Herman Miller, Inc. — FY2018 Form 10-K Summary
Filing-period note: The supplied filing is Herman Miller, Inc.’s Form 10-K for the fiscal year ended June 2, 2018, filed July 31, 2018. It is not a MillerKnoll filing and does not cover only 2017 Q4. Fiscal 2018 had 52 weeks; fiscal 2017 had 53 weeks.
Business context and reporting period
Herman Miller designs, manufactures and sells furnishings and related services for office, healthcare, education and residential markets. Products are sold through dealer, direct, retail studio, catalog and e-commerce channels; approximately 78% of FY2018 sales were made to or through independent dealers. Reportable segments are North America, ELA, Specialty and Consumer.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,381.2 million | $2,278.2 million |
| Gross margin | $873.0 million; 36.7% | $864.2 million; 37.9% |
| Operating earnings | $177.5 million; 7.5% of sales | $190.8 million; 8.4% of sales |
| Net earnings attributable to Herman Miller | $128.1 million | $123.9 million |
| Diluted EPS | $2.12 | $2.05 |
| Operating cash flow | $166.5 million | $202.1 million |
| Capital expenditures | $70.6 million | $87.3 million |
| Cash and cash equivalents at year-end | $203.9 million | $96.2 million |
| Interest-bearing debt at year-end | $275.0 million | $199.9 million |
| Working capital / current ratio | $231.6 million / 1.6 | $106.2 million / 1.3 |
FY2018 net sales grew 4.5% as reported and 6.5% on the company’s organic, non-GAAP basis. Net trade orders rose 5.5% as reported and 7.7% organically; ending backlog increased 6.8% to $344.5 million. The company paid $42.4 million in dividends and repurchased $46.5 million of stock. The board subsequently raised the quarterly dividend 10% to $0.1975 per share.
Fourth-quarter FY2018: Net sales were $618.0 million versus $577.2 million in Q4 FY2017; gross margin was $228.3 million versus $220.9 million; net earnings attributable to Herman Miller were $31.8 million versus $33.4 million; diluted EPS was $0.53 versus $0.55.
Material changes versus the prior comparable period
- Sales growth was led by ELA, up 12.7%, and Consumer, up 12.2%; Specialty rose 2.5%, while North America increased 0.6% as reported. Organic sales growth was strongest in ELA (11.3%) and Consumer (12.2%).
- Operating earnings fell 7.0% despite higher sales. Gross margin declined 120 basis points, mainly from deeper discounting, unfavorable product mix and higher commodity costs; value engineering and sourcing gains partly offset these pressures.
- Operating cash flow declined $35.6 million, with working capital use of $32.8 million, including higher receivables and inventory, and increased pension contributions.
- Cash increased substantially, while debt rose after $225 million was drawn on the revolving credit facility and $150 million was used to repay maturing Series B notes. The company reported compliance with its debt covenants.
- The effective tax rate declined to 25.2% from 31.1%, reflecting the U.S. Tax Cuts and Jobs Act and other factors. FY2018 tax accounting included provisional estimates.
Outlook, management commentary, risks and unusual items
- Management cited stronger demand and order generation, but warned that steel and other commodity inflation and competitive discounting pressured margins. U.S. steel and aluminum tariffs, and the risk of broader trade conflict, were identified as potential headwinds.
- No company-specific earnings or sales guidance is provided in the supplied filing text. Management expected $90–$100 million of capital spending in FY2019, primarily for product development and retail studio openings. BIFMA’s April 2018 industry forecast anticipated U.S. office-furniture sales growth of 1.9% in calendar 2018 and 3.6% in 2019.
- Cost programs included a previously announced target of $25–$35 million in annual gross savings by FY2020; a Consumer initiative targeting $15–$20 million of annual profit improvement by the end of FY2019; and an early-stage North America initiative with estimated opportunities of $20–$40 million.
- FY2018 included $5.7 million of restructuring expense and $13.8 million of special charges, including CEO-transition, consulting and facilities-consolidation costs. The filing’s adjusted EPS was $2.30 versus GAAP diluted EPS of $2.12; adjusted measures are non-GAAP.
- China and U.K. facilities consolidation was expected to finish by Q1 FY2020; the company anticipated approximately $4 million in annual savings from the ELA consolidation and about $2 million of additional restructuring and related charges.
- CEO Brian Walker planned to retire by August 31, 2018; succession was underway. After year-end, the company acquired a 33% interest in HAY and North American brand rights for approximately $71 million combined, and planned to acquire a 48% interest in MAARS for an estimated $6 million.
- Other principal risks include economic and office-furniture demand cycles, price competition, supply interruptions, dealer financial health, international and foreign-exchange exposure, consumer demand and studio execution, cybersecurity, product warranties, and execution of growth initiatives. Management said pending ordinary-course litigation was not expected to materially affect the company.
Important facts for investors to verify
- Whether sales growth and orders can persist after adjusting for FY2017’s extra week, dealer divestitures, currency effects and the DWR shipping-term change.
- Whether discounting and tariffs-driven material inflation continue to weigh on gross margin, and whether cost initiatives deliver their stated savings.
- Cash conversion and working-capital trends, including receivables, inventory and pension contributions, alongside planned capital spending and shareholder returns.
- Debt maturities, revolving-credit availability and covenant headroom after the refinancing and subsequent strategic investments.
- Final tax effects of the Tax Act, including the provisional estimates and treatment of foreign earnings.
- Execution and financial impact of HAY and MAARS investments, facilities consolidation, and the CEO succession process.