Business context and reporting period
This is Herman Miller, Inc.’s unaudited Form 10-Q for the quarter ended December 3, 2016, the second quarter of fiscal 2017. The filing covers a furniture business with North American Furniture Solutions, ELA, Specialty, and Consumer segments. The first six months of fiscal 2017 comprised 27 weeks, versus 26 weeks in the prior-year period, affecting year-over-year comparisons.
Financial results and key metrics
Unless stated otherwise, amounts are in U.S. dollars. Quarter and six-month comparisons are against the respective prior-year periods.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $577.5 million, down 0.5%; organic sales up 1.1% | $1,176.1 million, up 2.6%; organic sales up 1.3% |
| Gross margin | $218.0 million; 37.7%, versus 38.7% | $448.0 million; 38.1%, versus 38.5% |
| Operating earnings | $49.6 million, down 10.6%; 8.6% margin, versus 9.6% | $106.0 million, down 4.2%; 9.0% margin, versus 9.7% |
| Net earnings attributable to Herman Miller | $31.7 million, versus $34.7 million | $68.0 million, versus $68.2 million |
| Diluted EPS | $0.53, versus $0.57; adjusted EPS was $0.54 | $1.13, unchanged; adjusted EPS was $1.14 |
| Orders and backlog | Orders $575.9 million, down 4.2% reported and 2.7% organic; backlog $318.9 million, down 6.5% | Orders $1,171.5 million, up 0.6% |
Quarterly gross margin pressure reflected incremental discounting (approximately 90 basis points) and higher commodity costs (approximately 50 basis points), partly offset by lower incentive costs and production efficiencies. For the six months, discounting reduced gross margin by approximately 100 basis points; cost improvements partly offset commodity pressure.
Operating cash flow was $94.4 million for the six months, versus $73.2 million. Investing cash outflow was $77.3 million, including $46.7 million of capital expenditures, a $14.5 million equity investment in noncontrolled entities, and $15.3 million of repayments on life-insurance cash-value loans. Financing cash outflow was $30.3 million, including $19.0 million of dividends and $12.1 million of share repurchases. Cash declined $13.0 million to $71.9 million; marketable securities were $7.8 million.
At December 3, 2016, long-term debt was $219.6 million, compared with $221.9 million at May 28, 2016. The company had a $400 million revolving credit facility due in 2021, with $371.9 million available after usage, including letters of credit. Current assets were $470.3 million and current liabilities $382.9 million. The declared dividend was $0.17 per share for the quarter.
Material changes versus the prior period
- Quarterly sales were nearly flat overall, but North American segment sales declined 5.3%. Management cited weaker core contract demand and incremental discounting, which reduced quarterly sales by an estimated $8 million.
- ELA quarterly sales rose 6.9% reported and 16.8% organically, with growth in Asia-Pacific and Latin America; orders fell 11.5%, partly reflecting weaker U.K. and Middle East demand.
- Consumer quarterly sales increased 7.7% and orders 6.6%, supported by e-commerce, studios, catalogs, and marketing investment. Consumer operating earnings nevertheless declined to $1.8 million from $2.7 million.
- Specialty quarterly sales increased 5.4%, while orders declined 11.1%; management attributed some of the order decline to project timing and a difficult prior-year comparison.
- Reported first-half sales growth included approximately $37 million from the extra fiscal week. On the company’s adjusted organic basis, first-half sales increased 1.3%.
- Foreign-currency translation reduced accumulated other comprehensive income, while the company recorded a $4.2 million after-tax gain on its interest-rate swap in other comprehensive income.
Outlook, management commentary, risks and unusual items
No revenue or earnings guidance is provided. Management expected full-year capital expenditures of $85 million to $95 million, primarily for facilities and equipment. It stated that cash, operating cash flow, and borrowing capacity should be adequate for near-term and foreseeable operating, capital, dividend, and repurchase needs.
Management described a volatile macroeconomic backdrop, citing political uncertainty in Europe and the U.S., uneven order patterns, lower architectural billings, rising steel prices, and ongoing energy-sector challenges. It also identified competitive pricing, raw-material costs and availability, foreign exchange, customer capital spending, dealer and customer financial strength, and execution of Consumer studio expansion as risks. The filing cautions that actual results may differ materially from forward-looking statements.
The company recorded $1.0 million of restructuring expense for targeted workforce reductions in North America, ELA, and Specialty. It acquired a 50% interest in Naughtone in June 2016 and paid approximately $0.6 million of additional purchase consideration during the quarter. A $150 million interest-rate swap is scheduled to begin January 3, 2018, fixing the rate at 1.949% plus the applicable margin on that portion of borrowing. On January 1, 2017, the company sold a Philadelphia contract furniture dealership; expected consideration and gain were described as negligible.
Contingencies include a $44.6 million accrued warranty reserve, $8.7 million maximum exposure on performance bonds, and $8.4 million of standby letters of credit. The company also reported $25.4 million of redeemable noncontrolling interests; it may be required to acquire the remaining ownership interest within three years. Management said pending ordinary-course litigation was not expected to materially affect the financial statements. The filing reported no material change in risk factors or internal controls.
Most important facts for investors to verify
- Whether order trends and the $318.9 million backlog signal sustained demand weakness, particularly in North America, ELA, and Specialty.
- Whether discounting and commodity-cost pressures persist and continue to weigh on gross margin and operating earnings.
- How much of first-half reported growth reflects the extra week, currency, and the prior-year Australian dealership divestiture; reported and organic measures are not interchangeable.
- Whether Consumer sales growth translates into improved profitability given lower segment operating earnings and studio expansion costs.
- Whether planned capital spending remains within the $85 million to $95 million range and whether liquidity, debt, and shareholder distributions remain consistent with management’s assessment.
- Potential cash requirements from redeemable noncontrolling interests, warranty claims, and other disclosed guarantees or contingencies.