Business context and reporting period
Herman Miller, Inc. (the filing issuer; the supplied company metadata says MillerKnoll) filed this Form 10-Q for the fiscal third quarter ended February 28, 2015. The quarter comprised 13 weeks. Comparisons are with the quarter ended March 1, 2014; year-to-date figures cover nine months.
The company designs, manufactures, and sells furniture and related products through North American, ELA, Specialty, and Consumer segments. Results include Design Within Reach (DWR), acquired in July 2014.
Financial performance and position
| Metric | Fiscal Q3 2015 | Prior-year Q3 | Nine months 2015 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $516.4 million | $455.9 million | $1,591.5 million | $1,394.5 million |
| Gross margin | $190.5 million; 36.9% | $162.9 million; 35.7% | $581.8 million; 36.6% | $451.8 million; 32.4% |
| Operating earnings (loss) | $37.4 million; 7.2% of sales | $34.1 million; 7.5% | $126.3 million | $(51.9) million |
| Net earnings attributable to Herman Miller | $21.0 million | $19.4 million | $74.1 million | $(38.7) million |
| Diluted EPS | $0.35 | $0.33 | $1.23 | $(0.66) |
| Operating cash flow | Not separately stated | Not separately stated | $109.8 million | $50.4 million |
- Quarterly sales rose 13.3%; DWR contributed $52.5 million net of intercompany eliminations. Orders increased 7.9% to $500.5 million, while backlog was nearly unchanged at $316.6 million.
- Quarterly gross margin improved 120 basis points, reflecting mix and operating improvements, DWR, pricing, and lower commodity costs; currency translation reduced margin by 40 basis points. Operating earnings increased, but operating margin declined from 7.5% to 7.2%.
- For the nine-month period, GAAP operating results swung to profit from a loss, primarily because the prior-year period included $164.4 million of legacy pension expenses. Adjusted diluted EPS was $1.35 versus $1.18; these are non-GAAP measures.
- Nine-month investing cash outflow was $200.5 million, including $154.0 million for acquisitions and $43.2 million of capital expenditures. Cash fell to $61.8 million from $101.5 million at May 31, 2014; marketable securities were $6.4 million.
- At February 28, 2015, interest-bearing debt was $326.0 million, including $126.0 million drawn on the revolving facility. The $250 million facility had $115.7 million available after letters of credit. Total current assets were $459.5 million and current liabilities $325.5 million.
- Quarterly dividends declared were $0.14 per share. Nine-month dividends paid were $24.9 million.
Material changes versus the prior comparable period
- DWR materially expanded Consumer sales: the segment reported quarterly sales of $72.6 million versus $16.6 million a year earlier. DWR itself contributed $52.5 million of quarterly net sales and recorded a $0.5 million net loss for the quarter.
- North American quarterly sales grew only 0.7%, and segment operating earnings were flat at $26.7 million. The company reported U.S. domestic orders down 6.2% year over year, compared with BIFMA-reported industry order growth of 9.2%.
- ELA quarterly sales declined 0.6% in reported dollars, but rose about 5.5% excluding currency effects; Specialty sales rose 6.3%.
- Debt increased versus May 2014, reflecting DWR financing and the refinancing of $50 million of senior notes that matured in January 2015. The company also entered a new $250 million revolving credit agreement expiring in July 2019.
Outlook, commentary, risks, and unusual items
- Management expected the economic environment to support near-term growth in the North American contract market, citing BIFMA indicators, but gave no specific revenue or earnings guidance. It forecast fiscal-year capital spending of $65–$70 million.
- Management said North American order rates were below expectations and described actions to improve sales coverage, product introductions, showroom presentation, project competitiveness, and sales and operations leadership.
- Management cited continued U.S. dollar strength as a headwind. Risks include currency movements, competitive pricing, raw-material costs and supplier concentration, customer and dealer financial health, consumer spending, DWR integration and retail-studio execution, cybersecurity and customer-data exposure, and litigation or regulatory matters.
- The quarter included $1.9 million of restructuring charges for targeted North American workforce reductions. The nine-month comparison is affected by the prior-year pension-plan termination and related expenses. DWR purchase accounting remained preliminary; reported goodwill was $76.2 million and acquired intangibles $69.3 million.
- Other items to monitor include the DWR minority holders’ put rights, performance bonds with maximum exposure of $9.1 million, standby letters of credit of $8.3 million, and a U.K. facility repair estimate ranging from $0 to $3.0 million, with $1.2 million accrued. Management said pending ordinary-course litigation was not expected to have a material effect.
- The company reported compliance with debt covenants and believed cash, operating cash generation, and available borrowing capacity were adequate for business and capital needs. It had $51.2 million of cash outside the United States and said it did not plan to repatriate foreign cash during fiscal 2015.
Investor verification points
- Confirm the issuer and period: this is Herman Miller, Inc.’s fiscal Q3 2015 filing, not a filing under the supplied MillerKnoll company name.
- Track North American orders and competitive performance against industry trends, alongside backlog conversion.
- Assess DWR integration, profitability, cash needs, preliminary purchase accounting, and the economic effect of minority-holder put rights.
- Reconcile reported and non-GAAP earnings, particularly the impact of prior-year pension costs and current acquisition and restructuring items.
- Monitor debt, revolver availability, cash levels, capital spending, and foreign-exchange effects on sales and margins.