Furniture Makers Keep Credit Rating

April 30, 2002
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A downgrade in their outlooks by Standard & Poor’s reflects the overall environment for the office furniture industry, Steelcase Inc. and Herman Miller Inc. executives say, but they welcome an accompanying affirmation of their credit ratings.

Citing the “challenging conditions” facing the industry, Standard & Poor’s this month lowered its outlook for both Steelcase and Herman Miller from stable to negative. Competitor Knoll Inc., based in East Greenville, Pa., but with a significant West Michigan presence, retained its stable outlook.

All three companies had their current credit ratings maintained.

Given the unprecedented downturn in the industry that last year cost office furniture manufacturers more than $2.1 billion in sales collectively, the downgrade came as no surprise.

“There’s no new information there to us,” Steelcase Chief Financial Officer James Keane said. “It’s been a challenging year.”

Industrywide, domestic office furniture shipments declined 18.3 percent in 2001, from $13.28 billion to $10.97 billion, and are forecast to fall another 13 percent this year to $9.5 billion. Business is expected to begin picking up in the latter half of this year, setting the stage for a modest 3 percent rebound in shipments in 2003.

Weighing against the industry in the near-term is a national unemployment rate that’s expected to rise and continued softness in capital spending, which is expected to grow 9.3 percent in 2003, according to Standard & Poor’s.

Bob Dentzman, treasurer and vice president of investor relations for Herman Miller, said that given the economic conditions and what’s happened to the industry, he was happy to see the company’s credit rating sustained, even with the downgraded outlook.

“On balance, I think we’re pretty happy where we’re at,” Dentzman said. “We’ve been through one heck of a storm and we’re still a pretty solid company.”

In his analysis of the companies, Standard & Poor’s Martin Kounitz credits both Steelcase and Herman Miller for aggressively and quickly reducing their cost structures in the past year in the wake of a rapid business downturn after substantially increasing their capacities during the boom years of the 1990s.

“All three of these firms are very well-managed. They did what they had to do,” Kounitz said, including Knoll in the analysis.

Steelcase has been rated at A-minus since June 2000. The rating’s affirmation reflects Steelcase’s strong cash-flow generation and an installed product base that is the highest in the industry. The company had total outstanding debt of $593.7 million as of Feb. 22.

Herman Miller’s rating of BBB-plus is based on its “strong track record of innovation, efficient manufacturing structure and moderate financial policy,” Standard & Poor’s said. Herman Miller’s outstanding debt as of March 2 was $242.2 million.

The positive aspects of Steelcase, Herman Miller, and Knoll — which retained a BB rating — are offset by the industry’s volatility and highly cyclical and competitive nature, Standard & Poor’s said.

Executives viewed the analysis as a good sign of their ability to weather the downturn.

“It’s a reflection of the strength of the company,” Steelcase’s Keane said.

Steelcase, in its 2002 fiscal year that ended Feb. 22, posted a 23.7 percent decrease in annual revenues, from $4.04 billion in FY 2001 to $3.08 billion.

Steelcase did manage to squeeze out a meager $1 million profit for the year, or 1 cent per share. The company earned $193.7 million, or $1.30 per share, in its previous fiscal year. Excluding one-time charges, net income for FY 2002 totaled $34.7 million.

Herman Miller, through the first nine months of its 2002 fiscal year, recorded revenues of $1.14 billion, down 33.6 percent from the $1.72 billion through the first nine months of the previous fiscal year. Year-to-date losses for Herman Miller totaled $37.2 million, or 49 cents per share. That compares to earnings of $107.8 million, or $1.38 per share, through the first nine months of the 2001 fiscal year.

Kounitz warned that further erosion in credit ratios could lead Standard & Poor’s to lower credit ratings for Steelcase and Herman Miller, making it more expensive for both companies to borrow money. But the anticipated 13 percent decline in industrywide shipments for 2002 is already figured into the analysis and the erosion would have to get significantly worse before Standard & Poor’s would act, Kounitz said.

“There’s nothing out there we know of that we would say we’d lower their rating,” Kounitz said.           

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