Business context and reporting period
Herman Miller, Inc. (the company identified in the request as MillerKnoll) filed this Form 10-Q for its fiscal second quarter ended December 1, 2018, and the six months then ended. The company designs, manufactures, and sells workplace and consumer furnishings through North American Furniture Solutions, ELA, Specialty, and Consumer segments.
Financial results and position
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $652.6 million, up 7.9% | $1,277.3 million, up 7.8% |
| Gross margin | $235.6 million; 36.1% of sales, versus 36.7% | $460.7 million; 36.1%, versus 37.1% |
| Operating earnings | $53.1 million, versus $50.4 million | $99.1 million, versus $99.9 million |
| Net earnings attributable to Herman Miller | $39.3 million, versus $33.5 million | $75.1 million, versus $66.5 million |
| Diluted EPS | $0.66, versus $0.55 | $1.26, versus $1.10 |
| Operating cash flow | $91.5 million for six months, versus $81.5 million |
At December 1, cash and cash equivalents were $113.6 million and short-term investments were $8.2 million. Current assets were $601.0 million and current liabilities $425.3 million. Total debt was $285.3 million, including $225.0 million drawn on the revolving facility; available facility capacity was $163.7 million after letters of credit. Equity was $685.5 million.
Six-month capital expenditures were $41.1 million. Investing cash outflow was $118.7 million, principally reflecting $71.6 million invested in HAY and Maars and $4.8 million for HAY North American licensing rights. Financing cash outflow was $59.8 million, including $37.4 million of share repurchases and $22.4 million of dividends. Cash declined $90.3 million during the period. Operating cash flow less capital expenditures was approximately $50.4 million.
Material changes and operating trends
- Quarterly orders rose 11.6% to $702.6 million, and backlog increased 11.0% to $396.1 million. Management reported records for quarterly sales and orders.
- All four segments grew quarterly sales: North America 6.9%, ELA 4.9%, Specialty 9.7%, and Consumer 14.5%. Specialty and Consumer operating earnings improved; North America’s operating margin declined to 13.1% from 13.6%, while ELA’s rose to 11.6% from 11.2%.
- Despite higher sales, gross margin fell year over year, and first-half operating earnings were slightly lower. Cost of sales grew faster than sales; management cited manufacturing overhead, commodity costs, and initial China tariff effects.
- ASC 606 adoption accelerated recognition of some direct commercial product revenue and changed the presentation of certain pricing elements. It increased reported sales versus legacy accounting by $17.6 million for the quarter and $36.8 million for the half, while the pricing reclassification affected sales and cost of sales without changing gross profit dollars. Management cautions that comparisons are affected by the accounting change.
- Reported diluted EPS was $0.66 for the quarter; adjusted diluted EPS, a non-GAAP measure excluding specified special and other items, was $0.75. For the half, reported EPS was $1.26 and adjusted EPS was $1.44.
Outlook, risks, and unusual items
- Management described North American conditions as generally supportive of growth, citing industry orders, GDP, service-sector employment, and architectural billings. It highlighted uncertainty around trade policy, China tariffs, Brexit, global economic conditions, customer spending, competition, foreign exchange, raw-material costs, and execution of growth initiatives.
- The company expected to raise prices in January 2019 and said profit optimization work and the increase were expected to offset the then-incurred tariff impact; longer-term trade uncertainty remained. This is management commentary, not a quantified earnings forecast.
- Full-year capital purchases were expected to be $90 million–$100 million, mainly for facilities and equipment. The ELA facilities consolidation was expected to produce about $3 million of annual cost reductions; the company had recorded $5.3 million of related costs, expected about $2 million more, and anticipated completion by fiscal Q1 2020.
- Corporate expenses included special charges for CEO transition and profit-improvement consulting. HAY and Maars equity investments were accounted for under the equity method. A HAY shareholder put option could require purchase of an additional 33% at fair market value, with earliest exercise periods in fiscal 2020–2024. The company also noted potential purchases of remaining redeemable minority interests.
- Contingencies include ordinary-course litigation, $5.1 million maximum exposure on performance bonds, and $11.3 million of standby letters of credit (counted against revolving-facility availability). Management did not expect pending litigation or these guarantee arrangements to materially affect the financial statements. The filing also said lease-standard adoption was expected to significantly increase balance-sheet assets and liabilities.
Most important facts for investors to verify
- How much reported growth reflects underlying demand versus ASC 606 presentation and revenue-timing changes; review the filing’s legacy-GAAP reconciliations.
- Whether gross-margin pressure from overhead, commodities, tariffs, and discounting persists, and whether the planned price increase offsets those costs.
- Whether strong orders and backlog convert to sales and earnings, particularly given segment-level margin differences and higher corporate costs.
- Liquidity and capital allocation after the HAY/Maars investments, planned $90 million–$100 million capital spending, buybacks, dividends, and possible minority-interest or HAY put-option payments.
- Progress on ELA restructuring savings and costs, lease-accounting implementation, and resolution of trade, Brexit, tax, and other disclosed uncertainties.