Business context and reporting period
Herman Miller, Inc. (now MillerKnoll) filed this Form 10-Q for its first quarter of fiscal 2017, ended September 3, 2016. The quarter included 14 weeks versus 13 weeks in the comparable prior-year quarter, so reported growth overstates underlying growth. The company designs, manufactures, and sells workplace, specialty, and consumer furnishings.
Financial performance
Amounts are in millions except per-share data. Fiscal Q1 2017 compared with the three months ended August 29, 2015:
| Metric | Q1 FY2017 | Prior period |
|---|---|---|
| Net sales | $598.6 | $565.4 |
| Gross margin | $230.0; 38.4% | $216.8; 38.3% |
| Operating earnings | $56.4; 9.4% | $55.1; 9.7% |
| Net earnings attributable to Herman Miller | $36.3 | $33.5 |
| Diluted EPS | $0.60 | $0.56 |
| Orders / backlog | $595.6 / $320.5 | $563.3 / $320.1 |
| Operating cash flow | $30.2 | $33.3 |
| Capital expenditures | $22.1 | $16.6 |
Reported sales rose 5.9%, but management estimated organic sales growth of 1.5% after adjusting for the extra week, dealer divestiture, and currency effects. Orders rose 5.7% reported and 2.5% organically. Gross margin improved 0.1 percentage point, while operating margin declined 0.3 point. Net earnings attributable to the company increased 8.4%.
Segments
North American Furniture Solutions sales were $365.1 and operating earnings $43.3; organic sales grew 1.4%, while organic orders declined 1.4%. ELA sales were $97.3 and earnings $7.2; organic sales grew 0.5% and organic orders 12.4%, with Asia-Pacific activity supporting orders. Specialty sales were $60.8 and earnings $5.3; organic sales declined 0.5%, while orders increased 8.2%. Consumer sales were $75.4 and earnings $0.7, versus $3.8 a year earlier; organic sales increased 5.7% and orders 3.5%, but spending on marketing and new studios pressured profitability.
Financial position and liquidity
At September 3, 2016, cash and cash equivalents were $65.1, marketable securities $7.7, and long-term debt $233.9, compared with debt of $221.9 at May 28, 2016. Total current assets were $450.9 and current liabilities $356.2. The quarter-end cash balance declined $19.8 from the fiscal-year start. Working-capital changes used $28.9 of cash, principally inventory growth of $18.0 and a $25.2 decline in accrued compensation and benefits, partly offset by lower receivables.
Investing activities used $51.4, including $22.1 of capital spending, a $13.9 equity investment in noncontrolled entities, and $15.3 of repayments of loans against life-insurance cash value. Financing activities provided $0.8; the company paid $8.8 in dividends and repurchased $7.2 of stock. Quarter-end availability under the then-existing revolving facility was $207.6, net of letters of credit. After quarter-end, the company entered a new $400 facility maturing in September 2021; unused capacity was $360.1 as of September 13.
Changes, outlook, and risks
The extra week contributed approximately $37.0 of reported sales. Other cited sales factors included volume growth, especially in North American healthcare and Consumer, negative currency effects of $3.6, the prior-year Australian dealership divestiture (about $8.8 of sales), and approximately $11 of lower sales from pricing net of discounting. Incremental discounting reduced gross margin by about 110 basis points, partly offset by operational, mix, and labor improvements and lower incentive compensation.
Management gave no full-year revenue or earnings guidance in the provided filing text. It expected fiscal-year capital expenditures of $80–$90, primarily for facilities and equipment, and stated that cash, operating cash flow, and borrowing capacity should provide adequate near-term and foreseeable liquidity. The September 13 credit agreement was accompanied by a $150 interest-rate swap, effective January 2018, intended to fix the rate on that portion of debt at 1.949% plus the applicable margin.
Management cited North American order softness and project timing, rising steel prices, U.S. political uncertainty, energy-sector weakness, Brexit-related uncertainty, low oil prices, and broader global economic uncertainty. Other exposures include foreign-exchange movements, competitive pricing, raw-material availability and cost, and execution of Consumer studio and channel initiatives. The company reported routine tax audits and ordinary-course litigation; management did not expect pending litigation to materially affect the financial statements. Performance bonds had maximum exposure of about $8.3 and standby letters of credit about $8.4, with no liability recorded; the company reported no known circumstances requiring payment. Warranty accruals were $43.9. Minority holders could require purchases of interests within the next three years; redeemable noncontrolling interests were valued at $25.7.
Important facts for investors to verify
- Separate the extra-week and other adjustments from underlying sales and order trends; reported revenue growth was 5.9% versus management’s 1.5% organic growth estimate.
- Monitor North American order trends and Consumer profitability, including the costs and returns of DWR studio expansion.
- Assess cash conversion and working-capital needs, particularly inventory growth and annual incentive payouts, alongside planned $80–$90 capital spending.
- Review debt and liquidity under the post-quarter $400 revolving facility and the future interest-rate swap.
- Track pricing and discounting, input-cost pressures, currency exposure, tax-audit developments, warranty costs, and potential redemption of noncontrolling interests.