MILLERKNOLL, INC. annual report, FY2017

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Business context and reporting period

The filing is Herman Miller, Inc.’s Form 10-K for the fiscal year ended June 3, 2017—not a 2016 Q4 filing, and the registrant name in the filing is Herman Miller, not MillerKnoll. The year contained 53 weeks, versus 52 weeks in fiscal 2016; the extra week added approximately $37 million to sales. Herman Miller designs, manufactures, and sells workplace, healthcare, education, and residential furnishings through dealer, direct, retail, catalog, and e-commerce channels.

Financial results and liquidity

Unless indicated otherwise, amounts are in U.S. dollars. Fiscal 2017 consolidated results compared with fiscal 2016:

  • Revenue: $2,278.2 million, up 0.6% reported and 1.4% on the company’s organic, non-GAAP basis.
  • Profit and margins: Gross margin was $864.2 million, or 37.9% of sales, down from 38.6%. Operating earnings were $190.8 million (8.4% margin), down from $211.5 million (9.3%). Net earnings attributable to Herman Miller were $123.9 million versus $136.7 million; diluted EPS was $2.05 versus $2.26. Adjusted diluted EPS, a non-GAAP measure, was $2.16 versus $2.17.
  • Cash flow and investment: Operating cash flow was $202.1 million versus $210.4 million. Capital expenditures were $87.3 million; operating cash flow less capital expenditures was $114.8 million. Investing activities used $116.3 million and financing activities used $74.6 million.
  • Debt and liquidity: Long-term debt was $199.9 million, down from $221.9 million; the revolving credit facility had no borrowings and $391.7 million available after letters of credit. Cash and cash equivalents were $96.2 million, with $8.6 million in marketable securities. Working capital was $106.2 million and the current ratio was 1.3.
  • Capital returns: Cash dividends paid were $39.4 million and share repurchases were $23.7 million. Fiscal-year declared dividends were $0.68 per share. After year-end, the company announced a 6% increase in the quarterly dividend to $0.18 per share.

Material changes versus the prior comparable period

  • Reported sales growth was modest; excluding the extra week, currency effects, and dealer divestitures, organic sales rose 1.4%. Net trade orders increased 0.1% reported and 0.9% organically. Ending backlog was $322.6 million, down 0.3% from $323.5 million.
  • Discounting, net of price increases, reduced sales by roughly $32 million and gross margin by about 90 basis points. Higher commodity costs added approximately $9 million to costs year over year and reduced margin by about 40 basis points.
  • Consumer sales increased 10.2% to $318.1 million, but segment operating earnings fell to $5.3 million from $8.1 million as studio expansion and growth investments weighed on profitability. North American sales rose 0.8%, while operating earnings fell to $137.7 million from $152.0 million. ELA sales declined 6.6% reported, but increased 3% organically; ELA operating earnings fell to $30.8 million. Specialty sales were nearly flat and operating earnings increased to $17.7 million.
  • Fiscal 2017 operating expenses included $5.4 million of restructuring costs and a $7.1 million impairment of the Nemschoff trade name. Adjusted comparisons exclude these charges and certain prior-year gains; adjusted measures are non-GAAP and should be considered alongside GAAP results.

Outlook, commentary, risks, and unusual items

  • Management’s strategy prioritizes Consumer growth, Living Office products and technology, dealer-channel capabilities, innovation, and cost reduction. A three-year initiative targets $25 million to $35 million in gross annual cost reductions by fiscal 2020. The company expected fiscal 2018 capital spending of $90 million to $100 million, primarily for product development and retail studio openings. These are stated plans and targets, not earnings guidance.
  • Management cited mixed contract-market demand, competitive price discounting, higher steel and other commodity costs, and geopolitical and economic uncertainty, including Brexit and weakness in the Middle East. Other disclosed risks include dealer or supplier disruption, consumer spending and studio execution, foreign exchange, cybersecurity, product defects, and access to credit.
  • The $149.9 million Series B Senior Notes mature in January 2018. The company said it intended and was able to refinance them through its revolving facility; a $150 million forward-starting interest-rate swap was intended to fix the borrowing rate at 1.949% plus the applicable margin from January 2018. The company reported compliance with its debt covenants at year-end.
  • Other items to note: approximately $135 million of foreign subsidiary earnings were treated as indefinitely reinvested; a subsidiary’s redeemable noncontrolling interest was valued at $24.6 million and could be put to the company; and international pension plans were underfunded. A $12 million pension contribution and a Canadian dealership branch sale occurred after year-end. Management said pending ordinary-course litigation was not expected to materially affect the financial statements.
  • The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  1. Confirm the fiscal-period and issuer match: this is Herman Miller’s FY2017 10-K, with a 53-week year, not a 2016 Q4 report.
  2. Assess whether reported sales and order trends reflect durable demand, given the extra week, dealer divestitures, currency, and price discounting.
  3. Track gross-margin recovery against commodity inflation and discounting, and whether Consumer studio investments improve segment profitability.
  4. Check execution of the $25 million–$35 million annual cost-reduction target and the $90 million–$100 million fiscal 2018 capital-spending plan.
  5. Verify refinancing of the January 2018 notes, swap terms, covenant headroom, and liquidity after planned dividends and repurchases.
  6. Monitor the redeemable minority interest, pension funding, operating-lease commitments, and any material developments in litigation, tax matters, or contingent guarantees.