Herman Miller, Inc. — Fiscal 2015 Second-Quarter Form 10-Q
Business context and period. The filing is for the 13-week quarter ended November 29, 2014, and the six months then ended. Herman Miller designs, manufactures, and sells furniture and related products through North American, ELA, Specialty, and Consumer segments. Results include Design Within Reach (DWR) from its July 28, 2014 acquisition.
Financial performance
| Metric | Three months ended Nov. 29, 2014 | Six months ended Nov. 29, 2014 |
|---|---|---|
| Net sales | $565.4 million; up 20.2% | $1,075.1 million; up 14.5% |
| Gross margin | $205.7 million; 36.4% of sales | $391.3 million; 36.4% of sales |
| Operating earnings | $46.7 million; 8.3% of sales | $88.9 million; 8.3% of sales |
| Net earnings | $27.8 million | $53.0 million |
| Diluted EPS | $0.46 | $0.88 |
Management reported adjusted diluted EPS of $0.51 for the quarter and $0.98 for the six months, versus $0.42 and $0.84, respectively, in the comparable prior periods. These are non-GAAP measures. Adjusted operating margin was 9.1% for the quarter and 9.2% year to date.
Orders rose 13.8% to $572.1 million in the quarter; backlog was $332.5 million, up 8.0% year over year. Operating cash flow was $80.7 million for the six months, compared with $27.5 million. Investing used $176.5 million, including $154.0 million for acquisitions; financing provided $58.5 million. Cash and equivalents were $64.7 million, and marketable securities were $6.6 million at quarter-end.
Interest-bearing debt was $327.0 million at quarter-end, including $50.0 million of current maturities and $77.0 million drawn on the revolving facility. The $250 million facility had $162.4 million available, net of letters of credit. The $50 million Series A notes matured January 3, 2015 and were repaid with revolver borrowings; on January 5, revolver borrowings were $126.2 million. The company said it was compliant with debt covenants and expected to remain so.
Changes versus prior comparable periods
- Sales increased primarily from DWR and ELA growth. DWR contributed $61.0 million of net sales in the quarter and $81.0 million for the six months, after intercompany eliminations.
- GAAP operating results swung from losses of $125.2 million for the quarter and $86.1 million for the six months to profits. Comparisons are heavily affected by the prior year’s $161.3 million quarterly and $164.4 million year-to-date legacy pension expense, including settlement costs.
- Reported gross margin increased 1,110 basis points in the quarter and 560 basis points year to date. Excluding specified adjustments, adjusted gross margin rose to 37.2% from 36.0% in the quarter and to 37.1% from 36.4% year to date.
- Consumer sales increased substantially with DWR; excluding DWR, Consumer organic sales grew approximately 14% in the quarter. DWR recorded a net loss of $2.2 million in the quarter and $3.8 million since acquisition.
- Cash declined from $101.5 million at May 31, 2014, while debt rose from $250.0 million, reflecting acquisition financing and related funding activity.
Outlook, commentary, and risks
- Management anticipated full-year capital spending of $65 million to $70 million. It expected a new UK manufacturing and distribution facility to be operational by the third quarter of fiscal 2016, and a new leased India manufacturing facility to begin operations by the start of fiscal 2016.
- Management described the economic environment as positive and cited 12 consecutive quarters of organic order growth. It said North American orders were slower than expected, partly due to adoption of a new sales approach, open sales positions, and product-launch delays; it expected most issues to be behind the business in the third quarter.
- ELA growth was strongest in EMEA. Management cited further opportunities, particularly in Asia Pacific, and planned to pursue DWR integration and cost and operational synergies.
- Key risks include consumer-spending weakness, retail studio execution, cybersecurity and customer-data exposure, competition and pricing pressure, raw-material costs, foreign-exchange movements, dealer and customer financial health, and execution of new products and acquisitions.
- Contingencies include performance bonds with maximum exposure of $10.4 million and standby letters of credit of $10.6 million; no liability was recorded for these arrangements. A UK facility dilapidation estimate was $1.2 million, within a possible cost range of $0 to $3.0 million. Management said pending ordinary-course litigation was not expected to materially affect the financial statements.
- The DWR purchase-price allocation remained preliminary. Acquisition-related inventory adjustments were $4.8 million in the quarter and $7.8 million year to date; DWR acquisition-related expenses were $0.2 million and $2.2 million, respectively.
Important facts for investors to verify
- Whether North American order growth recovered after the sales-force and product-launch issues described by management.
- DWR’s ongoing sales, profitability, integration progress, expected synergies, and final purchase-price allocation.
- Cash generation and working-capital trends, capital-spending delivery, and liquidity after repayment of the maturing notes through the revolver.
- Debt covenant compliance and remaining revolver capacity, as well as exposure to interest rates, foreign exchange, and raw-material costs.
- Consumer-segment sensitivity to discretionary spending and the effectiveness of cybersecurity and retail-studio controls.