Herman Miller, Inc. — Fiscal 2014 Second-Quarter 10-Q
Reporting period: Quarter and six months ended November 30, 2013. The filing is for Herman Miller, Inc.; the company’s business spans North American and international furniture solutions, and specialty and consumer products.
Financial results and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $470.5 million, up 6.5% | $938.6 million, up 5.3% |
| GAAP net earnings (loss) | $(80.6) million; diluted EPS $(1.37) | $(58.1) million; diluted EPS $(0.99) |
| Operating earnings (loss) | $(125.2) million | $(86.1) million |
| Gross margin | 25.3%, versus 33.6% | 30.8%, versus 33.4% |
| Operating cash flow | Not separately presented | $27.5 million, versus $47.3 million |
- Results were heavily affected by a $158.2 million pretax pension settlement charge from terminating the primary domestic defined-benefit plans. The company reported adjusted diluted EPS of $0.42 for the quarter, versus $0.35 a year earlier, excluding legacy pension expenses, restructuring and impairment charges, and applicable inventory step-up costs. Adjusted measures are non-GAAP.
- Quarterly adjusted gross margin was 36.0%, versus 33.8%; adjusted operating earnings were $40.1 million, or 8.5% of sales, versus $37.0 million, or 8.4%.
- Six-month cash provided by operations was $27.5 million; investing used $26.3 million and financing used $10.3 million. Cash and equivalents were $73.3 million, with $11.6 million of marketable securities, at quarter-end. Operating cash flow was lower year over year, principally reflecting the $48.6 million pension contribution and related tax effects.
- Long-term debt was $250.0 million, unchanged from June 1, 2013. The $150 million revolving facility had $142.7 million available after letters of credit; no borrowing was reported under the China revolvers. The company said it complied with debt covenants and considered liquidity adequate.
- Current assets were $403.6 million and current liabilities $295.9 million at quarter-end. Capital expenditures were $20.0 million for the half-year. The quarterly dividend was $0.125 per share; after quarter-end, the company announced an increase to $0.14 per share, payable in April 2014.
Changes versus the prior comparable period
- Sales growth primarily reflected the Maharam acquisition, higher volumes and pricing; it was partly offset by dealer divestitures, currency effects and reduced U.S. federal-government demand. Maharam contributed $27.5 million of quarterly sales and $54.8 million for the six months.
- Orders increased 5.7% in the quarter to $502.9 million and 5.0% for the half-year to $974.1 million. Backlog was $307.9 million, down 2.0% year over year.
- North American quarterly sales fell 2.5% to $297.1 million, including weaker federal-government business. Non-North American sales rose 11.1% to $103.1 million, with growth led by EMEA and Latin America. Specialty and Consumer sales rose to $70.3 million, largely from Maharam; excluding Maharam, segment sales declined 3%.
- The pension settlement drove the large GAAP operating loss and lower reported gross margin. Excluding specified items, adjusted gross margin and adjusted operating margin improved year over year.
- The company acquired manufacturing and distribution assets in Dongguan, China, for total consideration of $8.0 million, of which $5.9 million was paid in the quarter. It abandoned plans for a new Ningbo facility and recorded a $4.0 million impairment of the previously acquired property.
Outlook, commentary and risks
- Management forecast full-year capital spending of $50 million to $55 million, with spending expected to increase in the second half. It gave no specific revenue or earnings guidance in the supplied filing text.
- Management expressed cautious optimism about improving economic conditions, including Europe, and anticipated slow industry growth in calendar 2014 strengthening into 2015. New Living Office systems were expected to begin standard order entry in the first half of calendar 2014; the Mirra 2 chair was scheduled for full launch in January 2014.
- Key uncertainties identified include economic and office-furniture demand, government procurement, customer capital spending, competitive pricing, raw-material costs and supply, foreign exchange, dealer and customer financial strength, product innovation, and execution of acquisitions and new products.
- Contingencies include performance bonds with approximately $10.3 million maximum exposure and standby letters of credit totaling approximately $9.7 million, of which $7.3 million counted against the revolver. Management reported no known circumstances requiring payment. A UK facility lease matter had estimated potential costs of $0–$3.0 million, with $1.4 million accrued. Management did not expect ordinary-course litigation to materially affect the financial statements.
Important facts for investors to verify
- Review the pension settlement’s composition, cash versus noncash effects, and the implications of terminating the primary domestic plans.
- Assess underlying earnings using the company’s non-GAAP reconciliations and confirm the exclusions used in adjusted EPS and margin measures.
- Track orders and backlog, particularly North American federal-government demand and Specialty and Consumer results excluding Maharam.
- Monitor execution and integration of Maharam and the Dongguan operation, as well as final purchase-price allocation for Maharam, which remained preliminary.
- Compare planned $50–$55 million capital spending and the increased dividend with operating cash generation and available liquidity.