Business context and reporting period
Herman Miller, Inc. (now MillerKnoll) filed this Form 10-Q for the quarter ended November 30, 2019, its second quarter of fiscal 2020. The company designs, manufactures, and sells furnishings and related services across contract, international, and retail markets. Comparisons below are with the corresponding prior-year period.
Financial results and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $674.2 million; up 3.3% | $1,345.2 million; up 5.3% |
| Gross margin | 37.9%, versus 36.1% | 37.3%, versus 36.1% |
| Operating earnings | $62.4 million; up 17.5% | $122.6 million; up 23.7% |
| Net earnings attributable to Herman Miller | $78.6 million, versus $39.3 million | $126.8 million, versus $75.1 million |
| Diluted EPS | $1.32, versus $0.66 | $2.14, versus $1.26 |
| Orders | $674.9 million; down 4.2% | $1,351.6 million; up 1.0% |
Reported earnings included a $30.5 million non-taxable gain from remeasuring the previously held naughtone investment when Herman Miller acquired the remaining stake. Excluding this gain, restructuring and other specified items, adjusted diluted EPS was $0.88 for the quarter versus $0.75, and $1.72 for six months versus $1.44. These are non-GAAP measures.
Quarterly sales growth reflected North America Contract and Retail gains; International Contract sales were nearly flat. Retail operating earnings turned to a $0.9 million loss from $1.8 million profit, with higher freight, studio, and HAY launch costs. For six months, Retail recorded a $4.9 million operating loss, versus $3.9 million earnings. Backlog was $400.6 million, down 1.5% year over year.
Operating cash flow for the six months was $142.4 million, compared with $91.5 million. Investing used $82.1 million, including $40.0 million net cash paid for naughtone; financing used $40.6 million. Cash increased $17.8 million to $177.0 million. At November 30, cash and short-term investments totaled $186.0 million, and availability under the revolving credit facility was $265.5 million.
Total debt was $278.3 million, including $225.0 million drawn on the revolving facility and $3.3 million of supplier financing. The company amended and extended its $500 million revolving facility to August 2024. Separately, adoption of lease accounting added right-of-use assets and lease liabilities: reported lease liabilities were $261.9 million, including $198.1 million long term. Current assets were $666.8 million and current liabilities $481.4 million.
Material changes, outlook, and risks
- Quarterly gross-margin expansion reflected pricing, production leverage, lower steel costs, and improvement initiatives; higher freight partly offset gains. Six-month margin also faced tariff costs and Retail distribution-center inefficiencies.
- naughtone became wholly owned and consolidated in October 2019. On December 2, 2019, after quarter-end, the company acquired an additional 34% of HAY for $78.6 million; HAY was expected to be consolidated in fiscal Q3. Options could require purchase of HAY’s remaining 33% at fair market value.
- Management expected fiscal-year capital purchases of $90–$100 million, mainly for facilities and equipment. It stated that cash, operating cash generation, and borrowing capacity should fund foreseeable operations, capital needs, dividends, and repurchases. The filing provides no earnings or revenue guidance.
- New Nemschoff restructuring actions were estimated at approximately $4.3 million, with $3.8 million expected in fiscal 2020; $2.6 million was recorded in the quarter. A North American sales and product-team reorganization also generated $1.4 million of quarterly costs. The separate early-retirement plan was complete and expected to generate about $10 million in annual savings.
- Management cited uncertain U.S. and international demand, trade-policy and Brexit uncertainty, tariffs, competitive pricing, raw-material availability and costs, and Retail delivery-cost pressures. It believed then-current pricing, sourcing, and improvement initiatives would offset tariffs in the near term, but outcomes were not assured.
- Retail goodwill and the DWR trade name had limited fair-value cushions at the latest annual impairment review; management warned future operating or cash-flow declines could require impairment. No interim impairment indicators were identified in the six months.
- Ordinary-course litigation was not expected by management to have a material adverse effect. Performance-bond exposure was approximately $3.9 million and standby letters of credit approximately $9.5 million; no related liabilities were recorded. The company disclosed no material changes to its previously reported risk factors.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the $30.5 million naughtone remeasurement gain and other adjustments.
- Whether order trends, backlog, and demand support continued sales growth, particularly given the quarter’s 4.2% order decline.
- Whether Retail can improve profitability amid freight costs, distribution inefficiencies, and investment in DWR and HAY studios.
- The final purchase-price allocation and operating contribution from naughtone, and the effects of HAY consolidation and its remaining purchase options.
- Progress against the $90–$100 million capital-spending plan, financing needs, and the effect of lease obligations on liquidity.
- Whether restructuring savings and tariff-mitigation actions materialize as expected, and whether economic, trade, or impairment risks worsen.