Business context and reporting period
Herman Miller, Inc. (the filing entity identified in the supplied 10-Q) reported its first quarter of fiscal 2012, ended September 3, 2011. The quarter included 14 weeks, versus 13 weeks in the prior-year quarter ended August 28, 2010, limiting direct comparability. The company designs, manufactures, and sells furniture for work settings, along with specialty and consumer products.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter |
|---|---|---|
| Net sales | $458.1 million | $380.7 million |
| Gross margin | $154.3 million; 33.7% | $123.6 million; 32.5% |
| Operating earnings | $41.8 million; 9.1% of sales | $29.2 million; 7.7% of sales |
| Net earnings | $24.6 million | $16.1 million |
| Diluted EPS | $0.42 | $0.22 |
| Orders / backlog | $481.4 million / $289.6 million | $393.8 million / $257.1 million |
| Operating cash flow | $39.2 million | $7.9 million |
| Capital expenditures | $7.6 million | $5.8 million |
Sales rose 20.3%, operating earnings 43.2%, and net earnings 52.8% year over year; management said results remained strong even after considering the extra week. The diluted EPS increase is reported as 90.9%. Gross-margin improvement reflected higher production and sales leverage and pricing benefits, partly offset by higher commodity costs. Foreign exchange was estimated to add $5.3 million to gross margin. Operating expenses were $112.5 million, or 24.6% of sales, versus $93.5 million; the prior period included about $5 million of favorable Nemschoff purchase-contingency adjustments. There were no restructuring charges in the quarter, versus $0.9 million previously.
By segment, North American Furniture Solutions sales were $330.5 million and operating earnings $28.3 million; Non-North American sales were $84.9 million and operating earnings $9.6 million; Specialty and Consumer sales were $42.7 million and operating earnings $4.2 million. Segment reporting was reorganized in the quarter, and prior-period results were revised accordingly.
Financial position and liquidity
- Cash and cash equivalents were $182.3 million at September 3, 2011, up from $142.2 million at May 28, 2011; marketable securities were $10.2 million.
- Total debt was $250.0 million, down from $301.0 million at the prior-year quarter-end; the balance sheet reports $250.0 million of long-term debt and no current maturities.
- Available capacity under the unsecured credit facility was $140.1 million, net of $9.9 million in letters of credit. The company reported compliance with debt covenants and expected to remain compliant.
- Current assets were $468.0 million and current liabilities $234.1 million. Total assets were $801.1 million; total liabilities $570.7 million; stockholders’ equity $230.4 million.
- Operating cash flow improved from the prior year, with working-capital changes providing $2.6 million of cash in the current quarter versus an $18.6 million use previously. Cash from sale of two dealerships was $7.6 million; dividends paid were $1.2 million.
Outlook, commentary, and risks
- Management cited continued demand, stronger sales and orders across North American and international businesses, and backlog growth. Orders exceeded sales; management estimated $10–$12 million of orders were pulled forward into Q1 ahead of a subsequent average 2.5% general price increase.
- The company cited BIFMA’s August 2011 forecast for calendar 2011 industry orders and shipments to increase approximately 14% and 18%, respectively, and for both to increase approximately 8% in calendar 2012. These are industry forecasts, not company guidance.
- Management expected a full-year effective tax rate of 32%–34% and fiscal 2012 capital purchases of approximately $35–$40 million. The company expected to contribute a further $7.4 million to its primary domestic pension plan during the rest of fiscal 2012, after a $3.7 million contribution subsequent to quarter-end.
- The company anticipated completing its POSH Office Systems acquisition during fiscal 2012. It sold two wholly owned contract furniture dealerships during Q1; the reported financial effect was not material.
- Key exposures include economic conditions and customer capital spending, competitive pricing, raw-material availability and cost, supplier concentration, foreign-exchange movements, pension asset returns and discount rates, dealer and customer financial health, and execution of acquisitions or product initiatives. Management noted that a 100-basis-point change in the pension discount rate could affect the pension liability by approximately $30 million.
- Contingencies include performance bonds with maximum exposure of approximately $10.4 million, standby letters of credit of approximately $9.9 million, and estimated UK facility obligations. A UK facility repair estimate ranged from $0 to $3.0 million, with a $1.3 million liability recorded. Management said pending ordinary-course litigation was not expected to materially affect the financial statements. Routine tax audits were ongoing; potential payments were not expected to be material.
Important facts for investors to verify
- Assess underlying growth after accounting for the extra reporting week, the dealership sales, foreign-exchange effects, pricing, and the prior-year Nemschoff adjustment.
- Verify sustainability of order and backlog growth, including the estimated $10–$12 million of orders shifted forward from Q2.
- Monitor gross-margin performance against commodity-cost pressure and the realization of pricing benefits.
- Review cash conversion, planned capital spending, debt and revolver availability, and compliance with financing covenants.
- Track the POSH acquisition timing and terms, pension funding and assumptions, and developments in the UK lease, tax audits, and other disclosed contingencies.