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MLHR > SEC Filings for MLHR > Form 10-Q on 11-Oct-2012All Recent SEC Filings

Show all filings for MILLER HERMAN INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MILLER HERMAN INC


11-Oct-2012

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of certain significant factors that affected the company's financial condition, earnings and cash flow during the periods included in the accompanying condensed consolidated financial statements and should be read in conjunction with the company's Annual Report on Form 10-K for the fiscal year ended June 2, 2012. References to "Notes" are to the footnote disclosures included in the condensed consolidated financial statements.

Discussion of Current Business Conditions The first quarter of fiscal 2013 included 13 weeks of operations as compared to 14 weeks in the prior year period. The extra week in the prior year is required approximately every six years in order to re-align our fiscal reporting dates with the actual calendar months. This is a factor that should be considered when comparing the company's financial results to the prior year period.

On a consolidated basis, the company reported net sales in the first quarter of $449.7 million; a decrease of 1.8 percent from the first quarter of fiscal 2012. After adjusting for the extra week of operations in the first quarter of fiscal 2012, the sale of a dealer during the second quarter of fiscal 2012, and the acquisition of POSH, net sales increased approximately 3 percent compared to the prior year first quarter.

Orders in the first quarter were down 6.1 percent from the level reported in the first quarter of last year. After adjusting for extra week of operations in the first quarter of fiscal 2012 and the sale of a dealer during the second quarter of fiscal 2012, orders in the first quarter of fiscal 2013 increased approximately 1.9 percent.

Net sales, cost of sales and resulting gross margin are affected by changes in foreign currency exchange rates. During the first quarter the estimated decrease to net sales and gross margin relative to the prior year first quarter was $6 million and $4 million, respectively. Operating expenses are also impacted by changes in foreign currency exchange rates. During the first quarter of fiscal 2013 the estimated impact to operating expenses was a decrease of approximately $1.2 million relative to the prior year period.

The company's Specialty and Consumer business made great strides toward the vision for expanding this segment, which resulted in double digit order growth. Likewise, the Non-North America segment continued to deliver solid results and make significant progress in building our footprint in the emerging markets. Growth in Asia and Latin America was offset by low demand in Europe and a weaker Euro. Soft demand from the federal government and healthcare customers offset positive growth in orders from commercial customers in North America.

Operating earnings in the quarter were $34.3 million or 7.6 percent of net sales, down $7.5 million from the prior year.

The Business Institutional Furniture Manufacturers Association's (BIFMA) most recent domestic industry forecast was released in August 2012. This forecast anticipates that orders and shipments for calendar 2012 will increase approximately 1 percent each. BIFMA's outlook for calendar 2013 forecasts orders and shipments increasing approximately 3 percent each.


Analysis of First Quarter Results
The following table presents certain key highlights from the results of
operations for the periods indicated.

(In millions, except
per share data)                          Three Months Ended
                                                                      Percent
                        September 1, 2012       September 3, 2011      Change
Net Sales             $             449.7     $             458.1      (1.8 )%
Gross Margin                        149.7                   154.3      (3.0 )
Operating Expenses                  114.9                   112.5       2.1
Restructuring                         0.5                       -         -
Operating Earnings                   34.3                    41.8     (17.9 )
Net Earnings                         20.0                    24.6     (18.7 )
Earnings per share -
diluted                              0.34                    0.42     (19.0 )
Orders                              452.0                   481.4      (6.1 )
Backlog               $             280.2     $             289.6      (3.2 )%

The following table presents, for the periods indicated, the components of the company's Condensed Consolidated Statements of Operations and Comprehensive Income as a percentage of net sales.

                                         Three Months Ended
                              September 1, 2012      September 3, 2011
Net Sales                             100.0 %                 100.0 %
Cost of Sales                          66.7                    66.3
Gross Margin                           33.3                    33.7
Operating Expenses                     25.6                    24.6
Restructuring                           0.1                       -
Operating Margin                        7.6                     9.1
Other Expense, net                      1.0                     1.1
Earnings Before Income Taxes            6.7                     8.0
Income Tax Expense                      2.2                     2.7
Net Earnings                            4.4 %                   5.4 %

Consolidated Sales, Orders, and Backlog
Net sales in the first quarter of fiscal 2013 were $449.7 million, a decrease of $8.4 million from the same period last year. Net sales were decreased by the extra week of operations in the prior year period and the sale of a dealer during the second quarter of fiscal 2012. These items had the effect of decreasing net sales in the current period by approximately $32 million and $4 million, respectively. Foreign exchange rate changes also decreased net sales by approximately $6 million in the first quarter of fiscal year 2013. These factors were partially offset by the fourth quarter fiscal 2012 acquisition of POSH resulting in approximately $14 million in net sales in the current quarter. Also, the capture of recent price increases net of deeper discounting increased net sales in the first quarter of fiscal 2013 by approximately $5 million. Increases in volume also contributed to approximately a $15 million increase in net sales in the current period.

Orders in the first quarter were $452.0 million, a decrease of $29.4 million or 6.1 percent over the same period last year.

The backlog of unfilled orders at September 1, 2012 was $280.2 million, a decrease of $9.4 million or 3.2 percent over the balance at the end of the first quarter last year.


Performance versus the Domestic Contract Furniture Industry We monitor the trade statistics reported by BIFMA, the trade association for the U.S. domestic office furniture industry, and consider them an indicator of industry-wide sales and order performance. BIFMA publishes statistical data for the contract segment and the office supply segment within the U.S. furniture market. The U.S. contract segment is primarily composed of large to mid-size corporations serviced by a network of dealers. The office supply segment is primarily made up of smaller customers serviced by wholesalers and retailers. We primarily participate in, and believe we are a leader in, the contract segment. While comparisons to BIFMA are important, we continue to pursue a strategy of revenue diversification that makes us less reliant on the drivers that impact BIFMA and lessens our dependence on the U.S. office furniture market.

We also use BIFMA statistical information as a benchmark for the performance of our domestic U.S. business (as defined by BIFMA) and also to that of our competitors. The timing of large project-based business may affect comparisons to this data. We remain cautious about reaching conclusions regarding changes in market share based on analysis of data on a short term basis. Instead, we believe such conclusions should only be reached by analyzing comparative data over several quarters.

While the sales and order data for our U.S. operations provide a relative comparison to BIFMA, it is not intended to be an exact comparison. The data we report to BIFMA is consistent with the BIFMA definition of office furniture "consumption." This definition differs slightly from the categorization we have presented in this report. Notwithstanding this difference, we believe our presentation provides the reader with a more relevant comparison.

For the three-month period ended September 1, 2012, the company's domestic U.S. shipments, as defined by BIFMA, decreased 4.1 percent year-over-year, while the company's domestic orders decreased 4.4 percent. After adjusting for the impact of the extra week in the first quarter of fiscal 2012 we estimate that the company's domestic U.S. shipments and orders increased 3.3 percent and 2.9 percent, respectively. BIFMA reported an estimated year-over-year decrease in shipments of 4.3 percent and a decrease in orders of 5.4 percent for the comparable period.

Consolidated Gross Margin
Consolidated gross margin in the first quarter was 33.3 percent of net sales, a decrease of 40 basis points compared to the first quarter last year.

The benefit captured from recent price increases net of incremental discounting drove an increase in net sales of approximately $5 million in the first quarter of fiscal 2013 relative to the prior year period. This has the effect of decreasing the expense components of the Condensed Consolidated Statements of Operations and Comprehensive Income as a percentage of net sales.

Direct material costs were 44.3 percent of net sales, an increase of 180 basis points from the first quarter last year. A shift in net sales of products with a higher material content and foreign exchange rate changes contributed approximately a 270 basis point increase. Partially offsetting these increases were favorable impacts from net pricing and lower commodity costs of 50 and 40 basis points, respectively.

Direct labor was 6.3 percent of net sales for the first quarter, a decrease of 50 basis points from the first quarter of last year. Approximately 10 basis points of the decrease was attributable to the improvement of net pricing changes relative to net sales. The remainder of the decrease was primarily due to a shift in net sales of products with a lower labor content.

Manufacturing overhead was 10.1 percent of net sales for the first quarter decreasing 110 basis points from the prior year period. Approximately 25 basis points of the decrease in manufacturing overhead percent was due to a reduction in overhead costs and a reduction in net sales related to a divested dealer. Approximately 10 basis points of the decrease was attributable to the improvement of net pricing changes relative to net sales. Overhead costs were also increased by additional pension costs associated with the transition of the company's domestic defined benefit plans. This increase was offset by lower incentive costs. The remaining decrease in manufacturing overhead percent was due to increased absorption of overhead costs.

Freight costs were 4.3 percent of net sales for the first quarter increasing 10 basis points compared to the same period last year. This was driven primarily by increased diesel costs compared to the prior year period.

Net sales, cost of sales and resulting gross margin are affected by changes in foreign currency exchange rates. During the first quarter the estimated impact was a decrease to gross margin of $4 million relative to the prior year period.


Operating Expenses and Operating Earnings First quarter operating expenses were $115.4 million, or 25.6 percent of net sales, which is an increase of $2.9 million from the first quarter of fiscal 2012. The extra week of operations in the prior year period included approximately $3 million in additional compensation expenses. The company also recorded $1.7 million less employee incentive expense in the current quarter compared to the prior year period. These decreases were more than offset by various expense increases including $1.3 million within research and development, $2.8 million related to POSH, $0.5 million of restructuring expense, approximately $1.1 million of pension, and various other operating expenses compared to the prior year period.
The restructuring expenses of $0.5 million during the current period relate to the previously announced 2012 Plan to consolidate the Nemschoff manufacturing operations.

Operating expenses are also impacted by changes in foreign currency exchange rates. During the first quarter of fiscal 2013 the estimated impact to operating expenses was a decrease of approximately $1.2 million relative to the prior year period.

Operating earnings in the first quarter were $34.3 million compared to earnings of $41.8 million in the same period last year. As a percentage of net sales, operating earnings were 7.6 percent as compared to operating earnings of 9.1 percent in the prior year.

Other Income/Expense and Income Taxes
Net other expense of $4.3 million in the first quarter of fiscal 2013 was $0.7 million lower compared to the prior year period. The decrease in the current period was primarily driven by higher investment income in the first quarter of fiscal 2013 compared to the prior year period.

The effective tax rates for the three months ended September 1, 2012 and September 3, 2011 were 33.5 percent and 33.3 percent, respectively. The effective rate in the current year and the prior year are below the statutory rate primarily due to the manufacturing deduction under the American Jobs Creation Act of 2004 (AJCA). The company expects the fiscal 2013 full year rate to be in the range of 33 percent to 35 percent.

Reportable Operating Segments
The business is comprised of various operating segments as defined by generally accepted accounting principles in the United States. These operating segments are determined on the basis of how the company internally reports and evaluates financial information used to make operating decisions. For external reporting purposes, the company has identified the following reportable segments:

? North American Furniture Solutions - Includes the operations associated with the design, manufacture, and sale of furniture products for work-related settings, including office, education, and healthcare environments, throughout the United States and Canada. The business associated with the company's owned contract furniture dealers is also included in the North American Furniture Solutions segment. In addition, the Healing operating segment has been aggregated with the North American Furniture Solutions segment.

? Non-North American Furniture Solutions - Includes the operations associated with the design, manufacture, and sale of furniture products, primarily for work-related settings, for Mexico and outside of North America as well as the company's Non-North America consumer retail business.

? Specialty and Consumer - Includes the operations associated with the design, manufacture, and sale of high-end furniture products including Geiger wood products, Herman Miller Collection products and the company's North American consumer retail business.

The company also reports a corporate category consisting primarily of startup business and unallocated corporate expenses including restructuring and impairment costs.


The current quarter and prior year period segment results are as follows:

(In millions)                   Three Months Ended
                      September 1, 2012     September 3, 2011     Change
Net Sales:
North American
Furniture Solutions  $          320.3      $           330.5     $ (10.2 )
Non-North American
Furniture Solutions              94.6                   84.9         9.7
Specialty and
Consumer                         34.8                   42.7        (7.9 )
Corporate                           -                      -           -
Total                $          449.7      $           458.1

Operating Earnings
(Loss):
North American
Furniture Solutions  $           26.9      $            28.3     $  (1.4 )
Non-North American
Furniture Solutions               5.5                    9.6        (4.1 )
Specialty and
Consumer                          2.4                    4.2        (1.8 )
Corporate                        (0.5 )                 (0.3 )      (0.2 )
Total                $           34.3      $            41.8

Further information regarding the reportable operating segments can be found in Note 13.

North America
Net sales within the North American Furniture Solutions reportable segment (North America) decreased $10.2 million to $320.3 million in the first quarter, representing a 3.1 percent decrease over the first quarter last year. The divestiture of the California dealer during the second quarter of fiscal 2012 led to approximately a $4 million decrease in both net sales and orders during the current quarter within this reportable segment. The impact of net changes in pricing is estimated to have had a $6 million increase on net sales during the first quarter of fiscal 2013 over the first quarter of fiscal 2012. The extra week of operations in the first quarter of fiscal 2012 contributed approximately $23 million in net sales. The impact of foreign currency changes was to decrease the first quarter fiscal 2013 net sales by approximately $1 million compared to the same period in the prior fiscal year. The remaining change in net sales was primarily driven by increased volumes.

Operating earnings for North America in the first quarter were $26.9 million, or 8.4 percent of net sales. This compares to operating earnings of $28.3 million or 8.6 percent of net sales in the first quarter fiscal 2012. The extra week of operations in the first quarter of fiscal 2012 contributed an estimated $1.8 million additional operating earnings. Warranty expenses for the period were lower by approximately $1 million due primarily to reduced spending in the period compared to the prior year period. Pension expense in the first quarter of fiscal 2013 increased approximately $2.2 million related to non-cash charges associated with the strategy to terminate its domestic defined benefit pension plans. In addition, North America had a decrease of approximately $2.8 million in employee incentive expenses during the first quarter of fiscal 2013 compared to the same period in the prior year. The remaining change in operating earnings as a percent of net sales in the current fiscal year is primarily due to the impact of foreign currency changes compared to the same period in the prior year.

Non-North America
Net sales within the Non-North American Furniture Solutions reportable segment (Non-North America) were $94.6 million in the first quarter, an increase of $9.7 million from the first quarter of fiscal 2012. The extra week of operations in the first quarter of fiscal 2012 contributed approximately $6 million in net sales. Additionally, net sales increased approximately $14 million in the first quarter of fiscal 2013 from the acquisition of POSH, which was acquired in the fourth quarter of fiscal 2012. The impact of net changes in pricing is estimated to have had a $1.5 million decrease on net sales during the first quarter of fiscal 2013 over the first quarter of fiscal 2012. The impact of foreign currency changes was to decrease the first quarter fiscal 2013 sales by approximately $5 million compared to the same period in the prior fiscal year. The remaining change in net sales was primarily driven by increased volumes.


Operating earnings within Non-North America were $5.5 million and $9.6 million for the first quarter of fiscal 2013 and fiscal 2012, respectively and represents 5.8 percent and 11.3 percent of net sales for the first quarter of fiscal 2013 and fiscal 2012, respectively. The extra week of operations in the first quarter of fiscal 2012 contributed an estimated $0.6 million additional operating earnings. The acquisition of POSH contributed an additional $0.7 million of operating earnings to the first quarter of fiscal 2013. The impact of foreign currency changes decreased the current periods operating earnings for Non-North America by approximately $1.9 million compared to the same period in the prior year. The remaining change in operating earnings as a percent of net sales was primarily driven by changes in sales mix.

Specialty and Consumer
Net sales for the quarter within the Specialty and Consumer reportable segment (Specialty and Consumer) were $34.8 million compared to $42.7 million in the prior year period. The extra week of operations in the first quarter of fiscal 2012 contributed approximately $3 million in net sales. The impact of net changes in pricing is estimated to have had a $0.5 million increase on net sales during the first quarter of fiscal 2013 over the first quarter of fiscal 2012. The remaining change in net sales was primarily driven by decreased volumes.

Operating earnings within Specialty and Consumer were $2.4 million for the first quarter of fiscal 2013 or 6.9 percent of net sales. This compares to operating earnings of $4.2 million or 9.8 percent of net sales in the same period in the prior fiscal year. The extra week of operations in the first quarter of fiscal 2012 contributed an estimated $0.3 million additional operating earnings. The remaining change in operating earnings as a percent of net sales was driven by lower net sales volumes in the current period.

Financial Condition, Liquidity, and Capital Resources The table below presents certain key cash flow and capital highlights for the periods indicated.

(In millions)                                             Three Months Ended
                                               September 1, 2012      September 3, 2011
Cash and cash equivalents, end of period      $           184.3      $           182.3
Marketable securities, end of period                        9.2                   10.2
Cash provided by operating activities                      28.7                   39.2
Cash (used in) provided by investing
activities                                                (15.1 )                  0.4
Cash (used in) provided by financing
activities                                                 (1.3 )                  0.8
Capital expenditures                                      (15.7 )                 (7.6 )
Stock repurchased and retired                              (0.4 )                 (0.8 )
Interest-bearing debt, end of period                      250.0                  250.0
Available unsecured credit facility, end of
period (1)                                                142.3                  140.1

(1) Amounts shown are net of outstanding letters of credit of $7.7 million and $9.9 million at September 1, 2012 and September 3, 2011, respectively, which are applied against the company's unsecured credit facility.

Cash Flow - Operating Activities
Cash generated from operating activities was $28.7 million for the three months ended September 1, 2012, as compared to $39.2 million in the prior year.

Three Months Ended September 1, 2012
Through the first three months of fiscal 2013, changes in working capital balances drove a use of cash totaling $0.9 million. The main factors impacting working capital were an increase in accounts receivable and inventory of $6.6 million and $2.1 million, respectively. These amounts were partially offset by a decrease in prepaid expenses of $8.3 million. The company also contributed cash of $3.7 million to its defined benefit plans during the first three months of fiscal 2013 compared to $0.2 million in the prior year period.

The company is not planning any cash contributions to its defined benefit pension plans in the remaining months of fiscal 2013. The company froze future benefit accruals of its primary domestic defined benefit plan as of September 1, 2012. The termination process is expected to take 12 to 24 months from the time that the benefit accruals are frozen, at which time the company will make the final plan contributions necessary to complete the termination process.

Three Months Ended September 3, 2011
Changes in working capital balances for the first quarter of fiscal 2012 drove a source of cash totaling $2.6 million. The main factors impacting working capital were decreases in accounts receivable and prepaid balances of $20.7 million and $14.2 million, respectively. These amounts were partially offset by decreases in accrued compensation and accounts payable of $22.6 million and $2.0 million, respectively. An increase in net inventory of $8.0 million also impacted working capital for the prior year quarter.


Cash Flow - Investing Activities
The most significant cash outflow during the first quarter of fiscal 2013 relates to investments in capital assets. The company purchased $15.7 million of capital assets in fiscal 2013 compared to $7.6 million in fiscal 2012. $5.5 million of the current quarter's capital expenditures relate to the company's purchase of property for the planned construction of a new manufacturing facility in Ningbo, China. At the end of the first quarter 2013, there were outstanding commitments for capital purchases of $12.1 million. The company expects full-year capital purchases to be between $55 million and $65 million primarily due to planned investments in the company's facilities. This compares to full-year capital spending of $28.5 million in fiscal 2012. The company also received cash proceeds of $7.6 million from the sale of two dealerships during the first three months of the prior year first quarter.

Cash Flow - Financing Activities
Cash outflows from financing activities were $1.3 million for the first quarter of fiscal 2013 compared to a source of cash of $0.8 million in the first quarter last year. Cash outflows for dividend payments were $1.3 million and $1.2 million for the first three months of fiscal 2013 and fiscal 2012, respectively. Cash inflows for stock issuances related to employee benefit programs were $0.4 million and $2.7 million during the first three months of fiscal 2013 and fiscal 2012, respectively.

Outstanding standby letters of credit totaled $7.7 million and are considered as usage against the company's unsecured revolving credit facility at the end of the first quarter fiscal 2013. At the end of the first quarter the availability under this credit facility was $142.3 million. The provisions of the private placement notes and unsecured credit facility require that the company adhere to certain covenant restrictions and maintain certain performance ratios. The company was in compliance with all such restrictions and performance ratios this quarter and expects to remain in compliance in the future.

At the end of the first quarter fiscal 2013, the company had cash of $184.3 million including foreign cash of $46.3 million. In addition, the company had foreign marketable securities of $9.2 million. The foreign subsidiary holding the company's marketable securities is taxed as a U.S. taxpayer at the company's election; consequently, for tax purposes all U.S tax impacts for this subsidiary have been recorded. The company currently plans to repatriate approximately $4.5 million within fiscal 2013 from foreign subsidiaries, for which all U.S taxes have been recorded. The company's intent is to permanently reinvest the remainder of the foreign cash amounts outside the U.S. The company's plans do not demonstrate a need to repatriate these balances to fund U.S. operations.

The company believes cash on hand, cash generated from operations, and the . . .

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