Gloomy 04 For Furniture Makers

October 31, 2003
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No new jobs, no rebound.

In a nutshell, that’s the situation facing office furniture manufacturers; a situation that, despite the best hopes of executives, remains stuck, running along the bottom of the economic trough in what’s turning out as a jobless national economic recovery.

“There is some positive news out there, it’s just not trickling down to us,” said Tom Reardon, executive director of the trade group Business and Institutional Furniture Manufacturer’s Association that recently downgraded its outlook for 2004.

“It’s still tough times out there,” he said.

The newest BIFMA outlook significantly lowers expectations for 2004 from the last forecast issued in July and nudges expectations slightly upward for the remainder of 2003, which won’t end up quite as bad as previously expected.

BIFMA now forecasts shipments next year to rise just 2.5 percent to $8.6 billion. BIFMA in July forecast a strong 14 percent rebound in 2004 shipments.

The downgrade for 2004, which led industry leader Steelcase Inc. to lower near-term expectations, is reflective of continued softness in corporate profit projections, office construction and white-collar hiring, Reardon said.

“The softer employment rebound is really affecting us,” Reardon said. “Until the employment projection really turns around, we’re probably not going to.”

For 2003, BIFMA now anticipates a 5.5 percent decline in industrywide shipments, from $8.89 billion to $8.4 billion. That’s an improvement from BIFMA’s July forecast that foresaw an 8.5 percent shipment decline for 2003.

Since the downturn began nearly three years ago, industrywide sales have plunged by more than one-third from the peak of $13.28 billion in 2000.

A spokesman for Herman Miller Inc. declined to comment on the new BIFMA outlook.

At Haworth Inc., President and Chief Executive Officer Bob Krasa said the outlook is probably in line with most economic forecasts for next year. Despite that prediction for slow growth, “Haworth is optimistic for 2004,” according to Krasa.

“We do expect that the economy will accelerate as the year goes by,” Krasa said.

On occasions during 2003, industry leaders have expressed optimism that business was finally showing signs of a rebound. But the upward movement in weekly order volumes was never sustained and order rates again softened.

“There’s certainly no increase at all that we have seen in the marketplace,” Jack Michaels, the CEO of HON Industries, told brokerage analysts in late October during a conference call to discuss the Iowa-based company’s latest results. “We see some stabilization occurring, but we don’t see any additional increase at this point.”

HON ranks among the industry leaders behind West Michigan-based Steelcase, Haworth Inc. and Herman Miller Inc.

Amid the significantly downgraded outlook for 2004, Steelcase recently told investors it expects to lose money for the rest of its fiscal year.

The company, citing flat order rates through mid-October and after earlier expecting a “gradual strengthening” of orders, reduced North American shipment expectations by 5 percent for the third and fourth quarters of FY 2004. Steelcase also trimmed its forecasted operating income and accelerated planned restructuring charges.

As a result, Steelcase now expects to post a loss of 5 cents to 7 cents per share for the third quarter that ends Nov. 30, with $5 million to $7 million in previously anticipated pre-tax restructuring charges, on sales that are “consistent” with the $612.1 million recorded in the second quarter.

Steelcase will record a fourth quarter loss of 6 cents to 11 cents per share that will include pre-tax charges of $15 million to $20 million. Restructuring charges that were to occur in early FY 2005 would now occur in the fourth quarter of FY 2004, the company said.

“Steelcase is aggressively implementing its plan to improve its cost structure, and is making faster than expected progress on rationalization initiatives in North America and international,” the company stated in its Oct. 24 announcement.

Steelcase spokeswoman Jeanine Hill said at the time that the company did not anticipate any further job cuts.

“At this point, there are no specific plans for headcount reductions or anything like that,” Hill said.

For the full fiscal year, Steelcase expects to lose 10 cents to 15 cents per share.

Steelcase executives in September told Wall Street analysts that they expected the company to post third-quarter earnings “just above breakeven,” including pre-tax restructuring charges of $5 million to $7 million, and a profit for the full fiscal year.

Analysts had expected Steelcase to post a profit of 3 cents per share for the third quarter and 6 cents per share for the fourth quarter, according to First Call/Thomson Financial.

The earnings warning from Steelcase came on the heels of reductions in the company’s credit rating by both Moody’s and Standard & Poor’s.

Moody’s gave Steelcase a negative rating and cited the company’s reduced revenue, operating income and cash flow that are “likely to persist over the near term, as demand for contract office furnishings remains sluggish.” Moody’s also cited the “risks associated with inefficiencies or additional charges arising from the company’s ongoing restructuring program.”

“The potential that Steelcase’s business model may require a fundamental and permanent shift away from that of a vertically integrated manufacturer to enhance its industry competitiveness, and the commensurate stress on company management, are also reflected in the negative outlook,” Moody’s said.

In its announcement, Steelcase stated that its balance sheet “remains strong with current cash balances and debt levels comparable to the end of the second quarter. The company expects to continue to comply with all debt covenants.”

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