Herman Miller, Inc., Reports Record Quarterly Earnings
Furniture World Magazine
Herman Miller, Inc., reported results for its second quarter ended December 1, 2007. Increases in sales, orders, and gross margins, coupled with a decrease in operating expenses, resulted in the highest quarterly earnings per share ever recorded by the company. Net earnings were $41.0 million, an increase of 12.0% over net earnings of $36.6 million for the same period in the prior year, and earnings per share were $0.67, an increase of 19.6% over the same period in the prior year of $0.56. Excluding restructuring expenses, Q2 earnings per share would have been $0.72.
Sales for the quarter increased a modest 1.4%, while orders increased a strong 8.2% from the year-ago period. Operating earnings expanded to 12.9% of sales based on improvements both in gross margin and operating expenses. Operating earnings included $5.2 million in pre-tax restructuring expenses related to the cost reduction activities announced earlier in the quarter.
The company's Board of Directors has approved the issuance of $200 million in Senior Unsecured Private Placement Notes and a plan to implement a $200 million Accelerated Share Repurchase program to begin in January 2008. The company has also negotiated an Unsecured Revolving Credit Facility of $250 million. Details of the new debt agreements will be reported in a Form 8-K filing with the Securities and Exchange Commission.
Additionally, the company announced in a separate release an agreement to acquire Seattle-based Brandrud Furniture, Inc. Brandrud is a manufacturer of healthcare furnishings, with an emphasis on seating products for patient rooms, patient treatment areas, and public spaces, such as lobbies and waiting areas.
Brian Walker, Chief Executive Officer, stated, "We are pleased with this quarter's results and the superb performance of our employee-owners. We were able to increase earnings with a very modest increase in top-line performance. This is a testament to the organization's ability to manage costs and drive operational efficiencies while continuing to push our strategic growth initiatives forward. We made substantial progress this quarter in our previously outlined initiatives to improve underlying business performance, accelerate investment in our growth initiatives, and more effectively use our balance sheet to create long-term value."
Walker continued, "Brandrud is an excellent company and a great strategic fit. This acquisition will expand our healthcare product offer and add management talent and strength to our efforts. The capital structure changes reflect the Board and management's confidence that we have the right long-term strategy for creating wealth for our shareholders and employee-owners. Our strong cash flow, resilient business model and ample revolving credit facility ensure we have the financial flexibility to continue to invest in our strategic growth initiatives."
The company's consolidated sales, orders, and backlog reflected year-over- year and sequential growth. Sales for the quarter were $505.9 million, up 1.4% from the same period a year ago and up 2.9% sequentially from the previous quarter. Orders were $572.5 million for the quarter, increasing 8.2% from the prior year and 18.3% from the prior quarter. Backlog was $346.5 million, up 7.0% from the same period a year earlier and up 23.8% sequentially from the previous quarter.
"We saw marked improvement in order entry rates throughout the quarter as compared to first quarter levels," said Curt Pullen, Chief Financial Officer. "While this is consistent with our normal seasonal pattern, the improvement was better than we anticipated. Our North American orders grew 9.7% over the prior year and 19.6% over the prior quarter. Orders outside of North America continued to improve and grew 12.1% over the prior year and 5.7% over the prior quarter."
Gross margin increased to 35.6% of sales, an improvement of 150 basis points from both the prior year and prior quarter of 34.1%. Gross margin was positively affected by the leverage gained from additional production volume, a mix shift to more profitable product lines, stable commodity costs, and the favorable impact of the company's February price increases.
Operating expenses declined to 21.7% of sales, in part driven by the cost reduction actions outlined earlier in the quarter. This was partially offset by higher compensation cost and increases in tax-related accruals. The company also recorded one-time restructuring expenses of $5.2 million in the quarter for employee separation costs associated with the previously announced cost- reduction actions.
Curt Pullen added, "We had an outstanding quarter -- our order rates picked up during the quarter to provide solid production volumes, we had a favorable product mix, and we did a very good job of managing cost. As a result, we were able to drive the highest quarterly operating income level we have seen in over eight years."
The company's ending cash position was $74.2 million. Cash flow from operations for the quarter totaled $55.9 million compared to $30.6 million for the same period last year. Capital spending for the quarter was $10.1 million compared to $10.2 million for the same period last year. The company also repurchased approximately 0.2 million shares of its stock for $5.3 million at an average price of $26.98 per share during the quarter.
Looking forward, as a result of the strong ending backlog, the company expects third quarter fiscal 2008 sales to be in a range of $475 million to $500 million. This represents a 2% decrease to 3% increase over the prior year. The company estimates earnings per share of $0.55 to $0.62, an increase of 10% to 24% over the prior year. The forecast includes an estimated reduction in the average shares outstanding as a result of the Accelerated Share Repurchase program discussed above.
Brian Walker concluded, "Given the current economic environment, we remain conservative in our assessment of the U.S. market's near-term growth potential. Our previously announced actions were designed to enable us to weather a period of softer demand, accelerate our investment in growth initiatives, and drive improved long-term operating performance. If the U.S. economy proves to be more robust than anticipated, we are well positioned to serve our customers' needs. We are very confident that our long-term investment initiatives will drive superior performance for our customers, employee-owners, and shareholders."
About Herman Miller: The designs and services of Herman Miller enhance the performance of human habitats worldwide, making customers' lives more productive, rewarding, delightful, and meaningful. The company's award-winning products, complemented by furniture-management and strategic consulting services, generated $1.92 billion in revenue during fiscal 2007. Herman Miller is widely recognized both for its innovative products and business practices. In fiscal 2004 Herman Miller was named recipient of the prestigious National Design Award for product design from the Smithsonian Institution's Cooper-Hewitt, National Design Museum. In 2007 the company was again included in CRO magazine's "100 Best Corporate Citizens" and was cited by Fortune magazine as the "Most Admired" company in its industry. The company trades on the NASDAQ market under the symbol MLHR. For additional information visit www.HermanMiller.com.