Herman Miller, Inc. (MillerKnoll filing metadata) — Q1 FY2018 10-Q
Reporting period: Three months ended September 2, 2017. The quarter had 13 weeks, compared with 14 weeks in the prior-year quarter ended September 3, 2016; reported year-over-year comparisons are affected by the extra prior-year week.
Financial results
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Net sales | $580.3 million | $598.6 million |
| Gross margin | $216.9 million; 37.4% | $230.0 million; 38.4% |
| Operating earnings | $49.1 million; 8.5% of sales | $56.4 million; 9.4% of sales |
| Net earnings attributable to Herman Miller | $33.1 million | $36.3 million |
| Diluted EPS | $0.55 | $0.60 |
| Operating cash flow | $18.9 million | $30.2 million |
| Capital expenditures | $24.9 million | $22.1 million |
Organic sales increased 3.9% year over year, excluding currency, dealer divestitures, the prior-year extra week, and the impact of changed Design Within Reach shipping terms. Adjusted diluted EPS, excluding restructuring and other charges and related tax effects, was $0.57 versus $0.60. These are non-GAAP measures.
Cash and cash equivalents were $80.0 million at quarter-end, down from $96.2 million at fiscal year-end; marketable securities were $8.7 million. Total debt was $207.9 million, including $4.0 million under the revolving facility and $4.0 million in supplier financing; balance-sheet long-term debt was $203.9 million. The company reported $387.8 million available under its $400 million revolving facility, net of letters of credit. Current assets were $498.7 million and current liabilities $384.0 million. The quarterly dividend declared was $0.18 per share.
Performance and changes versus prior period
- Reported sales declined 3.1%, while orders were nearly flat as reported; organic orders rose 7.8%. Backlog increased 3.6% to $332.1 million.
- The prior-year extra week reduced current-quarter sales by an estimated $37 million and operating earnings by about $5 million on a comparable basis. Dealer divestitures reduced current-period sales by $8.1 million compared with the prior-year quarter.
- North America sales were $328.6 million, down 5.4% reported but up 3.4% organically; operating earnings were $48.7 million. ELA sales were $93.4 million, down 4.0% reported but up 2.7% organically; operating earnings were $6.6 million.
- Specialty sales were $75.1 million, down 4.6% reported and up 0.9% organically; operating earnings fell to $1.6 million from $5.7 million, reflecting warranty costs and a supplier-quality disruption at Nemschoff. Consumer sales rose 10.3% to $83.2 million, while operating earnings declined to $0.3 million from $0.8 million.
- Gross margin contracted 1.0 percentage point. Management cited higher steel costs, outsourcing costs in capacity-constrained West Michigan operations, and lower Nemschoff margins from discounting, mix, and inventory reserves.
Liquidity, outlook, risks, and unusual items
- Operating cash flow was affected by a voluntary $12.0 million international pension contribution and a $21.5 million working-capital cash use, including inventory growth and payment of prior-year bonuses and profit sharing. Investing activities used $24.2 million; financing activities used $13.0 million.
- Management expected full-year capital purchases of $100 million to $105 million, primarily for facilities and equipment, versus $87.3 million in FY2017. The filing states that cash, operating cash generation, and borrowing capacity are expected to support foreseeable operating and capital needs, dividends, and repurchases.
- Management described the near-term outlook as mixed despite positive North American industry indicators, citing hurricane impacts and potential U.S. tax reform. International uncertainty included Brexit and lower orders in some Middle Eastern oil-producing regions. No specific sales or earnings guidance was provided.
- The company announced targeted workforce reductions, primarily in North America, and recorded $1.4 million of restructuring expense. It also recorded $0.7 million of consumer-business optimization consulting costs; restructuring actions were considered complete, with final payments expected over the next two quarters.
- Product warranty accruals increased to $52.6 million from $47.7 million. The company disclosed $9.4 million of maximum exposure under performance bonds and $8.2 million of standby letters of credit; management said it had no known circumstances requiring payment and did not expect material impact. Routine litigation was not expected by management to materially affect the financial statements.
- A $149.9 million Series B note matures January 3, 2018, but was classified as long-term based on management’s intent and ability to refinance. The company had $23.4 million of redeemable noncontrolling interests and noted it could be required to acquire the remaining interest within three fiscal years.
- Management said the new lease accounting standard is expected to have a significant financial-statement impact; the effect was still under evaluation. Revenue-standard adoption was expected to change timing for some product and service revenue recognition, but was not expected to be material.
Important facts for investors to verify
- How sales, orders, and margins trend after adjusting for the extra comparative week, dealership sales, currency, and the DWR shipping-term change.
- Whether steel, outsourcing, warranty, and Nemschoff supplier-quality pressures persist or improve.
- Whether planned capital spending and working-capital requirements affect cash generation, and how the 2018 note maturity is refinanced.
- The conversion of backlog and stronger organic orders into revenue and earnings, particularly given management’s mixed near-term outlook.
- The eventual balance-sheet impact of lease-accounting adoption and any changes in redeemable noncontrolling interests or related purchase obligations.