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MLHR > SEC Filings for MLHR > Form 10-K on 30-Jul-2013All Recent SEC Filings

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Form 10-K for MILLER HERMAN INC


30-Jul-2013

Annual Report


Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis

You should read the issues discussed in Management's Discussion and Analysis in conjunction with the company's Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in this Form 10-K.

Executive Overview
Herman Miller's inspiring designs, inventive technologies and strategic services help people do great things and organizations to perform at their best. At present, most of our customers come to us for interior environments in corporate office and healthcare settings. We also have a growing presence in educational and consumer markets. Our primary products include furniture systems, seating, storage, freestanding furniture, patient care products, casegoods and textiles.

More than 100 years of innovative business practices and a commitment to social responsibility have established Herman Miller as a recognized global company. A past recipient of the Smithsonian Institution's Cooper-Hewitt National Design Award, Herman Miller designs can be found in the permanent collections of museums worldwide. Innovative business practices and a commitment to social responsibility have also helped establish Herman Miller as a recognized global leader. In 2012, Herman Miller again received the Human Rights Campaign Foundation's top rating in its annual Corporate Equality Index and was named among the 50 Best U.S. Manufacturers by Industry Week. Herman Miller is included in the Dow Jones Sustainability World Index.

Herman Miller's products are sold internationally through wholly-owned subsidiaries or branches in various countries including the United Kingdom, Canada, France, Germany, Italy, Japan, Mexico, Australia, Singapore, China, Hong Kong, India, and the Netherlands. The company's products are offered elsewhere in the world primarily through independent dealerships or joint ventures with customers in over 100 countries.

The company is globally positioned in terms of manufacturing operations. In the United States, the manufacturing operations are located in Michigan, Georgia, Wisconsin and North Carolina. In Europe, the manufacturing presence is located within the United Kingdom. The manufacturing operations in Asia include a facility located in Ningbo, China. The company manufactures products using a system of lean manufacturing techniques collectively referred to as the Herman Miller Performance System (HMPS). Herman Miller strives to maintain efficiencies and cost savings by minimizing the amount of inventory on hand. Accordingly, production is order-driven with direct materials and components purchased as needed to meet demand. The standard lead time for the majority of our products is 10 to 20 days. These factors result in a high rate of inventory turns and typically cause our inventory levels to appear relatively low compared to sales volume.

A key element of the company's manufacturing strategy is to limit fixed production costs by sourcing component parts from strategic suppliers. This strategy has allowed the company to increase the variable nature of our cost structure while retaining proprietary control over those production processes that we believe provide us a competitive advantage. As a result of this strategy, our manufacturing operations are largely assembly-based.

The business is comprised of various operating segments as defined by generally accepted accounting principles in the United States (U.S. GAAP). 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 North American Furniture Solutions reportable segment is the aggregation of two operating segments. In addition, the company has determined that both operating segments within the North American Furniture Solutions reportable segment each represent reporting units.

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 and textiles including Geiger wood products, Maharam textiles, Herman Miller Collection products and the company's North American consumer retail business.

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

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Core Strengths
The company relies on the following core strengths in delivering workplace solutions to customers.

Brands - The Herman Miller brand is recognized by customers as a pioneer in design and sustainability, and as an advocate that supports their needs and interests. Within the industries the company operates, Herman Miller, Nemschoff, Geiger and Maharam are acknowledged as leading brands that inspire architects and designers to create their best design solutions. Leveraging the company's brand equity across the lines of business to extend the company's reach to customers and consumers is an important element of the company's business strategy.

Problem-Solving Design and Innovation - The company is committed to developing research-based functionality and aesthetically innovative new products and has a history of doing so. The company believes its skills and experience in matching problem-solving design with the workplace needs of customers provides the company with a competitive advantage in the marketplace. An important component of the company's business strategy is to actively pursue a program of new product research, design, and development. The company accomplishes this through the use of an internal research and engineering staff as well as third party design resources generally compensated on a royalty basis.

Operational Excellence - The company was among the first in our industry to embrace the concepts of lean manufacturing. HMPS provides the foundation for all of our manufacturing operations. The company is committed to continuously improving both product quality and production and operational efficiency. The company has extended this lean process work to its non-manufacturing processes as well as externally to our manufacturing supply chain and distribution channel. The company believes these concepts hold great promise for further gains in reliability, quality and efficiency.

Building and Leading Networks - The company values relationships in all areas of the business. The company considers its network of innovative designers, owned and independent dealers, and suppliers to be among the most important competitive factors and vital to the long-term success of the business.

Channels of Distribution
The company's products and services are offered to most of its customers under standard trade credit terms between 30 and 45 days and are sold through the following distribution channels.

Independent Contract Furniture Dealers and Licensees - Most of the company product sales are made to a network of independently owned and operated contract furniture dealerships doing business in many countries around the world. These dealers purchase the company's products and distribute them to end customers. The company recognizes revenue on product sales through this channel once products are shipped and title passes to the dealer. Many of these dealers also offer furniture-related services, including product installation.

Owned Contract Furniture Dealers - At June 1, 2013, the company owned 5 contract furniture dealerships, some of which have operations in multiple locations. The financial results of these owned dealers are included in our Consolidated Financial Statements. Product sales to these dealerships are eliminated as inter-company transactions from our consolidated financial results. The company recognizes revenue on these sales once products are shipped to the end customer and installation is substantially complete. The company believes independent ownership of contract furniture dealers is generally the best model for a financially strong distribution network. With this in mind, the company's strategy is to continue to pursue opportunities to transition the remaining owned dealerships to independent owners. Where possible, the goal is to involve local managers in these ownership transitions.

Direct Customer Sales - The company also sells products and services directly to end customers without an intermediary (e.g. sales to the U.S. federal government). In most of these instances, the company contracts separately with a dealership or third-party installation company to provide sales-related services. The company recognizes revenue on these sales once products are shipped and installation is substantially complete.

Independent Retailers - Certain products are sold to end customers through independent retail operations. Revenue is recognized on these sales once products are shipped and title passes to the independent retailer.

E-Commerce - The company sells products through its online store, in which products are available for sale via the company's website, hermanmiller.com. This site complements our existing methods of distribution and exemplifies the company's brand to new customers. The company recognizes revenue on these sales upon shipment of the product.

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Challenges Ahead
Like all businesses, the company is faced with a host of challenges and risks. The company believes its core strengths and values, which provide the foundation for its strategic direction, have us well prepared to respond to the inevitable challenges the company will face in the future. While the company is confident in its direction, the company acknowledges the risks specific to the business and industry. Refer to Item 1A for discussion of certain of these risk factors.

Future Avenues of Growth
The company believes it's well positioned to successfully pursue its mission in spite of the risks and challenges it faces. That is, inspiring designs to help people do great things. In pursuing our mission, we are shifting our business model to focus on increasing the size of our addressable market, faster growing segments driven by demographics, and higher margin products. This shift relies on the following key avenues of growth.

Primary Markets - Capture additional market share within our primary markets by offering superior solutions and ever expanding product categories, to customers who value space as a strategic tool.

Adjacent Markets - Further apply the company's core skills in adjacent customer markets such as small business, higher education, and hospitality.

Global Footprint - Expand the company's geographic reach in areas of the world with significant growth potential.

New Products - Through further investment in design and research the company will continue to offer new products with the goal of deriving greater than 20% of net sales from products introduced within the past 4 years.

Specialty & Consumer - We will utilize this segment to further diversify our sales channel, increase brand recognition for all markets, and improve our access to key product specifiers.

Industry Analysis
The Business and Institutional Furniture Manufacturer's Association (BIFMA) is the trade association for the U.S. domestic office furniture industry. The company monitors the trade statistics reported by BIFMA and considers 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 relates primarily to large to mid-size corporations installed via a network of dealers. The office supply segment relates primarily to smaller customers via wholesalers and retailers. The company primarily participates, and is a leader in, the contract segment. It is important to note that the company's diversification strategy lessens our dependence on the U.S. office furniture market.

The company also analyzes BIFMA statistical information as a benchmark comparison against the performance of the domestic U.S. business and also to that of competitors. The timing of large project-based business may affect comparisons to this data in any one period. Finally, BIFMA regularly provides its members with industry forecast information, which the company uses internally as one of several considerations in its short and long-range planning process.

Looking forward, the general economic outlook for our industry in the U.S. is expected to be positive. BIFMA issued its most recent report in May 2013 expecting that the growth rate of office furniture orders in the U.S. will be 4.8 percent and 5.8 percent in calendar 2013 and 2014, respectively, while the forecasted growth rate of shipments was 2.1 percent and 7.2 percent for calendar 2013 and 2014, respectively. This forecasted growth is based on an improvement in the U.S. economy, primarily driven by an improvement in employment.

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Discussion of Business Conditions
The fiscal years ended June 1, 2013 and June 2, 2012 contained 52 and 53 weeks of operations, respectively. The extra week in fiscal 2012 was included in the first quarter. 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 our financial results to the prior year period.

Net sales in fiscal 2013 totaled $1,774.9 million, an increase of 2.9 percent over the level we reported in fiscal 2012. This marked our third consecutive year of growth, over which time our net sales have increased by more than $450 million. Importantly, the sales growth we achieved this past year was accompanied by strong profitability and cash generation. We balanced our focus on forward strategic investment with our responsibility to deliver solid current period returns. In doing so, we achieved an operating earnings percentage and earnings per share equal to 6.5 percent and $1.16, respectively (8.1 percent and $1.47 on an adjusted Non-GAAP basis( 1)) and an after-tax return on invested capital of approximately 24 percent. Cash flows generated from operations totaled $136.5 million, up 51.5 percent from last year's level. This improved cash flow from operations allowed us to increase strategic spending across a number of important areas including new products, acquisitions, infrastructure improvements, and brand building.

Throughout the fiscal year, our North American Furniture Solutions segment faced the headwind of sluggish demand from U.S. federal government and healthcare buyers. With that said, robust business activity across the remainder of our core non-government office furniture business helped drive growth for the segment as a whole relative to fiscal 2012.

Our Non-North America Furniture Solutions segment also experienced a mixed demand picture, with lagging sales in the United Kingdom (U.K.) and other European economies being more than offset by increases in China and the Middle East. We are improving our existing production capabilities and preparing for new growth in emerging markets. The integration of POSH manufacturing in China continues and we will begin the construction of a new facility next spring to consolidate our U.K. operations serving EMEA (Europe, Middle East and Africa). We also have plans in development for India and Latin America that hold further promise for growth in those markets.

Our Specialty and Consumer segment posted solid sales growth this fiscal year, driven by the investments we've made in developing our offering across both commercial and retail markets. The Herman Miller Collection continues to grow in reach and quality, with multiple newly reissued iconic designs and including innovative new material options. In the last year we have also introduced wholly new designs, through both our Herman Miller and Geiger brands. Our Italian alliances with Magis and Mattiazzi are another source for new products and enhance our brand with consumers and specifiers. We have been developing our channels to market, with new shop-in-shop merchandising initiatives in the retail channel, as well as continued investment in our online marketing and fulfillment capabilities.

In April, we reached a major milestone with our acquisition of Maharam Fabric Corporation, a premier design brand in commercial interiors and recognized internationally for the highest quality textiles and wall coverings. The addition of Maharam to our Specialty and Consumer segment is a powerful strategic accelerator for our entire business, on multiple levels. We instantly became a North American market leader in their core product areas, with the ability to leverage our resources to further Maharam's reach into new markets. We have made it clear that Maharam will continue to be Maharam, maintaining their identity, design and operational excellence that made them a successful business, but we are also excited by the mutual brand reinforcement we gain in bringing the companies together.

We made significant progress this year toward our commitment to further strengthen our balance sheet while returning greater cash to shareholders. This includes the actions we've taken to terminate our U.S. defined benefit pension plans in favor of a defined contribution retirement program. We believe this plan to terminate our U.S. defined benefit pension plans will improve the predictability of cash flows and expenses associated with our employee benefit programs and significantly reduce balance sheet risk. We expect the process to be completed during the second quarter of fiscal 2014. At the time of termination, we will be required to make additional cash contributions to the plans, which we currently estimate will total between $50 million and $55 million.

Our results for the year ended June 1, 2013 include expenses associated with the transition from (and planned termination of) the domestic defined benefit pension plans. These expenses, referred to as, "legacy pension expenses" throughout this document, include settlements caused by the transition and net periodic benefit expenses, subsequent to September 1, 2012, related to the defined benefit plans in question. They also include incremental pension expenses in the first quarter of fiscal 2013 resulting from modifications we made to the investment strategy of our defined benefit plan assets in order to prepare for the termination process. We recognized legacy pension expenses totaling $28.2 million for the year ended June 1, 2013. Of this amount, $24.1 million is recorded within Operating expenses and the remaining portion is included in Cost of sales, thus reducing gross margin by approximately 20 basis points .

(1) Non-GAAP measurements; see accompanying reconciliations and explanations.

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Concurrent with the progress we made on the termination of our U.S. defined benefit pension plans and transition to a defined contribution retirement program, we also implemented two dividend increases, raising our annualized payout from $5 million in fiscal 2012, to today's run rate of approximately $29 million.
Capital expenditures totaled $50.2 million for the year ended June 1, 2013, an increase of $21.7 million compared to fiscal 2012. The ramp up in capital spending was in support of our shift strategy which includes investments in new product development, customer showroom refreshes, and other facilities. We expect capital expenditures to increase $10 to $20 million in fiscal 2014 in continued support of our avenues of growth.

Reconciliation of Non-GAAP Financial Measures This report contains Adjusted operating earnings measures and Adjusted earnings per share - diluted that are Non-GAAP financial measures. Adjusted operating earnings and Adjusted earnings per share - diluted are calculated by excluding from Operating earnings and Earnings per share - diluted items that we believe are not indicative of our ongoing operating performance. Such items consist of expenses associated with restructuring actions taken to adjust our cost structure to the current business climate and transition-related expenses, including amortization and settlement expenses, relating to defined benefit pension plans that we intend to terminate. We present Adjusted operating earnings and Adjusted earnings per share - diluted because we consider them to be important supplemental measures of our performance and believe them to be useful in analyzing ongoing results from operations.
Adjusted operating earnings and Adjusted earnings per share - diluted are not measurements of our financial performance under GAAP and should not be considered an alternative to Operating earnings and Earnings per share - diluted under GAAP. Adjusted operating earnings and Adjusted earnings per share - diluted have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, in evaluating Adjusted operating earnings and Adjusted earnings per share - diluted, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted operating earnings and Adjusted earnings per share - diluted should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing equal prominence of our GAAP results and using Adjusted operating earnings and Adjusted earnings per share - diluted only as a supplement.
The following table reconciles Operating earnings to Adjusted operating earnings for the years indicated.

                                           Fiscal Year Ended
(Dollars In millions)                        June 1, 2013
                                               52 weeks
Operating earnings                        $           114.9
Percentage of net sales                                 6.5 %
Add: Restructuring and impairment expense               1.2
Add: Legacy pension expenses (1)                       28.2
Adjusted operating earnings               $           144.3
Percentage of net sales                                 8.1 %

The following table reconciles Earnings per share - diluted to Adjusted earnings per share - diluted for the years indicated.

                                           Fiscal Year Ended
                                              June 1, 2013
                                                52 weeks
Earnings per share - diluted              $              1.16
Add: Restructuring and impairment expense                0.01
Add: Legacy pension expenses (1)                         0.30
Adjusted earnings per share - diluted     $              1.47

(1) At the end of fiscal 2012, the company modified the asset allocations strategy of its U.S. defined benefit pension plans. This change was made in response to the decision to close and ultimately terminate these plans. Legacy pension expenses are included as an adjustment to Operating earnings and Earnings per share - diluted only in periods subsequent to this change in allocation.

- 19-

Financial Results
The following is a comparison of our annual results of operations and
year-over-year percentage changes for the periods indicated.

(Dollars In millions)    Fiscal 2013     % Change from      Fiscal 2012     % Change from      Fiscal 2011
                           52 weeks           2012           53 weeks            2011           52 weeks
Net sales               $    1,774.9         2.9  %       $     1,724.1         4.5  %       $     1,649.2
Cost of sales                1,169.7         3.2  %             1,133.5         2.0  %             1,111.1
Gross margin                   605.2         2.5  %               590.6         9.8  %               538.1
Operating expenses             490.3         8.2  %               453.0         9.2  %               414.8
Operating earnings             114.9       (16.5 )%               137.6        11.6  %               123.3
Net other expenses              17.7        (2.2 )%                18.1       (13.0 )%                20.8
Earnings before income
taxes                           97.2       (18.7 )%               119.5        16.6  %               102.5
Income tax expense              28.9       (34.8 )%                44.3        39.7  %                31.7
Equity loss from
nonconsolidated
affiliates, net of tax          (0.1 )         -  %                   -           -  %                   -
Net earnings            $       68.2        (9.3 )%       $        75.2         6.2  %       $        70.8

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

                                     Fiscal 2013      Fiscal 2012     Fiscal 2011
Net sales                                  100.0 %         100.0 %         100.0 %
Cost of sales                               65.9            65.7            67.4
Gross margin                                34.1            34.3            32.6
Selling, general, and
administrative expenses                     24.2            22.9            22.2
Restructuring and impairment
expenses                                     0.1             0.3             0.2
Design and research expenses                 3.4             3.1             2.8
Total operating expenses                    27.6            26.3            25.2
Operating earnings                           6.5             8.0             7.5
Net other expenses                           1.0             1.0             1.3
Earnings before income taxes                 5.5             6.9             6.2
Income tax expense                           1.6             2.6             1.9
Net earnings                                 3.8             4.4             4.3

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Net Sales, Orders, and Backlog - Fiscal 2013 Compared to Fiscal 2012

For the fiscal year ended June 1, 2013, consolidated net sales increased 2.9 percent to $1,774.9 million from $1,724.1 million for the fiscal year ended June 2, 2012. The acquisitions of Maharam Fabric Corporation (Maharam) on April 29, 2013 and Sun Hing POSH Holdings Limited (POSH) on April 3, 2012 increased fiscal 2013 net sales approximately $56.6 million. The impact of dealer divestitures in the second quarter of fiscal 2012 and the third quarter of fiscal 2013 had the effect of reducing sales approximately $10 million compared to fiscal 2012. The overall impact of foreign currency changes for the fiscal year was to decrease net sales by approximately $8 million. The year ended June 2, 2012 contained 53 weeks. An extra week in the company's fiscal year is required approximately every six years in order to realign its fiscal calendar-end dates with the actual calendar months. The additional week in . . .

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