Herman Miller, Inc. — Form 10-Q summary
Business context and period: The filing is by Herman Miller, Inc. (not MillerKnoll, Inc.), for the quarter ended September 1, 2018, the first quarter of fiscal 2019. It reports North American Furniture Solutions, ELA Furniture Solutions, Specialty, and Consumer segments. Unaudited results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Quarter ended Sep. 1, 2018 | Comparable prior-year quarter | Change |
|---|---|---|---|
| Net sales | $624.6 million | $580.3 million | +7.6% |
| Gross margin | $225.1 million; 36.0% | $216.9 million; 37.4% | Margin down 1.4 percentage points |
| Operating earnings | $46.0 million; 7.4% of sales | $49.5 million; 8.5% | −7.1% |
| Net earnings attributable to Herman Miller | $35.8 million | $33.1 million | +8.2% |
| Diluted EPS | $0.60 | $0.55 | +9.1% |
| Orders / backlog | $630.6 million / $346.4 million | $594.8 million / $332.1 million | Orders +6.0%; backlog +4.3% |
| Operating cash flow | $32.9 million | $18.9 million | Improved |
| Cash and equivalents | $101.7 million | $203.9 million at June 2, 2018 | Down $102.2 million |
| Total debt | $285.6 million | $285.8 million at June 2, 2018 | Nearly unchanged |
Net earnings increased despite lower operating earnings, principally alongside a lower effective tax rate: 20.0% versus 30.5%, reflecting U.S. tax reform and other tax factors. Adjusted diluted EPS, a non-GAAP measure, was $0.69 versus $0.57, excluding specified charges and an HAY inventory step-up. The filing reports interest expense of $2.9 million.
Liquidity, capital allocation, and balance sheet
- Operating cash flow was $32.9 million; investing cash outflow was $99.7 million and financing cash outflow was $33.0 million. Cash fell primarily amid strategic equity investments, capital spending, repurchases, and other financing uses.
- Investing included $71.6 million in noncontrolled entities and $4.8 million for the HAY North American brand license; capital expenditures were $22.0 million.
- Cash plus short-term investments totaled $110.2 million. The $400 million revolving facility had $225.0 million drawn and $165.2 million available after letters of credit. Management said cash, operating cash generation, and borrowing capacity should cover foreseeable needs.
- Quarterly dividends paid were $10.7 million; the dividend declared was $0.1975 per share. The company repurchased $20.8 million of stock, or 545,866 shares, during the quarter.
- Current assets were $556.0 million and current liabilities $391.4 million. These include $25.4 million of unbilled receivables, which rose substantially following adoption of the new revenue standard.
Material changes and management commentary
- Sales increased in all segments. ELA grew fastest, with sales up 23.6% reported and 22.1% organic; North America rose 4.6% reported and 3.5% organic; Specialty rose 2.9%; Consumer rose 6.0% reported and 12.8% organic. ELA operating earnings improved to $10.5 million, while North American operating earnings declined to $45.0 million.
- ASC 606 adoption accelerated recognition of some direct commercial product revenue and changed certain pricing elements from net presentation to cost of sales. Management’s reconciliation shows fiscal Q1 reported sales of $624.6 million versus $605.4 million under legacy GAAP; adoption also affected gross margin percentage. It did not affect operating cash flow. Organic growth adjusts for these accounting effects and other items.
- Gross margin pressure reflected the ASC 606 presentation change, higher manufacturing and commodity costs, freight, and product mix. Operating expenses rose 7.0%, including CEO transition and consulting costs, increased depreciation and employee costs; lower warranty costs partly offset increases.
- The company acquired a 33% equity interest in HAY for approximately $65.5 million and a 48% interest in Maars for approximately $6.1 million; both are equity-method investments. Maars closed August 31, 2018.
- Management described North American conditions as supportive of continued growth but cited uncertainty from global tariffs, Brexit, and NAFTA negotiations. The filing gives no company-wide revenue or EPS guidance. It expects fiscal-year capital spending of $90–$100 million and approximately $26.6 million of outstanding capital purchase commitments at quarter-end.
Outlook, risks, and unusual items
- An ELA facilities consolidation plan is expected to yield about $3 million in annual cost reductions. The company had recognized $5.0 million of plan costs to date, expects approximately $2 million of additional restructuring and related charges, and anticipates completion by fiscal Q1 2020.
- The Tax Cuts and Jobs Act accounting remained provisional for certain foreign earnings and deferred-tax effects; the company had not decided its accounting policy for GILTI deferred taxes.
- Redeemable noncontrolling interests were $20.7 million after a $10.0 million purchase in the quarter. The company said it could be required to acquire most of the remaining interest within the next two fiscal years.
- Warranty liabilities were $52.1 million. Performance bonds exposed the company to up to $6.1 million and standby letters of credit to $9.8 million; management reported no known circumstances requiring payment and recorded no related liability. Ordinary-course litigation was not expected by management to materially affect results.
- Management cited risks including economic and employment conditions, customer capital spending, competitive pricing, raw-material costs and supplier reliance, currency movements, international regulatory and political risks, and the success of growth initiatives. The filing said risk factors had not materially changed from the prior annual report.
Important facts for investors to verify
- Confirm the filing and reporting-period identity: this is Herman Miller’s fiscal Q1 2019 report, despite the request metadata identifying “MILLERKNOLL, INC.” and “2018 Q1.”
- Assess underlying growth and comparability apart from ASC 606, currency effects, prior-year DWR shipping terms, and the dealership divestiture; reported and organic sales are not directly interchangeable.
- Monitor whether sales and orders translate into operating margin recovery, particularly given North American cost pressure and lower consolidated gross and operating margins.
- Track cash and borrowing headroom after HAY and Maars investments, planned capital spending, share repurchases, and potential purchases of remaining noncontrolling interests.
- Follow tariff, Brexit, and NAFTA developments, as well as completion costs and savings from the ELA consolidation and final tax accounting under the Tax Cuts and Jobs Act.