Herman Miller, Inc. — Q3 FY2013 Form 10-Q
Filing identity: The supplied filing is for Herman Miller, Inc., for the quarter ended March 2, 2013; it is not filed under the MillerKnoll name in the request metadata. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Herman Miller designs, manufactures, and sells furniture for workplace, healthcare, education, specialty, and consumer markets. The quarter comprised 13 weeks. The first nine months of FY2013 comprised 39 weeks, versus 40 weeks in the comparable FY2012 period, affecting year-to-date comparisons.
Financial results and liquidity
| Metric | Q3 FY2013 | Q3 FY2012 | First 9 months FY2013 | First 9 months FY2012 |
|---|---|---|---|---|
| Net sales | $423.5 | $399.8 | $1,315.0 | $1,303.5 |
| Gross margin | $144.4; 34.1% | $134.2; 33.6% | $442.6; 33.7% | $440.6; 33.8% |
| Operating earnings | $27.4 | $25.3 | $79.2 | $107.8 |
| Net earnings | $16.5 | $14.9 | $44.8 | $63.2 |
| Diluted EPS | $0.28 | $0.26 | $0.76 | $1.08 |
| Orders | $382.2 | $360.5 | $1,310.0 | $1,281.9 |
- Q3 sales rose 5.9%, operating earnings 8.3%, and net earnings 10.7% year over year. Q3 gross margin improved 50 basis points; operating margin was 6.5% versus 6.3%.
- For nine months, sales increased 0.9%, but operating earnings declined 26.5% and net earnings declined 29.1%. The prior-year period included an extra week.
- Cash from operations was $77.3 for nine months, versus $82.4. Investing used $40.9, including $39.4 of capital spending; financing used $9.8. Cash ended at $198.1, with $10.2 of marketable securities.
- Long-term debt was $250.0, unchanged from June 2, 2012. The $150 million revolving facility had $7.7 of letters of credit outstanding and $142.3 available; the company reported compliance with debt covenants. No balance was drawn on its separate approximately $5 million China revolver at quarter-end.
- Quarterly dividends declared were $0.125 per share. Nine-month dividends paid were $11.8, versus $3.8 in the prior-year period.
Material changes versus the comparable period
- POSH, acquired in April 2012, contributed approximately $13 of Q3 sales and $40 of nine-month sales. Q3 sales also benefited from higher volumes, partly offset by a $7 decline in U.S. federal government sales.
- North American Q3 sales increased 1.8%; Non-North American sales increased 16.7%, largely reflecting POSH; Specialty and Consumer sales increased 13%. Year-to-date North American sales fell 2.4%, including a $47 decline in U.S. federal government sales.
- Q3 gross-margin improvement reflected better labor efficiency, product and channel mix, lower commodity costs, and freight efficiency. The year-to-date margin was down 10 basis points.
- Legacy pension costs totaled $4.0 in Q3 and $24.5 for nine months, weighing on operating expenses and gross margin. These costs were the principal disclosed factor in the year-to-date earnings decline.
- Backlog was $266.6 at quarter-end, up 9.4% year over year. Management said orders improved after a particularly soft January, with improvement continuing into March.
Outlook, commentary, risks, and unusual items
- Q3 sales were below management’s beginning-of-quarter expectation of $430–$450. Management cited a soft January, but reported better orders in February and March. No specific company revenue or earnings guidance for the next quarter or full year is provided in the filing.
- Management expected U.S. office furniture demand to grow in calendar 2013 if policymakers reached a durable fiscal resolution. The February BIFMA forecast anticipated calendar-2013 industry orders growth of approximately 3.4% and shipments growth of 2.1%. Management described Europe as weak and near-term recovery prospects as limited.
- The company expected FY2013 capital expenditures of approximately $55, versus $28.5 in FY2012; $13.4 of capital-purchase commitments remained at quarter-end. Spending included property for a planned Ningbo, China manufacturing facility.
- The company had frozen future accruals under its primary U.S. defined-benefit pension plan and was transitioning to defined-contribution benefits. Plan termination was expected in Q2 FY2014, with estimated additional contributions of $50–$55 at termination. Management also said an additional $1–$3 of settlement expense was likely, but not certain, during the remainder of FY2013.
- Other items include a $1.0 gain on the Q3 sale of a Florida dealership and $1.2 accrued for potential U.K. facility maintenance and repairs, estimated at $0–$3. Performance-bond exposure was approximately $15.5 and standby-letter-of-credit exposure $7.7; no liabilities were recorded for these guarantees. Management said ordinary-course litigation was not expected to materially affect the financial statements.
- Key risks include uncertain economic and office-furniture demand, government procurement, pricing and raw-material costs, supplier and dealer/customer financial health, foreign exchange, pension funding and settlement costs, and international political and economic conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether order and backlog growth, including the reported March momentum, converted into subsequent-quarter revenue.
- The contribution and profitability of POSH, and the extent to which reported sales growth reflects acquisition versus underlying demand.
- Actual pension settlement charges, timing of plan termination, and final cash contributions compared with the $50–$55 estimate.
- Whether planned capital spending and the higher dividend remain supportable from operating cash flow while maintaining liquidity and debt-covenant compliance.
- How U.S. federal-government demand, European weakness, foreign exchange, and material-cost changes affect segment sales and margins.