Herman Miller, Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter ended December 2, 2017, and the six months then ended. The filing is under the name Herman Miller, Inc. (the company identified in the request as MillerKnoll). The six-month comparison covers 26 weeks in fiscal 2018 versus 27 weeks in fiscal 2017.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $604.6m | $577.5m | $1,184.8m | $1,176.1m |
| Gross margin | $222.1m; 36.7% | $218.0m; 37.7% | $439.0m; 37.1% | $448.0m; 38.1% |
| Operating earnings | $50.0m; 8.3% | $49.6m; 8.6% | $99.1m; 8.4% | $106.0m; 9.0% |
| Net earnings attributable to Herman Miller | $33.5m | $31.7m | $66.5m | $68.0m |
| Diluted EPS | $0.55 | $0.53 | $1.10 | $1.13 |
| Operating cash flow | — | $81.5m | $94.4m |
Q2 reported sales rose 4.7%; organic sales rose 6.0%. Orders increased 9.3% to a quarterly record $629.4m, and backlog was $356.9m, up 11.9% year over year. Q2 adjusted diluted EPS, a non-GAAP measure excluding restructuring and other costs and related taxes, was $0.57 versus $0.54. For the first half, reported sales grew 0.7% and organic sales 4.9%; adjusted diluted EPS was $1.14 versus $1.14.
Gross margin pressure reflected deeper discounting, higher steel costs, and elevated outsourcing costs at capacity-constrained West Michigan operations. Cost savings and favorable segment/channel mix partially offset these effects. Q2 net earnings improved year over year, while first-half earnings and operating margin declined. The prior-year extra week reduced comparability: management estimated it added about $37m in first-half sales and $5m in operating earnings.
Liquidity, debt, and capital allocation
- At December 2, 2017, cash and equivalents were $114.6m and marketable securities were $8.5m. Available capacity under the $400m revolving credit facility was $391.8m, net of letters of credit.
- Long-term debt was $200.0m; total debt including current obligations and supplier financing was $203.7m. The $150m Series B notes matured January 3, 2018. The company subsequently borrowed $225m under its revolver: $150m to settle those notes, with the balance for general purposes.
- First-half capital expenditures were $39.8m; full-year capital spending was expected to be $85m–$95m. Capital purchase commitments were $29.5m at quarter-end.
- First-half dividends paid were $20.9m and share repurchases were $17.3m. The quarterly dividend declared was $0.18 per share.
- Operating cash flow was lower year over year, reflecting a $12m voluntary international pension contribution and working-capital use, including higher inventory. Cash increased to $114.6m from $96.2m at fiscal year-end.
Segments and material changes
- North America: Q2 sales rose 5.3% to $330.5m; organic growth was 8.6%. Operating earnings increased to $45.1m from $38.9m. Demand and orders strengthened, partly offset by dealer divestitures and discounting.
- ELA: Q2 sales rose 5.0% to $113.0m, but organic growth was 2.7%; orders rose 18.4%. Operating earnings were $12.3m versus $12.1m. Management cited broad order growth and strength in several international markets.
- Specialty: Q2 sales declined 2.6% to $74.4m and operating earnings fell to $2.1m from $5.2m. Lower Maharam and Geiger volumes, inventory reserves, product mix, and Nemschoff supplier-quality and warranty issues weighed on results. Nemschoff was moved into this segment in FY2018; prior-year segment results were revised.
- Consumer: Q2 sales rose 8.9% to $86.7m, but operating earnings fell to $1.0m from $1.8m. New DWR studios, shipping-policy changes, and channel mix pressured profitability; new studios generally take 12–18 months to reach full efficiency.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management described North American industry indicators and economic conditions as supportive, while noting uncertainty around Brexit, oil-producing regions, and geopolitical risks.
- The company cited competitive discounting, steel and other input costs, capacity constraints, supplier concentration and quality, warranty costs, dealer/customer financial health, currency movements, and DWR studio execution among relevant business risks.
- FY2018 restructuring charges totaled $3.8m for the first half; $1.7m was recorded in Q2. The company also recorded $1.9m of first-half third-party consulting costs related to profit-improvement and consumer optimization initiatives. Restructuring actions were considered complete, with final payments expected over the next two quarters.
- The Tax Cuts and Jobs Act was enacted after quarter-end. Management expected a blended FY2018 U.S. federal statutory rate of about 29% and planned to record tax effects, including deferred-tax remeasurement and a tax liability on certain undistributed foreign earnings, in the following quarter; the impact was still being analyzed.
- Performance bonds carried maximum exposure of approximately $9.7m and standby letters of credit $8.2m. Management said it was unaware of circumstances requiring payment and did not expect pending ordinary-course litigation to materially affect the financial statements.
- The company expected the new lease standard to have a significant financial-statement impact; it was still evaluating the amount. The revenue standard was expected to change certain performance-obligation and revenue-recognition practices, with adoption planned for FY2019.
Important facts for investors to verify
- Whether record orders and backlog convert to sales and support margins amid discounting and manufacturing capacity constraints.
- Whether Specialty performance recovers as supplier-quality, warranty, inventory-reserve, and product-mix issues are addressed.
- Whether Consumer/DWR studio expansion and delivery changes improve segment profitability after near-term costs.
- The final tax effects of the Tax Cuts and Jobs Act, including foreign-earnings transition tax and deferred-tax remeasurement.
- Post-quarter revolver borrowing and refinancing terms, alongside liquidity needs, capital commitments, dividends, and repurchases.
- The filing contains an apparent inconsistency in the Specialty segment discussion: the Q2 narrative reports organic orders up 8.9%, while a later sentence says they decreased 8.9%. Verify against the company’s filed tables or XBRL.