Business context and reporting period
Herman Miller, Inc. (the historical filing issuer identified in the filing; metadata refers to MillerKnoll) reported its first quarter of fiscal 2015, a 13-week period ended August 30, 2014. The quarter includes five weeks of Design Within Reach (DWR), acquired July 28, 2014.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $509.7 million | $468.1 million | +8.9% |
| Gross margin | $185.6 million; 36.4% | $170.0 million; 36.3% | +9.2%; +10 bps |
| Operating earnings | $42.2 million; 8.3% | $39.1 million; 8.4% | +7.9% |
| Net earnings | $25.2 million | $22.5 million | +12.0% |
| Diluted EPS | $0.42 | $0.38 | +10.5% |
| Orders / backlog | $517.0 million / $322.7 million | $471.2 million / $275.7 million | Orders +9.7%; backlog +17.0% |
| Operating cash flow | $42.0 million | $38.2 million | +9.9% |
Adjusted diluted EPS, a non-GAAP measure, was $0.47 versus $0.43; adjusted EBITDA was $59.2 million versus $54.6 million. Adjusted measures exclude specified acquisition, inventory purchase-accounting, and prior-year pension items.
Cash and cash equivalents were $66.7 million and marketable securities $10.9 million at quarter-end. Interest-bearing debt was $350.0 million ($50.0 million current and $300.0 million long-term), versus $250.0 million at May 31, 2014. The company had $139.4 million of availability under its $250 million revolving facility, net of letters of credit. Investing cash outflow was $162.6 million, primarily reflecting the DWR acquisition; financing cash inflow was $86.4 million. Capital expenditures were $8.2 million. The declared dividend was $0.14 per share.
Material changes versus prior period
- Sales growth reflected DWR’s $20.0 million net contribution, stronger EMEA volumes, pricing and general sales growth; lower U.S. federal-government sales and dealer divestitures partly offset increases.
- Segment sales were North America $321.1 million (+0.9%), ELA $95.4 million (+16.9%), Specialty $54.6 million (+5.0%), and Consumer $38.6 million (+136.8%). Consumer sales grew 14.1% organically, excluding DWR’s partial-quarter contribution.
- Consolidated operating margin edged down 10 basis points despite higher gross margin. Acquisition expenses and DWR operating costs contributed to expense growth. Consumer operating earnings fell to $2.3 million from $3.4 million, including $3.0 million of DWR inventory purchase-accounting expense.
- Cash declined from $101.5 million at fiscal year-end, while debt rose following $100.0 million of net revolver borrowings used in part to finance DWR.
Outlook, commentary, risks and unusual items
Management expected demand to gain traction in the second quarter, citing positive North American economic indicators, but cautioned that it was not certain the industry would achieve BIFMA’s projected growth. Full-year capital spending was forecast at $65–70 million, compared with $40.8 million in fiscal 2014. No full-year revenue or earnings guidance was provided in the filing.
DWR was acquired for $155.0 million in cash for an approximately 81% interest, followed by purchase of another approximately 4%; remaining interests were contributed to the consumer subsidiary. The preliminary purchase-price allocation includes $74.4 million goodwill and $69.6 million intangible assets and remained subject to valuation adjustments. The filing estimates approximately $10 million in present-value future tax benefits. Management expects $3.0 million of remaining DWR inventory purchase-accounting expense in Q2.
Key risks include consumer-spending weakness, retail-studio execution, cybersecurity and customer-data exposure, competition and pricing pressure, raw-material costs, currency movements, and economic and government-procurement conditions. The company’s $50 million Series A Senior Notes mature January 3, 2015; management reported covenant compliance and expected continued compliance. Performance bonds exposed the company to up to $8.4 million and standby letters of credit to $10.6 million; no liabilities were recorded for these arrangements. A UK leased-facility dilapidation liability of $1.3 million was recorded, within an estimated potential cost range of $0–3.0 million. Management said pending ordinary-course litigation was not expected to materially affect the financial statements.
Important facts for investors to verify
- How DWR performs beyond the five weeks included in this quarter, including its consumer-channel margins and integration costs.
- Final DWR purchase-price allocation and the amount and timing of inventory step-up costs, particularly the expected Q2 expense.
- Progress on the January 2015 $50 million debt maturity, borrowing costs, and ongoing revolver availability and covenant compliance.
- Whether orders and backlog convert to sales, and whether management’s demand outlook and $65–70 million capital-spending forecast hold.
- Exposure to consumer-demand, retail-studio, cybersecurity, commodity-cost, currency, and legal or guarantee-related risks.