Herman Miller announced results for its third quarter ended March 1, 2014. Net sales in the quarter totaled $455.9 million, an increase of 7.7% from the same quarter last fiscal year. New orders in the third quarter of $464.0 million were 21.4% above the prior year level, reflecting broad-based growth across each of the company’s major business units and geographic regions.
The company estimates its most recent price increase, which became effective on February 3, 2014, had the effect of accelerating approximately $22 million of orders that would have otherwise been entered in the fourth quarter of fiscal 2014. On an organic basis, which adjusts for this order acceleration as well as acquisitions, divestitures, and foreign currency translation, sales and orders in the third quarter increased 4.2% and 11.1%, respectively, from the same quarter last fiscal year.
Herman Miller reported net earnings of $0.33 per share on a diluted basis in the third quarter. This compares to diluted earnings per share of $0.28 in the same quarter last fiscal year. Excluding restructuring expenses of $1.1 million recognized in the current period, adjusted diluted earnings per share in the third quarter totaled $0.34. This compares to adjusted earnings of $0.32 per share in the third quarter of fiscal 2013.
Brian Walker, Chief Executive Officer, stated, “The clear highlight in our results this quarter is the strong order growth across each of our business segments. Particularly encouraging is the fact that this improvement extended into areas that for some time have been headwinds to growth, including the U.S. federal government and key markets within EMEA and Asia. While it’s too early to call these improvements sustainable, they certainly increase our optimism. In short, the business fired on all cylinders this quarter, and although uncertainty remains in the global economic and political picture, we feel good about our momentum and direction.”
Third Quarter Fiscal 2014 Financial Results
Sales for the quarter within Herman Miller’s North American reportable segment were $293.9 million, an increase of 3.0% from the same quarter last fiscal year. On an organic basis (as defined above), segment sales increased 5.8% on a year-over-year basis. New orders in the third quarter totaled $291.7 million, including an estimated $17.0 million accelerated into the period as a result of the price increase. In total, segment orders in the third quarter were 9.0% higher than the year ago period and were up 5.7% on an organic basis.
Herman Miller has renamed its international reportable business segment “ELA” in order to better describe the geographic regions it serves, which include EMEA, Latin America, and Asia-Pacific. Prior to this name change, the company referred to this segment as “non-North America.”
Net sales within the ELA segment totaled $97.9 million in the third quarter of fiscal 2014. This represents a 7.8% increase from the same quarter last fiscal year, with the largest contributors of this growth coming from the EMEA and Latin American regions. New orders in this segment totaled $100.8 million in the third quarter, representing a year-over-year increase of 24.8% driven by growth in almost all major geographic regions. On an organic basis, segment sales increased 9.7% and orders increased 26.4% from the third quarter of last year.
Net sales in the third quarter within Herman Miller’s Specialty and Consumer segment totaled $64.1 million. This represents a 35.5% increase over sales in the same quarter last year. The acquisition of Maharam, which closed in the fourth quarter of fiscal 2013, drove the sales growth in the quarter. Excluding the impact from this acquisition, segment sales decreased 15.9%, with the majority of the decline relating to the company’s Geiger subsidiary. New orders in the third quarter totaled $71.5 million, including an estimated $5.0 million from pricing-related acceleration. This represents an increase of 110.9% compared to the same quarter last year. On an organic basis, segment orders increased 16.5% compared to last year. This order growth was broad based across the segment, and included double digit growth at Geiger, the company’s Consumer business, and within the Herman Miller Collection.
Herman Miller’s consolidated gross margin in the third quarter of 35.7% was consistent with company’s expectations coming into the quarter. This compares to 34.1% reported in the third quarter of last fiscal year, or 34.3% adjusted to exclude the impact of legacy pension expenses. The year-over-year improvement in gross margin percentage is primarily attributed to favorable product and channel mix (including the addition of Maharam products), improved labor productivity, and other operational cost savings. These factors were partially offset this quarter by the negative impact of foreign currency exchange rates relative to year ago levels.
During the third quarter, the company announced restructuring actions aimed at improving efficiencies within its North American sales and distribution channel and Geiger manufacturing operations. These actions focused primarily on targeted workforce reductions and resulted in the recognition of pretax restructuring expenses totaling $1.1 million in the quarter.
Greg Bylsma, Chief Financial Officer, stated, “Our operating performance this quarter is encouraging on several fronts. We delivered against the expectations we outlined at the beginning of the quarter in the areas of net sales, gross margin, and earnings per share. This was accomplished against a backdrop of improved order pacing across the business. We also reached important milestones in the area of new products, including the launch of our Mirra 2 chair program and further process readiness relating to upcoming launches in support of our Living Office initiative.”
Herman Miller reported operating expenses in the third quarter of $127.7 million compared to $117.0 million in the same quarter a year ago. The expenses in the prior year period included $3 million of legacy pension charges associated with defined benefit plans that have since been terminated. Excluding the impact of these legacy pension charges, operating expenses increased $14 million from the third 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 third quarter was 33.3% compared to 29.4% in the same quarter last fiscal year. The prior year rate was lower due primarily to benefits associated with the extension of R&D tax credit legislation, which was signed into law during the period.
The company ended the third quarter with total cash and cash equivalents of $77.1 million, an increase of $3.8 million from the balance at the end of the second quarter. Cash flow generated from operations in the third quarter was $22.9 million compared to $30.0 million in the same quarter last fiscal year.
Looking forward, Herman Miller expects net sales in the fourth quarter of fiscal 2014 to be in the range of $485 million to $505 million. This would represent an increase of between 5.4% and 9.8% from the fourth quarter of fiscal 2013. Diluted earnings per share in the quarter are expected to range between $0.43 and $0.47.
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