Herman Miller, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended November 28, 2015. The filing is for Herman Miller, Inc.; the supplied company label “MillerKnoll, Inc.” does not match the registrant named in the filing.
Business context and financial performance
Herman Miller designs, manufactures and sells workplace, specialty and consumer furnishings. Second-quarter results reflected growth in North America and Specialty, partly offset by declines in ELA and Consumer. Orders were $601.4 million, up 5.1%; backlog was $341.1 million, up 2.6% from the prior-year quarter.
| Metric | Quarter ended Nov. 28, 2015 | Year-over-year | Six months ended Nov. 28, 2015 | Year-over-year |
|---|---|---|---|---|
| Net sales | $580.4 million | +2.7% | $1,145.8 million | +6.6% |
| Gross margin | 38.7% | 36.4% prior year | 38.5% | 36.4% prior year |
| Operating earnings | $55.5 million; 9.6% margin | +$8.8 million | $110.6 million; 9.7% margin | +$21.7 million |
| Net earnings attributable to Herman Miller | $34.7 million | +24.8% | $68.2 million | +28.7% |
| Diluted EPS | $0.57 | $0.46 prior year | $1.13 | $0.88 prior year |
| Cash from operating activities | Not provided for quarter alone | — | $73.2 million | $80.7 million prior year |
For the six-month period, adjusted operating earnings were $110.6 million and adjusted diluted EPS was $1.13; prior-year adjusted results were $98.9 million and $0.98, respectively. These non-GAAP measures exclude specified acquisition-related costs and inventory adjustments; the current period had no such adjustments.
Segments and changes versus prior year
- North America: Second-quarter sales rose 10.4% to $348.1 million and operating earnings rose to $41.4 million. Management cited stronger volume, selling capacity, product launches, showroom refreshes, lower commodity and freight costs, and production leverage.
- ELA: Sales fell 11.9% to $100.7 million and operating earnings fell to $7.3 million. Currency translation reduced sales by about $8.5 million; constant-currency sales declined 4.5%, while orders were nearly flat.
- Specialty: Sales increased 4.2% to $57.7 million; operating earnings rose to $4.2 million. Orders grew 15.2%.
- Consumer: Sales declined 8.1% to $73.9 million and orders fell 10.3%; operating earnings were $2.7 million. Management cited the slower-than-expected transfer of wholesale sales to direct channels, studio changes and selling interruptions during DWR’s ERP implementation. The implementation was largely complete by quarter-end.
Six-month sales growth included $30.2 million from DWR being included for a longer period than in the prior-year comparison. Excluding that acquisition-period effect, Consumer sales declined $8.6 million. Currency translation reduced consolidated sales by $13.9 million in the quarter and $29.8 million in the first half.
Cash, debt and liquidity
- Cash and cash equivalents were $54.7 million and marketable securities were $5.4 million at November 28, 2015, compared with cash of $63.7 million at fiscal year-end.
- Six-month operating cash flow was $73.2 million, down from $80.7 million. Working capital used $31.2 million, principally reflecting higher receivables and inventories and lower accounts payable.
- Capital expenditures were $35.2 million, versus $26.7 million in the prior-year half, mainly for a consolidated U.K. manufacturing and distribution facility. Full-year capital spending was expected to be $70–$80 million.
- Long-term debt was $256.8 million, down from $289.8 million at May 30, 2015. Revolver borrowings were $57.0 million; $184.4 million of the $250 million facility was available after letters of credit. Management said available cash, operating cash flow and borrowing capacity should fund operations, capital needs, dividends and share repurchases.
- Dividends declared were $0.148 per share for the quarter and $0.295 for the six months. Six-month dividends paid were $17.2 million.
Outlook, risks and unusual items
- No full-year revenue or earnings guidance is provided. Management expected full-year capital spending of $70–$80 million and planned Consumer brand-awareness and promotional initiatives in the second half.
- Management described the global economic backdrop as mixed: North America benefited from employment and construction indicators, while China, Latin America, Europe and the Middle East remained areas of uncertainty. Currency changes continued to pressure reported results and margins.
- Margin factors included lower North American commodity costs and operating efficiencies, partly offset by adverse currency effects and higher incentive compensation. Management estimated currency reduced consolidated gross margin by about 60 basis points and higher incentives by about 40 basis points.
- Key stated risks include economic and customer capital-spending conditions, competitive pricing, raw-material availability and costs, supplier concentration, currency and international compliance risks, dealer and customer financial strength, execution of DWR’s studio strategy, product innovation and litigation or governmental proceedings.
- The company corrected an immaterial prior error in product-warranty accruals, adjusting accrued warranty by $12.5 million, deferred-tax-related assets by $4.7 million and retained earnings by $7.8 million. It stated the correction did not affect earnings or cash flows.
- The company acquired the George Nelson Bubble Lamp product line for $3.6 million cash plus $2.7 million fair value of contingent consideration; $3.2 million of goodwill was recorded. Management said routine pending legal matters were not expected to materially affect the financial statements. Performance bonds had $6.7 million maximum exposure and standby letters of credit $8.6 million; no related liability was recorded.
Important facts for investors to verify
- Confirm the issuer and period: this source is Herman Miller, Inc., fiscal Q2 2016, not a filing identified in its text as MillerKnoll, Inc.
- Track whether North American momentum continues and whether ELA orders convert to sales amid currency and regional demand pressures.
- Assess Consumer recovery after the DWR ERP implementation and studio transition, including whether sales migrate to online, catalog and studio channels as management expected.
- Monitor working-capital consumption, planned capital spending, debt repayment and available revolver capacity.
- Review warranty reserve development and the disclosed correction, as well as currency, commodity and other stated operating risks.