at Year End 2.46 2.51 2.99 3.07 2.89
Market Price per Share at Year End 20.19 27.69 17.88 7.72 5.42
Weighted Average Shares Outstanding-
Diluted 84,831 92,039 96,124 100,515 99,168
FINANCIAL CONDITION
Total Assets $ 761,506 $ 784,346 $ 755,587 $ 694,911 $ 659,012
Working Capital (1,247) 21,803 100,253 115,878 39,575
Current Ratio 1.0 1.06 1.35 1.53 1.15
Interest-Bearing Debt 147,590 130,655 127,369 131,710 144,188
Shareholders' Equity 209,075 231,002 287,062 308,145 286,915
Total Capital 356,665 361,657 414,431 439,855 431,103
EBITDA 299,261 268,579 182,711 123,015 50,070
Debt-to-EBITDA Ratio .5 .5 .7 1.1 2.9
EBITDA-to-Interest Expense Ratio 41.0 32.4 20.7 15.6 7.9
(1) Shown as a percent of net sales
(2) Retroactively adjusted to reflect two-for-one stock splits occurring in
1998 and 1997.
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Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS The issues discussed in management's
discussion and analysis should be read in conjunction with the company's
consolidated financial statements and the notes to the consolidated financial
statements. FORWARD-LOOKING STATEMENTS This discussion and analysis of financial
condition and results of operations, as well as other sections of our 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 about the company itself. Words such as
"anticipates," "believes," "confident," "estimates," "expects," "forecasts,"
"likely," "plans," "projects," "should," variations of such words, and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of 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 may be expressed or forecasted in
such forward-looking statements. Furthermore, Herman Miller, Inc., undertakes no
obligation to update, amend, or clarify forward-looking statements, whether as a
result of new information, future events, or otherwise.
(graph)
EARNINGS PER SHARE
in dollars
1995 $0.04
1996 $0.46
1997 $0.77
1998 $1.39
1999 $1.67
OVERVIEW
We had a record-setting year at Herman Miller in a number of categories,
including sales, net income, earnings per share and Economic Value Added (EVA).
While we set new reference points for all of these critical measures, we did not
achieve our goals for sales and net income growth. A key reason for our
shortfall was a significant decline in industry demand that began to affect our
order entry in the third quarter. We believe the driver behind this change in
industry dynamics was the expectation of lower corporate profits in the United
States (U.S.). Corporate profits were expected to decline in late calendar 1998
and early 1999. This was a result of economic difficulties in many international
regions. As we finished fiscal 1999, the outlook had improved. Corporate profits
were stronger than anticipated, the U.S. economy was still growing, and demand
for our industry's products appeared to be firming up. This is discussed in more
detail under the domestic operations section of this analysis.
This was a year of significant investment for Herman Miller. As we expected,
capital expenditures increased to an all-time high of $103.4 million. We also
made significant investments in the form of additional operating expenses. In
total, our operating expenses increased $14.8 million, or 3.4 percent. Our
design and research expenditures increased approximately 12.1 percent. Our
investments were in three primary areas: information technology to connect our
manufacturing, logistics, customer-care and administrative operations; an
electronic sales platform; and new products. These investments are core building
blocks that
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will enable us to implement our strategy, get connected, and change the game in
the office furniture industry.
(graph)
EVA in millions of dollars
1995 ($13.4)
1996 $10.3
1997 $40.9
1998 $78.4
1999 $91.1
Despite less-than-anticipated sales growth, we continued to invest in our
future, improve our profitability and set a new record for EVA performance. This
was made possible by the continued efforts of our employee-owners to reduce and
eliminate waste, redeploy or eliminate nonproductive assets, and prioritize our
expenditures against our strategic imperatives.
Fiscal 1999 marked our third year of utilizing EVA as our business measurement
tool. As we indicated when we initiated the program, our Board of Directors had
set improvement targets for the initial three-year period, and has now
established new targets for the next three years. While establishing targets for
the future, we were able to reflect on the EVA program and the impact it has had
on the company. We believe there have been numerous benefits from this program,
with the most significant being the business literacy of our employee-owners.
Nearly all of our 8,185 employees worldwide have received training in EVA. Our
employee-owners know that capital is not free and that sustainable value is
created through continuous improvement and growth. They also understand that
their compensation is directly tied to EVA results. Extensive independent market
research has demonstrated that EVA more closely correlates with shareholder
value, in the long run, than any other measure. And this has been the case for
Herman Miller, over the past four years. However, it was not true for Herman
Miller in fiscal 1999. Our EVA increased 16.2 percent, while the value of one
share of Herman Miller common stock declined 27.1 percent. We believe that this
divergence in share price is a short-term phenomenon and that EVA will continue
to be the best long-term predictor of shareholder value. Therefore, again this
year, we have presented a summarized calculation of our EVA for fiscal 1999,
1998, and 1997. In addition, we have noted throughout our analysis the impact
that changes in performance had on EVA.
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CALCULATION OF ECONOMIC VALUE ADDED
(In Thousands) 1999 1998 1997
Operating income $ 224,313 $ 208,295 $ 130,683
Divestiture -- -- 14,500
Interest expense on noncapitalized leases (1) 4,071 4,166 4,509
Goodwill amortization 3,001 6,161 4,725
Other 4,621 13,765 5,093
Increase (decrease) in reserves (4,293) 1,290 18,649
Capitalized design and research 3,657 2,101 2,819
--------- --------- ---------
Adjusted operating profit 235,370 235,778 180,978
Cash taxes (2) (83,607) (90,703) (72,091)
--------- --------- ---------
Net operating profit after taxes (NOPAT) 151,763 145,075 108,887
Weighted-average capital employed (3) 551,600 606,018 617,727
Weighted-average cost of capital (4) 11% 11% 11%
--------- --------- ---------
Cost of capital 60,676 66,662 67,950
--------- --------- ---------
Economic Value Added $ 91,087 $ 78,413 $ 40,937
--------- --------- ---------
(1) Imputed interest as if the total noncancelable lease payments were
capitalized.
(2) The reported current tax provision is adjusted for the statutory tax impact
of interest expense.
(3) Total assets less noninterest-bearing liabilities plus the LIFO, doubtful
accounts and notes receivable reserves, warranty reserve, amortized
goodwill, loss on sale of the German manufacturing operation, deferred
taxes, restructuring costs, and capitalized design and research expense.
Design and research expense is capitalized and amortized over 5 years.
(4) Management's estimate of the weighted average of the minimum equity and
debt returns required by the providers of capital.
As you can see, we generated $91.1 million of EVA this year, compared to $78.4
million last year, and $40.9 million in 1997. In 1999, our EVA increased 16.2
percent, after increasing 91.5 percent in 1998.
KEY DRIVERS
NET SALES Over the past three years, our sales have increased at a compound rate
of 11.2 percent. In fiscal 1999, our sales increased 2.8 percent, after
increasing 14.9 percent in 1998, and 16.5 percent in 1997. Our fiscal 1999
result was significantly below our goal of increasing sales 15 percent per
annum. These results brought home two facts. First, we will be affected from
time to time by macro factors that are not in our control. Second, we have just
begun our journey to reinvent our industry and ourselves.
(graph)
NET SALES in
millions of dollars
1995 $1,083.1
1996 $1,283.9
1997 $1,495.9
1998 $1,718.6
1999 $1,766.2
As we stated in the overview, much of the year-over-year decline in growth rates
can be attributed to poor industry dynamics in the U.S. Based on industry
information, we believe that we have continued to gain market share in the U.S.,
which is our largest market. Our international markets were also impacted by the
economic turmoil in Asia and Latin America. In addition, the strong U.S. dollar
made it more difficult to compete as an exporter. Each of these topics is
expanded upon below.
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Our leadership team began their work together four years ago. The first two
years, we concentrated on practicing the fundamentals. We also implemented some
of our building blocks, such as EVA and lean manufacturing. In year three, we
refined our strategic vision and developed an implementation plan. This year, we
began the implementation. Of course, many of the key competencies and
capabilities have been in place for some time; however, we also have areas where
the development is still in process. In the end, we intend to connect our
historical strengths with our new capabilities to form new business models that
will redefine the competitive playing field.
We know that we will not achieve our aggressive growth goals in each and every
year. However, we continue to believe that, under normal industry conditions,
our overall growth strategy is appropriate and attainable.
DOMESTIC OPERATIONS Our domestic sales grew 3.8 percent this year, after growing
16.7 percent in 1998, and 19.2 percent in 1997. Excluding acquisitions, our
domestic sales increased 2.3 percent in 1999, 15.9 percent in 1998, and 16.4
percent in 1997. Individually, none of our acquisitions were material. Our
domestic growth has been primarily driven by unit volume increases. We have not
materially changed list prices in over three years. During 1999, incremental
discounts given to customers reduced our net sales by approximately $11 million.
Changes in discounts did not have a material impact on our sales in 1998 or
1997.
(graph)
DOMESTIC SALES GROWTH
as a percent
BIFMA Herman Miller
1995 9.4% 10.1%
1996 5.1% 16.7%
1997 10.1% 19.2%
1998 11.9% 16.7%
1999 1.9% 3.8%
The Business and Institutional Furniture Manufacturers Association (BIFMA)
reported that U.S. sales grew approximately 1.9 percent in the 12 months ended
May 1999, after increasing 11.9 percent in 1998, and 10.1 percent in 1997. Given
that our growth has exceeded the industry's growth, we believe we have gained
market share in each of the past three years.
We believe demand for office furniture in the U.S. is driven by three factors in
the macro economy: corporate profits, white-collar employment, and
nonresidential fixed investments. During fiscal years 1997 and 1998, each of
these factors had a positive impact. Secular trends, such as the deployment of
technology into work environments and new and emerging work styles, have also
positively influenced demand in recent years.
We believe the decline in industry demand experienced in the last two quarters
of fiscal 1999 was due to economic forecasts of weaker corporate profits. In
late summer and early fall of 1998, many economic analysts began to predict
declining corporate profits for the last quarter of calendar 1998 and much of
1999. Additionally, both white-collar employment and nonresidential fixed
investment were expected to increase at a lower rate than in 1998 and 1997. This
change in the macro economic outlook resulted in many companies delaying or
reducing investment plans. The impact of these changes began to negatively
affect our order entry at the beginning of our third quarter. This was further
exacerbated by our normal pattern of lower order entry during the Christmas and
New Year holiday season.
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In retrospect, the actual decline in corporate profits was less than expected.
The U.S. economy continued to expand and the international markets began to
stabilize. Our industry has historically lagged behind changes in the macro
economy by approximately six months. Therefore, we continued to experience weak
demand throughout much of our fourth quarter. As we ended fiscal 1999, demand
patterns had begun to firm up. This was evidenced by a 15.8 percent increase in
order entry, from the third quarter to the fourth quarter. A portion of the
sequential quarter increase was due to the seasonal impact of the holidays.
However, renewed confidence that corporate profits will increase in 1999,
coupled with the positive bias in the other macro factors, should enable the
industry to return to more normal growth patterns. BIFMA is currently estimating
that industry shipments will increase 1 to 3 percent in calendar 1999, and 4 to
6 percent in calendar 2000.
Our next fiscal year will contain 53 weeks. This extra week will be included in
our results for the first quarter of fiscal 2000. Excluding the impact of this
event, we expect our sales in the first half of fiscal 2000 to be nearly the
same as the first half of 1999. Our sales growth in fiscal 2000 is likely to be
heavily weighted to the second half of the year, as the year-over-year
comparisons will be more favorable. In addition, we will still be rebuilding
momentum in the first half of the year.
INTERNATIONAL OPERATIONS AND EXPORTS FROM THE UNITED STATES Three years ago, we
stated our primary objective for our international business was to improve
profitability. We had experienced several years of net operating losses, failed
acquisitions and restructuring charges. Our plan was to right-size the business
and to retain those assets and operations that were adding value, as a
geographic segment, or supporting our multinational customers. We completed most
of this work in fiscal 1997 and 1998. This included the sale of our German
manufacturing operation in 1997, the realignment of our Italian operation in
1998, and a turnaround effort in Mexico in 1996. We are pleased to report that
these efforts have all had positive impacts on our profitability with minimal,
if any, impact on our sales. Fiscal 1999 marked our second year of positive
operating results in our international business as a whole. All of those efforts
are now driving tangible results. In spite of a decline in revenue, net income
for 1999 was $8.1 million, versus $7.6 million last year. In 1997, we reported a
net loss of $4.6 million, excluding the sale of our German manufacturing
operation. These numbers are different than we have reported in past years. We
have restated all years to conform to our internal reporting, where we allocate
the cost of certain corporate functions and assets. This accounting provides a
more accurate picture of the economic returns we receive from these operations.
While we continue to incur losses in some of our operations, no individual
location is generating a significant operating loss.
Net sales of international operations and export sales from the U.S. for the
year declined 2.8 percent in 1999 to $259.1 million, compared with $266.7
million last year, and $251.2 million in 1997. The decline in 1999 and increases
in 1998 and 1997 were primarily attributable to changes in unit volumes.
(graph)
INTERNATIONAL NET SALES
in millions of dollars
1995 $188.6
1996 $240.1
1997 $251.2
1998 $266.7
1999 $259.1
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This year, our international sales have been negatively impacted by three macro
factors. First, the strong U.S. dollar has made it more difficult to compete as
an exporter. Our production capacity outside of the U.S. is largely limited to
the United Kingdom. Second, the crisis in Asia has led indigenous companies to
curtail investments and caused American multinationals to reevaluate the amount
of risk they are willing to take in these markets. Last, the economic situation
in Latin America has slowed activity levels in that region.
The sales decline for the year was primarily attributable to our Canadian
business and, to a lesser extent, South America. The decline in Canada is due,
in part, to the weak Canadian dollar. In addition, our sales in Canada are
heavily project driven and some project business from last year did not repeat
in the current year.
We continue to have very good results in our Mexico and United Kingdom
operations. Each of these regions has increased revenue for each of the past
three years. While our operations on the continent of Europe showed a decline in
revenue in 1999, we are very pleased with the progress we have made in
profitability and capability.
GROSS MARGIN Fiscal 1999 marked the third year in a row where we improved our
gross margin percentage. Gross margin, as a percent of sales, increased to 37.9
percent for the year, compared to 37.2 percent in the prior year, and 35.7
percent in 1997. This improvement contributed approximately $7.8 million to EVA
and net income in the current year.
Three primary factors are responsible for our improvements in gross margin:
manufacturing productivity, reductions in material costs, and favorable changes
in product mix. A decline in incentive compensation contributed to the
improvement in 1999. These incentives are paid to all employees and are tied to
year-over-year improvement in EVA. As discussed above, in 1999, these positive
factors were partially offset by increased discounts given to customers.
We began to make significant improvements in our manufacturing processes in
1995. At that time, we implemented a series of changes to our manufacturing and
logistical operations that eliminated or reduced non value-adding activities.
This resulted in the elimination of certain facilities. Those changes continued
to pay dividends to us over the past three years. In addition, we are in the
process of implementing lean manufacturing techniques throughout our operations.
These techniques are a process of continuous improvement that focuses on the
elimination of waste in all aspects of our business. While it's difficult to
quantify, we believe that this process began to have a significant impact on our
costs in 1999. If this is true, the good news is that we are in the very early
stages of this work and can anticipate an ongoing positive impact on costs.
Our improvements in manufacturing productivity have also led to a substantial
reduction in the amount of money we have invested in working capital. At the end
of 1999, the day's sales outstanding in the sum of our accounts receivable and
inventory had declined to 52.5 days, compared to 56.2 days and 63.3 days at the
end of 1998 and 1997, respectively. These improvements are the result of
eliminating steps in the physical distribution process, faster cycle times, and
improved connectivity with our vendors. In addition, as our operations become
more reliable, our customers pay on a more timely basis. These improvements have
had a significant impact on EVA. Over the past three years, these improvements
have resulted in a cumulative decrease in capital deployed of $28.3 million or a
$3.1 million increase in annual EVA.
Our manufacturing operations rely heavily on our supply base. In fact, 63.9
percent of our cost of goods sold is material cost. We believe this is a
competitive advantage. Not only are our costs more variable with sales, we can
be more flexible in selecting new materials and processes in the research,
design, and development of new products. However, to be cost competitive and
achieve the reliability and speed we demand, we must be connected with our
supply base technologically and in purpose. We are making progress on both
fronts. By partnering with our supply base, we were able to reduce our material
cost by approximately $10 million in 1999. This work also has
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had and will continue to have a positive impact on our speed, reliability, and
working-capital investment.
Our product mix has continued to shift toward seating products, a trend that
started several years ago. Over the past four years, we introduced several new
seating products, which we believe have given us the strongest work-seating
offering in our industry. As a result, our sales in this product segment have
increased at a faster rate than our total sales. On average, these products have
higher gross margin levels.
While this has had a beneficial impact on margins, office furniture systems
still represent the largest industry segment. We have introduced several new
office systems products that we believe will enable us to increase our rate of
sales growth in this category. Q system, a product line that was introduced in
June of 1997, began to make a significant contribution to our sales in 1999.
Passage desk-based system, introduced in June of 1998, became available for
order in the third quarter of 1999. In June of 1999, we introduced Resolve
system. We believe this product line will set new reference points for function,
aesthetics, and costs in the systems furniture segment. Each of these products
received a gold award on their introduction at the industry's annual trade show,
NeoCon.
Over the last few years, we have had relatively stable pricing. The increased
discounting in 1999 was not confined to any one product. Discounting in 1999 was
more pronounced than we had anticipated at the beginning of the year, however,
given the slower demand pattern, pricing has remained rational. For the year,
the impact of increased discounting was approximately $11 million, or 0.6
percent of sales.
At the end of 1998, we began to implement a new Enterprise Resource Planning
(ERP) system in most of our U.S. operations. As part of this implementation, we
intend to reengineer many of our operating processes. We believe the
implementation of these investments, coupled with our implementation of lean
manufacturing techniques, will improve our quality and reliability and reduce
lead-times and the cost of producing product. Last year, we estimated the total
investment to implement the ERP system would be approximately $80 million. We
were wrong. The project will take longer than we anticipated and we now expect
the total cost to be $100 million. After a difficult start, we reorganized the
implementation, recruited several new information technology professionals, and
reduced our reliance on external consultants. While we are not pleased with the
increased time and money, we are confident that the revised plan will be
achieved and believe this investment will generate positive EVA and improve our
competitive position. To date, we have two West-Michigan manufacturing sites
operating on the new system. We also are using the system for the financial
operations of our largest operation in the U.S. All of these areas implemented
these systems with very little, if any, disruption. While it is still early, we
are seeing tangible benefits where we had anticipated them. We expect to
implement the new system at the majority of our manufacturing sites over the
next 12 to 18 months.
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(graph)
GROSS MARGIN
as a percent of net sales
1995 34.9%
1996 33.9%
1997 35.7%
1998 37.2%
1999 37.9%
Going forward, we expect gross margins to remain in the range of 37.5 to 38.5
percent of sales. Continued productivity improvements and material cost
reductions will be offset, to some degree, by additional discounting. We also
could be negatively impacted by the cost of disruptions associated with
implementation of our ERP system, a new production facility in Atlanta, Georgia,
and new products that will be introduced over the next 12 months.
OPERATING EXPENSES Over the last four years, operating expense reductions have
been a key driver of our improvement in EVA. Since 1995, we have reduced our
operating expenses from 31.1 percent of sales to 25.2 percent in 1999. This
reduction accounts for $64.1 million of EVA on an annual basis. This year, we
had very little change in operating expenses. The 25.2 percent reported for 1999
is virtually the same as the 25.1 percent we reported in 1998.
(graph)
OPERATING EXPENSES
as a percent of net sales
1995 31.1%
1996 26.7%
1997 26.0%
1998 25.1%
1999 25.2%
Last year, we told you our goal was to reduce operating expenses to 23 percent
by 2001. Our goal is still 23 percent of sales, but it will take us until 2002
to achieve it. Two things prevented us from making progress toward our goal in
1999. First, as we discussed above, we did not have a great deal of top line
growth. Second, we have been and continue to be in a period of significant
investment. We believe these investments, both capital and expense, are critical
to building the capabilities we need to have a sustainable competitive
advantage. Three areas required significant incremental spending during 1999.
The first of these areas is the continued development of our electronic selling
platform, referred to internally as the 1:1 platform. Essentially, using this
tool, we are able to design, specify, quote, and place an order, from a laptop
personal computer brought to the customer's site. This tool has significantly
improved the buying experience for our customers, while having the added benefit
of streamlining the order-entry process. Our incremental investment in
developing and implementing this capability was $4.2 million, or 0.2 percent of
net sales in 1999.
As we have discussed throughout this report, the deployment of technology has
been and will continue to be a key focus for us. To support this work, we have
increased the size and expertise of our information technology staff. This year,
the team was focused on implementing our new ERP system and upgrading our
information technology infrastructure. In total, our spending in this area
increased $10.6 million. We expect our information technology costs to remain at
an increased level for the foreseeable future. This is due, in part, to our
ongoing ERP implementation. In addition, we believe that most companies who lead
their industry also lead in the deployment of technology.
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The third area of incremental expenditure was design and research. Design and
research costs, excluding royalty payments, were $33.4 million in 1999, compared
to $29.0 million in 1998, and $25.7 million in 1997. 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 1.9 percent in 1999, 1.7 percent in 1998, and 1.7 percent in 1997. As
discussed earlier, new product design and development has been, and continues to
be, a key business strategy. The increased expenditures are directly related to
the increased number of new products introduced and currently in development.
In addition to these areas, we had incremental operating expenses from
acquisitions completed during fiscal 1999 and 1998, and increases in wages and
benefits of approximately 3 percent. Our incremental expenditures were partially
offset by lower incentive compensation payments. Our executive incentives and
company-wide gain sharing programs are based on the annual improvement in EVA.
OPERATING INCOME The combination of improved gross margins and relatively
unchanged operating expenses has resulted in significant improvements in
operating income. As a percent of sales, operating income improved to 12.7
percent in 1999, after improving to 12.1 percent in 1998, and 9.7 percent in
1997. The 1997 amount excludes the charge for the sale of our German
manufacturing operation. The 12.7 percent recorded in 1999 was the highest
reported for a fiscal year in over 10 years.
(graph)
OPERATING INCOME
as a percent of net sales
1995 3.8%
1996 7.1%
1997 9.7%
1998 12.1%
1999 12.7%
INCOME TAXES Our effective tax rate was 38.3 percent in 1999, compared to 38.8
percent and 40.9 percent in 1998 and 1997, respectively. The lower tax rate is
due primarily to lower state taxes, international tax benefits and utilization
of net operating loss carryforwards. The 1997 tax rate was also negatively
impacted by the loss on the sale of the German manufacturing operation, which
provided a tax benefit that was lower than our statutory rate.
We expect the effective tax rate for fiscal 2000 to be in the range of 36.5 to
37.5 percent.
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LIQUIDITY AND CAPITAL RESOURCES The table below shows certain key cash flow and
capital highlights:
(In Thousands) 1999 1998 1997
Cash and cash equivalents $ 79,952 $115,316 $106,161
Cash from operating activities $205,613 $268,723 $218,170
Days sales in accounts receivable and inventory 52.5 56.2 63.3
Capital expenditures $103,404 $ 73,561 $ 54,470
Debt-to-EBITDA ratio .5 .5 .7
EBITDA-to-interest expense ratio 41.0 32.4 20.7
EVA capital $577,122 $543,789 $615,120
NOPAT to EVA capital 26.3% 26.7% 17.7%
Our cash flow from operations declined 23.5 percent in 1999, to $205.6 million,
from the all-time high we recorded last year of $268.7 million. The decrease
from last year was due to an incremental increase in working capital of $14.9
million. Last year we were able to reduce our dollars invested in working
capital by $85.2 million. As we discussed above, we continued to do an excellent
job of managing our working capital in 1999. Days sales outstanding in the total
of accounts receivable and inventory declined 3.7 days or 6.6 percent. Over the
past four years, we have reduced our days sales outstanding by 38.7 days or 42.4
percent. As noted above, this has significantly increased our return on invested
capital. Our progress in 1999 was offset by declines in accounts payable and
unfunded checks. These reductions were the result of lower inventory balances
and the timing of payments to vendors. We believe the investments we are making
in the deployment of lean manufacturing techniques and information technology
will allow us to achieve further improvements in working capital.
Fiscal 1999 capital expenditures were primarily for investments in our new ERP
system, overall information technology infrastructure, the development and
deployment of our electronic selling platform, new products, and machinery and
equipment to improve operational performance and expand capacity. At the end of
the fiscal year, $25.4 million of capital was committed for future expenditures.
In 1996, we established a plan to reduce the cash we had invested in
nonproductive or nonessential assets. This has resulted in the sale of certain
real estate assets over the past three years. During 1999, we completed the sale
of our manufacturing site and excess land in Roswell, Georgia, a building in
Grandville, Michigan, and excess land in the United Kingdom. Total proceeds from
the sale of these properties were $26.0 million. Our gain on the sale of these
assets, net of other capital losses, was $4.3 million or $.05 per share. The
Grandville site is no longer needed and will not be replaced. The Georgia
facility will be replaced by a new facility, which will be completed in 2000.
The new facility will enable us to consolidate the operations currently
performed on our Roswell site with operations performed at two leased locations,
thus lowering our total operating costs and providing increased capacity.
(graph)
CASH FLOW FROM OPERATING ACTIVITIES
in millions of dollars
1995 $29.9
1996 $124.5
1997 $218.2
1998 $268.7
1999 $205.6
We expect capital expenditures, net of redeployments, to increase to between
$110 million and $140 million in 2000. The largest planned expenditures will be
investments in our ERP system,
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electronic selling platform, new products, the new facility in Georgia, and
facility enhancements in West Michigan.
In 1999, we acquired three privately owned North American dealers as part of our
service strategy. These local service organizations were acquired for
approximately $4.7 million. We also invested $3.7 million to enter into a joint
venture with one of our North American dealers. We expect to invest between $10
million and $20 million in acquiring additional local and regional service
operations in 2000.
At the end of 1999, we continued to have a high level of cash and cash
equivalents. We intend to utilize the cash to repurchase shares of the company's
stock, to fund acquisitions, and to fund future capital expenditures.
In the past year, we reexamined our use of the debt-to-capital ratio as a
financial statistic. Our debt-to-capital ratio at the end of 1999 was 41.4
percent, compared to 36.1 percent at the end of 1998. This was the highest
debt-to-capital ratio we have had in over 10 years, and is due to the large
amount of our common stock repurchased over the past four years.
We determined that it is more important for our company to look at the liquidity
of the business and its cash-generating potential than at historical retained
earnings. We need the financial flexibility to finance our growth and share
repurchase plans and to enable us to effectively manage our capital structure.
The covenants on our long-term debt and revolving credit loan contained minimum
net-worth requirements. In 1999, we renegotiated the covenants and obtained a
new $300 million unsecured revolving credit facility. Going forward, our capital
structure will be managed based on two tenets. First, we will maintain the
financial strength and flexibility that would enable our debt to be rated
investment grade. Second, we will maintain a minimum EBITDA-to-interest expense
ratio and a maximum debt-to-EBITDA ratio. EBITDA stands for Earnings Before
Interest Expense, Taxes, Depreciation, and Amortization.
Our available credit, combined with our existing cash and expected cash flow, is
adequate to fund our day-to-day operations, strategic investments, and share
repurchases. If necessary, we also have informal credit facilities that can be
accessed.
COMMON STOCK TRANSACTIONS
(In Thousands, Except Share and Per Share Data)
1999 1998 1997
Shares acquired 8,379,444 5,222,361 2,765,984
Cost of shares acquired $ 167,496 $ 201,982 $ 97,962
Cost per share acquired $ 19.99 $ 38.68 $ 35.42
Shares issued 958,347 1,347,483 470,082
Cost per share issued $ 16.18 $ 21.23 $ 28.13
Cash dividends $ 11,992 $ 13,361 $ 12,593
Dividends per share $ .15 $ .15 $ .13
The Board of Directors first authorized the company to repurchase its common
stock in 1984, and has periodically renewed its authorization. During 1999, we
repurchased 8.1 million shares of our common stock for $160.5 million under the
Board-approved stock repurchase program. Over the past four years, we have
repurchased 26,141,915 shares of our common stock for $468.6 million, adjusted
for stock splits in fiscal 1998 and 1997. This represents approximately 26.3
percent of the common shares outstanding at the end of 1995. Management and the
Board of Directors believe the share repurchase program is an excellent means of
returning value to our shareholders and preventing dilution from
employee-ownership programs. In January of this year, our Board of Directors
approved an additional $100 million to be used for share repurchases. We
currently have $56.8 million remaining on this authorization.
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(graph)
TOTAL CASH RETURNED TO SHAREHOLDERS
in millions of dollars
1995 $ 13.6
1996 $ 38.1
1997 $110.4
1998 $215.5
1999 $179.8
(graph)
TOTAL RETURN TO SHAREHOLDERS
as a percent
Herman Miller S&P500
1995 (9.72%) 20.16%
1996 43.11% 28.55%
1997 133.33% 29.54%
1998 55.71% 30.61%
1999 (26.56%) 21.03%
YEAR 2000
This Year 2000 readiness disclosure is the most current information
available and replaces all previous disclosures made by the company in its
filings on form 10-Q and form 10-K, and in its annual report to shareholders.
During fiscal year 1998, the company performed an analysis of the work necessary
to assure that its existing information systems and manufacturing equipment for
both domestic and international operations will be able to address the issues
surrounding the advent of the year 2000.
Company's State of Readiness:
Herman Miller has a comprehensive, written plan that is regularly updated and
monitored by technical personnel and company management, and reported to senior
management and the Board of Directors.
All of our domestic locations are now substantially Year 2000 compliant. For
international locations, the company presently believes that all remediation and
testing will be completed prior to August 1999.
The company has also verified Year 2000 conversion plans with its significant
vendors and independent dealers. All significant vendors and independent dealers
confirmed that they were Year 2000 compliant or are in the process of completing
their Year 2000 conversion plans.
Costs to Address the Company's Year 2000 Issues:
To date, the company has spent approximately $5 million on Year 2000
renovations. These are renovations to existing systems and are exclusive of the
implementation of our new ERP system. The company does not separately track the
internal costs incurred for the Year 2000 project, and such costs incurred are
principally related to payroll costs for employees involved with the project.
Based on costs incurred to date, the company does not believe the expenses
related to Year 2000 compliance will be material to the results of its
operations, financial position, or cash flows. The
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company does not expect to spend any significant additional amounts to complete
the renovation.
Risks of the Company's Year 2000 Issues:
The company expects to have completed its Year 2000 remediation plan prior to
any Year 2000 issues having an adverse impact on its operations. Due to the
uncertain and unprecedented nature of the Year 2000 issue, however, and
especially the uncertainty surrounding the readiness of third-party vendors,
independent dealers, and customers, the company cannot provide assurance at this
time that the consequences of the Year 2000 dating issue will not have a
material impact on its results of operations, financial position, or cash flows.
Possible business consequences of the Year 2000 dating issues include, but are
not limited to, higher than expected costs of remediation; or a temporary
inability to manufacture or ship product, process transactions, communicate with
customers, vendors, subsidiary locations and employees, or conduct other similar
corporate activities in a normal business environment.
Company's Contingency Plans:
In the event that additional actions beyond those described above are necessary,
the company will immediately, upon identifying the need, begin developing and
implementing remedial actions to address the issues.
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 has been notified that the GSA referred an
audit of the company to the Department of Justice for consideration of a
potential civil False Claims Act case. Management does not expect resolution of
the audit to have a material adverse effect on the company's consolidated
financial statements. Management does not have information that would indicate a
substantive basis for a civil False Claims Act case.
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
In conclusion, we have shared with you the key elements of our financial
performance, including how we intend to increase our market opportunity and
improve our operational performance. Each of these elements played a key role in
our EVA and net income improvement over the past three years and, we believe,
will continue to enable us to improve EVA and net income and provide superior
returns to our shareholders in the future. We also hope you have gained some
insight into the risks and challenges we face.
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Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company has no material financial exposure to the various financial
instrument market risks covered under this item. Foreign currency exchange rate
fluctuations related to the company's foreign operations did not have a material
impact on the financial results of the company during fiscal 1999. The company
has no material sensitivity to changes in foreign currency exchange rates. For
further information, refer to the Fair Value of Financial Instruments and
Financial Instruments with Off-Balance-Sheet Risk disclosures in the Notes to
Consolidated Financial Statements filed as part of this report.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA
Summary of the quarterly operating results on a consolidated basis:
May 29, 1999; May 30, 1998; May 31, 1997 First Second Third Fourth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
1999 Net sales $447,503 $464,818 $421,550 $432,368
Gross margin 170,212 176,112 155,975 167,406
Net income 34,005 38,913 29,927 38,967
Earnings per share-diluted $ .39 $ .45 $ .35 $ .48
1998 Net sales $401,545 $415,086 $436,708 $465,256
Gross margin 147,001 151,643 164,896 175,299
Net income 27,807 30,446 32,639 37,439
Earnings per share-diluted $ .30 $ .33 $ .36 $ .40
1997 Net sales $342,484 $377,137 $365,060 $411,204
Gross margin 118,272 134,300 131,933 149,419
Net income 15,586 17,852 13,535 27,425
Earnings per share-diluted $ .16 $ .18 $ .14 $ .29
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CONSOLIDATED STATEMENTS OF INCOME
May 29, 1999; May 30, 1998; May 31, 1997 1999 1998 1997
(In Thousands, Except Per Share Data)
NET SALES $1,766,239 $1,718,595 $1,495,885
COST OF SALES 1,096,534 1,079,756 961,961
---------- ---------- ----------
GROSS MARGIN 669,705 638,839 533,924
---------- ---------- ----------
Operating Expenses:
Selling, general, and administrative 407,446 396,698 359,601
Design and research 37,946 33,846 29,140
Loss on divestiture -- -- 14,500
---------- ---------- ----------
TOTAL OPERATING EXPENSES 445,392 430,544 403,241
---------- ---------- ----------
OPERATING INCOME 224,313 208,295 130,683
---------- ---------- ----------
Other Expenses (Income):
Interest expense 7,295 8,300 8,843
Interest income (7,128) (11,262) (8,926)
Loss on foreign exchange 300 270 1,687
Other, net (6,066) 1,456 3,196
---------- ---------- ----------
NET OTHER EXPENSES (INCOME) (5,599) (1,236) 4,800
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 229,912 209,531 125,883
Income Taxes 88,100 81,200 51,485
---------- ---------- ----------
NET INCOME $ 141,812 $ 128,331 $ 74,398
---------- ---------- ----------
EARNINGS PER SHARE--BASIC $ 1.69 $ 1.42 $ .79
---------- ---------- ----------
EARNINGS PER SHARE--DILUTED $ 1.67 $ 1.39 $ .77
---------- ---------- ----------
The accompanying notes are an integral part of these statements.
-24-
25
CONSOLIDATED BALANCE SHEETS
May 29, 1999, and May 30, 1998 1999 1998
(In Thousands, Except Share and Per Share Data)
ASSETS
Current Assets:
Cash and cash equivalents $ 79,952 $115,316
Accounts receivable, less allowances of $14,144 in 1999, and
$13,792 in 1998 192,374 192,384
Inventories 32,615 47,657
Prepaid expenses and other 45,161 44,778
------- --------
TOTAL CURRENT ASSETS 350,102 400,135
------- --------
Property and Equipment:
Land and improvements 25,073 27,279
Buildings and improvements 137,367 156,605
Machinery and equipment 428,867 364,817
Construction in progress 55,356 47,171
------- --------
646,663 595,872
Less: accumulated depreciation 329,944 305,208
------- --------
NET PROPERTY AND EQUIPMENT 316,719 290,664
------- --------
Notes Receivable, less allowances of $5,469 in 1999, and $8,430 in 1998 17,400 27,522
Other Assets 77,285 66,025
------- --------
TOTAL ASSETS $761,506 $784,346
------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Unfunded checks $ 22,605 $ 35,241
Current portion of long-term debt 10,130 10,203
Notes payable 46,568 19,542
Accounts payable 82,404 92,241
Accrued liabilities 189,642 195,489
------- -------
TOTAL CURRENT LIABILITIES 351,349 352,716
Long-Term Debt, less current portion above 90,892 100,910
Other Liabilities 110,190 99,718
------- -------
TOTAL LIABILITIES 552,431 553,344
------- -------
Shareholders' Equity:
Preferred stock, no par value (10,000,000 shares authorized, none issued) -- --
Common stock, $.20 par value (240,000,000 shares authorized, 79,565,860
and 86,986,957 shares issued and outstanding in 1999 and 1998) 15,913 17,397
Additional paid-in capital -- --
Retained earnings 210,084 227,464
Accumulated other comprehensive loss (10,683) (9,360)
Key executive stock programs (6,239) (4,499)
------- -------
TOTAL SHAREHOLDERS' EQUITY 209,075 231,002
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $761,506 $784,346
-------- --------
The accompanying notes are an integral part of these balance sheets.
-25-
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
(In Thousands, 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 JUNE 1, 1996 $ 4,934 $ 14,468 $ 303,578 $(11,633) $(3,202) $ 308,145
Net income -- -- 74,398 -- -- 74,398
Current year translation adjustment -- -- -- 770 -- 770
---------
Total comprehensive income 75,168
Cash dividends ($.134 per share) -- -- (12,593) -- -- (12,593)
Exercise of stock options 63 9,049 -- -- -- 9,112
Employee stock purchase plan 14 2,637 -- -- -- 2,651
Repurchase and retirement of
2,765,984 shares of common stock (553) (29,374) (68,414) -- 379 (97,962)
Stock dividend 4,732 -- (4,732) -- -- --
Directors' fees 1 225 -- -- -- 226
Stock grants earned -- -- -- -- 387 387
Stock grants issued 16 2,995 -- -- (1,776) 1,235
Stock purchase assistance plan -- -- -- -- 693 693
------- -------- --------- -------- ------- ---------
BALANCE MAY 31, 1997 $ 9,207 $ -- $ 292,237 $(10,863) $(3,519) $ 287,062
------- -------- --------- -------- ------- ---------
Net income -- -- 128,331 -- -- 128,331
Current year translation adjustment -- -- -- 1,503 -- 1,503
---------
Total comprehensive income 129,834
Cash dividends ($.145 per share) -- -- (13,361) -- -- (13,361)
Exercise of stock options 246 14,105 -- -- -- 14,351
Employee stock purchase plan 21 3,831 -- -- -- 3,852
Tax benefit relating to employee
stock plans -- 10,074 -- -- -- 10,074
Repurchase and retirement of
5,222,361 shares of common stock (1,044) (30,161) (170,777) -- -- (201,982)
Stock dividend 8,966 -- (8,966) -- -- --
Directors' fees 1 325 -- -- -- 326
Stock grants earned -- -- -- -- 718 718
Deferred compensation plan -- 1,826 -- -- (1,826) --
Stock purchase assistance plan -- -- -- -- 128 128
------- -------- --------- -------- ------- ---------
BALANCE MAY 30, 1998 $17,397 $ -- $ 227,464 $ (9,360) $(4,499) $ 231,002
------- -------- --------- -------- ------- ---------
Net income -- -- 141,812 -- -- 141,812
Current year translation adjustment -- -- -- (1,323) -- (1,323)
--------
Total comprehensive income 140,489
Cash dividends ($.145 per share) -- -- (11,992) -- -- (11,992)
Exercise of stock options 135 8,662 -- -- -- 8,797
Employee stock purchase plan 51 4,345 -- -- -- 4,396
Tax benefit relating to
employee stock plans -- 1,978 -- -- -- 1,978
Repurchase and retirement of
8,379,444 shares of common stock (1,676) (18,620) (147,200) -- -- (167,496)
Directors' fees 3 314 -- -- -- 317
Stock grants earned -- -- -- -- 1,222 1,222
Stock grants issued 3 424 -- -- (409) 18
Deferred compensation plan -- 2,897 -- -- (2,897) --
Stock purchase assistance plan -- -- -- -- 344 344
------- -------- --------- -------- ------- ---------
BALANCE MAY 29, 1999 $15,913 $ -- $ 210,084 $(10,683) $(6,239) $ 209,075
======= ======== ========= ======== ======= =========
The accompanying notes are an integral part of these statements.
-26-
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CONSOLIDATED STATEMENTS OF CASH FLOWS
May 29, 1999; May 30, 1998; and May 31, 1997 1999 1998 1997
(In Thousands)
Cash Flows from Operating Activities:
Net Income $ 141,812 $ 128,331 $ 74,398
Adjustments to reconcile net income
to net cash provided by operating activities 63,801 140,392 143,772
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 205,613 268,723 218,170
--------- --------- ---------
Cash Flows from Investing Activities:
Notes receivable repayments 491,077 561,923 449,405
Notes receivable issued (486,525) (544,182) (460,956)
Property and equipment additions (103,404) (73,561) (54,470)
Proceeds from sales of property and equipment 28,853 870 5,336
Net cash paid for acquisitions (4,689) (4,076) (9,743)
Other, net (15,899) (7,102) 1,548
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (90,587) (66,128) (68,880)
--------- --------- ---------
Cash Flows from Financing Activities:
Short-term debt borrowings 65,589 192,808 236,627
Short-term debt repayments (38,563) (189,619) (239,417)
Long-term debt repayments, net (10,091) (179) (302)
Dividends paid (12,270) (13,516) (12,463)
Common stock issued 13,528 18,529 11,989
Common stock repurchased and retired (167,496) (201,982) (97,962)
--------- --------- ---------
NET CASH USED FOR FINANCING ACTIVITIES (149,303) (193,959) (101,528)
--------- --------- ---------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (1,087) 519 1,346
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (35,364) 9,155 49,108
--------- --------- ---------
Cash and Cash Equivalents, Beginning of Year 115,316 106,161 57,053
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 79,952 $ 115,316 $ 106,161
--------- --------- ---------
The accompanying notes are an integral part of these statements.
-27-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is engaged in the design, manufacture, and
sale of office systems, products, and services principally for offices and, to a
lesser extent, for healthcare facilities and other uses. 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
principally are amounts due from the dealers.
Fiscal Year The company's fiscal year ends on the Saturday closest to May 31.
The years ended May 29, 1999, May 30, 1998, and May 31, 1997, each contained 52
weeks.
Foreign Currency Translation The functional currency for most 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. The United States dollar is used as the functional
currency for subsidiaries in highly inflationary foreign economies, and the
financial results are translated using a combination of current and historical
exchange rates, and the resulting translation adjustments are included along
with gains or losses arising from remeasuring all foreign currency transactions
into the appropriate currency in determining net income.
Cash Equivalents The company invests in certain debt and equity securities as
part of its cash management function. Due to the relative short-term maturities
and high liquidity of these securities (consisting primarily of money market
investments), they are included in the accompanying consolidated balance sheets
as cash equivalents at market value and totaled $46.5 million and $67.3 million
as of May 29, 1999, and May 30, 1998, respectively.
The company's cash equivalents are considered "available for sale." As of May
29, 1999, and May 30, 1998, 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.
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. The average useful lives of the assets are 32 years for
buildings and seven years for all other property and equipment.
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 five years.
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 $3.0, $4.3, and $4.8 million in 1999, 1998,
and 1997, respectively.
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29
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.
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 income (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.
Excluding the impairment incurred in connection with the divestiture of the
company's German manufacturing operation in 1997 (see Acquisitions and
Divestitures note), such provisions were not significant in 1999, 1998, or 1997.
Intangible assets included in other assets consist mainly of goodwill, patents,
and other acquired intangibles, and are carried at cost, less applicable
amortization of $19.5 and $16.0 million in 1999 and 1998, respectively. These
assets are amortized using the straight-line method over periods of five to 15
years.
Unfunded Checks As a result of maintaining a consolidated cash management
system, the company utilizes controlled disbursement bank accounts. These
accounts are funded as checks are presented for payment, not when checks are
issued. The resulting book overdraft position is included in current liabilities
as unfunded checks.
Self-Insurance The company is partially self-insured for general liability,
workers' compensation, and certain employee health benefits. The general and
workers' compensation liabilities are managed through a wholly owned insurance
captive; the related liabilities are included in the accompanying consolidated
financial statements. The company's policy is to accrue amounts equal to the
actuarially determined liabilities. The actuarial valuations are based on
historical information along with certain assumptions about future events.
Changes in assumptions for such matters as legal actions, medical costs, and
changes in actual experience could cause these estimates to change in the near
term.
Research, Development, Advertising, and Other Related Costs Research,
development, advertising materials, preproduction and start-up costs are
expensed as incurred. Research and development costs consist of expenditures
incurred during the course of planned search and investigation aimed at
discovery of new knowledge that will be useful in developing new products or
processes, or significantly enhancing existing products or production processes,
and the implementation of such through design, testing of product alternatives,
or construction of prototypes. Royalty payments made to designers of the
company's products as the products are sold are not included in research and
development costs, as they are considered to be a variable
-29-
30
cost of the product. Research and development costs, included in design and
research expense in the accompanying statements of income, were $33.4, $29.0,
and $25.7 million in 1999, 1998, and 1997, respectively.
Income Taxes Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse.
Earnings per Share Basic earnings per share (EPS) exclude the dilutive effect of
common shares that could potentially be issued, due to the exercise of stock
options, and is computed by dividing net income by the weighted-average number
of common shares outstanding for the period. Diluted EPS is computed by dividing
net income by the weighted-average number of shares outstanding plus all shares
that could potentially be issued.
Revenue Recognition Revenues are recorded when product is shipped and invoiced
and performance of services is complete.
Comprehensive Income The company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," as of May 31, 1998, the
beginning of its 1999 fiscal year. SFAS No. 130 establishes new standards for
the reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the company's net income or
shareholders' equity. The company's comprehensive income consists of net income
and foreign currency translation adjustments. Prior years' financial statements
have been reclassified to conform to these requirements.
Use of Estimates in the Preparation of Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
New Accounting Standards In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability, measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. SFAS 133 is effective in the company's fiscal year 2002. The company
has not yet determined the timing or method of adoption of SFAS 133; however,
the Statement is not expected to have a material impact on the company's
consolidated financial statements.
Reclassifications Certain prior year information has been reclassified to
conform to the current year presentation.
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ACQUISITIONS AND DIVESTITURES
During 1999, 1998, and 1997, the company made several acquisitions, all of
which were recorded using the purchase method of accounting. Accordingly, the
purchase price of these acquisitions has been allocated to the assets acquired
and liabilities assumed based on the estimated fair values at the date of the
acquisition. The cost of the acquisitions in excess of net identifiable assets
acquired has been recorded as goodwill.
During 1999, 1998, and 1997, the company purchased various privately owned North
American dealers. These companies were acquired for approximately $18.5 million
in cash, which resulted in approximately $11.1 million of goodwill. The results
of the acquisitions were not material to the company's consolidated operating
results.
During the second quarter of fiscal 1997, declining sales and continuing losses
at the company's German subsidiary led the company, in accordance with its
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 the company's operating results in Germany were evaluated to
determine if any potential impairment existed. Although none of the options were
developed to the extent required to enable the company to reach a decision and
plan for implementation, based on the results of its various evaluations of
potential impairment, the company 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 $.05
per share after tax) was recorded for the write-off of the goodwill and
brand-name assets of the subsidiary.
During the third quarter of fiscal 1997, management authorized and committed the
company to a plan to restructure the manufacturing component of its German
operation. Based on the most current information available at that time,
management believed that closing the facility was the most viable option. As a
result, the company recorded a pretax restructuring charge of $13.7 million
($5.4 million, or $.06 per share after tax).
During the fourth quarter of fiscal 1997, the company sold the German
manufacturing operation. The sale had the effect of reducing both the pretax
restructuring costs recorded in the third quarter by $4.7 million, and the
anticipated tax benefit by $5.2 million. In summary, after adjusting for the
effects of the sale, the divestiture of the company's investments in its German
manufacturing operation resulted in a pretax loss of $14.5 million ($10.4
million, or $.11 per share after tax) for fiscal 1997.
The following is a summary of significant accounting and reporting policies not
reflected elsewhere in the accompanying financial statements.
INVENTORIES
(In Thousands) 1999 1998
Finished products $11,946 $19,807
Work in process 7,446 8,844
Raw materials 13,223 19,006
------- -------
$32,615 $47,657
======= =======
Inventories are valued at the lower of cost or market and include material,
labor, and overhead. The inventories of certain subsidiaries are valued using
the last-in, first-out (LIFO) method. The inventories of all other subsidiaries
are valued using the first-in, first-out method. Inventories valued using the
LIFO method amounted to $18.4 and $25.2 million at May 29, 1999, and May 30,
1998, respectively.
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32
If all inventories had been valued using the first-in, first-out method,
inventories would have been $11.8 and $13.6 million higher than reported at May
29, 1999, and May 30, 1998, respectively.
PREPAID EXPENSES AND OTHER
(In Thousands) 1999 1998
Current deferred income taxes $ 20,906 $ 27,154
Other 24,255 17,624
-------- --------
$ 45,161 $ 44,778
======== ========
ACCRUED LIABILITIES
(In Thousands) 1999 1998
Compensation and employee benefits $ 75,125 $ 85,068
Income taxes 39,499 22,809
Other 75,018 87,612
-------- --------
$189,642 $195,489
======== ========
OTHER LIABILITIES
(In Thousands) 1999 1998
Pension benefits $ 41,907 $ 41,898
Postretirement benefits 9,510 9,618
Other 58,773 48,202
-------- --------
$110,190 $ 99,718
======== ========
NOTES PAYABLE
(In Thousands) 1999 1998
U.S. dollar currencies $ 36,000 $ --
Non-U.S. dollar currencies 10,568 19,542
-------- --------
$ 46,568 $ 19,542
======== ========
The following information relates to short-term borrowings in 1999:
(In Thousands) Domestic Foreign
Weighted-average interest rate at May 29, 1999 5.3% 3.9%
Weighted-average interest rate at May 30, 1998 -- 4.8%
Weighted-average interest rate during 1999 5.3% 4.8%
Unused short-term credit lines $-- $ 39,400
In addition to the company's formal short-term credit lines shown above, the
company has available informal lines of credit totaling $41.5 million.
LONG-TERM DEBT
(In Thousands) 1999 1998
Series A senior notes, 6.37%, due March 5, 2006 $ 70,000 $ 70,000
Series B senior notes, 6.08%, due March 5, 2001 15,000 15,000
Series C senior notes, 6.52%, due March 5, 2008 15,000 15,000
Finance lease obligation -- 10,000
Other 1,022 1,113
-------- --------
101,022 111,113
Less current portion 10,130 10,203
-------- --------
$ 90,892 $100,910
======== ========
During the third quarter of 1996, the company entered into a private placement
of $100.0 million of senior notes with seven insurance companies. The Series A,
B, and C notes have interest-only payments until March 5, 2000, March 5, 2001,
and March 5, 2004, respectively.
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The company has available an unsecured revolving credit loan that provides for a
$300.0 million line of credit of which $36.0 million is currently outstanding.
The loan permits borrowings in multiple currencies and matures on April 16,
2004. Outstanding borrowings bear interest, at the option of the company, at
rates based on the prime rate, certificates of deposit, LIBOR, or negotiated
rates. Interest is payable periodically throughout the period a borrowing is
outstanding. During 1999 and 1998, the company borrowed at the LIBOR contractual
rate or other negotiated rates.
Provisions of the senior notes and the unsecured senior revolving credit loan
restrict, without prior consent, the company's borrowings, long-term leases, and
sale of certain assets. In addition, the company has agreed to maintain certain
financial performance ratios. At May 29, 1999, the company was in compliance
with all of these provisions.
Annual maturities of long-term debt for the five years subsequent to May 29,
1999 (in millions), are as follows: 2000-$10.1; 2001-$25.1; 2002-$10.2;
2003-$10.2; 2004-$13.1; thereafter-$32.3.
OPERATING LEASES
The company leases real property and equipment under agreements
that expire on various dates. Certain leases contain renewal provisions and
generally require the company to pay utilities, insurance, taxes, and other
operating expenses.
Future minimum rental payments (in millions) required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year
as of May 29, 1999, are as follows: 2000-$20.5; 2001-$12.4; 2002-$9.1;
2003-$7.1; 2004-$5.8; thereafter-$5.4.
Total rental expense charged to operations was $17.6, $20.4, and $20.9 million
in 1999, 1998, and 1997, respectively. Substantially all such rental expense
represented the minimum rental payments under operating leases.
EMPLOYEE BENEFIT PLANS
The company maintains plans which provide retirement benefits for substantially
all employees.
Pension Plans The principal domestic plan is a defined-benefit pension plan.
Effective December 1, 1998, the defined-benefit pension plan was converted from
the existing average final pay benefit calculation to a cash-balance
calculation. As part of the redesign, the company bought out the postretirement
healthcare obligation for active employees through a one-time, lump-sum transfer
contribution to the cash-balance plan. Benefits under this plan are based upon
an employee's years of service and earnings.
The amendment converting the plan to the cash-balance formula was the primary
reason for the $43.9 million change in the projected benefit obligation in 1998.
In addition to the domestic pension plan and the retiree healthcare and life
insurance plan, one of Herman Miller, Inc.'s wholly owned foreign subsidiaries
has a defined-benefit pension plan which is based upon an average final pay
benefit calculation. The plan has not been amended and is included in the
following information:
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Postretirement
Pension Benefits Benefits
---------------- --------------
1999 1998 1999 1998
Change in benefit obligations
Benefit obligations at beginning of year $193,723 $188,743 $10,387 $24,467
Service cost 11,507 11,722 -- 1,168
Interest cost 14,293 14,678 773 1,713
Transfer of obligations -- 15,822 -- (15,822)
Actuarial effects of plan redesign (7) (43,878) 774 --
Actuarial (gain) loss 4,462 10,018 (185) (480)
Benefits paid (7,219) (4,387) (968) (721)
Other 651 1,005 37 62
-------- -------- ------- -------
Benefit obligations at end of year 217,410 193,723 10,818 10,387
-------- -------- ------- -------
Change in plan assets
Fair value of plan assets at beginning of year 236,568 184,178 -- --
Actual return on plan assets 21,341 47,692 -- --
Employer contribution 1,387 9,085 -- 721
Benefits paid (7,219) (4,387) -- (721)
-------- -------- ------- -------
Fair value of plan assets at end of year 252,077 236,568 -- --
-------- -------- ------- -------
Funded status 34,667 42,845 (10,818) (10,387)
Unrecognized transition amount (1,448) (1,975) -- --
Unrecognized net actuarial (gain) loss (33,978) (38,651) 584 769
Unrecognized prior service cost (41,148) (44,117) 724 --
-------- -------- ------- -------
Accrued benefit cost ($41,907) ($41,898) ($9,510) ($9,618)
======== ======== ======= =======
Weighted average assumptions
Discount rate 7.25% 7.25% 7.25% 7.25%
Expected return on plan assets 9.00% 9.00% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
For measurement purposes, a 7.0 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 2000. The rate was
assumed to decrease to 6.0 percent for 2001 and remain at that level thereafter.
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Pension Benefits Postretirement Benefits
---------------- -----------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Components of net periodic
benefit cost
Service cost $11,507 $11,722 $ 9,620 $ -- $1,168 $1,132
Interest cost 14,293 14,678 12,683 773 1,713 1,653
Expected return on plan assets (20,884) (16,913) (11,008) -- -- --
Net amortization (4,251) (523) (514) 50 (50) (44)
------- ------- ------- ---- ------ ------
Net periodic benefit cost $ 665 $ 8,964 $10,781 $823 $2,831 $2,741
======= ======= ======= ==== ====== ======
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for the healthcare plans. A one-percentage-point change in assumed
healthcare cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point
Increase Decrease
-------- --------
Effect on total of service and interest cost
components $48 $(45)
Effect on postretirement benefit obligation $703 $(667)
Plan assets consist primarily of listed common stocks, mutual funds, and
corporate obligations. Plan assets at May 29, 1999, and May 30, 1998, included
1,043,619 and 888,346 shares of Herman Miller, Inc., common stock, respectively.
Profit Sharing and 401(k) Plan Domestically, Herman Miller, Inc., has a trusteed
profit sharing plan that covers substantially all employees. These employees are
eligible to begin participating at the beginning of the quarter following the
date of hire. The plan provides for discretionary contributions (payable in the
company's common stock) of not more than 6.0 percent of employees' wages based
on the company's EVA performance. The cost of the plan charged against
operations was $14.0, $8.1, and $6.6 million in 1999, 1998, and 1997,
respectively.
Effective December 1, 1998, the company began to match the employees'
contribution to their 401(k) account. The match is equal to half of the
employees' contribution up to the first 6.0 percent of the employees' pay. The
company's contribution charged against operations was $2.9 million in fiscal
1999.
COMMON STOCK AND PER SHARE INFORMATION
On January 20, 1998, the Board of Directors approved a 2-for-1 stock split
effected in the form of a 100 percent dividend to shareholders of record on
February 27, 1998, payable on March 16, 1998. The distribution increased the
number of shares outstanding from 44,831,103 to 89,662,206. All share and per
share information, including stock plan information, has been restated to
reflect the split.
On March 18, 1997, the Board of Directors approved a 2-for-1 stock split
effected in the form of a 100 percent dividend to shareholders of record on
March 31, 1997, payable on April 15, 1997. The Board of Directors also approved
an increase in the quarterly cash dividend from $.03250 to $.03625 per share for
shareholders of record on May 31, 1997.
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The following table reconciles the numerators and denominators used in the
calculations of basic and diluted EPS for each of the last three years:
(Dollars in Thousands) 1999 1998 1997
Numerators:
Numerators for both basic and diluted EPS, net
income $ 141,812 $ 128,331 $ 74,398
========== ========== ==========
Denominators:
Denominators for basic EPS,
weighted-average common shares outstanding
83,734,707 90,240,102 94,627,772
Potentially dilutive shares resulting from stock
option plans 1,096,375 1,799,067 1,496,428
---------- ---------- ----------
Denominator for diluted EPS 84,831,082 92,039,169 96,124,200
========== ========== ==========
Certain exercisable stock options were not included in the computations of
diluted EPS because the option prices were greater than average quarterly market
prices for the periods presented. The number of stock options outstanding at the
end of each year presented which were not included in the calculation of diluted
EPS and the ranges of exercise prices were: 3,346,421 at $19.88-$32.50 in 1999;
and 132,368 at $32.50 in 1998. All exercisable stock options were included in
the computation of EPS in 1997 as the option prices were not greater than the
average quarterly market prices.
STOCK PLANS
Under the terms of the company's 1995 Employee Stock Purchase Plan, 4.1 million
shares of authorized common stock were reserved for purchase by plan
participants at 85.0 percent of the market price. At May 29, 1999, 3,356,980
shares remained available for purchase through the plan, and there were 7,109
employees eligible to participate in the plan, of which 2,401, or 33.8 percent,
were participants. During 1999, 1998, and 1997, employees purchased 253,076;
107,182; and 71,213 shares, respectively.
The company has stock option plans under which options are granted to employees
and nonemployee officers and directors at a price not less than the market price
of the company's common stock on the date of grant. All options become
exercisable one year from date of grant and expire 10 years from date of grant.
At May 29, 1999, there were 164 employees and 11 nonemployee officers and
directors eligible, all of whom were participants in the plans. At May 29, 1999,
there were 5,044,110 shares available for future options.
The company's Long-Term Incentive Plan, along with the Nonemployee Officer and
Director Stock Option Plan, authorize reload options. Reload options provide for
the purchase of shares equal to the number of shares delivered upon exercise of
the original options plus the number of shares delivered to satisfy the tax
liability incurred in the exercise. The reload options retain the expiration
date of the original options; however, the exercise price must equal the fair
market value on the date the reload options are granted. During fiscal 1999,
252,998 reload options were automatically granted.
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37
A summary of shares subject to options follows:
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
1999 Exercise 1998 Exercise 1997 Exercise
Shares Prices Shares Prices Shares Prices
Outstanding at
beginning of year: 3,463,814 $14.19 4,028,196 $ 7.27 4,863,840 $ 6.48
Granted 2,174,247 $26.50 1,599,152 $22.12 338,000 $15.92
Exercised (676,584) $13.01 (2,081,834) $ 6.90 (1,102,644) $ 5.78
Terminated (61,710) $25.86 (81,700) $17.60 (71,000) $ 7.74
--------- --------- ---------
Outstanding at
end of year: 4,899,767 $19.67 3,463,814 $14.19 4,028,196 $ 7.27
--------- --------- ---------
Exercisable at
end of year: 2,744,960 $14.33 1,921,162 $ 7.58 3,770,196 $ 6.68
========= ========= =========
Weighted-average
fair-market value
of options
granted $ 8.71 $ 6.54 $ 4.42
A summary of stock options outstanding at May 29, 1999, follows:
Exercisable Stock
Outstanding Stock Options Options
------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Shares Remaining Average Average
Range of Exercise (In Contractual Exercise Shares Exercise
Price Thousands) Life Price (In Thousands) Price
$ 4.66- $ 8.00 1,370 5.05 years $ 6.75 1,370 $ 6.75
$ 8.04- $22.50 1,698 8.64 years $20.51 897 $18.84
$ 24.44- $32.50 1,832 8.35 years $28.57 478 $27.60
----- -----
Total 4,900 7.53 years $19.67 2,745 $14.33
===== =====
The company accounts for its employee stock purchase plan and its stock option
plans under APB Opinion 25; therefore, no compensation costs are recognized when
employees purchase stock or when stock options are authorized, granted, or
exercised. If compensation costs had been computed under SFAS No. 123,
"Accounting for Stock-Based Compensation," the company's net income and earnings
per share would have been reduced by approximately $12.8 million, or $.15 per
share in 1999, and $7.2 million, or $.08 per share in 1998, and $1.0 million, or
$.01 per share in 1997.
-37-
38
For purposes of computing compensation costs of stock options granted, the fair
value of each stock option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
1999 1998 1997
Risk-free interest rates 4.39%-5.48% 5.39%-6.26% 5.93%-6.35%
Expected term of options 3-5 years 3 years 3 years
Expected volatility 37%-46% 34% 31%
Dividend yield .5% .5% .5%
Black-Scholes is a widely accepted stock option pricing model; however, the
ultimate value of stock options granted will be determined by the actual lives
of options granted and future price levels of the company's common stock.
KEY EXECUTIVE AND DIRECTOR STOCK PROGRAMS
Restricted Stock Grants The company has granted restricted common shares to
certain key employees. Shares were awarded in the name of the employee, who has
all rights of a shareholder, subject to certain restrictions on transferability
and a risk of forfeiture. The forfeiture provisions on the awards expire
annually, over a period not to exceed six years, as certain financial goals are
achieved. During fiscal 1999, 8,100 shares were granted under the company's
long-term incentive plan, no shares were forfeited, and the forfeiture
provisions expired on 72,174 shares. As of May 29, 1999, 96,005 shares remained
subject to forfeiture provisions and restrictions on transferability.
The remaining shares subject to forfeiture provisions have been recorded as
unearned stock grant compensation and are included as a separate component of
shareholders' equity under the caption Key Executive Stock Programs. The
unearned compensation is being charged to selling, general, and administrative
expense over the five-year vesting period and was $1.2, $.7, and $.4 million in
1999, 1998, and 1997, respectively.
Key Executive Deferred Compensation Plan During fiscal 1997, the company
established the Herman Miller, Inc., Key Executive Deferred Compensation Plan,
which allows certain executives to defer receipt of all or a portion of their
EVA cash incentive. The company may make a matching contribution of 30 percent
of the executive's contribution up to 50 percent of the deferred EVA cash
incentive. The company matching contribution vests at the rate of 33 1/3 percent
annually. In accordance with the terms of the plan, the executive deferral and
company matching contribution have been placed in a "Rabbi" trust, which invests
solely in the company's common stock. These Rabbi trust arrangements offer the
executive a degree of assurance for ultimate payment of benefits without causing
constructive receipt for income tax purposes. Distributions to the executive
from the Rabbi trust can only be made in the form of the company's common stock.
The assets in the Rabbi trust remain subject to the claims of creditors of the
company and are not the property of the executive and are, therefore, included
as a separate component of shareholders' equity under the caption Key Executive
Stock Programs.
Key Executive Stock Purchase Assistance Plan During fiscal 1995, the company
adopted a key executive stock purchase assistance plan whereby the company may
extend credit to officers and key executives to purchase the company's stock
through the exercise of options or on the open market. These loans are secured
by the shares acquired and are repayable under full recourse promissory notes.
The sale or transfer of shares is restricted for five years after the loan is
fully paid. The plan provides for the key executives to earn repayment of a
portion of the notes, including interest, based on meeting annual performance
objectives as set forth by the Executive Compensation Committee of the Board of
Directors. The notes bear interest at 7.0 percent per annum. Interest is payable
annually and principal is due on various dates through September 1, 2007. As of
May 29, 1999, the notes outstanding relating to the exercise of options were $.3
million and are included as a separate component of shareholders' equity under
the caption Key
-38-
39
Executive Stock Programs. Notes outstanding related to open-market purchases
were $2.6 million and are recorded in other assets. Compensation expense related
to earned repayment was $1.7 million in 1999, $2.5 million in 1998, and $3.9
million in 1997.
Director Fees During fiscal 1997, the Board of Directors approved a plan that
allows the Board members to elect to receive their director fees in the form of
unrestricted company stock at the then fair market value rather than in cash.
Under this plan, the Board members received 14,587 and 12,409 shares of the
company's stock in fiscal 1999 and 1998, respectively.
INCOME TAXES
Pretax income consisted of the following:
(In Thousands) 1999 1998 1997
Domestic $206,002 $186,266 $141,742
Foreign 23,910 23,265 (15,859)
-------- -------- --------
$229,912 $209,531 $125,883
======== ======== ========
The provision for income taxes consisted of the following:
(In Thousands) 1999 1998 1997
Current: Domestic--Federal $62,534 $77,161 $66,003
Domestic--State 4,140 4,430 4,957
Foreign 7,923 6,184 (2,287)
------- ------- -------
74,597 87,775 68,673
------- ------- -------
Deferred: Domestic--Federal 13,666 (7,019) (15,938)
Domestic--State (258) 321 (677)
Foreign 95 123 (573)
------- ------- -------
13,503 (6,575) (17,188)
------- ------- -------
Total income tax provision $88,100 $81,200 $51,485
======= ======= =======
The tax effects and types of temporary differences that give rise to significant
components of the deferred tax assets and liabilities at May 29, 1999, and May
30, 1998, are presented below:
(In Thousands) 1999 1998
Deferred tax assets:
Foreign net operating loss carryforwards $ 1,140 $ 8,114
Book over tax loss on sale of fixed assets 6,828 5,845
Compensation-related accruals 16,653 9,475
Accrued pension and postretirement benefit obligations 19,119 21,743
Reserves for inventory 3,995 4,317
Reserves for uncollectible accounts and notes receivable 4,517 5,756
Other 30,717 31,703
Valuation allowance (1,140) (8,114)
-------- --------
$ 81,829 $ 78,839
======== ========
Deferred tax liabilities:
Book basis in property in excess of tax basis $(19,079) $(19,828)
Capitalized software costs (15,635) (5,340)
Prepaid employee benefits (3,123) (2,665)
Other (15,875) (9,386)
-------- --------
$(53,712) $(37,219)
======== ========
The company has foreign net operating loss carryforwards, the tax benefit of
which is $1.1 million, of which $.1 million expires at various dates through
2008, and of which $1.0 million has unlimited expiration. For financial
statement purposes, the tax benefit of the foreign net operating loss
carryforward has been recognized as a deferred tax asset, subject to a valuation
allowance.
-39-
40
The company has not provided for United States income taxes on undistributed
earnings of foreign subsidiaries totaling $52.5 million. Recording of deferred
income taxes on these undistributed earnings is not required, since these
earnings have been permanently reinvested. These amounts would be subject to
possible U.S. taxation only if remitted as dividends. The determination of the
hypothetical amount of unrecognized deferred U.S. taxes on undistributed
earnings of foreign entities is not practicable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the company's financial instruments included in current
assets and current liabilities approximates their fair value due to their
short-term nature. The fair value of the notes receivable is estimated by
discounting expected future cash flows using current interest rates at which
similar loans would be made to borrowers with similar credit ratings and
remaining maturities. As of May 29, 1999, and May 30, 1998, the fair value of
the notes receivable approximated the carrying value. The company intends to
hold these notes to maturity and has recorded allowances to reflect the terms
negotiated for carrying value purposes. As of May 29, 1999, and May 30, 1998,
the carrying value approximated the fair value of the company's long-term debt.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The company utilizes derivative financial instruments to manage its exposure to
foreign currency volatility at the transactional level. The majority of these
contracts relate to major currencies such as the Japanese yen, the Australian
dollar, and the British pound. The exposure to credit risk is minimal, since the
counterparties are major financial institutions. The market risk exposure is
essentially limited to currency rate movements. The gains or losses arising from
these financial instruments are applied to offset exchange gains or losses on
related hedged exposures. Realized gains or losses in 1999, 1998, and 1997 were
not material to the company's results of operations. At May 29, 1999, and May
30, 1998, the company had no outstanding derivative financial instruments.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following table presents the adjustments to reconcile net income to net cash
provided by operating activities:
(In Thousands) 1999 1998 1997
Depreciation and amortization $ 62,054 $ 50,748 $ 47,985
Loss on divestiture -- -- 14,500
Provision for losses on accounts
and notes receivable 4,433 5,245 7,302
Loss (gain) on sales of property and equipment (6,947) 2,243 1,575
Deferred taxes 13,503 (6,575) (17,188)
Other liabilities 4,479 2,815 17,070
Stock grants earned 1,222 718 387
Changes in current assets and liabilities:
Decrease (increase) in assets:
Accounts receivable 5,439 (12,706) (11,735)
Inventories 15,179 5,237 11,130
Prepaid expenses and other (6,535) 3,715 (4,096)
Increase (decrease) in liabilities:
Accounts payable (11,650) 13,691 15,296
Accrued liabilities (17,376) 75,261 61,546
-------- -------- --------
Total changes in current assets and liabilities (14,943) 85,198 72,141
-------- -------- --------
Total adjustments $ 63,801 $140,392 $143,772
======== ======== ========
Cash payments for interest and income taxes were as follows:
-40-
41
(In Thousands) 1999 1998 1997
Interest paid $ 8,103 $ 7,709 $ 8,759
Income taxes paid $78,674 $66,023 $53,185
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. On July 15, 1996, management was notified by the
Department of Justice that the GSA referred an audit of the company to the
Department of Justice for consideration of a potential civil False Claims Act
case. Management does not expect resolution of the audit to have a material
adverse effect on the company's consolidated financial statements. Management
does not have information that would indicate a substantive basis for a civil
False Claims Act case. 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.
OPERATING SEGMENTS
The company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
with its 1999 fiscal year beginning May 31, 1998. All prior period information
has been restated to conform to this statement.
The company is engaged worldwide in the design, manufacture, and sale of office
furniture systems, products, and related services through its wholly owned
subsidiaries. Throughout the world the product offerings, the production
processes, the methods of distribution, and the customers serviced are
consistent. The product lines consist primarily of office furniture systems,
seating, storage solutions, and casegoods. Management evaluates the company as
one operating segment in the office furniture industry.
Sales to customers are attributed to the geographic areas based on the location
of the customer. Long-lived assets consist of property and equipment. Geographic
information is as follows:
(in thousands) 1999 1998 1997
Net sales:
United States $1,507,107 $1,451,885 $1,244,645
International 259,132 266,710 251,240
---------- ---------- ----------
$1,766,239 $1,718,595 $1,495,885
========== ========== ==========
Long-lived assets:
United States $ 305,362 $ 278,185 $ 253,493
International 11,357 12,479 11,734
---------- ---------- ----------
$ 316,719 $ 290,664 $ 265,227
========== ========== ==========
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42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Herman Miller, Inc.:
We have audited the accompanying consolidated balance sheets of Herman Miller,
Inc., (a Michigan corporation) and subsidiaries as of May 29, 1999, and May 30,
1998, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended May 29, 1999.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Herman Miller, Inc., and
subsidiaries as of May 29, 1999, and May 30, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
May 29, 1999, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Grand Rapids, Michigan
June 25, 1999
-42-
43
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The consolidated financial statements of Herman Miller, Inc., and subsidiaries
were prepared by, and are the responsibility of, management. The statements have
been prepared in conformity with generally accepted accounting principles
appropriate in the circumstances and include amounts that are based on
management's best estimates and judgments.
The company maintains systems of internal accounting controls designed to
provide reasonable assurance that all transactions are properly recorded in the
company's books and records, that policies and procedures are adhered to, and
that assets are protected from unauthorized use. The systems of internal
accounting controls are supported by written policies and guidelines and are
complemented by a staff of internal auditors and by the selection, training, and
development of professional financial managers.
The consolidated financial statements have been audited by the independent
public accounting firm Arthur Andersen LLP, whose appointment is ratified
annually by shareholders at the annual shareholders' meeting. The independent
public accountants conduct a review of internal accounting controls to the
extent required by generally accepted auditing standards and perform such tests
and related procedures as they deem necessary to arrive at an opinion on the
fairness of the financial statements.
The Financial Audit Committee of the Board of Directors, composed solely of
directors from outside the company, regularly meets with the independent public
accountants, management, and the internal auditors to satisfy itself that they
are properly discharging their responsibilities. The independent public
accountants have unrestricted access to the Financial Audit Committee, without
management present, to discuss the results of their audit and the quality of
financial reporting and internal accounting control.
Michael A. Volkema, President and Chief Executive Officer
Brian C. Walker, Executive Vice President, Finance and Business Development, and
Chief Financial Officer
June 25, 1999
-43-
44
Item 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No changes in, or disagreements with, accountants referenced in Item 304 of
Regulation S-K occurred during the 24-month period ended May 29, 1999.
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of Registrant
Information relating to directors and director nominees of the registrant is
contained under the caption "Director and Executive Officer Information," in the
company's definitive Proxy Statement, dated August 16, 1999, relating to the
company's 1999 Annual Meeting of Shareholders and the information within that
section is incorporated by reference. Information relating to Executive Officers
of the company is included in Part I hereof entitled "Executive Officers of the
Registrant."
There are no family relationships between or among the above-named executive
officers. There are no arrangements or understandings between any of the
above-named officers pursuant to which any of them was named an officer.
Item 11 EXECUTIVE COMPENSATION
Information relating to management remuneration is contained under the tables
and discussions on pages 7-13 in the company's definitive Proxy Statement, dated
August 16, 1999, relating to the company's 1999 Annual Meeting of Shareholders,
and the information within those sections is incorporated by reference.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The sections entitled "Voting Securities and Principal Shareholders" and
"Director and Executive Officer Information" in the definitive Proxy Statement,
dated August 16, 1999, relating to the company's 1999 Annual Meeting of
Shareholders and the information within those sections is incorporated by
reference.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions contained
under the captions "Director and Executive Officer Information" and
"Compensation of Board Members and Non-Employee Officers" in the definitive
Proxy Statement, dated August 16, 1999, relating to the company's 1999 Annual
Meeting of Shareholders is incorporated by reference.
-44-
45
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of the company are
included in this Form 10-K on the pages noted:
Page Number in
the Form 10-K
--------------
Consolidated Statements of Income 24
Consolidated Balance Sheets 25
Consolidated Statements of Shareholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-41
Report of Independent Public Accountants 42
Management's Report on Financial Statements 43
(a) 2. Financial Statement Schedule
The following financial statement schedule and related Report of
Independent Public Accountants on the Financial Statement Schedule are
included in this Form 10-K on the pages noted:
Page Number in
this Form 10-K
---------------
Report of Independent Public Accountants
on Financial Statement Schedule 46
Schedule II- Valuation and Qualifying
Accounts and Reserves for the
Years Ended May 29, 1999; May
30, 1998; and May 31, 1997 48
All other schedules required by Form 10-K Annual Report have been
omitted because they were inapplicable, included in the notes to
consolidated financial statements, or otherwise not required under
instructions contained in Regulation S-X.
(a) 3. Exhibits
Reference is made to the Exhibit Index which is included in this
Form 10-K Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
the year ended May 29, 1999.
-45-
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of Herman Miller, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Herman Miller, Inc., and subsidiaries
included in this Form 10-K, and have issued our report thereon dated June 25,
1999. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed at Item 14(a)2
above is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
-----------------------
Grand Rapids, Michigan
June 25, 1999
-46-
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HERMAN MILLER, INC.
/s/ Michael A. Volkema /s/ Brian C. Walker
- - ------------------------------------- and ----------------------------------
By Michael A. Volkema Brian C. Walker
(President and Chief Executive Officer) (Chief Financial Officer)
Date: August 16, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on August 16, 1999, by the following persons on behalf of
the Registrant in the capacities indicated. Each Director of the Registrant,
whose signature appears below, hereby appoints Michael A. Volkema as his
attorney-in-fact, to sign in his name and on his behalf, as a Director of the
Registrant, and to file with the Commission any and all amendments to this
Report on Form 10-K.
/s/ David L. Nelson /s/ Michael A. Volkema
----------------------------- -----------------------------
David L. Nelson Michael A. Volkema
(Chairman of the Board) (President, Chief Executive
Officer and Director)
/s/ William K. Brehm /s/ E. David Crockett
----------------------------- -----------------------------
William K. Brehm E. David Crockett
(Director) (Director)
/s/ Richard H. Ruch /s/ Lord Griffiths of Fforestfach
----------------------------- ---------------------------------
Richard H. Ruch Lord Griffiths of Fforestfach
(Director) (Director)
/s/ Dorothy A. Terrell /s/ C. William Pollard
----------------------------- ----------------------------
Dorothy A. Terrell C. William Pollard
(Director) (Director)
/s/ J. Harold Chandler /s/ Ruth A. Reister
----------------------------- ----------------------------
J. Harold Chandler Ruth A. Reister
(Director) (Director)
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48
HERMAN MILLER, INC., AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
- - -------- -------- ---------------------- ----------------- --------
Additions Increased Uncollectible
Balance at charged to net accounts Balance
beginning costs and operating written off Losses at end
Description of period expenses losses (net) (1) Utilized (2) of period
- - ----------- --------- -------- ------ ----------- ------------ ---------
Year ended May 29, 1999:
Allowance for possible losses
on accounts receivable $13,792 $3,213 $ -- $2,861 $ -- $14,144
Allowance for possible losses
on notes receivable $ 8,430 $1,220 $ -- $4,181 $ -- $ 5,469
Valuation allowance for deferred tax asset $ 8,114 $ -- $ 185 $ -- $ 7,159 $ 1,140
Year ended May 30, 1998:
Allowance for possible losses
on accounts receivable $12,943 $4,558 $ -- $3,709 $ -- $13,792
Allowance for possible losses
on notes receivable $ 8,489 $2,881 $ -- $2,940 $ -- $ 8,430
Valuation allowance for deferred tax asset $10,791 $ -- $ 378 $ -- $ 3,055 $ 8,114
Year ended May 31, 1997:
Allowance for possible losses $10,423 $4,809 $ -- $2,289 $ -- $12,943
on accounts receivable
Allowance for possible losses $ 4,415 $4,074 $ -- $ -- $ -- $ 8,489
on notes receivable
Valuation allowance for deferred tax asset $22,475 $ -- $1,034 $ -- $12,718 $10,791
(1) Includes effects of foreign currency translation.
(2) Includes utilization of capital and net operating losses. In 1999,
this includes write-off of net operating loss carryforwards that cannot be
utilized. In 1997, this includes the write-off related to the German
divestiture.
-48-
49
HERMAN MILLER, INC., AND SUBSIDIARIES
Exhibit Index
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation are incorporated by reference to
Exhibit 3(a) and 3(b) of the Registrant's 1986 Form 10-K
Annual Report.
(b) Certificate of Amendment to the Articles of Incorporation,
dated October 15, 1987, are incorporated by reference to
Exhibit 3(b) of the Registrant's 1988 Form 10-K Annual Report.
(c) Certificate of Amendment to the Articles of Incorporation,
dated May 10, 1988, are incorporated by reference to Exhibit
3(c) of the Registrant's 1988 Form 10-K Annual Report.
(d) Amended and Restated Bylaws, dated January 6, 1997, are
incorporated by reference to Exhibit 3(d) of the Registrant's
1997 Form 10-K Annual Report.
(4) Instruments Defining the Rights of Security Holders
(a) Specimen copy of Herman Miller, Inc., common stock is
incorporated by reference to Exhibit 4(a) of Registrant's 1981
Form 10-K Annual Report.
(b) Note Purchase Agreement dated March 1, 1996, is incorporated
by reference to Exhibit 4(b) of the Registrant's 1996 Form
10-K Annual Report.
(c) First Amendment to the Note Purchase Agreement, dated February
11, 1999, is incorporated by reference to Exhibit 4(c) of the
Registrant's 1999 Form 10-K Annual Report.
(d) Other instruments which define the rights of holders of
long-term debt individually represent debt of less than 10% of
total assets. In accordance with item 601(b)(4)(iii)(A) of
regulation S-K, the Registrant agrees to furnish to the
Commission copies of such agreements upon request.
(e) Dividend Reinvestment Plan for Shareholders of Herman Miller,
Inc., dated January 6, 1997, is incorporated by reference to
Exhibit 4(d) of the Registrant's 1997 Form 10-K Annual Report.
(10) Material Contracts
(a) Officers' Supplemental Retirement Income Plan is incorporated
by reference to Exhibit 10(f) of the Registrant's 1986 Form
10-K Annual Report. *
50
Exhibit Index (continued)
(b) Officers' Salary Continuation Plan is incorporated by
reference to Exhibit 10(g) of the Registrant's 1982 Form
10-K Annual Report. *
(c) Herman Miller, Inc., Plan for Severance Compensation after
Hostile Takeover is incorporated by reference to Exhibit 10(f)
of the Registrant's 1986 Form 10-K Annual Report. *
(d) Amended Herman Miller, Inc., Plan for Severance Compensation
after Hostile Takeover, dated January 17, 1990, is
incorporated by reference to Exhibit 10(n) of the Registrant's
1990 Form 10-K Annual Report. *
(e) Herman Miller, Inc., 1994 Key Executive Stock Purchase
Assistant Plan, dated October 6, 1994, is incorporated by
reference to Appendix C of the Registrant's 1994 Proxy
Statement. *
(f) First Amendment to the Herman Miller, Inc., 1994 Key Executive
Stock Purchase Assistant Plan, dated April 28, 1998, is
incorporated by reference to Exhibit 10(g) of the Registrant's
1998 Form 10-K Annual Report. *
(g) Incentive Share Grant Agreement, dated October 4, 1995,
between the company and Michael A. Volkema is incorporated by
reference to Exhibit 10(g) of the Registrant's 1996 Form 10-K
Annual Report. *
(h) Incentive Share Grant Agreement, dated May 15, 1996, between
the company and Michael A. Volkema is incorporated by
reference to Exhibit 10(h) of the Registrant's 1996 Form 10-K
Annual Report. *
(i) Herman Miller, Inc., Long-Term Incentive Plan, dated October
6, 1994, is incorporated by reference to Exhibit 4 of the
Registrant's May 22, 1996, Form
S-8 Registration No. 33-04369.*
(j) Herman Miller, Inc., 1994 Nonemployee Officer and Director
Stock Option Plan, dated October 6, 1994, is incorporated by
reference to Exhibit 4 of the Registrant's May 22, 1996, Form
S-8 Registration No. 33-04367. *
(k) First Amendment to Herman Miller, Inc., 1994 Nonemployee
Officer and Director Stock Option Plan, dated January 7, 1997,
is incorporated by reference to Exhibit 10(m) of the
Registrant's 1998 Form 10-K Annual Report. *
51
Exhibit Index (continued)
(l) Herman Miller, Inc., Key Executive Deferred Compensation Plan
and form of Deferred Compensation Agreement, dated February
28, 1997, is incorporated by reference to Exhibit 10(l) of the
Registrant's 1997 Form 10-K Annual Report.
(m) First Amendment to the Herman Miller, Inc., Key Executive
Deferred Compensation Plan, dated January 20, 1998, is
incorporated by reference to Exhibit 10(o) of the Registrant's
1998 Form 10-K Annual Report.
(n) Herman Miller, Inc., Incentive Cash Bonus Plan, dated
September 29, 1998, is incorporated by reference to Appendix A
of the Registrant's 1998 Proxy Statement.*
(o) Credit Agreement dated April 16, 1999, is incorporated by
reference to Exhibit 10(o) of the Registrant's 1999 Form 10-K
Annual Report.
* denotes compensatory plan or arrangement.
(21) Subsidiaries.
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule (exhibit available upon request)