Herman Miller, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 1, 2014 (quarterly comparison: March 2, 2013). The filing is by Herman Miller, Inc.; the supplied company metadata says MillerKnoll, Inc. and “2013 Q3,” but the filing itself covers fiscal 2014 Q3.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $455.9 million | $423.5 million | $1,394.5 million | $1,315.0 million |
| Gross margin | $162.9 million; 35.7% | $144.4 million; 34.1% | $451.8 million; 32.4% | $442.6 million; 33.7% |
| Operating earnings (loss) | $34.1 million | $27.4 million | $(51.9) million | $79.2 million |
| Net earnings (loss) | $19.4 million | $16.5 million | $(38.7) million | $44.8 million |
| Diluted EPS | $0.33 | $0.28 | $(0.66) | $0.76 |
| Operating cash flow | Not provided for the quarter | $50.4 million | $77.3 million |
- Q3 sales rose 7.7%; new orders increased 21.4% to $464.0 million and backlog was $315.8 million, up 18.5% year over year.
- Q3 operating margin was 7.5% versus 6.5%. Management reported adjusted diluted EPS of $0.34 versus $0.32, excluding specified pension, restructuring and impairment, and acquisition-related inventory step-up items.
- Nine-month adjusted operating earnings were $119.0 million versus $104.9 million; adjusted diluted EPS was $1.18 versus $1.03. These are non-GAAP measures and should be considered alongside GAAP results.
- Nine-month operating cash flow declined to $50.4 million, principally reflecting $48.8 million in pension contributions and a $17.4 million working-capital cash outflow. Capital expenditures were $32.0 million.
Liquidity, debt and capital
- At March 1, 2014, cash and equivalents were $77.1 million and marketable securities were $11.1 million. Current assets were $413.6 million and current liabilities $348.1 million.
- Interest-bearing debt totaled $250.0 million: $50.0 million was classified as current maturities due to the Series A Senior Notes’ January 3, 2015 maturity, with $200.0 million long-term.
- Available capacity under the unsecured revolving facility was $142.7 million, net of $7.3 million in letters of credit. The company reported covenant compliance and said available cash, operating cash flow and borrowing capacity should meet near-term and future operating and capital needs.
- Nine-month dividends paid were $22.1 million. The quarterly dividend was increased to $0.14 per share, payable in April 2014.
Material changes and unusual items
- Q3 sales growth reflected the Maharam acquisition, higher volumes and pricing, partly offset by dealer divestitures, foreign exchange and weaker U.S. federal-government sales. Maharam contributed $24.4 million of Q3 sales; Specialty and Consumer sales excluding Maharam declined 16% year over year.
- During Q2, the company settled its primary domestic defined-benefit pension plans, recording $158.2 million of pretax settlement expense and contributing $48.8 million in cash during fiscal 2014. The charge drove the nine-month GAAP operating loss; the plans’ settlement relieved the company of further obligations under those primary domestic plans.
- The company recorded a $4.0 million impairment after deciding not to build a planned facility on land in Ningbo, China, following its acquisition of manufacturing and distribution operations in Dongguan. Q3 restructuring charges were $1.1 million for targeted workforce reductions.
- The April 2013 Maharam acquisition cost $155.8 million. Purchase-price allocation remained preliminary at quarter-end, including valuation of intangibles, deferred taxes and goodwill allocation.
- Management cited improving industry and economic indicators but noted uncertainty around China, geopolitical developments in Eastern Europe, and U.S. federal procurement. Its cited BIFMA forecast was approximately 3% industry growth in 2014 and more than 10% in 2015; this is an industry forecast, not company guidance.
Outlook, risks and contingencies
- Management expected fiscal-year capital spending of approximately $50 million. The February general list-price increase averaged 2.5%; management expected its sales benefit over the following 12 months and historically captured 30%–50% of list increases, net of incremental discounting. Approximately $22 million of orders was pulled into Q3 ahead of the increase.
- Key risks include economic and employment conditions, customer capital spending, federal-government demand, competitive pricing, raw-material costs and supply concentration, foreign exchange, dealer and customer financial health, product mix, and international political risks.
- Performance bonds exposed the company to a maximum of approximately $9.8 million; standby letters of credit totaled $7.3 million and counted against the revolving facility. No liabilities were recorded for these arrangements. A U.K. facility dilapidation obligation was estimated at $0–$3.0 million; a $1.5 million liability was recorded. Management said ordinary-course litigation was not expected to materially affect the financial statements.
Important facts for investors to verify
- Confirm the fiscal reporting period: this filing is for the quarter ended March 1, 2014, notwithstanding the “2013 Q3” metadata.
- Assess the scale and nonrecurring nature of the pension settlement, its cash funding, and the distinction between GAAP and management-adjusted results.
- Review the January 2015 debt maturity, available revolver capacity, and subsequent refinancing or repayment information.
- Monitor whether Q3 order growth and backlog convert to sales, particularly given the $22 million order pull-forward, and evaluate organic Specialty and Consumer trends apart from Maharam.
- Check the final Maharam purchase-price allocation and the eventual financial impact of the Ningbo property decision and disclosed contingencies.