Herman Miller, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended May 31, 2014 (52 weeks); the requested fourth quarter ended May 31, 2014. The filing is for Herman Miller, Inc. and reports annual results as well as quarterly data. Dollar amounts are in millions unless noted.
Business context and financial results
The company designs, manufactures, and sells furnishings and related services for office, healthcare, education, and consumer markets. Approximately 80% of FY2014 sales were made to or through independent dealers. The year included the Maharam acquisition’s first full year of contribution and the acquisition of manufacturing and distribution operations in Dongguan, China.
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $1,882.0 | $1,774.9 |
| Gross margin | $631.0; 33.5% | $605.2; 34.1% |
| Operating earnings (loss) | $(25.7); (1.4%) | $114.9; 6.5% |
| Net earnings (loss) | $(22.1) | $68.2 |
| Diluted EPS | $(0.37) | $1.16 |
| Cash from operating activities | $90.1 | $136.5 |
| Capital expenditures | $40.8 | $50.2 |
Fourth quarter: Sales were $487.5, compared with $460.0 in Q4 FY2013; net earnings were $16.6 versus $23.4, and diluted EPS was $0.28 versus $0.40.
Liquidity and debt: Year-end cash and cash equivalents were $101.5, with $11.1 in marketable securities. Working capital was $145.7 and the current ratio was 1.3. Interest-bearing debt was $250.0, including $50.0 due in January 2015. The company reported $145.1 of available unsecured credit capacity at year-end and compliance with debt covenants. The filing states management believes cash, operating cash generation, and borrowing capacity provide adequate liquidity.
Material changes versus the prior year
- Sales increased 6.0%; Maharam contributed approximately $96.5 of incremental sales. Dealer divestitures reduced sales by $25.6, foreign exchange by $8.9, and lower U.S. federal government volumes by $12.0; pricing added an estimated $10.5.
- GAAP operating results were sharply lower, principally due to $164.4 of legacy pension expenses, including a $158.2 pre-tax settlement charge following termination of the primary domestic defined benefit plans. The company contributed $48.8 to complete the termination.
- Gross margin declined 60 basis points, with pension-related expense reducing margin by approximately 250 basis points, partly offset by Maharam, pricing, and in-sourcing benefits.
- Cash from operations fell $46.4, primarily reflecting pension contributions and a $21.2 use of cash from working-capital changes. Cash nevertheless rose to $101.5 from $82.7.
- Backlog increased 11.7% to $306.4 from $274.4. Net trade orders rose 8.2% to $1,917.7; the company cautioned that backlog is not necessarily indicative of future-period sales.
Outlook, commentary, risks, and unusual items
- Management described improving economic and industry conditions and expressed optimism about business momentum, while noting geopolitical concerns, including Ukraine and the Middle East. BIFMA’s May 2014 forecast projected U.S. office furniture order growth of 4.9% in calendar 2014 and 9.5% in 2015; this is an industry forecast, not company guidance.
- FY2015 capital spending was expected to be $65–$75, primarily for manufacturing facilities. No specific company revenue or earnings guidance is provided in the filing.
- Management presented non-GAAP adjusted operating earnings of $164.0 and adjusted diluted EPS of $1.68, excluding specified pension, restructuring, impairment, inventory step-up, and contingent-consideration items. These measures supplement, and do not replace, GAAP results.
- Restructuring and impairment charges totaled $26.5, including $21.4 for POSH and Nemschoff trade names and $4.0 for Ningbo property. Management cited forecasts below original acquisition expectations for the trade names, while noting both businesses continued to grow and contribute profits.
- After year-end, the company acquired approximately 83% of Design Within Reach for $155 cash and borrowed $127 under its credit facility. The acquisition closed July 28, 2014; the final purchase price remained subject to adjustment.
- On July 25, 2014, Nemschoff received FDA inspection observations. The company had not yet determined the scope or remedy, and stated that the potential financial impact could not be estimated.
- Key risks include economic and office-furniture demand cyclicality, competitive pricing, commodity costs, international and currency exposure, dealer and supplier financial health, execution of growth and acquisition plans, product defects and warranty costs, and access to capital. A UK facility lease dilapidation liability was estimated at $1.5 (within a $0–$3 range). Management said pending ordinary-course litigation was not expected to materially affect results.
Important facts for investors to verify
- Reconcile the $164.4 legacy pension expense and $26.5 impairment/restructuring charges to reported GAAP losses and management’s adjusted measures.
- Review the pension plan termination’s completed obligations, remaining international and post-retirement liabilities, and future cash contributions.
- Assess whether the higher backlog and order growth convert to sales, noting the timing effect of approximately $22 of orders moved into Q3 ahead of a price increase.
- Confirm the final Design Within Reach purchase price, financing and integration effects, and subsequent liquidity and leverage after the $127 borrowing.
- Monitor the FDA observations at Nemschoff, any resulting remediation or costs, and the adequacy of warranty and other contingency reserves.