Business context and reporting period
The filing is Herman Miller, Inc.’s unaudited Form 10-Q for the third quarter of fiscal 2018, ended March 3, 2018—not a 2017 Q3 filing. The company designs, manufactures and sells furniture and related products through North American Furniture Solutions, ELA, Specialty and Consumer segments. The quarter and prior-year quarter each contained 13 weeks; the nine-month periods contained 39 and 40 weeks, respectively.
Financial performance and position
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $578.4M | $524.9M | $1,763.2M | $1,701.0M |
| Gross margin | $205.8M; 35.6% | $195.5M; 37.2% | $644.7M; 36.6% | $643.4M; 37.8% |
| Operating earnings | $38.3M; 6.6% of sales | $35.0M; 6.7% | $137.4M; 7.8% | $141.0M; 8.3% |
| Net earnings attributable to Herman Miller | $29.8M | $22.5M | $96.3M | $90.5M |
| Diluted EPS | $0.49 | $0.37 | $1.60 | $1.50 |
- Quarterly sales increased 10.2%; orders rose 3.7% to $563.2M and backlog increased 3.0% to $341.7M. Management’s non-GAAP organic sales growth was 9.6% for the quarter and 6.4% for nine months.
- Quarterly gross margin fell 1.6 percentage points year over year; nine-month gross margin fell 1.2 points. Management cited discounting, commodity and outsourcing costs, product mix, and manufacturing labor and overhead pressures.
- Nine-month operating cash flow was $110.7M, versus $122.1M. Investing cash outflow was $42.5M, including $51.0M of capital expenditures; financing provided $28.3M. Cash and equivalents were $193.0M at quarter-end.
- Debt totaled $278.3M, including $225.0M drawn on the revolving facility and $3.3M in supplier financing. The company had $166.8M of revolver availability, net of letters of credit. Marketable securities were $8.4M.
- Quarter-end current assets were $608.7M and current liabilities were $383.3M. Dividends declared were $0.18 per share for the quarter; the company repurchased $30.1M of shares during the first nine months.
Material changes and segment trends
- Consumer was a notable improvement: quarterly sales rose 18.7% and operating earnings were $4.2M, versus a $0.7M operating loss a year earlier. ELA quarterly sales rose 16.6% and orders 33.2%; North American sales rose 7.4%, but orders fell 7.4%. Specialty sales rose 4.8% and operating earnings increased to $2.0M.
- For the first nine months, reported sales rose 3.7%, but comparison is affected by fiscal 2017’s extra week, dealer divestitures and currency. Reported operating earnings declined 2.6%; the prior-year extra week reduced the comparison by an estimated $5M of operating earnings.
- The company said cost-savings initiatives reduced operating expenses by an estimated $5M in the quarter and $13M year to date. These savings were offset by special charges, incentive costs, studio expansion and other operating pressures.
- On January 3, 2018, the company drew $225M on its revolver, repaid $150M of Series B notes and used the balance for general purposes. Interest-rate swaps fixed rates on $150M and $75M of borrowings at 1.949% and 2.387%, respectively, plus the applicable margin.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management described economic conditions as generally supportive, while noting risks in the U.K., Middle East and other foreign markets. It expects fiscal 2018 capital expenditures of $75M–$85M.
- A March 14, 2018 announcement outlined ELA facility consolidations in the U.K. and China, expected to produce about $4M in annual savings, with $6M–$8M of restructuring and related charges. Completion is expected by the first quarter of fiscal 2020; management noted near-term operational-disruption risk.
- The Tax Cuts and Jobs Act affected reported taxes. The quarter included provisional favorable tax effects of $3.0M from the rate reduction and $8.7M from deferred-tax remeasurement, alongside a provisional $9.2M transition-tax liability on certain foreign earnings. Management said these estimates could change materially as analysis continues. The reported quarterly effective tax rate was 19.0%, compared with 29.8%.
- Adjusted diluted EPS was $0.50 for the quarter versus GAAP EPS of $0.49; adjustments included the tax-law impact and special charges. Special charges included CEO-transition costs and consulting fees for profit-improvement initiatives.
- Management identified potential tariff-related pressure on steel and aluminum costs and possible retaliatory trade measures. Other disclosed risks include pricing and raw-material costs, foreign exchange, demand and customer capital spending, global political and economic conditions, and execution of the DWR studio and facility-consolidation plans.
- Other contingencies include $8.9M maximum exposure under performance bonds and $8.2M of standby letters of credit; management reported no expected material impact from claims or ordinary-course litigation. The filing also notes possible acquisition of the remaining redeemable minority interest, valued at $24.3M, within the next three fiscal years.
Key facts for investors to verify
- Confirm the filing and period: this is Herman Miller’s quarter ended March 3, 2018, despite the request metadata identifying MillerKnoll and 2017 Q3.
- Track whether gross-margin pressures—discounting, steel costs, outsourcing and product mix—ease, and whether order trends support future sales, particularly in North America.
- Monitor the final tax accounting under the Tax Cuts and Jobs Act, including the provisional transition-tax estimate and any effects on repatriation of foreign cash.
- Assess execution, timing, charges and realized savings from the ELA consolidation and broader cost-saving initiatives.
- Review liquidity and leverage alongside buybacks, dividends, capital spending and any required redemption of minority interests.
- Assess the potential effects of U.S. tariffs and retaliatory trade measures on material costs, margins and international demand.