Herman Miller, Inc. — Form 10-Q Summary
Business context and period: The filing is for the 13 weeks ended August 31, 2013, the first quarter of fiscal 2014. Herman Miller designs, manufactures, and sells furniture and related products through North American Furniture Solutions, Non-North American Furniture Solutions, and Specialty and Consumer. Results include Maharam, acquired April 29, 2013.
Financial performance
- Sales and orders: Net sales were $468.1 million, up 4.1% from $449.7 million. Orders rose 4.2% to $471.2 million; backlog was $275.7 million, down 1.6% year over year.
- Profit and margins: Gross margin increased to $170.0 million, or 36.3% of sales, from $149.7 million, or 33.3%. Operating earnings rose 14.0% to $39.1 million; operating margin was 8.4%, versus 7.6%. Net earnings were $22.5 million, up 12.5%; diluted EPS was $0.38, versus $0.34.
- Adjusted results (non-GAAP): Excluding legacy pension expenses and Maharam inventory step-up costs, adjusted operating earnings were $43.6 million, or 9.3% of sales, versus $36.5 million, or 8.1%. Adjusted diluted EPS was $0.43, versus $0.37. These measures are supplemental and not GAAP results.
- Cash flow and capital spending: Operating cash flow was $38.2 million, compared with $28.7 million. Investing activities used $6.2 million and financing activities used $4.3 million. Capital expenditures were $6.5 million, versus $15.7 million. Cash increased $27.4 million during the quarter.
- Liquidity and debt: Cash and equivalents were $110.1 million and marketable securities were $11.0 million at quarter-end. Long-term debt was $250.0 million. The company reported $142.7 million available under its unsecured revolving facility after letters of credit; it was in compliance with debt covenants.
- Balance sheet: Total assets were $973.0 million, total liabilities $632.0 million, and stockholders’ equity $341.0 million. The declared dividend was $0.125 per share, compared with $0.090 a year earlier.
Changes and segment performance
- Reported sales growth included $27.3 million from Maharam and was partly offset by $9.9 million of sales lost from dealer divestitures and a $1.9 million adverse currency impact. Pricing added an estimated $5.0 million; sales volume decreased $2.1 million overall.
- North American Furniture Solutions: Sales were $318.2 million, down 0.7%; operating earnings increased to $34.0 million from $26.9 million. Improved production leverage, product mix, and lower warranty costs helped earnings. Federal government business remained weak.
- Non-North American Furniture Solutions: Sales declined 13.7% to $81.6 million, and the segment recorded a $0.1 million operating loss versus $5.5 million of earnings. Management cited difficult conditions in Europe and Australia, lower volumes, and order timing; currency-adjusted orders increased nearly 3%.
- Specialty and Consumer: Sales nearly doubled to $68.3 million, with operating earnings of $5.2 million versus $2.4 million. Maharam was the largest contributor to sales growth; management also cited gains in Herman Miller Collection, Retail, and Geiger.
Outlook, risks, and unusual items
- Management expected fiscal 2014 capital expenditures of $55 million to $65 million, with spending anticipated to increase later in the year. No specific revenue or EPS guidance was provided in the filing text.
- The domestic defined-benefit pension termination was expected to be completed in the second quarter of fiscal 2014. Management estimated approximately $170 million of additional pre-tax pension settlement expenses during the remainder of fiscal 2014 and $50 million to $55 million of additional plan contributions. The filing says the settlement expense estimate is likely, but not certain.
- Maharam contributed $27.3 million in quarterly sales and $0.8 million in net income. Its purchase-price allocation remained preliminary. A $1.4 million inventory fair-value step-up charge reduced current-quarter results.
- Management described economic conditions as mixed: North American demand was modestly improving, while non-North American markets faced challenges. Risks include government procurement weakness, customer capital spending, competition and pricing, input costs and suppliers, foreign exchange, pension funding and settlement costs, and general economic conditions.
- Contingencies included $7.1 million maximum exposure under performance bonds and $9.7 million under standby letters of credit, of which $7.3 million counted against the revolver. Management reported no known circumstances requiring payment and recorded no liability for these arrangements. A UK facility dilapidation liability of $1.3 million was recorded; estimated total costs ranged from zero to $3.0 million. Management did not expect pending ordinary-course litigation to materially affect the financial statements.
Important facts for investors to verify
- Whether the pension termination was completed as expected and the final settlement expense and cash contribution amounts versus management’s estimates.
- How much reported sales and margin performance reflects Maharam, and whether Specialty and Consumer growth continues excluding the acquisition.
- Whether Non-North American orders convert to shipments and whether that segment returns to profitability.
- Actual full-year capital spending compared with the $55 million to $65 million outlook, and liquidity after pension contributions.
- Final Maharam purchase accounting, including acquired intangible assets, goodwill, and any resulting amortization or valuation changes.