Business context and reporting period
The filing identifies the issuer as Herman Miller, Inc. (not MillerKnoll, Inc.). This Form 10-Q covers the fiscal second quarter ended November 27, 2010, and the six months then ended; each comparable quarter had 13 weeks. The company designs, manufactures, and sells furniture for work, healthcare, education, and residential settings.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $412.2 million, up 19.9% | $792.9 million, up 18.8% |
| Gross margin | $135.8 million; 32.9% of sales | $259.4 million; 32.7% of sales |
| Operating earnings | $31.5 million; 7.6% of sales | $60.7 million; 7.7% of sales |
| Net earnings | $17.9 million | $34.0 million |
| Diluted EPS | $0.26 | $0.48 |
| Orders / backlog | Orders $461.8 million, up 33.6%; backlog $314.6 million, up 34.8% | Orders $855.7 million, up 28.1% |
For the quarter, gross margin improved 70 basis points year over year, mainly from higher volume and product mix, partly offset by deeper discounting and higher material costs. Net earnings rose 86.5% in the quarter and 88.9% for the six months versus the prior-year periods. The filing reports basic EPS of $0.31 and diluted EPS of $0.26 for the quarter; contingent-consideration adjustments affect the diluted-EPS calculation.
For the six months, operating cash flow was $32.1 million, down from $54.4 million. Capital expenditures were $12.2 million. Cash and equivalents were $153.8 million at November 27, 2010, with marketable securities of $11.5 million. Current assets were $477.5 million and current liabilities $374.0 million. Interest-bearing debt was approximately $300.6 million, including $100 million of current maturities; the company had $140.6 million of available revolving credit capacity after letters of credit. Shareholders’ equity was $118.0 million.
Material changes and management commentary
- Management reported the third consecutive quarter of sequential and year-over-year order growth, with orders at their highest level in more than two years. Second-quarter sales increased 8.3% sequentially.
- North American segment sales rose 18.1% to $326.5 million and operating earnings increased to $27.0 million. Non-North American sales rose 30.8% to $72.7 million and operating earnings increased to $4.0 million; acquisitions contributed to this segment’s growth.
- Operating expenses increased year over year, reflecting acquired businesses, variable selling costs, product launches, marketing, and employee incentives. Favorable Nemschoff contingent-consideration adjustments reduced quarterly operating expenses by $4.4 million.
- Six-month operating cash flow was lower primarily amid a $14.9 million working-capital use, including growth in receivables and inventory. The company also contributed $8.9 million to its primary domestic pension plan during the second quarter.
- After quarter-end, the company signed an agreement to refinance $50 million of the $100 million public debt due in March 2011 with a 10-year private placement note. Management said this would meet near-term liquidity needs and reduce net debt requirements.
Outlook, risks, and unusual items
Management expected the full-year effective tax rate to be 29%–31% and full-year capital expenditures of approximately $30–$32 million. It estimated up to $6.1 million of additional contributions to the primary domestic pension plan for the remainder of fiscal 2011. The filing cites BIFMA’s industry forecast of approximately 6%–8% growth in U.S. contract-furniture orders and shipments for calendar 2011; this is an industry forecast, not company guidance.
Key risks include economic and customer capital-spending conditions, competitive pricing and discounting, raw-material costs and supplier concentration, foreign-exchange movements, dealer and customer financial health, pension funding sensitivity, and the success of new products and acquisitions. Commodity costs were estimated to be about $3 million higher year over year in the quarter, particularly for steel; deeper discounting reduced sales by an estimated $9 million versus the prior year. Management reported compliance with debt covenants. Performance bonds had maximum exposure of approximately $17.8 million, and the company estimated a UK lease-related obligation of $0–$3 million, with $1.2 million accrued. Management did not expect pending litigation or potential GSA audits to materially affect the financial statements. The 2009 restructuring plan was completed; further significant costs under the manufacturing consolidation and 2010 plans were not expected.
Important facts for investors to verify
- Confirm the issuer and period: the filing is for Herman Miller, Inc., fiscal Q2 ended November 27, 2010.
- Review the terms and completion of the post-quarter $50 million refinancing and the remaining debt maturity due March 2011.
- Track whether order growth converts to sales and cash generation, particularly as receivables and inventory rise.
- Assess margin sustainability against discounting, commodity inflation, product mix, and the favorable Nemschoff contingent-consideration adjustment.
- Monitor pension contributions, covenant compliance, and the company’s stated capital-spending and tax-rate expectations.