Furniture Industry Jobs Get Leaner
GRAND RAPIDS — Driven by design and increased efficiency, the furniture industry is living up to predictions of a dramatic turnaround in 2005.
Herman Miller saw its most significant profit spike in 17 quarters in the third quarter ending Feb. 26, its net earnings of $16.8 million a 115.4 percent increase over previous year same quarter results. It was its third straight quarter of double-digit, year-over-year sales growth and the highest rate of quarterly sales increases over the prior year since November 2000.
Meanwhile, Steelcase was seeing growth as well.
The world's top office furniture maker reported last week net income of $1 million for the fourth quarter that ended Feb. 25. The 1-cent-per-share profit easily beat the loss of $19 million, or 13 cents per share, of a year earlier.
That was a dip from the previous quarter profit of $10.1 million, which at 7 cents per share had topped Wall Street's expectations of 4 cents per share. Analysts expected similar results in the fourth quarter despite Steelcase guidance suggesting only a small profit or to break even in the fourth quarter.
At $691 million, fourth quarter revenue increased 23 percent.
For the 2005 fiscal year, Steelcase reported revenue of $2.6 billion, an 11 percent increase over $2.3 billion last year, and profits of $12.7 million, a significant swing from the $23.8 million loss of 2004.
Judging by its breakthrough third quarter, Herman Miller should complete a stronger turnaround with the close of 2005 in May. Fourth quarter sales were projected to be up 7 percent to 13 percent.
But if the industry is to be measured by job creation and loss, as the manufacturing sector has been of late, all of the recent guidance from the two public furniture giants will spell out only rainy days.
Two days prior to its 2005 fiscal report, Steelcase announced consolidation plans that could cost West Michigan 600 jobs over the next two years and close a major portion of its Grand Rapids manufacturing facilities.
Three plants at its Grand Rapids headquarters campus will be consolidated into its newer Kentwood/Gaines Township campus. Officials estimate 100 salaried and 500 hourly workers will be affected by the decision, which will be partially offset by the addition of 300 jobs at the consolidated campus.
The corporate office and Steelcase University will remain at the Grand Rapids site, along with 2.6 million square feet of vacant manufacturing space.
"It has been a difficult three-year period for our employees," said President and CEO Jim Hackett in a March 30 conference call. "I assure that management is taking all the steps to assure that we think about all the people involved in this decision. Our employees worked very hard to improve customer service even as we were reducing half of our work force. I'm very proud that today I will announce bonuses that are the direct result of their commitment to service and savings."
The consolidation announcement is an effort to lock in those savings, Hackett said.
Steelcase has applied lean concepts to its operations with a customer service-oriented approach. With the reliability of the Internet and a growth of supplier efficiencies throughout North America, Steelcase can continue to take advantage of lean principles and further alter its manufacturing footprint.
The consolidation will reduce freight and other redundancies between the West Michigan campuses, said Jim Keane, chief financial officer. Steelcase has been steadily incurring restructuring costs over the past three years, and the Grand Rapids consolidation will bring a pre-tax charge of between $25 million and $30 million over the next two years, not including an additional $4 million of disruption costs.
Once complete, Keane expects the company to save $45 million annually beginning in fiscal year 2007. He estimates the sale of the real estate to provide an additional $30 million to $35 million of revenue, although it might be several years before it is sold.
The consolidation is the latest in a series of restructuring efforts toward a new industrial model for Steelcase, which Keane indicated will soon extend deeper into its non-manufacturing operations.
"We've emerged from difficult economic times a stronger company, determined to continually improve every aspect of our business," said Hackett. "These changes reflect our ongoing commitment to build a new and more flexible industrial system that will ensure our competitiveness. We continue to execute our strategy of implementing lean manufacturing, reducing complexity and developing a world-class global supply chain."
In fiscal year 2000, Steelcase had 12.9 million square feet of manufacturing space in North America. After three years of consolidation and restructuring efforts, it now has 7.6 million square feet. The Grand Rapids consolidation will reduce that to 5 million.
"That's a reduction of about 60 percent," Keane said. "We will still have plenty of capacity; as sales increase, we can shift around work and can rely on our suppliers if needed. Clearly there are risks, but we believe we will be able to deliver more with 5 million than we did in 2000 (with 12.9 million)."
Hackett said the combination of last week's actions and other ongoing projects are essential in helping Steelcase to achieve its previously stated 35 percent long-term gross margin target.
The restructuring effort was attributed to a rise in gross margins to 28.2 percent in the fourth quarter, up from 23.9 percent in the prior year quarter. This was despite higher material and compensation costs and unexpected inflationary pressure. Steelcase's steel surcharge underestimated the actual cost of steel by $4 million, a loss of 0.7 margin points.
For 2005, gross margins of 28.5 showed a marked improvement over 26.2 in 2004.
Restructuring and other charges in fiscal 2005 totaled a net $9.4 million after-tax. Charges were primarily related to facility rationalizations in the company's North America and International segments.
While not providing guidance for the full year, Steelcase expects double-digit sales growth in the first quarter.
Hackett indicated that future growth will be driven largely by next-generation product innovations concerning sustainability and ergonomics, among other markets.
Likewise, product innovations within the Herman Miller Production System (HMPS) are the central component of Herman Miller's five-year plan. It hopes to challenge for the industry's top position by 2010, stating a revenue goal of $2.6 billion. That would require double-digit annual growth each of the next five years.
"We'll have to grow faster than the industry," said CEO Brian Walker said. "We have to find new markets and combine that with continued efficiency."
With HMPS, Herman Miller has captured 50 percent of the price increase it implemented in August. That and additional volume was enough to offset significantly higher raw material costs, as the third quarter's gross margin of 32.1 percent was a marked improvement over the prior year's 30.1 percent.
Even with higher fuel prices, HMPS allowed Herman Miller to decrease its freight costs.
It is now in the process of applying HMPS deeper into its supply chain, said Vice President of Investor Relations Joe Nowicki, as it looks for new efficiencies in its distribution strategy with plans to roll out a HMPS training program for vendors and suppliers.
If anything, the recent announcements are proving that as the furniture industry rebounds, it will not likely have an effect on employment in the region.
The office furniture industry has kept pace with the productivity gains seen throughout the manufacturing sector, noted industry analyst Michael Dunlap of Michael A. Dunlap & Associates LLC.
"Because productivity has been so good, especially in the last few years, you don't see any gains in employment," he said.
If gains in productivity parallel sales increases, employment will not change, Dunlap explained. But if sales don't match productivity gains, there will be a surplus of either employees or manufacturing space.
"There is still a risk of additional job cuts," Dunlap said. "Part of it depends on productivity improvements, then also how much offshore sourcing we see in the industry. That's very likely to happen, and if it does, we'll see more job reductions."
With improvements in productivity a primary goal for both Herman Miller and Steelcase, the only way the region will likely see widespread hiring within the industry is with a growth period like that of the 1990s.
"Then the other thing to think about is the number of senior employees out there," Dunlap said. "I'm not sure of the numbers, but I've heard that the average Steelcase worker has been there for something like 17 years. As these older workers retire, they will have to be replaced by new hires."
Early retirement will be an option in a severance package Steelcase will offer at significant expense to the company, Keane said.
"Management is very aware of the impact to families," he said. "It might seem unusual, but it is consistent with the approach we've used when we've closed other plants. It's the right thing to do for employees who have been with us for many years."