MILLERKNOLL, INC. quarterly report, Q3 FY2019

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Filing summary

Period and issuer: This source is Herman Miller, Inc.’s Form 10-Q for its fiscal third quarter and nine months ended March 2, 2019, not a 2018 Q3 filing. The registrant named in the filing is Herman Miller, Inc.; the supplied “MILLERKNOLL, INC.” metadata does not match the filing.

Financial performance

  • Quarter: Net sales were $619.0 million, up 7.0% year over year; orders rose 8.4% to $610.7 million and backlog increased 13.5% to $387.8 million. Management’s non-GAAP organic sales measure was up 6.3%, excluding specified accounting, currency, and other effects.
  • Gross margin was 35.7% versus 35.6%; operating earnings were $47.8 million versus $38.7 million, with operating margin of 7.7% versus 6.7%. Net earnings attributable to Herman Miller were $39.2 million versus $29.8 million; diluted EPS was $0.66 versus $0.49.
  • Nine months: Sales were $1,896.2 million, up 7.5% (organic growth 7.0%). Gross margin declined to 36.0% from 36.6%; operating earnings were $146.9 million versus $138.6 million, and operating margin was 7.7% versus 7.9%. Attributable net earnings were $114.5 million versus $96.3 million; diluted EPS was $1.92 versus $1.60.
  • Cash flow and investment: Nine-month operating cash flow was $130.6 million versus $110.7 million. Capital expenditures were $63.0 million, compared with $51.0 million. Investing used $142.4 million, including $71.6 million for equity investments and $4.8 million for the HAY North American license. Cash and equivalents declined to $113.5 million from $203.9 million at fiscal year-end.
  • Debt and liquidity: Total debt was $285.4 million, including $225.0 million drawn on the revolving facility; balance-sheet long-term debt was $281.9 million. Cash plus short-term investments was $122.4 million, and $165.0 million of revolver capacity remained available, net of letters of credit.
  • Dividends paid were $34.0 million and share repurchases were $43.4 million in the first nine months. The company authorized an additional $250 million for repurchases in January 2019.

Drivers, comparability, and segment results

  • Quarterly growth was led by ELA, where sales rose 22.8% and operating earnings increased to $16.3 million from $7.6 million; Consumer sales rose 10.6%, but operating earnings fell to $2.3 million from $4.2 million. North American sales increased 1.4%, while operating earnings edged down to $37.4 million. Specialty sales increased 4.8% and operating earnings rose to $2.8 million.
  • ASC 606 adoption changed product and service performance-obligation accounting and the presentation of some pricing elements. It increased reported quarterly sales by $9.3 million compared with legacy accounting, while the nine-month legacy comparison would show sales $38.9 million lower than reported. For the nine months, the filing estimates ASC 606 reduced operating earnings by $4.8 million versus legacy accounting. Review reported and organic measures with these changes in mind.
  • Quarterly gross margin benefited from profit-optimization actions and lower material costs, partly offset by ASC 606 presentation, commodities, and China tariffs. Nine-month margin also faced higher overhead costs, including depreciation and medical benefits.

Outlook, risks, and unusual items

  • No specific earnings or sales guidance is provided. Management expected full-year capital spending of $85 million to $95 million, primarily for facilities and equipment, and said cash, operating cash flow, and borrowing capacity should support foreseeable needs.
  • Management viewed North American conditions as generally supportive, while monitoring U.S. trade negotiations, tariffs, and Brexit. It said profit-optimization initiatives and a January 2019 price increase were expected to offset current China-tariff costs; further strategic-sourcing contingencies were under consideration if tariffs intensified.
  • Risks include economic and industry weakness, customer delays in capital spending, competitive pricing, raw-material and tariff costs, currency movements, Brexit-related disruption, supplier and dealer health, and execution of the company’s consumer studio and growth initiatives. Management reported no material change to most previously disclosed risk factors, but added discussion of adverse economic and Brexit-related risks.
  • Fiscal 2019 included $1.7 million of nine-month restructuring and impairment charges for ELA facility consolidations; management estimated approximately $2 million of additional charges and approximately $3 million in annual cost reductions from the plan. A separate limited early-retirement program announced March 28 had an unquantified financial impact at filing time.
  • The company acquired 33% of HAY for $65.5 million and 48% of Maars for $6.1 million, both accounted for as equity-method investments. HAY options could require purchase of an additional 33% at fair market value beginning in fiscal 2020 through fiscal 2024. Potential purchases of other redeemable minority interests may also require cash.
  • The company said pending ordinary-course litigation was not expected to materially affect the financial statements. It disclosed $6.4 million of performance-bond exposure and $10.0 million of standby letters of credit; no related liabilities were recorded. The new lease standard was expected to materially increase balance-sheet assets and liabilities, though not significantly affect the income statement.

Investor verification priorities

  • Confirm the filing identity and period: the source is Herman Miller fiscal Q3 2019, despite the supplied MillerKnoll/2018 Q3 metadata.
  • Assess underlying sales and earnings growth apart from ASC 606 effects, foreign exchange, and management’s non-GAAP adjustments.
  • Track working capital—especially inventory and receivables—and whether cash generation sustains planned capital spending, dividends, and buybacks.
  • Verify tariff and pricing recovery, ELA restructuring savings and remaining costs, and Consumer segment profitability after HAY-related launch and studio spending.
  • Monitor potential cash requirements from HAY options, redeemable minority interests, the early-retirement program, and adoption of lease accounting.