Herman Miller, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended September 1, 2012. The filing is by Herman Miller, Inc. (not MillerKnoll, Inc.); the quarter contained 13 weeks versus 14 weeks in the prior-year quarter.
Financial performance and liquidity
| Metric | Q1 FY2013 | Prior-year quarter |
|---|---|---|
| Net sales | $449.7 million | $458.1 million |
| Gross margin | $149.7 million; 33.3% | $154.3 million; 33.7% |
| Operating earnings / margin | $34.3 million; 7.6% | $41.8 million; 9.1% |
| Net earnings | $20.0 million | $24.6 million |
| Diluted EPS | $0.34 | $0.42 |
| Operating cash flow | $28.7 million | $39.2 million |
- Cash and cash equivalents were $184.3 million at quarter-end, with $9.2 million of marketable securities. Long-term debt was $250.0 million, unchanged from June 2, 2012.
- Current assets were $470.6 million and current liabilities $257.4 million. The $150 million revolving credit facility had $142.3 million available after letters of credit; the facility expires in November 2016. The company reported compliance with its debt covenants.
- Capital expenditures were $15.7 million, versus $7.6 million a year earlier. Cash increased by $12.1 million during the quarter.
- Dividends declared were $0.09 per share, versus $0.022 in the prior-year quarter.
Changes and operating context
- Reported sales decreased 1.8%; management estimated sales grew approximately 3% after adjusting for the prior period’s extra week, a dealer sale, and the POSH acquisition. Orders declined 6.1% reported, but increased approximately 1.9% on management’s comparable-period adjustments. Backlog was $280.2 million, down 3.2% year over year.
- Foreign exchange reduced sales by an estimated $6 million and gross margin by $4 million; it also reduced operating expenses by approximately $1.2 million.
- North American segment sales were $320.3 million, down $10.2 million, and operating earnings were $26.9 million, down $1.4 million. Non-North American sales rose to $94.6 million from $84.9 million, while operating earnings fell to $5.5 million from $9.6 million. Specialty and Consumer sales declined to $34.8 million from $42.7 million, and operating earnings fell to $2.4 million from $4.2 million.
- The company acquired Hong Kong-based POSH Office Systems in April 2012 for $47.1 million net cash, with contingent consideration of up to $5.2 million. POSH contributed approximately $14 million of current-quarter sales.
- The primary domestic defined benefit plan’s future accruals were frozen effective September 1, 2012. Employees are transitioning to a defined contribution program; plan termination is expected to take 12 to 24 months. Management cited higher pension costs, including non-cash charges related to this transition.
Outlook, risks and unusual items
- Management expected fiscal 2013 capital expenditures of $55 million to $65 million, mainly for facility investments, compared with $28.5 million in fiscal 2012. The filing reports $12.1 million of outstanding capital purchase commitments at quarter-end.
- Management expected a full-year effective tax rate of 33% to 35%. The filing cited BIFMA forecasts of approximately 1% growth in calendar 2012 orders and shipments and approximately 3% growth in calendar 2013.
- The company planned to invest further in a manufacturing site in Ningbo, China; the land purchase was completed after quarter-end for $7.4 million total.
- The May 2012 restructuring plan consolidates Nemschoff manufacturing operations and closes the Sioux City, Iowa plant, affecting approximately 70 North American employees. Management anticipated another $1.0 million of restructuring expense in future periods; $0.5 million was recorded in this quarter.
- Risks discussed include weak economic and office-furniture demand, European recession and euro weakness, foreign-exchange movements, raw-material costs and availability, customer and dealer creditworthiness, pension assumptions and funding, and competitive pricing. Performance bonds had maximum exposure of $10.9 million and standby letters of credit $7.7 million; no liabilities were recorded for these arrangements. A U.K. facility lease contingency was estimated at $0 million to $3.0 million, with $1.2 million accrued.
- Management said pending ordinary-course legal matters were not expected to materially affect the financial statements. The filing notes that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether underlying sales and orders growth persists after adjusting for the 14-week comparison, divestitures, POSH, and currency effects.
- Whether lower gross and operating margins recover, particularly given segment earnings declines, product mix, currency impacts, and pension costs.
- Execution and total cost of the restructuring, domestic pension-plan termination, and planned China facility investment.
- Whether the $55 million to $65 million capital-spending outlook and liquidity assumptions remain appropriate as operating cash flow develops.
- Developments in European demand and currency exposure, and any changes to warranty, tax-audit, lease, or guarantee exposures.