Business context and reporting period
This filing is Herman Miller, Inc.’s Form 10-Q for the fiscal third quarter and nine months ended February 29, 2020; it is not a 2019 Q3 filing. The company designs, manufactures, and sells furnishings and accessories across contract, international, and retail markets. The filing predates the company’s later MillerKnoll name.
Financial results and liquidity
Unless noted, amounts are in millions of dollars. Quarter comparisons are with the three months ended March 2, 2019; nine-month comparisons are with the prior-year comparable period.
| Metric | Q3 FY2020 | Prior Q3 | Nine months FY2020 | Prior nine months |
|---|---|---|---|---|
| Net sales | $665.7 | $619.0 | $2,010.8 | $1,896.2 |
| Gross margin | $243.3; 36.5% | $221.0; 35.7% | $744.9; 37.0% | $681.7; 36.0% |
| Operating earnings | $50.4 | $47.8 | $173.0 | $146.9 |
| Net earnings attributable to Herman Miller | $37.7 | $39.2 | $164.5 | $114.5 |
| Diluted EPS | $0.64 | $0.66 | $2.78 | $1.92 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $191.8 | $130.6 |
- Quarter sales rose 7.5%, but organic sales declined 0.5%; orders increased 6.3% and backlog was $411.2 million, up 2.7% year over year.
- Quarter gross margin improved 0.8 percentage points, while operating expenses rose 11.4% to $192.9 million. Quarter diluted EPS fell 3.0%.
- Nine-month reported earnings included a $30.5 million non-taxable gain from remeasuring the previously held naughtone investment upon gaining control. Adjusted diluted EPS, a non-GAAP measure, was $2.47 versus $2.09.
- Cash and cash equivalents were $110.6 million at February 29, down from $159.2 million at June 1, 2019; short-term investments were $8.9 million. Nine-month investing cash use was $171.3 million, including $111.2 million for acquisitions net of cash received; financing cash use was $69.8 million.
- At quarter end, total debt was $277.5 million, including $225.0 million drawn on the revolving facility. The $500 million facility had $265.5 million of availability after letters of credit. Reported total liquidity was $385.0 million, including cash, marketable securities, and undrawn facility availability.
- Adoption of lease accounting added approximately $245 million of right-of-use assets and $275 million of lease liabilities. At February 29, right-of-use assets were $222.9 million and lease liabilities were $188.5 million long term, with the remaining amount in current liabilities.
Material changes versus the prior comparable period
- Acquisitions materially contributed to reported sales growth: HAY and naughtone were consolidated after the company acquired controlling interests in December and October 2019, respectively. Excluding acquisitions and currency effects, nine-month sales grew 3.4%.
- North America Contract delivered stronger results: nine-month sales increased to $1,322.5 million and operating earnings to $176.4 million, from $1,252.8 million and $139.5 million.
- International Contract sales rose to $156.1 million in the quarter, largely due to acquisitions, while organic sales fell 10.4%; quarterly operating earnings declined to $11.3 million from $16.3 million.
- Retail quarterly sales were essentially flat at $96.2 million, while operating results shifted to a $1.6 million loss from $2.3 million earnings. Nine-month retail operating results were a $6.4 million loss versus $6.3 million earnings.
- Nine-month operating cash flow increased by $61.2 million, reflecting higher earnings and working-capital movements; cash declined overall due to investing and financing outflows.
Outlook, risks, contingencies, and unusual items
- COVID-19 was identified as a significant subsequent event. The company reported temporary manufacturing and retail closures, supply disruption, and expected a material adverse impact on sales, results, and cash flows for the remainder of fiscal 2020 and fiscal 2021. It stated the impact could not then be estimated reliably and flagged potential impairment of intangible and other long-lived assets.
- In March 2020, after quarter end, the company drew $265 million on its revolving credit line as a precaution. It also announced temporary compensation and retirement-contribution reductions, suspended share repurchases, postponed the declared quarterly dividend, and temporarily suspended future dividends.
- Before the pandemic’s full impact, management expected fiscal-year capital spending of $75–$85 million. The filing does not provide a revised quantitative earnings or sales forecast.
- Restructuring expense was $9.6 million for nine months. Actions included Nemschoff-related costs; the company estimated about $5 million total costs for those actions, with about $3 million expected in fiscal 2020. Other restructuring programs included estimated annual savings of approximately $10 million for an early-retirement plan and approximately $3 million for an international facilities consolidation.
- Warranty accruals rose to $57.4 million from $53.1 million at June 1; management attributed higher expense partly to increased claims and a product recall. Performance bonds exposed the company to up to $4.6 million and standby letters of credit to $9.5 million; no related liability was recorded. Management did not expect ordinary-course litigation to have a material adverse effect.
- Management cited uncertain customer demand, trade-policy and Brexit uncertainty, tariffs, retail shipping-cost pressure, and risks from global supply and operations. It reported that current pricing, sourcing, and cost initiatives had offset tariffs imposed on China imports.
Important facts for investors to verify
- Track the duration and operational effects of COVID-19 closures, supply constraints, and demand weakness, along with any impairment charges or updated outlook.
- Confirm the company’s liquidity and borrowing position after the post-quarter $265 million draw, and assess the implications of the dividend postponement and suspension.
- Separate organic performance from acquisition contributions, especially in International Contract and Retail, and monitor integration costs and final purchase-price allocations for HAY and naughtone.
- Assess whether margin gains, cost reductions, and restructuring savings offset higher operating costs, warranty claims, and retail freight pressure.
- Review the non-GAAP reconciliations and the $30.5 million acquisition-related gain when evaluating reported nine-month earnings and EPS.