Filing summary
Entity and period: The filing is Herman Miller, Inc.’s unaudited Form 10-Q for the quarter ended March 3, 2012 (fiscal 2012 third quarter), not a MillerKnoll filing for 2011 Q3. The fiscal-year-to-date period covers 40 weeks, versus 39 weeks in the prior-year comparison.
Financial results
| Metric | Quarter ended March 3, 2012 | Prior-year quarter | Nine months ended March 3, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $399.8 million | $414.8 million | $1,303.5 million | $1,207.7 million |
| Gross margin | $134.2 million; 33.6% | $133.0 million; 32.1% | $440.6 million; 33.8% | $392.4 million; 32.5% |
| Operating earnings | $25.3 million; 6.3% of sales | $31.1 million; 7.5% | $107.8 million; 8.3% | $91.8 million; 7.6% |
| Net earnings | $14.9 million | $19.8 million | $63.2 million | $53.8 million |
| Diluted EPS | $0.26 | $0.29 | $1.08 | $0.77 |
Quarterly sales fell 3.6% year over year; excluding sales from the three dealerships sold during fiscal 2012, sales increased 0.8%. Orders declined 2.1% overall, but rose 3.0% excluding those divestitures. The quarter’s prior-year operating results included a favorable $5.4 million Nemschoff purchase-contingency adjustment. Quarterly gross margin improved 150 basis points, including a $2.3 million benefit from non-recurring accrual adjustments; operating margin declined 120 basis points.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $82.4 million, versus $52.5 million; investing cash outflow was $6.2 million and financing cash outflow was $0.6 million.
- Capital expenditures were $19.1 million, compared with $21.8 million. Cash at period-end was $217.8 million, up from $142.2 million at May 28, 2011; marketable securities were $10.7 million.
- Long-term debt was $250.0 million, down from $300.0 million at May 28, 2011. The $150 million revolving facility had $140.3 million available after letters of credit; the company reported compliance with its covenants.
- Management said cash, operating cash generation and borrowing capacity should fund near-term and future operating and capital needs.
Business, outlook and notable developments
- North American Furniture Solutions quarterly sales decreased 9.8% and operating earnings fell to $16.4 million from $24.8 million; dealership divestitures and lower volumes contributed. Management also cited weaker federal-government and healthcare-sector activity.
- Non-North American Furniture Solutions sales rose 14.7%, and Specialty and Consumer sales rose 15.2%, with growth primarily attributed to higher unit volumes.
- Backlog was $243.8 million, down 9.3% from the prior-year quarter. BIFMA’s March 2012 forecast anticipated approximately 2% declines in industry orders and shipments for calendar 2012, followed by approximately 7% growth in 2013. These are industry forecasts, not company guidance.
- The company expected its fiscal 2012 effective tax rate to be 31%–33%, full-year capital spending of approximately $28 million, and fourth-quarter defined-benefit plan contributions of $31 million net of tax benefits.
- After quarter-end, Herman Miller acquired Hong Kong-based POSH Office Systems for approximately $50 million in cash, with up to $5 million of performance-based contingent consideration. POSH reported approximately $50 million in sales in its last fiscal year.
- After quarter-end, the company announced a shift from defined-benefit retirement programs to defined-contribution arrangements. It planned to freeze future accruals in its primary domestic plan on September 1, 2012, with termination expected to take 12–24 months after the freeze.
Risks, contingencies and other items
- Risks identified include economic conditions and customer capital spending, competitive pricing, raw-material availability and costs, suppliers, foreign exchange, dealer and customer financial health, execution of product innovation, and pending litigation or governmental audits.
- Warranty accruals rose to $21.9 million from $16.7 million a year earlier; management attributed higher year-to-date warranty expense to increased spending and changes in estimates.
- Maximum exposure was approximately $11.1 million for performance bonds and $9.7 million for standby letters of credit; no liabilities were recorded for these arrangements. Management said ordinary-course litigation was not expected to materially affect the financial statements.
- A UK facility-related maintenance obligation was estimated at $0–$3.0 million, with a $1.2 million liability recorded. Routine tax audits were ongoing; potential tax payments were not expected to be material to results.
Most important facts to verify
- Confirm the intended issuer and reporting period: this source is Herman Miller, Inc., fiscal Q3 2012, rather than MillerKnoll, 2011 Q3.
- Assess how the dealer sales, weaker North American demand and lower backlog affect future orders and margins.
- Separate recurring gross-margin performance from the quarter’s $2.3 million non-recurring accrual benefit and the prior-year Nemschoff adjustment.
- Verify the cash, funding and integration implications of the POSH acquisition and the planned pension transition and contributions.
- Monitor warranty accruals, raw-material costs, pension assumptions and the other identified contingencies and market risks.