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US: Gritting Quarters

The economy has seen its worse but as the office furniture industry usually reacts slower to macro conditions, American manufacturers must still grit their teeth through another quarter. Major players expect things to look up within months. Nicole Liang reports, with quarterly financial outlooks from HNI, Steelcase, Herman Miller and Knoll.

The Business and Institutional Furniture Manufacturers Association (BIFMA) International recently released the latest quarterly forecast published by the economic consulting firm Global Insight. According most current report released on May 27, the current projections are:

Economic data for the fourth quarter of 2008 contributed to a more pessimistic outlook for office furniture consumption and shipments. Previous forecast predicts 2009 office furniture shipments could contract 19 percent as compared to 2008 volumes. Orders were expected to drop 25 percent. It also predicted that office furniture demand was expected to decline on a year-on-year basis throughout 2009 and begin to climb again during the second half of 2010.

But the updated forecast (see Table) for 2010 heralds renewed optimism. Office furniture production and consumption are expected to improve by 2.8 percent and 3.9 percent respectively next year.
After back-to-back declines in real GDP of more than six percent, the period of economic free-fall seems to be over, at least for GDP.

While the worst seems to be over for the overall economy, for the office furniture industry conditions will stay rough for a while. Orders and shipments of office furniture for the first quarter of 2009 came in well below expectations as downward momentum in the business spending sector remains severe.

The domestic market should improve as 2009 progresses, but recovery for the rest of the world will come more slowly. This means that the office furniture export market will take longer to stabilise and will be another major drag on the US office furniture industry in 2009.

The Major Drag

But how much more bleeding can America’s greatest names in office furniture and furnishing sustain before the modest single-digit growths next year? By the middle of 2009, some of the country’s largest office names seem to really be going through a major drag.

HNI Corp, the world’s second largest office furniture manufacturer and leading manufacturer and marketer in the US, sustained a net loss of US$1.4 million against sales of US$383 million for the second quarter ending July 4, 2009. Charges related to the shutdown of two office furniture manufacturing plants and restructuring of hearth operations are included. Consolidated net sales decreased 37.5 percent to US$383 million. The group’s umbrella of brands includes HON, Allsteel, Gunlocke, Paoli, Maxon, Lamex, HBF, Heatilator and Heat Stove.

Also in July 2009, Steelcase Inc was forced to vacate its iconic pyramid headquarters in Grand Rapids, Michigan. The landmark building was completed in 1989 using US$111 million and today, the 500 employees it housed had to move out, as Steelcase cited reasons of “under capacity” of this Corporate Development Centre and financial concerns.

Its financials motivated this bleak move. Steelcase’s fourth quarter and fiscal year 2009 financial results saw the company in the reds with a fourth quarter revenue of US$654.9 million, representing a 27.3 percent decline. It had sustained a net loss of US$65.7 million, Steelcase announced on March 31.

Restructuring

Things did begin look up slightly afterwards. Steelcase reported break-even net income for the first quarter of fiscal 2010. Operating expenses fell US$59.7 million to US$161 million, or 29.6 percent of revenue.

Some of this may be accounted for by the cessation of the Steelcase Inc Retirement Plan for fiscal 2010 and that the further reduction its white-collar workforce by approximately 200 positions globally. In addition, Steelcase is consolidating a number of smaller manufacturing facilities across its global operations. These actions, which the company anticipates to complete over the balance of the fiscal year, are projected to generate an estimated US$30 million in annualised pre-tax savings.

The company expects second quarter fiscal 2010 revenue to approximate US$600 million, compared to US$901.8 million in the prior year. Recent order patterns have reflected modest seasonal improvements, which are projected to continue into the second quarter.

"While the demand environment has been challenging, we are pleased with the positive impact our restructuring actions and cost controls are having on our ability to weather this downturn," said James P Hackett, Steelcase president and CEO in the quarterly report.

"In the midst of mixed economic signals, uncertainty in the demand environment for office furniture remains high," said David C Sylvester, Steelcase vice president and CFO.

 

 

HNI Corp Chairman, President and CEO, Stan Askren expressed similar sentiments: "Market conditions remain difficult, but we are seeing signs of stabilisation, particularly in our office furniture businesses. We expect our historical seasonal demand patterns to hold and drive third quarter revenue above second quarter levels".

"We made strong progress resetting our cost structure and generating cash flow during the quarter. As a result, we exceeded our earnings expectations and reduced debt by US$62 million despite highly challenging market conditions.”
Askren added that he is pleased with the progress of the office furniture operations.

Like Steelcase, HNI hopes to improve financials by cutting factories and jobs. Another office furniture manufacturing facility closed in mid-July 2009, as part of HNI’s plans to go lean and restructure.

Herman Miller

Also headquartered in Grand Rapids, fellow office furniture and furnishing giant Herman Miller, Inc treads the same waters, though with gentler winds. With acquisitions in place to give emphasis to emerging markets, sails are higher and as it appears, stronger.

The company’s consolidated net sales decreased 38.4 percent year-on-year in the fourth quarter ended May 30, 2009. Results for fiscal year 2009 also recorded a decline – of 19 percent to US$1.63 billion in consolidated net sales.

On the brighter side: While gross margin for the quarter decreased to 32.5 percent of sales, it was an improvement of 260 basis points from the prior quarter. Excluding restructuring charges, the adjusted operating income was 9.3 percent of sales.

"Business levels this quarter reflect the economic slowdown facing most industries today," said Herman Miller CFO Greg Bylsma. "Although on a positive note, sequentially we did experience an increase in orders of almost 16 percent over the third quarter… The rate of demand decline has clearly slowed--and there are signs demand has stabilised. We also expect to see continued benefit from the additional cost reduction actions announced this quarter."

Diversificatcation

Brian Walker, Herman Miller’s CEO concluded in the quarterly report: "We've just completed one of the most challenging years in Herman Miller's history… We know the current year will be just as difficult, but our new additions of the Legrand alliance, the Nemschoff acquisition, and a long list of new products that were launched at NeoCon… have our team optimistic and focused on our future”.

Herman Miller on June 24, 2009 successfully completed the acquisition of Nemschoff, Inc, a healthcare furnishing designer and maker that posted more than US$90 million in revenue in 2008. Nemschoff has specific strengths in soft seating and the patient care environment, according to a statement by Herman Miller. Many of the Nemschoff family of products are also specified in the commercial office and education markets.

Walker said that Herman Miller has been looking to expand its customer base, which is especially important in the global economic downturn. The healthcare sector is an important and growing vertical market opportunity, the company feels.

"In the US and globally, our populations are aging and growing. As a result, the demand for healthcare services continues to grow faster than the overall economy. Therefore, we have focused an ever-increasing amount of our strategic resources toward growing our product and solution portfolio for this customer segment," Walker said.

This strategic acquisition will help Herman Miller further target the healthcare market as it can “immediately expand our product breadth and depth and accelerate [its] healthcare strategy”.

With the acquisition of Nemschoff, the combined companies will offer a full range of product applications from the waiting room to administrative offices, and from the clinical lab and pharmacy to the patient room, a company statement said.

Knoll’s Generatation

While Herman Miller is foraging into healthcare, and even HNI is trying to improve its hearth product offering, Pennsylvania-headquartered Knoll, Inc is diversifying too, but is staying within its core office furniture segments.
Knoll reported net sales of US$202.2 million for the second quarter ended June 30, 2009. Operating profit was US$18.5 million. Gross margin increased to 35 percent. By far, great news when compared with the net losses reported by its competitors.

The company attributed higher gross margins to favourable foreign exchange rates and lower transportation costs. In addition, cost reduction activities and our global sourcing efforts helped too.
But for Knoll to even be in the position to be profitable, much credit should go to its unique portfolio covering office, healthcare, contract, residential and kids furniture, and even textiles.

"While our industry continues to be severely impacted by the global economic crisis we are pleased that we were able to report relatively robust profitability," said Knoll CEO Andrew Cogan.

"Our strategy of diversifying our sources of revenue into high design content business continued to buffer our results. The June introduction of our new Generation by Knoll work chair at the annual tradeshow was one of the most broadly well received launches in our history,” he added.

High stakes are placed on the Generation chair, which won the Best of NeoCon Gold award 2009 for task seating. “I believe that we succeeded in setting a new reference point for work chair seating and will, in the coming years, see meaningful revenue and profit impact from our Generation launch,” Cogan said.

With Generation’s good start, Knoll hopes to double its current market share in office seating from about five percent to 10 percent within two years, Andrew Cogan told Reuters in a report dated July 17. More new product releases following Generation’s success footsteps can be expected along the way to stimulate demand, even as the economy does not pick up.

"We have great core opportunities in the North American office market, and again that's why we are introducing new chairs, storage products and innovative accessory products," Cogan said.

On the other hand, Herman Miller’s North American sales for the most recent quarter were US$268.3 million, a 35.1 percent decrease from the prior year, while non-North American sales for the quarter were US$44.1 million, a 53.4 percent decline from a year ago.