Filing summary
Entity and period: The supplied filing is Herman Miller, Inc.’s Form 10-K for the fiscal year ended May 28, 2016, not a MillerKnoll filing or a stand-alone 2015 Q4 report. Fiscal 2016 contained 52 weeks. The filing reports fourth-quarter results as part of its annual disclosures.
Business context
Herman Miller designs, manufactures, and sells furnishings and related services for office, healthcare, education, and residential markets. Products are sold through independent dealers, direct sales, retail studios, e-commerce, catalogs, and retailers. Approximately 74% of fiscal 2016 sales were made to or through independent dealers. Reportable segments were North America, ELA, Specialty, and Consumer; Consumer includes Design Within Reach (DWR).
Financial performance
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Net sales | $2,264.9 million | $2,142.2 million |
| Gross margin | $874.2 million; 38.6% | $791.4 million; 36.9% |
| Operating earnings | $211.5 million; 9.3% of sales | $163.4 million; 7.6% of sales |
| Net earnings attributable to Herman Miller | $136.7 million | $97.5 million |
| Diluted EPS | $2.26 | $1.62 |
| Cash from operating activities | $210.4 million | $167.7 million |
| Capital expenditures | $85.1 million | $63.6 million |
| Cash and cash equivalents at year-end | $84.9 million | $63.7 million |
| Interest-bearing debt at year-end | $221.9 million | $289.8 million |
| Working capital / current ratio | $90.5 million / 1.2 | $110.1 million / 1.3 |
Fiscal 2016 fourth-quarter net sales were $582.6 million, net earnings attributable to Herman Miller were $40.7 million, and diluted EPS was $0.67.
Changes and segment results
- Annual sales grew 5.7%; operating earnings rose 29.4% and diluted EPS increased from $1.62 to $2.26. Gross margin expanded 170 basis points, reflecting lower North American commodity costs, lower freight costs, production leverage, and operational efficiencies. Management estimated foreign exchange reduced gross margin by about 30 basis points.
- North America sales increased 7.2% to $1,331.8 million and operating earnings rose 21.4% to $152.0 million. ELA sales increased 0.7% as reported, while constant-currency growth was 7.0%; operating earnings rose 36.3% to $35.3 million, including $6.1 million of nonrecurring gains from property and dealership disposals.
- Specialty sales increased 5.4% to $231.8 million and operating earnings rose to $16.4 million. Consumer sales increased 6.7% as reported to $288.7 million, partly because fiscal 2016 included 52 weeks of DWR versus 44 weeks in fiscal 2015. Consumer operating earnings fell to $8.1 million from $14.7 million; on an organic basis, Consumer sales declined 4.1%.
- Orders increased 6.2% to $2,279.7 million. Year-end backlog was $323.5 million, up 0.4% from $322.2 million; the fiscal 2016 figure included an approximately $14 million reduction from the Australian dealership divestiture.
Cash, debt, and capital allocation
Operating cash flow increased $42.7 million year over year. Investing used $80.8 million, including $85.1 million of capital expenditures; financing used $106.5 million, including $68.0 million of net repayments on the revolving credit facility, $34.9 million of dividends, and $14.1 million of share repurchases. The company had $232.1 million available under unsecured credit facilities at year-end and reported compliance with its debt covenants. The current ratio was 1.2. Management stated that cash, operating cash flow, and borrowing capacity should provide adequate liquidity for operations, capital needs, dividends, and repurchases, subject to financing availability.
Outlook, risks, and unusual items
- Management forecast fiscal 2017 capital spending of $80 million to $90 million, primarily for product development and retail studio openings. BIFMA’s February 2016 industry forecast projected North American office furniture order growth of 3.1% in calendar 2016 and 4.4% in 2017; shipment growth of 1.0% and 4.8%, respectively. These are industry forecasts, not company earnings guidance.
- Management cited continued foreign-currency headwinds, increased discounting in North America and ELA, rising steel costs late in fiscal 2016, and uncertainty surrounding the United Kingdom’s EU referendum. Other identified risks include economic and industry conditions, competition and pricing pressure, supply disruptions, dealer financial health, consumer demand and retail-studio execution, cybersecurity, product defects, and international regulatory and currency exposure.
- No restructuring or impairment charges were recorded in fiscal 2016; fiscal 2015 included $12.7 million, including a $10.8 million POSH trade-name impairment and $1.9 million of workforce-reduction costs. Fiscal 2014 earnings were significantly affected by the settlement of the primary domestic defined-benefit pension plans, including a $158.2 million pretax settlement charge.
- The company corrected an immaterial prior-period product-warranty accrual error in fiscal 2016, adjusting accrued warranty by $12.5 million, other noncurrent assets by $4.7 million, and retained earnings by $7.8 million. It stated that the correction did not affect earnings or cash flows.
- After year-end, on June 3, 2016, the company acquired a noncontrolling interest in Naughtone Holdings Limited for £8 million ($11.6 million). Management said pending ordinary-course litigation was not expected to materially affect the financial statements. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Confirm the issuer and period: the source is Herman Miller, Inc. FY2016, despite the request metadata naming MillerKnoll and 2015 Q4.
- Assess whether Consumer/DWR can restore profitability, given the segment’s lower earnings and 4.1% organic sales decline, and track studio transition and ERP execution.
- Evaluate the sustainability of gross-margin gains amid rising steel costs, discounting, and currency exposure; compare reported and constant-currency results.
- Review cash conversion and capital allocation against higher capital spending, lease commitments, and debt maturities, including $149.9 million due in fiscal 2018.
- Monitor the $27.0 million redeemable noncontrolling interest, warranty reserves, and the assumptions underlying goodwill and intangible-asset valuations.