Herman Miller, Inc. — Q2 FY2013 Form 10-Q
Issuer and period: The filing identifies the issuer as Herman Miller, Inc. (not MillerKnoll, Inc.). The second quarter ended December 1, 2012; the six-month period also ended December 1, 2012. Prior-year first-half comparisons include one additional week of operations.
Financial performance
| Metric | Q2 FY2013 | Prior-year Q2 | Six months FY2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $441.8 million | $445.6 million | $891.5 million | $903.7 million |
| Gross margin | $148.5 million; 33.6% | $152.1 million; 34.1% | $298.2 million; 33.4% | $306.4 million; 33.9% |
| Operating earnings | $17.5 million; 4.0% of sales | $40.7 million; 9.1% | $51.8 million; 5.8% | $82.5 million; 9.1% |
| Net earnings | $8.4 million | $23.7 million | $28.3 million | $48.3 million |
| Diluted EPS | $0.14 | $0.41 | $0.48 | $0.83 |
- Q2 sales declined 0.9%; first-half sales declined 1.4%. Q2 orders increased 8.1% to $475.8 million, and backlog rose 11.9% year over year to $314.2 million.
- Six-month operating cash flow was $47.3 million, versus $38.7 million. Capital expenditures were $29.1 million, versus $13.2 million; cash ended at $185.7 million, with $9.5 million of marketable securities.
- Long-term debt was $250.0 million, plus $2.4 million of short-term notes payable. The $150 million revolving facility had $142.3 million available after letters of credit; the company reported compliance with its debt covenants.
- At December 1, total assets were $882.2 million, total liabilities $596.6 million, and stockholders’ equity $285.6 million. The quarterly dividend was raised to $0.09 per share from $0.022.
Changes and segment results
- Profitability fell substantially despite nearly flat quarterly sales. Management attributed most of the earnings decline to $18.8 million of Q2 legacy pension costs, including a $16.0 million noncash settlement charge. First-half legacy pension costs were $20.5 million.
- North American Furniture Solutions Q2 sales fell 5.3% to $304.7 million and operating earnings fell to $9.7 million from $28.5 million. Management cited an $18 million decline in U.S. federal-government sales, partly offset by stronger commercial activity.
- Non-North American sales rose to $92.8 million, including approximately $13 million from POSH, acquired in April 2012; segment operating earnings decreased to $4.6 million from $8.8 million. Specialty and Consumer sales increased 22% to $44.3 million, with operating earnings of $3.9 million versus $3.6 million.
- Q2 sales missed management’s expected $445–$465 million range. East Coast weather delayed an estimated $5–$7 million of sales recognition, while some orders had longer lead times and were expected to convert in the second half.
Outlook, risks, and unusual items
- Management expects to complete termination of domestic defined-benefit pension plans by Q2 FY2014, with estimated additional contributions of approximately $50 million at termination. It expects no pension-plan cash contributions during the remainder of FY2013. Additional FY2013 settlement expenses of $3–$5 million were considered likely, but not certain.
- FY2013 capital spending was expected to be $50–$60 million, primarily for facility investment; $12.4 million of capital-purchase commitments were outstanding. Spending included property for a planned Ningbo, China manufacturing facility.
- Management described U.S. conditions as modestly improving, Asia as growing more slowly, and Europe as weak. It cited policy uncertainty, government procurement, customer capital spending, raw-material costs, currency movements, competition, and dealer/customer financial health as risks. The BIFMA industry forecast cited by management projected 2013 U.S. orders up about 4.5% and shipments up about 3.4%; these are industry estimates, not company guidance.
- Following legislation extending the R&D tax credit, management expected a Q3 FY2013 effective tax rate of 27.5%–29.5%. The filing also disclosed up to $16.2 million exposure under performance bonds and $7.7 million under standby letters of credit, with no liabilities recorded; an estimated $1.2 million liability was recorded for U.K. facility repairs.
- Q2 operating results also included $0.7 million of restructuring expense under a plant-consolidation plan. The company estimated $0.1 million of additional restructuring expense remained.
Investor verification priorities
- Confirm the issuer identity and fiscal-period mapping: the filing is for Herman Miller, Inc., despite the request metadata naming MillerKnoll, Inc.
- Track order conversion, backlog, and whether the weather- and lead-time-delayed sales were recognized in the second half.
- Assess earnings excluding pension-related charges, and monitor final pension-plan termination costs, timing, and the estimated $50 million funding requirement.
- Check whether capital spending remains within the $50–$60 million outlook and how liquidity changes as the Ningbo investment proceeds.
- Monitor federal-government demand, POSH integration and profitability, foreign-exchange effects, and developments in European and broader economic conditions.