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MLHR > SEC Filings for MLHR > Form 10-Q on 9-Oct-2013All Recent SEC Filings

Show all filings for MILLER HERMAN INC

Form 10-Q for MILLER HERMAN INC


9-Oct-2013

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 1, 2013. References to "Notes" are to the footnotes included in the condensed consolidated financial statements.

Discussion of Current Business Conditions Net sales in the quarter totaled $468.1 million, an increase of 4.1 percent from the same quarter last fiscal year. New orders in the first quarter were $471.2 million, 4.2 percent higher than the prior year period. Operating earnings in the first quarter were 8.4 percent of net sales, an improvement from 7.6 percent a year ago. The company's earnings in the quarter were reduced by costs associated with the previously announced strategy to terminate its domestic defined benefit pension plans. The results were also negatively impacted by non-recurring costs capitalized in inventory as part of the acquisition of Maharam. Excluding these expenses, adjusted operating earnings( 1) in the first quarter were 9.3 percent of net sales - the highest level achieved by the company in almost 5 years.

Diluted earnings per share in the first quarter was $0.38 per share, compared to $0.34 per share in the same period of fiscal 2013. Excluding the impact of legacy pension and the Maharam inventory amortization, adjusted diluted earnings per share( 1) in the first quarter totaled $0.43 per share. This compares to adjusted diluted earnings per share of $0.37 per share in the first quarter of last fiscal year.
Our Specialty and Consumer segment was once again a standout story this quarter with sales up more than 96 percent from the first quarter of fiscal 2013. Maharam was the single largest contributor to that performance. However, it's important to note that the Herman Miller Collection, Retail, and Geiger all experienced double digit year-on-year sales gains. This segment best illustrates our success in strategically diversifying our business into areas that offer new growth and higher margins. We are very pleased with the addition of Maharam to our Specialty and Consumer segment including the results from operations, the reaction from the market, and the contributions of the Maharam leaders and employees.

Net sales within our North American Furniture Solutions segment ended the quarter slightly ahead of our expectations, driven by improved demand from healthcare customers (including government healthcare entities) and modest growth in the core commercial office business. This growth was consistent with recent economic data which remains mixed but seems generally supportive of improving industry conditions. This includes sluggish but continued job growth, higher Architectural Billing Index ("ABI") and non-residential construction indices, and improving business sentiment-all of which is reflected in BIFMA's recent projections for this calendar year and next.
Although we did see an improvement in activity from government-related healthcare agencies, the remainder of our federal government business was again weak. This had a significant influence on overall order activity in our North American Furniture Solutions segment. The magnitude of this multi-year decline in government furniture purchases is dramatic and has been felt across our industry. While we have certainly participated in that pain, we do believe our government market share is stable relative to competitors and the sales team is earning our share of the business that is available. Despite this clear challenge, we believe Herman Miller is well positioned as more customers, both in the U.S. and abroad, search for a new office landscape that better serves the needs of their people and the performance of their business.
The pattern of demand in our Non-North American Furniture Solutions segment differed sharply from what we saw in North America this quarter. Net sales for this segment were down 13.7% compared to the same period in the prior year driven by the challenging economic environment in Europe, Australia and, to a lesser extent, some markets in Asia. The decline in sales was also exacerbated by the timing of orders, which were much stronger in the second half of the first quarter. As a result, we built backlog this quarter, which we expect to ship in future periods. In total, segment sales - adjusted for currency translation - were down 12.3% from last year. By comparison, orders (adjusted for the impact of currency translation effects) were up almost 3% - with the strongest order performance coming from Mexico and the Middle East. While we are disappointed with this segment's results for the quarter, our Non-North American team has had a strong track record of good operating results and we continue to believe the demographics of the emerging markets will result in long-term growth and opportunity for Herman Miller.

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


Our results for the quarters ended August 31, 2013 and September 1, 2012 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 $3.1 million and $1.7 million for the first quarter of fiscal 2014 and 2013, respectively. Of these amounts, $2.1 million and $0.8 million are recorded within Operating expenses and the remaining portion is included in Cost of sales, thus reducing gross margin by approximately 20 basis points. For segment reporting purposes, $2.7 million of these legacy expenses are reflected in the company's North American Furniture Solutions business segment. The remaining portion is included in the Specialty and Consumer segment. We expect to complete the final phase of its legacy pension termination in the second quarter of fiscal 2014. The completion of this process will result in approximately $170.0 million of additional pre-tax legacy pension expenses and cash contributions to the pension plans which we currently estimate will total between $50 million and $55 million.
Capital expenditures totaled $6.5 million for the quarter ended August 31, 2013, a decrease of $9.2 million compared to the first quarter of fiscal 2013. The decrease in capital spending was primarily due to timing, and as we move through the balance of the year, we expect capital spending to ramp-up, particularly in support of several planned manufacturing facility and equipment initiatives, new products and showroom investments. We anticipate our full year capital spending to range between $55 million and $65 million.

The remaining sections within Item 2 include additional analysis of our three months ended August 31, 2013, including discussion of significant variances compared to the prior year period.


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, as well as expenses related to the step-up of inventory valuation stemming from the acquisition of Maharam. 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 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 periods indicated.

                                                    Three Months Ended
(Dollars In millions)                       August 31, 2013   September 1, 2012
Operating earnings                         $        39.1     $            34.3
Percentage of net sales                              8.4 %                 7.6 %
Add: Restructuring and impairment expenses             -                   0.5
Add: Inventory step-up expenses                      1.4                     -
Add: Legacy pension expenses (1)                     3.1                   1.7
Adjusted operating earnings                $        43.6     $            36.5
Percentage of net sales                              9.3 %                 8.1 %

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

                                                      Three Months Ended
                                             August 31, 2013     September 1, 2012
Earnings per share - diluted               $      0.38          $              0.34
Add: Restructuring and impairment expenses           -                         0.01
Add: Inventory step-up expenses                   0.02                            -
Add: Legacy pension expenses (1)                  0.03                         0.02
Adjusted earnings per share - diluted      $      0.43          $              0.37

(1) At the end of fiscal 2012, the company modified the asset allocation 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.


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
                            August 31, 2013       September 1, 2012      Percent
                                                                         Change
Net sales                 $           468.1     $             449.7        4.1  %
Cost of sales                         298.1                   300.0       (0.6 )%
Gross margin                          170.0                   149.7       13.6  %
Operating expenses                    130.9                   114.9       13.9  %
Restructuring and
impairment expenses                       -                     0.5     (100.0 )%
Total operating expenses              130.9                   115.4       13.4  %
Operating earnings                     39.1                    34.3       14.0  %
Net other expenses                      4.6                     4.3        7.0  %
Earnings before income
taxes                                  34.5                    30.0       15.0  %
Income tax expense                     12.0                    10.0       20.0  %
Net earnings              $            22.5     $              20.0       12.5  %

Earnings per share -
diluted                   $            0.38     $              0.34       11.8  %
Orders                                471.2                   452.0        4.2  %
Backlog                   $           275.7     $             280.2       (1.6 )%

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

                                                 Three Months Ended
                                       August 31, 2013      September 1, 2012
Net sales                                    100.0 %                 100.0 %
Cost of sales                                 63.7                    66.7
Gross margin                                  36.3                    33.3
Operating expenses                            28.0                    25.6
Restructuring and impairment expenses            -                     0.1
Total operating expenses                      28.0                    25.7
Operating earnings                             8.4                     7.6
Net other expenses                             1.0                     1.0
Earnings before income taxes                   7.4                     6.7
Income tax expense                             2.6                     2.2
Net earnings                                   4.8                     4.4

Consolidated Sales
Net sales in the first quarter of fiscal 2014 were $468.1 million, an increase of $18.4 million from the same period last year. The fourth quarter fiscal 2013 acquisition of Maharam contributed $27.3 million in net sales in the current quarter, which was partially offset by the impact of dealer divestitures in the third quarter of fiscal 2013 and the first quarter of fiscal 2014. The dealer divestitures had the effect of reducing sales by approximately $9.9 million compared to the first quarter of fiscal 2013. The overall impact of foreign currency changes for the first quarter was to decrease net sales by approximately $1.9 million relative to the first quarter of the prior year. The impact of net changes in pricing is estimated to have had a $5.0 million increase on net sales during the first quarter of fiscal 2014. The remaining year over year change in sales was due to a decrease in sales volumes in the current period.


The following table presents the quantification of the changes in net sales from the first quarter of fiscal 2013 to the first quarter of fiscal 2014.
(In millions)

First Quarter Fiscal 2013 Net sales $ 449.7
Acquisitions and divestitures
Maharam acquisition                    27.3
Dealer divestitures                    (9.9 )
Impact from foreign currency           (1.9 )
Net changes in pricing                  5.0
Change in sales volumes                (2.1 )
First Quarter Fiscal 2014 Net sales $ 468.1

Performance versus the Domestic Contract Furniture Industry We monitor the trade statistics reported by the 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, 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 August 31, 2013, the company's domestic U.S. shipments, as defined by BIFMA, increased 5.7 percent year-over-year, while the company's domestic orders decreased 0.1 percent. BIFMA reported an estimated year-over-year increase in shipments of 3.2 percent and an increase in orders of 1.6 percent for the comparable period.

Consolidated Gross Margin
Consolidated gross margin in the first quarter was 36.3 percent of net sales; an increase of 300 basis points compared to the first quarter last year. The benefit captured from price increases, net of incremental discounting, had the effect of increasing gross margin by approximately 100 basis points. This benefit drove an increase in net sales of approximately $5.0 million during the first quarter of fiscal 2014 relative to the first quarter of the prior year. An improvement in pricing net of incremental discounting increases net sales relative to prior periods. In addition, the acquisition of Maharam had the effect of increasing the gross margin percent by 90 basis points in the first quarter of fiscal 2014.

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

                                        Three Months Ended
Period Ended             August 31, 2013     September 1, 2012    Change
Direct materials                 40.8 %               44.3 %      (3.5 )%
Direct labor                      6.5                  6.3         0.2
Manufacturing overhead           10.6                 10.1         0.5
Freight and distribution          5.8                  6.0        (0.2 )
Cost of sales                    63.7 %               66.7 %      (3.0 )%


Direct material costs as a percent of net sales decreased 350 basis points as compared to the first quarter of fiscal 2013. The material costs as a percent of net sales decreased 40 basis points related to the impact of net pricing, 40 basis points due to lower commodity prices, 70 basis points as result of insourcing various components and products, and 20 basis points as a result of the dealer divestitures. The remaining decrease was related to favorable impact of changes in the product and channel mix compared to the prior year period.

Direct labor was 6.5 percent of net sales for the first quarter of fiscal 2014, an increase of 20 basis points from the same period last year. The acquisition of Maharam reduced the direct labor as a percent of net sales by 40 basis points. This was partially offset by the the dealer divestitures which had the effect of increasing the direct labor as a percent of net sales by 10 basis points. The remaining increase in the direct labor percent was due to the impact of changes in the product mix compared to the prior year period.

Manufacturing overhead was 10.6 percent of net sales for the first quarter of fiscal 2014, increasing 50 basis points from the first quarter of the prior year. Overhead costs as a percent of net sales were increased by 30 basis points due to higher employee incentive costs compared to the first quarter of fiscal 2013. These increases were partially offset by lower overhead costs as a percent of net sales due to the acquisition of Maharam of 10 basis points, dealer divestitures of 20 basis points, and lower medical costs of 40 basis points. The remaining increase was due to the impact of changes in the product mix compared to the prior year period.

Freight and distribution expenses, as a percentage of sales, was 5.8 percent for fiscal 2014; decreasing 20 basis points as compared to the prior year. This reduction was primarily due to the acquisition of Maharam.

Operating Expenses and Operating Earnings First quarter operating expenses were $130.9 million, or 28.0 percent of net sales, which is an increase of $16.0 million over the first quarter of fiscal 2013. The increase in operating expenses primarily relates to legacy pension costs of $1.4 million, and the acquisition of Maharam, which contributed an additional $12.4 million of operating expenses in the quarter. In addition, research and development, marketing expenses, and employee incentive costs increased $2.3 million, $2.4 million, and $2.4 million, respectively. Warranty expenses for the period were lower by $1.9 million due to lower customer specific claims in the period compared to the prior year. The dealer divestitures in fiscal 2013 had the effect of decreasing operating expenses by $2.2 million in the first quarter of fiscal 2014 compared to the same period in the prior year. The remaining change was related to decreases in various other operating expenses compared to the prior year period.

Operating expenses are also impacted by changes in foreign currency exchange rates. During the first quarter of fiscal 2014, the estimated impact to operating expenses was a decrease of approximately $0.5 million relative to the prior year period.

The following table presents the quantification of the changes in total operating expenses from fiscal 2013 to fiscal 2014.
(In millions)

First Quarter Fiscal 2013 Operating expenses $ 115.4
Selling, general & administrative change
Acquisitions and divestitures
Maharam acquisition                             12.4
Dealer divestitures                             (2.2 )
Legacy pension expenses                          1.4
Warranty                                        (1.9 )
Marketing and selling                            2.4
Employee incentive costs                         2.4
Impact from foreign currency                    (0.5 )
Design and research                              2.3
Other                                           (0.3 )
Restructuring and impairment change             (0.5 )
First Quarter Fiscal 2014 Operating expenses $ 130.9

Operating earnings in the first quarter were $39.1 million, an increase of $4.8 million compared to the same period last year. This increase relates to improvements in gross margin of $20.3 million net of the increases in operating expenses of $16.0 million.


Other Income/Expense and Income Taxes
Net other expense of $4.6 million in the first quarter of fiscal 2014 was $0.3 million higher compared to the prior year period. The increase in the current period was primarily due to an increase in the currency loss and lower interest income due to the decrease in cash.

The effective tax rates for the three months ended August 31, 2013 and September 1, 2012 were 34.7 percent and 33.5 percent, respectively. The increase in the rate is primarily due to a mix shift of earnings between taxing jurisdictions.

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 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 startup business and unallocated corporate expenses including restructuring and other related expenses (including impairment expenses). The current quarter and prior year period segment results are as follows:

(In millions)                                    Three Months Ended
                                        August 31, 2013     September 1, 2012     Change
Net Sales:
North American Furniture Solutions     $       318.2       $           320.3     $ (2.1 )
Non-North American Furniture Solutions          81.6                    94.6      (13.0 )
Specialty and Consumer                          68.3                    34.8       33.5
Corporate                                          -                       -          -
Total                                  $       468.1       $           449.7

Operating Earnings (Loss):
North American Furniture Solutions     $        34.0       $            26.9     $  7.1
Non-North American Furniture Solutions          (0.1 )                   5.5       (5.6 )
Specialty and Consumer                           5.2                     2.4        2.8
Corporate                                          -                    (0.5 )      0.5
Total                                  $        39.1       $            34.3

Further information regarding the reportable operating segments can be found in Note 16.

North America
Net sales within the North American Furniture Solutions reportable segment ("North America") decreased 2.1 million to $318.2 million in the first quarter, representing a 0.7 percent decrease from the first quarter last year. The impact of foreign currency changes was to decrease the first quarter fiscal 2014 net . . .

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