Herman Miller, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2011, the three months ended August 28, 2010. The filing is by Herman Miller, Inc.; the supplied company label “MillerKnoll, Inc.” does not match the issuer name in this 2010 filing. Unless otherwise indicated, amounts are in millions of dollars.
Financial results and liquidity
| Metric | Quarter ended Aug. 28, 2010 | Comparable 2009 quarter |
|---|---|---|
| Net sales | $380.7 | $324.0 |
| Gross margin | $123.6; 32.5% | $107.5; 33.2% |
| Operating earnings | $29.2; 7.7% of sales | $14.1; 4.4% of sales |
| Net earnings | $16.1 | $8.4 |
| EPS, basic / diluted | $0.28 / $0.22 | $0.15 / $0.14 |
| Cash from operations | $10.0 | $27.2 |
| Capital expenditures | $5.8 | $5.8 |
Sales rose 17.5%, orders increased 22.3% to $393.8, and backlog grew 8.3% year over year to $257.1. Operating earnings more than doubled and net earnings increased 91.7%. Gross margin declined 70 basis points, principally from deeper discounting and higher materials costs; operating margin improved with higher volume, lower restructuring expense, and prior cost-reduction actions. Diluted EPS reflects an adjustment for contingent acquisition consideration; the filing reconciles diluted-EPS net income to $12.8 versus reported net earnings of $16.1.
Cash and cash equivalents were $138.8 at quarter-end, with $11.0 in marketable securities. Operating cash flow fell to $10.0 from $27.2, principally because working-capital changes used $16.5: receivables and inventory rose $19.1 and $9.3, partly offset by higher payables and accrued taxes. Cash increased $4.0 during the quarter. Interest-bearing debt was approximately $301.0, including the swap’s fair value; cash and marketable securities together were $149.8. The revolving facility had $140.4 available after letters of credit. Current and long-term debt maturities were $100.0 and $201.0, respectively; $100.0 of notes is due in March 2011.
Total assets were $801.5 and shareholders’ equity was $98.2 at August 28, 2010. The company reported compliance with debt covenants, including a maximum leverage ratio below 3.5:1 and minimum interest coverage above 4:1.
Business changes and management commentary
Management described a strong start, with demand improving broadly across North American and international markets. North American Furniture Solutions sales increased 15.4% to $311.1 and operating earnings rose to $27.6 from $21.4. Non-North American sales increased 40.4% to $58.7, and the segment returned to operating profit of $1.3 from a $1.6 loss. “Other” sales declined 12.8% to $10.9, while operating results improved to $0.3 from a $5.7 loss, partly reflecting lower restructuring charges and the prior-year debt-tender expense.
Management attributed margin pressure to discounting, commodities, mix, and freight, partly offset by manufacturing-volume leverage. Estimated commodity cost increases were $3.5 for the quarter, with steel and aluminum among the largest contributors. Deeper discounting reduced sales by an estimated $7.5 versus the prior year. Operating expenses included $5.3 of favorable adjustments to Nemschoff contingent purchase-price liabilities, compared with $1.2 of favorable adjustments a year earlier; this is an important non-routine contributor to reported results.
During the quarter, the company acquired Colebrook Bosson Saunders (CBS); cash consideration was $14.4, with contingent consideration valued at $2.9. The prior-year comparison includes the 2009 Nemschoff acquisition and a $4.5 debt-tender charge. Restructuring charges were $0.9, down from $2.6. Management also reinstated the remaining half of previously reduced wages at the start of the second quarter, ending the wage recovery program.
Outlook, risks, and contingencies
Management expected a full-year effective tax rate of 30%–32% and approximately $30 in fiscal 2011 capital expenditures, versus $22.3 in fiscal 2010. It cited BIFMA’s August 2010 industry forecast for calendar 2011, projecting orders and shipments growth of approximately 4%–7%; this is an industry forecast, not company-specific guidance. Management said available cash, operating cash generation, and borrowing capacity should cover operating and capital needs.
After quarter-end, the company contributed $8.9 in cash to its primary domestic pension plan and estimated possible additional fiscal 2011 funding of up to $6.1. Key risks include economic and customer capital-spending conditions, competitive pricing, raw-material availability and costs, supplier concentration, foreign exchange, pension funding, dealer and customer financial strength, and product innovation and execution. A 100-basis-point change in the pension discount rate was estimated to affect the pension liability by about $30. The company estimated annual pretax interest expense would change by about $0.5 for a 1-percentage-point move in rates on its $50 of variable-rate debt.
Notable contingencies include performance bonds with maximum exposure of $19.9 and standby letters of credit of $9.6; no liability was recorded, and management did not expect material impact. A U.K. facility obligation was estimated at $0–$3, with $1.1 accrued. The filing also discusses ordinary-course litigation and potential GSA contract audits; management did not expect material adverse effects. The company was undergoing routine tax audits and said material changes to uncertain tax benefits were not expected.
Important facts for investors to verify
- Whether order growth and the $257.1 backlog convert into sales, and how much demand reflects a sustained recovery.
- Whether discounting and higher commodity costs continue to weigh on gross margin, and whether volume leverage offsets them.
- The sustainability of earnings after the $5.3 favorable Nemschoff contingent-consideration adjustment and other comparison-period items.
- Liquidity and refinancing plans for the $100.0 debt maturity due March 2011, plus compliance with credit-facility covenants.
- Actual pension contributions, acquisition-related contingent payments, and outcomes of the U.K. lease, GSA, tax, and other disclosed contingencies.