Herman Miller fiscal 2014: sales grow, earnings decline
American maker of professional furniture Herman Miller reported net sales for fiscal 2014 of USD 1,882.0 million, reflecting a year-over-year increase of 6.0%.
In fiscal 2014, the company reported a diluted loss per share of USD (0.37) versus earnings of USD 1.16 in fiscal 2013. On an adjusted basis, which excludes the impact of restructuring and impairment charges, reductions in contingent consideration liabilities, and expenses associated with the company’s now complete domestic pension termination initiative, adjusted diluted earnings per share were $1.68 and $1.47 in fiscal 2014 and 2013, respectively.
Brian Walker, Chief Executive Officer, stated, “Our results this quarter reflected an overall pace and timing of new orders that was a bit slower than we anticipated through the first half of the quarter, but showed positive momentum as the period progressed. This late-quarter improvement drove healthy organic order growth for the quarter, resulting in an 11.7% increase in our ending backlog relative to last year.
The uneven pace of orders is a reflection of the sluggish, albeit steady, pace of the global economic recovery. We continue to be encouraged by the pace of improvements in Europe, early signs of recovery in our business in Asia, and reports of strong project activity by architectural practices in North America.”
Q4 2014 results
Net sales in the quarter totalled $487.5 million, an increase of 6.0% from the same quarter last fiscal year. New orders in the fourth quarter of $479.5 million were 3.9% above the prior year level.
Herman Miller’s order growth in the quarter was negatively impacted by the timing of its February 3, 2014 price increase, which had the effect of accelerating approximately USD 22.0 million of new orders into the third quarter that would have otherwise been entered in the fourth quarter.
On an organic basis, which adjusts for this order acceleration as well as acquisitions, divestitures, and foreign currency translation, sales and orders in the fourth quarter increased 2.9% and 5.7%, respectively, from the same quarter last fiscal year.
Herman Miller reported net earnings of $0.28 per share on a diluted basis in the fourth quarter. This compares to diluted earnings per share of $0.40 in the same quarter last fiscal year.
Excluding the impact of restructuring and impairment charges and current quarter reductions in contingent consideration liabilities, adjusted diluted earnings per share in the fourth quarter totalled $0.50.
The adjusted diluted earnings per share in the quarter was favourably impacted by approximately $0.03 due to a lower than forecast effective tax rate. In the fourth quarter of last fiscal year, the company reported adjusted diluted earnings per share of $0.43.
Business segment results
Sales for the quarter within Herman Miller’s North American reportable segment were $307.1 million, a decrease of 1.4% from the same quarter last fiscal year. On an organic basis (as defined above), segment sales were flat on a year-over-year comparison.
New orders in the fourth quarter totalled $316.9 million representing an increase of 0.2% from last year. The timing of the company’s February list price increase is estimated to have accelerated approximately $17.0 million in new orders for this segment into the third quarter that would have otherwise been entered in the fourth quarter.
On an organic basis, segment orders were up 7.2% from the fourth quarter of last fiscal year. Demand from the U.S. federal government sector showed continued signs of improvement this quarter, with modest year-over-year increases in both sales and orders versus the same quarter last year.
Net sales within the ELA segment totalled $109.6 million in the fourth quarter of fiscal 2014. This represents a 10.6% increase from the same quarter last fiscal year, with the largest contributor of this growth coming from the company’s business in the United Kingdom.
New orders in this segment totalled $94.7 million in the fourth quarter, representing a year-over-year increase of 1.5%. On an organic basis, segment sales increased 9.3% and orders were flat relative to the fourth quarter of last fiscal year.
Net sales in the fourth quarter within Herman Miller’s Specialty and Consumer segment totalled $70.8 million. This represents a 43.3% increase over sales in the same quarter last year.
The acquisition of Maharam, which closed in the fourth quarter of fiscal 2013, was a significant driver of the sales growth in the quarter, though each of the segment’s underlying business units contributed to the year-over-year sales increase in the period. Excluding the impact from the Maharam acquisition, segment sales increased 8.1%.
New orders in the fourth quarter of $67.9 million increased 30.3% compared to last year. On an organic basis, adjusting for the Maharam acquisition and order pull-ahead from the price increase last quarter, segment orders increased 7.1% compared to the same quarter last year. This organic order growth was driven by increased orders in the Herman Miller Collection and Geiger business units.
Herman Miller’s consolidated gross margin in the fourth quarter totalled 36.7%, a 130 basis point improvement over last year’s fourth quarter gross margin of 35.4%.
The addition of higher margin Maharam products and net benefit from the recent price increase drove the majority of this year-over-year increase.
During the fourth quarter, the company recognized pretax asset impairment expenses totalling $21.4 million associated with the Nemschoff and POSH trade name intangibles. These non-cash charges were determined based upon Herman Miller’s normal-course impairment review process, which is conducted on an annual basis for certain classes of intangible assets.
Mr. Walker stated, “Despite the required reduction in accounting book value, we continue to believe the Nemschoff and POSH brands and companies are important contributors to the overall Herman Miller offer. This past year Nemschoff was again recognized as the number one brand for Healthcare furnishings in the United States, and the POSH brand continues to maintain a leading position in China with a growing presence throughout Asia.”
Greg Bylsma, Chief Financial Officer, added, “It’s important to note these acquisitions included forms of contingent consideration that were payable based on performance subsequent to the date of acquisition. These write-downs reflect, in part, that the performance levels needed to earn the additional consideration were not achieved. As a result, over time, we have also recorded gains as it became clear the contingent consideration would not be paid.”
Herman Miller reported operating expenses in the fourth quarter of $131.5 million compared to $126.9 million in the same quarter a year ago. This represents a year-over-year increase of $4.6 million.
Herman Miller’s expenses in the current year fourth quarter were reduced by $2.6 million from the reversal of contingent liabilities associated with the targeted sales growth of its POSH subsidiary. Operating expenses in the prior year period reflect $2.1 million of legacy pension charges associated with defined benefit plans that have since been terminated.
Excluding these items, Herman Miller’s operating expenses increased approximately USD 9.3 million from the fourth quarter of last fiscal year. This year-over-year increase relates primarily to the acquisition of Maharam.
Herman Miller’s effective income tax rate in the fourth quarter was 25.7%. On an adjusted basis, excluding asset impairment expenses and the reduction in contingent consideration liabilities, the effective rate in the quarter was approximately 28%. This adjusted rate is below the company’s previous forecast of 32% to 33% due to favourable true-up adjustments to reconcile recorded tax provisions to completed tax returns. The effective tax rate in the fourth quarter of last fiscal year was 24.4%.
Herman Miller ended the fiscal year with total cash and cash equivalents of USD 101.5 million, an increase of USD 18.8 million from the balance at the end of the third quarter. Cash flow generated from operations in the fourth quarter and full fiscal year was USD 39.7 million and USD 90.1 million, respectively. This compares to USD 59.2 million and USD 136.5 million in the respective periods last fiscal year.
Mr. Bylsma continued, “Our teams did a good job this quarter delivering on the performance we committed to coming into the period, while at the same time advancing on a number of near-term priorities – including readying new products for commercial launch and delivering a powerful presentation at the NeoCon trade show. We continue to demonstrate improvement in our financial performance through focused efforts to increase operating efficiency, shift the mix of our business toward higher margin growth opportunities, and generate strong cash flow.”
Looking forward, Herman Miller expects net sales in the first quarter of fiscal 2015 to be in the range of $480 million to $500 million. This would represent an increase of between 2.5% and 7% from the first quarter of fiscal 2014.
Diluted earnings per share in the quarter are expected to range between $0.44 and $0.48.
Mr. Walker concluded, “As we close this past fiscal year we are encouraged by our significant progress in virtually every area of the business as we advance our strategic agenda. We have meaningfully improved our ability to deliver Herman Miller’s unique brand of human-centered solutions to customers in diverse settings around the world and we see further opportunity ahead.”