Business context and reporting period
Herman Miller, Inc. (now associated with the MillerKnoll name) filed this unaudited Form 10-Q for the first quarter of fiscal 2020, the three months ended August 31, 2019. The company designs, manufactures, sells, and distributes furnishings and accessories for work, healthcare, education, and residential settings. Fiscal-quarter results are not necessarily indicative of full-year results.
Financial and operating highlights
- Revenue and demand: Net sales were $670.9 million, up 7.4% from $624.6 million; organic sales increased 7.7%. Orders rose 6.9% to $676.7 million, and backlog increased 12.7% to $399.9 million.
- Profit and margins: Gross margin was $246.1 million, or 36.7%, versus $225.1 million, or 36.0%. Operating earnings rose 30.7% to $60.1 million; operating margin expanded to 9.0% from 7.4%. Net earnings attributable to Herman Miller were $48.2 million versus $35.8 million. Diluted EPS increased 35.0% to $0.81; adjusted diluted EPS, a non-GAAP measure, was $0.84 versus $0.69.
- Segment performance: North America Contract sales rose 8.9% to $458.4 million and operating earnings increased to $62.9 million from $48.1 million. International Contract sales declined 1.3% to $113.9 million, while operating earnings rose to $13.1 million from $10.5 million. Retail sales increased 11.8% to $98.6 million, but the segment recorded a $3.9 million operating loss versus $2.1 million of earnings, reflecting lower gross margin and increased expenses.
- Cash flow: Operating cash flow was $54.7 million, up from $32.9 million. Investing used $24.0 million versus $99.7 million, largely because the prior-year period included substantial HAY and Maars investment outlays. Financing used $27.9 million. Cash increased $0.3 million to $159.5 million.
- Liquidity and debt: Cash and cash equivalents were $159.5 million and short-term investments were $9.0 million. Total debt was $278.3 million, including $225.0 million drawn on the revolving facility. Available revolver capacity was $265.2 million. The company amended and restated its credit facility, increasing capacity to $500 million and extending maturity to August 2024.
- Balance sheet: Total assets were $1.785 billion versus $1.569 billion at June 1, 2019; total liabilities were $1.040 billion. The new lease standard added recognized right-of-use assets and lease liabilities; reported lease liabilities were $200.2 million long-term, with the current portion included in other accrued liabilities.
Material changes, outlook, and risks
- Sales growth was led by North America Contract and Retail, with incremental list-price increases also contributing. Management cited higher production leverage, lower steel costs, and improvement initiatives as gross-margin benefits, partly offset by freight and storage costs and tariffs on Chinese imports.
- Management described North American conditions as generally supportive of growth but flagged uncertainty from trade-policy negotiations and Brexit-related developments, particularly for Europe and China. It expected pricing, sourcing actions, and profit initiatives to offset the then-current tariff impact in the near term.
- Retail faced delivery-cost and margin pressure, distribution-center transition inefficiencies, and costs from new studios and the HAY launch. The company was assessing freight, logistics, and product-pricing responses.
- Full-year capital spending was expected to be $90–$100 million, primarily for facilities and equipment. Management said cash, operating cash flow, and borrowing capacity should provide adequate near-term and foreseeable liquidity. No specific full-year revenue or EPS guidance is provided in the filing text.
- Restructuring expense was $1.8 million in the quarter. North America initiatives were expected to generate about $10 million in annual savings and were substantially complete, with $0.1 million of estimated future expense. International facility consolidation was expected to generate about $3 million in savings, with $1.7 million of estimated remaining costs and completion expected by fiscal year-end.
- On October 8, 2019, after quarter-end, the company agreed to acquire an additional 34% of HAY for approximately $78 million in cash, subject to customary closing conditions; it expected to close December 2, 2019. HAY was expected to be consolidated beginning in fiscal 2020’s third quarter.
- Other items include acquisition of the remaining minority interests in Herman Miller Consumer Holdings for total consideration of approximately $20.4 million, and adoption of the lease-accounting standard, which materially increased reported assets and liabilities. Legal proceedings were described as ordinary-course matters not expected by management to materially affect the financial statements; performance bonds and letters of credit had maximum exposures of $4.6 million and $9.8 million, respectively, with no liability recorded.
Important facts for investors to verify
- Whether North America growth, order growth, and the higher backlog convert into sustained sales and earnings.
- Whether Retail can address freight and delivery costs, distribution inefficiencies, and studio/HAY launch expenses and return to profitability.
- How tariffs, trade negotiations, Brexit-related uncertainty, foreign exchange, and customer capital-spending trends affect demand and margins.
- Whether planned restructuring savings are realized and remaining International consolidation costs stay within estimates.
- HAY transaction closing, funding, integration, and the financial effect of consolidation.
- Cash generation, revolver usage, lease obligations, and the planned $90–$100 million of annual capital spending.
- Potential goodwill or DWR trade-name impairment if Retail performance or related cash flows weaken; the filing reported no interim impairment indicators at quarter-end.