MillerKnoll(MLKN) - 2020 Q2 - Quarterly Report

Part I — Financial Information Item 1: Financial Statements (Unaudited) This section presents Herman Miller, Inc.'s unaudited condensed consolidated financial statements for the quarter ended November 30, 2019, including income, balance, cash flow, and equity statements with detailed notes Condensed Consolidated Statements of Comprehensive Income Net sales increased 3.3% to $674.2 million, with net earnings doubling to $78.6 million and diluted EPS reaching $1.32, driven by a $30.5 million gain from an equity investment consolidation Three and Six Months Ended November 30, 2019 and December 1, 2018 | (In millions, except per share data) | Three Months Ended Nov 30, 2019 | Three Months Ended Dec 1, 2018 | Six Months Ended Nov 30, 2019 | Six Months Ended Dec 1, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $674.2 | $652.6 | $1,345.2 | $1,277.3 | | Gross margin | $255.5 | $235.6 | $501.6 | $460.7 | | Operating earnings | $62.4 | $53.1 | $122.6 | $99.1 | | Gain on consolidation of equity method investment | $30.5 | $— | $30.5 | $— | | Net earnings attributable to Herman Miller, Inc. | $78.6 | $39.3 | $126.8 | $75.1 | | Earnings per share — diluted | $1.32 | $0.66 | $2.14 | $1.26 | Condensed Consolidated Balance Sheets Total assets increased to $1,878.0 million, driven by $232.5 million in Right of Use assets and $60.1 million in Goodwill, while total liabilities rose to $1,033.4 million due to $198.1 million in lease liabilities As of November 30, 2019 and June 1, 2019 | (In millions) | November 30, 2019 | June 1, 2019 | | :--- | :--- | :--- | | Total current assets | $666.8 | $661.3 | | Net property and equipment | $339.8 | $348.6 | | Right of use assets | $232.5 | $— | | Goodwill | $363.9 | $303.8 | | Total Assets | $1,878.0 | $1,569.3 | | Total current liabilities | $481.4 | $446.1 | | Long-term debt | $275.0 | $281.9 | | Lease liabilities | $198.1 | $— | | Total Liabilities | $1,033.4 | $829.5 | | Total Stockholders' Equity | $844.6 | $719.2 | Condensed Consolidated Statements of Cash Flows Net cash from operations significantly increased to $142.4 million, while cash used in investing decreased to $82.1 million due to lower acquisition spending, and financing activities used $40.6 million Six Months Ended November 30, 2019 and December 1, 2018 | (In millions) | Six Months Ended Nov 30, 2019 | Six Months Ended Dec 1, 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $142.4 | $91.5 | | Net Cash Used in Investing Activities | ($82.1) | ($118.7) | | Net Cash Used in Financing Activities | ($40.6) | ($59.8) | | Effect of Exchange Rate Changes on Cash | ($1.9) | ($3.3) | | Net Increase (Decrease) in Cash | $17.8 | ($90.3) | | Cash and Cash Equivalents, End of Period | $177.0 | $113.6 | Notes to Condensed Consolidated Financial Statements This section details financial statement figures, covering new lease accounting standards, revenue disaggregation, naughtone and HAY acquisitions, goodwill impairment, debt structure, and segment reporting - The company adopted the new lease accounting standard (ASU 2016-02, Topic 842) on June 2, 2019, using the modified retrospective method, resulting in the recognition of approximately $245 million of Right-of-Use (ROU) assets and corresponding lease liabilities of approximately $275 million on the balance sheet[20][29] - On October 25, 2019, the company acquired the remaining 47.5% equity interest in naughtone for $45.9 million, resulting in its consolidation and a non-taxable gain of $30.5 million from remeasuring the previously held equity investment to fair value[47][49] - The company increased its investment in HAY by agreeing to purchase an additional 34% of equity for approximately $79 million, completed on December 2, 2019, which will result in HAY being consolidated in the third quarter of fiscal 2020[45] - The effective tax rate for the three and six months ended Nov 30, 2019 was 14.3% and 16.9% respectively, significantly lower than the prior year, mainly due to the non-taxable gain from the naughtone acquisition[61] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 FY2020 financial results, noting a 3.3% sales increase to $674.2 million, 100% diluted EPS growth to $1.32, improved gross margin, and strategic investments Results of Operations Q2 FY20 consolidated net sales rose 3.3% to $674.2 million, gross margin expanded to 37.9%, operating earnings increased 17.5% to $62.4 million, and adjusted diluted EPS grew 17.3% to $0.88 Q2 FY2020 vs Q2 FY2019 Performance Highlights | Metric | Q2 FY2020 | Q2 FY2019 | % Change | | :--- | :--- | :--- | :--- | | Net Sales (in millions) | $674.2 | $652.6 | 3.3% | | Gross Margin % | 37.9% | 36.1% | +180 bps | | Operating Earnings (in millions) | $62.4 | $53.1 | 17.5% | | Diluted EPS | $1.32 | $0.66 | 100.0% | | Adjusted Diluted EPS* | $0.88 | $0.75 | 17.3% | - Gross margin improvement was primarily driven by list price increases (120 bps), manufacturing leverage and lower steel costs (100 bps), partially offset by higher freight costs in the Retail segment (-30 bps)[123] - Operating expenses increased by $10.6 million, mainly due to higher compensation costs, incremental spending for DWR and HAY brand expansion, and $4.2 million in restructuring expenses[114][125] Reportable Operating Segment Results North America Contract sales and earnings grew, International Contract sales were flat with lower earnings, and Retail sales grew but incurred an operating loss due to higher costs and brand investments Segment Net Sales and Operating Earnings (Three Months Ended Nov 30, 2019) | Segment | Net Sales (in millions) | % of Total | Operating Earnings (in millions) | Operating Margin % | | :--- | :--- | :--- | :--- | :--- | | North America Contract | $450.6 | 66.8% | $62.5 | 13.9% | | International Contract | $118.2 | 17.5% | $12.8 | 10.8% | | Retail | $105.4 | 15.6% | ($0.9) | (0.9)% | | Corporate | N/A | N/A | ($12.0) | N/A | - North America Contract: Sales growth was driven by list price increases ($13 million) and the naughtone acquisition ($3 million), with operating earnings increasing due to a 260 basis point improvement in gross margin[135][136] - Retail: Sales increased by $6.1 million (6.1%) from volume growth, but the segment swung to an operating loss due to a 70 basis point decline in gross margin (from higher freight costs) and a $4.7 million increase in operating expenses for brand expansion[139][141] Financial Condition, Liquidity and Capital Resources The company maintains a strong liquidity position, with cash from operations increasing to $142.4 million, ending the quarter with $177.0 million in cash and $265.5 million available credit, despite significant acquisition and dividend payments - Cash from operations increased by $50.9 million year-over-year, primarily due to higher net earnings and favorable changes in working capital, specifically accounts receivable[145][147] - The company amended its credit facility, increasing its revolving borrowing capacity to $500 million and extending the expiration to August 2024[89] - As of November 30, 2019, the company had total liquidity of $451.5 million, consisting of $177.0 million in cash, $9.0 million in marketable securities, and $265.5 million in credit facility availability[150] Item 3: Quantitative and Qualitative Disclosures About Market Risk No significant changes in market risk disclosures, with foreign exchange risk remaining the primary exposure due to global operations in various currencies - The company's primary market risk is foreign exchange risk due to its global operations, with principal exposures including the British pound sterling, euro, Canadian dollar, Japanese yen, Mexican peso, Hong Kong dollar, and Chinese renminbi[161][162] - The company utilizes foreign currency forward contracts to mitigate risks associated with foreign currency exposures, though these are not designated as hedging instruments for accounting purposes[75][162] Item 4: Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of November 30, 2019, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of November 30, 2019, the company's disclosure controls and procedures are effective[163] - No material changes to the company's internal control over financial reporting occurred during the second quarter of fiscal 2020[164] Part II — Other Information Item 1 & 1A: Legal Proceedings and Risk Factors No material changes to legal proceedings or risk factors from the prior 10-K, and pending litigation is not expected to materially affect financial statements - There have been no material changes in the Company's risk factors from the Annual Report on Form 10-K for the year ended June 1, 2019[167] - The company is involved in legal proceedings in the ordinary course of business, but management does not expect them to have a material adverse effect on financial statements[87][166] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 10,006 shares at ~$43.65 per share, with $256.1 million remaining for future repurchases under board-authorized plans Issuer Purchases of Equity Securities (Q2 FY2020) | Period | Total Shares Purchased | Average Price Paid | Maximum Dollar Value Remaining for Purchase (in millions) | | :--- | :--- | :--- | :--- | | 9/1/19 - 11/30/19 | 10,006 | ~$43.65 | $256.1 | Items 3, 4, 5 & 6: Other Information The company reports no defaults on senior securities or mine safety disclosures, with a list of exhibits including Sarbanes-Oxley certifications and XBRL data files - The company reports 'None' for Item 3 (Defaults upon Senior Securities) and Item 5 (Other Information), and 'Not applicable' for Item 4 (Mine Safety Disclosures)[170] - Item 6 lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL interactive data files[171][173]