Herman Miller, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended August 29, 2015 (13 weeks), compared with the three months ended August 30, 2014. The filing identifies the registrant as Herman Miller, Inc.; it is not a MillerKnoll-era filing.
Financial results and position
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $565.4 million | $509.7 million | +10.9% |
| Gross margin | $216.8 million; 38.3% | $185.6 million; 36.4% | +190 bps margin |
| Operating earnings | $55.1 million; 9.7% of sales | $42.2 million; 8.3% of sales | +30.6% |
| Net earnings attributable to Herman Miller | $33.5 million | $25.2 million | +32.9% |
| Diluted EPS | $0.56 | $0.42 | +33.3% |
| Orders / backlog | $563.3 million / $320.1 million | $517.0 million / $322.7 million | Orders +9.0%; backlog -0.8% |
| Operating cash flow | $33.3 million | $42.0 million | Down $8.7 million |
Gross-margin improvement reflected lower North American commodity costs, pricing, lower freight costs, manufacturing efficiencies and product mix. Currency translation reduced gross margin by approximately 60 basis points. Operating expenses rose 12.8% to $161.7 million, including higher DWR-related costs, incentives, design and research, and other expenses. The prior-year period included $3.0 million of DWR acquisition-related inventory adjustments and $2.0 million of transaction expenses; excluding those items, adjusted operating earnings were $55.1 million versus $47.2 million.
Cash, liquidity and debt: Cash and cash equivalents were $52.0 million at quarter-end, down from $63.7 million at May 30, 2015; marketable securities were $5.7 million. Long-term debt was $268.0 million, down from $290.0 million at fiscal year-end and compared with $350.0 million at the prior-year quarter-end. The company reported $171.3 million available under its syndicated revolver, net of letters of credit. Current assets were $471.5 million and current liabilities $356.3 million. Capital expenditures were $16.6 million; dividends paid were $8.4 million and share repurchases were $2.4 million.
Material changes and segment performance
- Sales growth reflected the DWR acquisition, North American volume growth, and ELA and Specialty growth; a stronger U.S. dollar reduced sales by approximately $16.0 million year over year.
- North America sales increased 5.3% to $338.1 million and operating earnings rose to $40.8 million from $36.2 million.
- ELA sales increased 7.4% to $102.5 million; constant-currency sales grew approximately 19%. Operating earnings increased to $6.6 million from $3.1 million.
- Specialty sales rose 5.9% to $57.8 million and operating earnings increased to $4.3 million from $2.9 million.
- Consumer sales increased 73.6% to $67.0 million, largely because the current quarter included 13 weeks of DWR results versus five weeks in the prior-year quarter. After adjusting for the differing DWR periods and currency, Consumer orders rose 2% while sales declined 4%.
Outlook, risks and contingencies
- Management reported the highest operating earnings in more than six years and said North American orders improved. It expected Consumer growth to accelerate as larger-format DWR studios opened and online, catalog and studio sales recaptured wholesale volume. Up to six larger-format studios were expected to open later in FY2016.
- Full-year capital spending was forecast at $70 million to $80 million, primarily for facilities and equipment, including the new U.K. manufacturing and distribution facility. Management said cash, operating cash generation and borrowing capacity should provide adequate liquidity.
- Management described the global economic backdrop as mixed, citing uncertainty in China, Brazil, Russia’s oil-producing regions and the Middle East. Risks include currency movements, pricing and raw-material costs, customer spending, competition, execution of the DWR studio strategy, and litigation or governmental audits.
- Performance bonds had maximum exposure of approximately $8.3 million and standby letters of credit $10.7 million; no liability was recorded for these arrangements. A U.K. facility lease-dilapidation liability of $1.2 million was recorded, within an estimated cost range of $0.5 million to $1.5 million. Management said ordinary-course legal proceedings were not expected to materially affect the financial statements.
- Cash declined partly because working capital used $17.6 million, including increases in receivables and inventory and lower accounts payable. Approximately $50.7 million of cash was held outside the United States; management said most foreign cash was intended to remain permanently reinvested.
Important facts for investors to verify
- Whether reported growth persists excluding DWR’s differing contribution to the comparable quarters, currency effects and prior-year acquisition adjustments.
- Whether Consumer’s organic sales improve as planned despite promotional timing, studio conversions and distributor rationalization.
- Whether orders convert into sales and backlog, which was slightly below the prior-year level despite higher orders.
- Whether working-capital usage, capital spending and foreign-currency pressure affect cash generation, and whether the $70 million to $80 million capital-spending outlook is maintained.
- Developments in uncertain tax positions, the U.K. lease obligation, performance bonds and other ordinary-course contingencies.