Herman Miller, Inc., announced results for its third quarter ended February 27, 2010. The period was highlighted by double-digit percentage growth in orders within the company's international, healthcare, learning and retail vertical markets relative to the same quarter last year. On a consolidated basis, new orders in the quarter were $290 million, representing an increase of 3.8% from the prior year third quarter. Net sales for the third quarter of $329.6 million were 7% below the prior year level. Relative to the second quarter of this fiscal year, net sales and orders showed typical seasonal pattern declines of 4.1% and 16.1%, respectively. On an adjusted basis, excluding $2.3 million in pretax restructuring charges, operating earnings and earnings per share in the third quarter were $19.1 million and $0.15, respectively. These amounts compare to adjusted operating earnings of $20.6 million and earnings per share of $0.18 in the prior year third quarter – a period in which pretax restructuring expenses totaled $23.4 million.
Including the impact of restructuring charges, Herman Miller reported third quarter operating earnings and earnings per share of $16.8 million and $0.12, respectively. In the same quarter last year, the company reported a loss from operations of $(2.8) million and earnings per share of $(0.10).
Brian Walker, Chief Executive Officer, stated, "After five consecutive quarters of declines, it's a pleasure to report positive growth in orders compared to the prior year. While overall industry conditions remain challenging, this serves as a measurable signal that business conditions have stopped deteriorating. The relative strength in our international, healthcare, learning, and retail businesses supports our strategic direction to diversify our revenue base by investing in market segments outside our core. This strategy has served us well throughout the downturn, and we believe it will continue to prove important as the U.S. and international economies continue to recover."
Third Quarter 2010 Financial Results
New orders in the third quarter within Herman Miller's North American business segment decreased 1% from the prior year period, while non-North American segment orders increased 21.4%. Net sales in the North American business segment totaled $269.5 million in the third quarter, representing a decrease of 8.9% from the same period last fiscal year. The company's non-North American business segment reported sales of $46.9 million in the third quarter, a 9.5% decrease from a year ago.
Despite lower sales in comparison to the prior year, gross margin in the third quarter improved 190 basis points to 31.8%. The increase was driven by lower commodity costs relative to the prior year and cost savings from the company's restructuring initiatives. Herman Miller's third quarter gross margin decreased 40 basis points relative to the second quarter of this fiscal year; a change resulting principally from lower sales and production levels along with comparatively higher commodity costs. Production inefficiencies associated with the consolidation of the Brandrud and Nemschoff manufacturing operations also contributed to the sequential-quarter margin decrease. This consolidation project is scheduled to be completed by the end of fiscal 2010.
Operating expenses in the third quarter totaled $85.7 million, an increase of approximately $0.4 million from the same quarter last year. The expenses for the current quarter include approximately $4.7 million from the consolidation of Nemschoff and also reflect a favorable adjustment related to the contingent value right (CVR) component of the Nemschoff purchase price. This adjustment, which was driven by the increase in the company's stock price during the quarter, resulted in a $1.8 million reduction to operating expenses in the period. On a sequential-quarter basis, operating expenses in the third quarter were $4.2 million lower than the second quarter of this fiscal year. The decrease resulted from lower compensation costs related to the company's performance-based wage recovery program and the valuation adjustment to the CVR.
Greg Bylsma, Chief Financial Officer, stated, "As expected, the seasonal dip in sales and production schedules put pressure on our margins this quarter. We continue to operate under several initiatives aimed at aligning business expenses with lower revenue levels, including reduced work schedules for the majority of our employees. These programs will continue over the near-term as we navigate the business back to stronger and sustainable revenue levels. The order growth we reported this quarter is a clear step in that direction. In the meantime, we remain committed to balancing today's profitability goals with the investments required to fuel our future growth."
The company's effective tax rate for the quarter was 32.8% compared to 34.0% in the second quarter of this fiscal year and 39.4% in the prior year period. The relatively high rate in the prior year third quarter was driven by the marginal tax rate benefit recorded against the company's loss in the quarter combined with additional benefits resulting from research and developmental credits.
The company's cash position at the end of the quarter was $123.1 million, down from $192.9 million at the end of fiscal 2009. The reduction was driven principally by first quarter cash outflows associated with the early retirement of debt securities and the Nemschoff acquisition. Cash flow from operations in the third quarter was $8.4 million compared to $18.7 million in the same quarter last year. Capital spending in the quarter was $3.9 million, down from last year's level of $4.5 million.
Mr. Walker concluded, "Despite the headwinds that remain in the general economy, we're encouraged by the early signs of recovery and believe we are well positioned for renewed growth in the markets we serve. For all the change and adversity we have faced over the past year, our commitment to thought-leadership and balanced performance within our industry has remained constant. This focus has once again earned us the distinct recognition of being named among the most innovative companies by Fast Company magazine, and among both America's best employers and most admired companies as surveyed by Fortune magazine. While this is not the first time we have earned a place on these lists, we are especially proud this year given the challenges brought on by the recession. As much as this says about our past accomplishments, we believe it speaks even more about what we are capable of achieving in the future."
About Herman Miller
Herman Miller works for a better world around you—with inventive designs, technologies and related services that improve the human experience wherever people work, heal, learn, and live. Its curiosity, ingenuity, and design excellence create award-winning products and services, resulting in more than $1.6 billion in revenue in fiscal 2009. Innovative business practices and a commitment to social responsibility have also established Herman Miller as a recognized global company. In 2010, Herman Miller was again cited by FORTUNE as the "Most Admired" in its industry and among the "100 Best Companies to Work For" in America, while Fast Company has named Herman Miller among its 2010 "Innovation All-Stars." Herman Miller trades on the NASDAQ Global Select Market under the symbol MLHR.