Business context and reporting period
This filing is a Form 10-Q for Herman Miller, Inc. (now associated with the MillerKnoll name), for the fiscal third quarter ended March 4, 2017. The filing’s fiscal 2017 year ends June 3, 2017. The nine-month comparison is not like-for-like by length: fiscal 2017 included 40 weeks versus 39 weeks in the prior-year period.
The company reports North American Furniture Solutions, ELA Furniture Solutions, Specialty, and Consumer segments. The filing identifies the registrant as Herman Miller, Inc.; investors should confirm that this is the intended issuer and period for the request.
Financial results and key metrics
| Metric | Three months ended Mar. 4, 2017 | Prior-year quarter | Nine months ended Mar. 4, 2017 | Prior-year period |
|---|---|---|---|---|
| Net sales | $524.9 million | $536.5 million | $1,701.0 million | $1,682.3 million |
| Gross margin | $195.5 million; 37.2% | $207.8 million; 38.7% | $643.4 million; 37.8% | $649.0 million; 38.6% |
| Operating earnings | $35.0 million; 6.7% of sales | $44.3 million; 8.3% | $141.0 million; 8.3% | $154.9 million; 9.2% |
| Net earnings attributable to Herman Miller | $22.5 million | $27.9 million | $90.5 million | $96.1 million |
| Diluted EPS | $0.37 | $0.46 | $1.50 | $1.59 |
| Orders / backlog | $543.2 million / $331.6 million | $508.8 million / $313.3 million | Orders: $1,714.7 million | Orders: $1,673.5 million |
Quarterly revenue declined 2.2%, operating earnings fell 21.0%, and diluted EPS declined 19.6%. Nine-month reported revenue rose 1.1%, while operating earnings fell 9.0% and diluted EPS fell 5.7%. Management’s non-GAAP organic-sales measure showed quarterly growth of 0.1% and nine-month growth of 0.9%, adjusting for dealer divestitures, currency effects, and the extra fiscal week.
Operating cash flow was $122.1 million for the nine months, compared with $125.9 million. Investing used $99.0 million, including $70.5 million of capital expenditures; financing used $29.6 million. Cash declined $6.5 million to $78.4 million. At March 4, cash plus marketable securities was $86.4 million.
At March 4, total assets were $1,278.3 million, current assets $466.0 million, and current liabilities $358.3 million. Long-term debt was $234.5 million, versus $221.9 million at May 28, 2016. Debt fair value was $246.1 million. The company had a $400 million revolving credit facility, with $357.1 million available after outstanding letters of credit. Cash and cash equivalents included $74.1 million held outside the United States.
The declared dividend was $0.17 per share for the quarter. Nine-month dividends paid were $29.2 million; share repurchases were $17.2 million.
Material changes and operating drivers
- Gross margin declined 150 basis points in the quarter. Management attributed the pressure principally to incremental discounting (about 100 basis points) and higher commodity costs (about 40 basis points), partly offset by lower incentive costs.
- Orders increased 6.8% in the quarter, but management estimated that the February price increase pulled forward approximately $21 million of orders that otherwise would have been entered in the fourth quarter. Organic orders increased 4.8%.
- North American quarterly sales declined 0.9%, while orders rose 12.3% (about 6.8% on management’s adjusted basis). ELA sales fell 11.0%, including divestiture and currency effects; organic sales declined 0.8%. Specialty sales fell 1.3%. Consumer sales rose 4.1%, but the segment recorded a $0.2 million operating loss, compared with $2.8 million of operating earnings in the prior-year quarter.
- Quarterly operating expenses declined $3.0 million, reflecting lower incentive costs, divestitures, and cost savings; these benefits were partly offset by restructuring charges, DWR studio costs, and higher occupancy and staffing costs.
- For the nine months, the extra week added an estimated $37 million of reported sales. Management cited discounting, divestitures, currency, and the extra week as important factors in year-over-year comparisons.
Outlook, risks, contingencies, and unusual items
- Management described industry conditions as mixed and North American orders as inconsistent, while noting that order entry strengthened late in the quarter. It cited competitive pricing and commodity-cost increases as continuing challenges. No specific revenue or earnings guidance was provided.
- Full-year fiscal 2017 capital purchases were expected to be $85 million to $95 million, primarily for facilities and equipment; fiscal 2016 capital spending was $85.1 million.
- Targeted workforce restructuring generated $2.7 million of quarterly charges and $3.7 million for the nine months. Actions were considered complete at March 4, with final payments expected over the next two quarters. The quarter also included a $0.7 million gain on sale of a Pennsylvania dealership. Management’s adjusted diluted EPS was $0.39 for the quarter and $1.52 for the nine months, excluding restructuring charges and the dealership gain.
- Potential exposures include performance bonds of up to $10.2 million and standby letters of credit of $8.3 million; no related liabilities were recorded, and management said it was unaware of circumstances likely to require payment. Product warranty accruals were $46.5 million. Management stated pending ordinary-course litigation was not expected to materially affect the financial statements.
- Redeemable noncontrolling interests were $25.0 million. Certain minority holders may require the company to acquire the remaining interest within the next three years. A $150 million interest-rate swap is scheduled to begin January 3, 2018, fixing the referenced rate at 1.949% plus applicable margin; its March 4 fair value was $8.2 million.
- Management identified macroeconomic and customer capital-spending conditions, pricing competition, raw-material costs and availability, currency movements, dealer and customer financial health, and DWR studio expansion and leasing as risks. The filing reported no material change in risk factors from the fiscal 2016 Form 10-K.
Important facts for investors to verify
- Confirm issuer and period: this is Herman Miller, Inc.’s fiscal 2017 third-quarter filing, not a filing labeled MillerKnoll or fiscal 2016 Q3.
- Assess whether quarterly order growth reflects durable demand or order timing pulled forward by the February price increase; review subsequent-quarter sales, orders, and backlog.
- Track whether discounting and commodity costs continue to pressure gross margin, and whether price increases offset those pressures.
- Evaluate Consumer segment profitability and the returns from DWR studio, marketing, and infrastructure investments.
- Monitor inventory growth, capital spending, debt and refinancing needs, and possible redemption of the remaining noncontrolling interest.
- Review the company’s stated non-GAAP adjustments alongside GAAP results, and account for the extra week when comparing nine-month performance.