Herman Miller, Inc. — FY2020 Form 10-K
Period and context: The filing is Herman Miller, Inc.’s annual report for the 52 weeks ended May 30, 2020, filed July 28, 2020. It is not a 2019 Q4 report; the filing covers fiscal 2020, including the quarter most affected by COVID-19. The registrant identifies as Herman Miller, Inc. (NASDAQ: MLHR), not MillerKnoll.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $2,486.6 million | $2,567.2 million |
| Gross margin | $910.7 million; 36.6% | $929.9 million; 36.2% |
| Operating income (loss) | $(38.4) million | $203.5 million |
| Net income (loss) attributable to Herman Miller | $(9.1) million | $160.5 million |
| Diluted earnings (loss) per share | $(0.15) | $2.70 |
| Cash provided by operating activities | $221.8 million | $216.4 million |
| Capital expenditures | $69.0 million | $85.8 million |
Reported diluted EPS was $(0.15); the company’s non-GAAP adjusted diluted EPS was $2.61, down 12.1% from $2.97. The adjusted measure excludes specified acquisition-related items, impairment, restructuring and other special charges or gains.
Liquidity, debt, and capital allocation
- Year-end cash and cash equivalents were $454.0 million, with $7.0 million of short-term investments. Working capital was $403.8 million and the current ratio was 1.8.
- Total debt was $591.3 million, including $490.0 million drawn on the $500 million revolving facility; only $0.6 million was available after letters of credit. The company reported compliance with its credit covenants.
- Cash from financing activities was $244.0 million, principally reflecting a $265 million revolver draw and $50 million of senior notes issued. The $265 million draw was repaid in June 2020, after year-end.
- The company declared dividends of $0.63 per share for FY2020 but suspended future dividends amid COVID-19 uncertainty. Share repurchases were also temporarily suspended.
Material changes and unusual items
- Sales fell 3.1% reported and 6.6% organically. COVID-related facility closures and reduced sales volume were major drivers; acquisitions of HAY and naughtone and pricing increases partly offset the decline.
- Gross margin improved 0.4 percentage points, reflecting pricing and cost improvements, partly offset by lower factory utilization and higher Retail freight costs.
- Operating expenses included $205.4 million of non-cash impairment charges: $125.5 million for goodwill, $53.3 million for indefinite-lived intangibles and $26.6 million for long-lived assets. Impairments affected Design Within Reach (DWR), Maharam, HAY and naughtone; Retail and Maharam goodwill was reduced to zero.
- The company recorded $26.4 million of restructuring expense and $12.3 million of special charges. A $36.2 million pre-tax gain from consolidating prior equity-method investments in HAY and naughtone partly offset the reported operating loss below operating income.
- Herman Miller acquired an additional 34% of HAY, bringing ownership to 67%, and acquired the remaining 47.5% of naughtone, bringing ownership to 100%. Reported results include these businesses only from their respective acquisition dates.
- Fourth-quarter sales were $475.7 million versus $671.0 million a year earlier. The quarter recorded a $173.7 million net loss attributable to Herman Miller, primarily reflecting the impairment charges.
Outlook, commentary, and risks
Management said COVID-19 adversely affected FY2020 and expected an adverse effect in FY2021, but stated the duration, demand impact and financial consequences could not be estimated with certainty. The filing provides no specific FY2021 revenue or earnings guidance. Management cited near-term demand pressure, temporary facility closures, and uncertainty in office-furniture demand as employees work remotely.
- Cost and liquidity measures included reducing the workforce by approximately 400 positions, reducing cash compensation for most salaried employees by 10%, deferring an additional 15% of executive compensation, and temporarily suspending employer retirement contributions and other compensation programs. The May 2020 restructuring plan was expected to lower annual expenses by about $40 million.
- Backlog was $470.8 million at year-end versus $394.2 million a year earlier. Management attributed the increase partly to COVID-related order-processing delays and cautioned that backlog does not necessarily indicate future sales.
- Principal risks include prolonged COVID-19 disruption, weaker office and retail demand, commodity and tariff costs, competition and pricing pressure, foreign exchange and geopolitical risks, supply interruptions, dealer financial health, and the possibility of further impairments.
- Management said pending ordinary-course litigation was not expected to materially affect the company. The independent auditor issued unqualified opinions on the financial statements and internal controls; the internal-control assessment excluded HAY and naughtone, which were acquired during the year.
Investor verification priorities
- Verify the reporting-period mismatch: this is FY2020, ended May 30, 2020, rather than a 2019 Q4 filing.
- Assess the sustainability of sales and margins after the COVID-driven fourth-quarter decline, and distinguish reported from organic sales and adjusted from GAAP earnings.
- Confirm the post-year-end repayment of the $265 million revolver draw and review remaining debt, borrowing availability, covenant headroom and cash needs.
- Review impairment assumptions and the risk of additional charges, particularly for the International Contract reporting unit and acquired or Retail-related brands.
- Track execution and costs of the HAY and naughtone integrations, planned restructuring savings, workforce reductions, and the timing of any dividend resumption.