Herman Miller Inc. Reports Operating Results (10-Q)
Herman Miller & Co. is engaged primarily in the design manufacture and sale of furniture systems and furniture and related products and services for offices and to a lesser extent for health-care facilities and other uses. Through research the company seeks to define and clarify customer needs and problems existing in its markets and to design through innovation where feasible products and systems as solutions to such problems. Herman Miller Inc. has a market cap of $643.1 million; its shares were traded at around $11.98 with a P/E ratio of 5.8 and P/S ratio of 0.3. The dividend yield of Herman Miller Inc. stocks is 2.9%. Herman Miller Inc. had an annual average earning growth of 5.3% over the past 10 years. Highlight of Business Operations: Our investment in R&D, excluding royalties, totaled $8.8 million and $9.4 million for the quarterly periods ended February 28, 2009 and March 1, 2008, respectively. Through the first nine months of fiscal 2009, R&D expenses were $27.3 million. This compares to $28.5 million in the same period last fiscal year. Operating earnings in the third quarter were a loss of $2.8 million compared to a profit of $61.7 million in the same period last year. On a year-to-date basis, operating earnings totaled $108.4 million, or 40.0 percent below last year.
Other Income/Expense and Income Taxes Net other expenses in the quarter and the nine months ended February 28, 2009 totaled $6.0 million and $16.8 million respectively. This compares to $4.6 million and $11.1 million respectively, in the same periods last year. The increase in expense over both comparative periods was driven primarily by higher interest expense due to the long-term debt issued in the third quarter of fiscal 2008. We incurred a net foreign currency transaction loss of $0.4 million in the current quarter compared to a loss of $0.3 million last year. The effective tax rates for the three months ended February 28, 2008 and March 1, 2008, were 39.4 percent and 33.0 percent, respectively. The current rate of 39.4 percent was above the federal statutory rate of 35 percent due to the current quarter loss and tax benefits related to Research & Development Credits. The effective tax rates were 33.8 percent and 33.5 percent for the nine months ended February 28, 2009, and March 1, 2008, respectively. The current quarter and year-to-date effective rates varied from the United States federal statutory rate of 35 percent primarily due to the manufacturing deduction under the American Jobs Creation Act of 2004 (AJCA), the loss during the quarter, and the tax benefits recognized related to Research and Development credits. We expect our full-year effective tax rate for fiscal 2009 to be between 32 percent and 34 percent. In the first quarter of fiscal 2008, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" (FIN 48). Upon adoption, we recognized an increase in accrued liabilities associated with unrecognized tax benefits. We also recognized an increase in accruals for estimated interest and penalties associated with those unrecognized tax benefits. These accrual adjustments totaled $1.0 million, and were recorded net of tax within beginning retained earnings. This adjustment, which did not impact net earnings, is considered a Cumulative Effect of a Change in Accounting Principle as required by FIN 48. Additionally, in the first quarter of fiscal 2008, we reclassified $8.7 million from current accrued income taxes payable into non-current liabilities. This reclassification was made to match the anticipated timing of future income tax payments.
Cash Flow Operating Activities Cash generated from operating activities in the third quarter was $18.7 million compared to $35.5 million in the prior year. Cash payments of approximately $9.2 million are included in the third quarter cash from operating activities amount and are related to the restructure actions made during the quarter. For the first nine months of fiscal 2009, cash generated from operations totaled $64.4 million. This compares to cash flows generated from operating activities of $123.2 million in the same period in fiscal 2008.
Quarter and Nine Months Ended March 1, 2008 Changes in working capital balances resulted in a net cash use of $8.9 million in the third quarter of fiscal 2008. Volume-driven increases in accounts receivable were more than offset by increased inventory balances related to project timing and accounts payable balances. Through the first nine months of last year, changes in working capital balances accounted for a net $31.8 million use of cash. Included in this amount were increases in accounts receivable and inventories totaling $36.7 million. We also experienced a net reduction of $16.7 million in compensation and benefit accruals in the nine-month period, due largely to the payout of incentive bonuses earned during fiscal 2007. Partially offsetting these working capital investments were volume-driven increases in accounts payable of $6.2 million and unearned revenue liabilities of $8.3 million. Accruals for income taxes also increased from the prior year-end, further offsetting the investment in working capital in the year-to-date period.
At the end of the third quarter, we had outstanding commitments for capital purchases of $5.0 million. We continue to manage and prioritize capital investments. We expect our full-year capital purchases to be approximately $25 million to $30 million. This compares to full-year capital spending of $40.5 million in fiscal 2008. The year-to-date capital spending reflects the elimination or delay of certain projects that have been deemed non-essential. We do continue to target investment in capital expenditures for projects such as new product development and manufacturing improvements, among others, that are vital to our long term outlook. During the second quarter of this year, we acquired certain assets and liabilities of a specialty wood manufacturer and supplier in North Carolina. The cash outlay related to this transaction was $2.9 million. This purchase price is reflected as a net cash outflow within the Condensed Consolidated Statement of Cash Flows for the nine-month period ended February 28, 2009. Further information related to this transaction can be found in Note 17.
There were no open-market stock repurchases during the current quarter or year-to-date, however, last year in the same period, we repurchased $200.6 million and $266.7 million in common shares in the quarter and year-to-date, respectively. During the third quarter of fiscal 2008, we completed a debt financing transaction involving the issuance of $200 million in senior unsecured private placement notes. $50 million of these notes are due in January 2015, and bear interest at a fixed annual coupon rate of 5.94 percent. The remaining $150 million is due in January 2018 and bears interest at a fixed annual coupon rate of 6.42 percent. We used the $200 million proceeds from the notes for an accelerated share repurchase of our common stock. Refer to Note 5 for more information related to the ASR.
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