Business context and reporting period
Herman Miller, Inc. designs, manufactures and sells furniture, textiles and related services for office, healthcare, education and residential markets. This filing is the company’s Form 10-K for the fiscal year ended June 1, 2013 (52 weeks); the comparable fiscal 2012 year had 53 weeks. Although the request identifies MillerKnoll, the filing’s registrant is Herman Miller, Inc.
Financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $1,774.9 million | $1,724.1 million |
| Gross margin | $605.2 million; 34.1% | $590.6 million; 34.3% |
| Operating earnings | $114.9 million; 6.5% | $137.6 million; 8.0% |
| Net earnings | $68.2 million | $75.2 million |
| Diluted EPS | $1.16 | $1.29 |
| Operating cash flow | $136.5 million | $90.1 million |
| Capital expenditures | $50.2 million | $28.5 million |
Fourth-quarter FY2013 unaudited results: sales of $460.0 million, gross margin of $162.6 million, net earnings of $23.4 million and diluted EPS of $0.40.
At year-end, cash and cash equivalents were $82.7 million, marketable securities $10.8 million, and interest-bearing debt $250.0 million. The current ratio was 1.4 and working capital, as defined in the filing, was $109.3 million. The company reported $142.3 million of available unsecured credit capacity, net of letters of credit, and compliance with debt covenants.
Material changes versus the prior period
- Sales rose 2.9%, but operating earnings fell 16.5% and net earnings fell 9.3%. The prior year included an extra operating week, estimated to have added $32 million of sales.
- Management attributed $28.2 million of FY2013 expense to the transition and planned termination of U.S. defined-benefit pension plans. Excluding this and restructuring costs, the company reported non-GAAP adjusted operating earnings of $144.3 million (8.1% of sales) and adjusted diluted EPS of $1.47.
- Maharam was acquired on April 29, 2013 for $155.8 million. The acquisition contributed $10.6 million of sales and a $0.1 million net loss in the period; purchase accounting remained preliminary. POSH, acquired in April 2012, contributed to FY2013 sales growth as well.
- Operating cash flow increased by $46.4 million, while cash declined by $89.5 million, primarily reflecting acquisition spending, higher capital expenditures and shareholder distributions. Investing cash outflow was $209.7 million, including $157.5 million for acquisitions, net of cash acquired.
- North American sales were nearly flat; Non-North American sales increased 8.6% and Specialty and Consumer sales increased 11.0%. U.S. federal government sales declined about $50 million year over year.
Outlook, risks and unusual items
- Management expected to complete termination of the domestic defined-benefit plans in FY2014, with additional contributions estimated at $50–$55 million. The company had shifted active employees to a defined-contribution program and was moving pension assets toward a fixed-income allocation.
- FY2014 capital expenditures were expected to be $60–$70 million. This is management’s stated spending outlook, not earnings guidance. Management cited BIFMA’s May 2013 industry forecast of U.S. office-furniture order growth of 4.8% in calendar 2013 and 5.8% in 2014.
- Key risks include economic and office-furniture demand weakness, pricing and commodity-cost pressure, supplier or dealer disruption, foreign exchange and international-market exposure, execution of growth and acquisition plans, pension funding and actuarial assumptions, product warranty claims, and access to capital. The company also disclosed self-insurance exposure and ordinary-course litigation, which management did not expect to be material.
- Recorded U.K. facility-related liabilities included an estimated $1.3 million for repairs and maintenance and $0.6 million for an exited facility lease. Performance-bond exposure was approximately $12.9 million; no liability was recorded for those bonds.
- Management and the auditor reported effective internal control over financial reporting, but their assessment did not include Maharam, which represented 18% of total assets at year-end and 1% of FY2013 sales. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether pension-plan termination proceeded as planned and the actual timing and cash cost of the estimated $50–$55 million contributions.
- How much of reported sales growth and future earnings reflects acquired businesses, and whether Maharam’s preliminary purchase-price allocation changed.
- Whether operating margins recover after the FY2013 pension-transition charges and increased design, research and other operating expenses.
- Cash conversion and liquidity after acquisition spending, planned capital expenditures and increased dividends; also review debt maturities and covenant headroom.
- Underlying demand trends, especially U.S. federal government purchasing, Europe, China and the reported order backlog, which management cautioned is not a reliable indicator of future sales.