Herman Millers Restructuring Looks Past Present Downturn

June 19, 2002
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ZEELAND — A corporate restructuring initiated in the wake of a $2.9 million first quarter loss and a 25 percent drop in sales is designed to benefit Herman Miller Inc. far beyond the present economic times, executives say.

The goal is to enable the company to continue investing in new product programs and respond quickly for growth when the economy rebounds, while weathering the present economic slump that has generated an unprecedented downturn for the office furniture industry — one that will result in an estimated $2 billion loss in industrywide sales for 2001.

Herman Miller is eliminating an additional 750 jobs, closing four plants, outsourcing long-distance transportation operations, taking over some parts work from suppliers and consolidating its supply base in an effort to permanently cut costs.

The moves are on top of earlier spending and workforce reductions and "will improve our current performance, (and) ensure our financial strengths and positions as a leader and a more focused competitor after the recovery," Chairman and Chief Executive Officer Michael Volkema told brokerage analysts during a Sept. 25 conference call.

"As always, we need to continue to balance short-term performance with a need to invest in the future. It's not an 'either-or' — but a 'both,'" Volkema said. "These are truly economic actions that will change the cost structure of the business on an ongoing basis."

The actions taken since January will combine for an annualized savings of $125 million for Herman Miller, Chief Financial Officer Beth Nickels said. The company will end up taking a charge of $50 million to $65 million for the 2002 fiscal year to cover the cost of restructuring, which includes a $9.6 million pre-tax, first-quarter charge.

Once all the job cuts are made, Herman Miller will have pared 3,000 positions, or 25 percent of its workforce, since January in response to the downturn, as well as reduced its manufacturing capacity by 11 percent. About 300 of the additional 750 job cuts, announced Sept. 24, will occur in West Michigan.

Locally, Herman Miller is closing its Powder Coat Technologies plant in Spring Lake, plans to vacate three leased facilities in the Holland-Zeeland area, and move that work to other locations in Holland, Zeeland and Spring Lake, including the Powder Coat plant.

The company also is closing and selling its plant in Rocklin, Calif., a move the will affect about 410 workers.

The moves came as Herman Miller reported first quarter sales of $410.3 million, down 25.1 percent from the $547.9 million in the same period a year earlier.

The company lost $2.9 million, or 4 cents per share, during the quarter, which compares to net income of $32.5 million, or 41 cents per share, a year ago.

Herman Miller expects second quarter sales of between $400 million and $420 million, with earnings of 4 cents to 8 cents per share before charges relating to the restructuring. That's presuming the economy doesn't deteriorate any further, especially in light of the Sept. 11 terrorist attacks in New York and Washington, D.C.

The company reported sales of $592.5 million and earnings of $42.3 million, or 54 cents per share, during the second quarter of FY 2001.

"We will continue to face tough times in our second quarter," Nickels said.

Beyond the plant closings and job cuts, Herman Miller will outsource some manufacturing and its long-distance transportation fleet to "capable and reliable" vendors, Nickels said.

The company also has worked for some time — and is accelerating its efforts — to consolidate its supply base through a "very extensive kind of review of every single vendor that we have," with a goal of generating additional long-term cost savings, Volkema said.

"Obviously we rely on a lot of other people making things for us to create value for the customer," Volkema said.

Each of the vendors that Herman Miller retains should have a proven ability to absorb at least a 25 percent increase in volume, Nickels said.

"We're not just consolidating into one vendor and then have to add a vendor back when the business comes back," Nickels said.

Herman Miller presently has about 450 active suppliers, about 70 percent of which are located in West Michigan, spokesman Bruce Buursma said.

The restructuring is by far the deepest action Herman Miller has taken in response to the economic downturn the industry began feeling early this year. Volkema told analysts that the company was "somewhat surprised" by the speed and depth at which the downturn hit.

While he acknowledged Herman Miller could have taken significant action sooner, Volkema wanted to ensure the restructuring was focused on maintaining momentum the company had built in the years prior to the downturn in gaining market share and targeting new markets, and to position it for when the economy recovers, he said.

"We were on an acceleration mode," he said.

If there is a "silver lining" in the present situation, it's that downturns in the industry have always been followed by years of strong growth, Volkema said. While nobody's sure exactly when business will pick up, he anticipates the industry will follow the same course when the U.S. economy recovers and corporations feel comfortable to spend again on capital improvement and new employees.

"We anticipate that when the psychology turns around, the underlying dynamics will support a recovery, and that we're not facing what is a protracted period of downward movement in our industry in general," Volkema said.

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