MillerKnoll(MLKN) - 2020 Q3 - Quarterly Report

Part I — Financial Information Item 1: Financial Statements (Unaudited) The unaudited statements show increased nine-month net sales and earnings, with balance sheet changes from new lease standards and acquisitions Condensed Consolidated Statements of Comprehensive Income Highlights | Indicator (in millions) | Three Months Ended Feb 29, 2020 | Three Months Ended Mar 2, 2019 | Nine Months Ended Feb 29, 2020 | Nine Months Ended Mar 2, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $665.7 | $619.0 | $2,010.8 | $1,896.2 | | Gross margin | $243.3 | $221.0 | $744.9 | $681.7 | | Operating earnings | $50.4 | $47.8 | $173.0 | $146.9 | | Net earnings attributable to Herman Miller, Inc. | $37.7 | $39.2 | $164.5 | $114.5 | | Diluted EPS | $0.64 | $0.66 | $2.78 | $1.92 | Condensed Consolidated Balance Sheet Highlights | Indicator (in millions) | Feb 29, 2020 | June 1, 2019 | | :--- | :--- | :--- | | Total current assets | $636.3 | $661.3 | | Total Assets | $1,985.8 | $1,569.3 | | Total current liabilities | $506.1 | $446.1 | | Total Liabilities | $1,077.3 | $829.5 | | Total Stockholders' Equity | $836.8 | $719.2 | Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended) | Indicator (in millions) | Feb 29, 2020 | Mar 2, 2019 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $191.8 | $130.6 | | Net Cash Used in Investing Activities | ($171.3) | ($142.4) | | Net Cash Used in Financing Activities | ($69.8) | ($76.6) | | Net Decrease in Cash and Cash Equivalents | ($48.6) | ($90.4) | Note 2: Recently Issued Accounting Standards The company adopted the new lease standard ASU 2016-02, recognizing lease assets and liabilities on the balance sheet - Adopted the new lease standard (ASU 2016-02), which requires recognizing most lease rights and obligations as assets and liabilities on the balance sheet[21] Note 3: Revenue from Contracts with Customers Total net sales grew to $2,010.8 million for the nine-month period, with growth across all three reportable segments Net Sales by Reportable Segment (Nine Months Ended) | Segment (in millions) | Feb 29, 2020 | Mar 2, 2019 | | :--- | :--- | :--- | | North America Contract | $1,322.5 | $1,252.8 | | International Contract | $388.1 | $359.9 | | Retail | $300.2 | $283.5 | | Total | $2,010.8 | $1,896.2 | Note 4: Leases Adoption of ASC 842 resulted in recognizing approximately $245 million in ROU assets and $275 million in lease liabilities - The adoption of the new lease standard resulted in the addition of approximately $245 million of ROU assets and $275 million of lease liabilities to the balance sheet[30] Lease Metrics (as of Feb 29, 2020) | Metric | Value | | :--- | :--- | | Total Lease Expense (9 months) | $46.9 million | | Weighted Avg. Remaining Lease Term | 7 years | | Weighted Avg. Discount Rate | 3.1% | Note 5: Acquisitions The company completed acquisitions of HAY and naughtone, resulting in consolidation and a non-taxable gain of approximately $30 million - Increased ownership in HAY to 67% for $79.0 million, resulting in consolidation[44] - Acquired the remaining 47.5% of naughtone for $45.9 million, resulting in 100% ownership and consolidation[50] - Recognized a non-taxable gain of approximately $30 million on the remeasurement of the previously held equity method investment in naughtone[52] Note 7: Goodwill and Indefinite-Lived Intangibles Goodwill increased to $466.1 million due to acquisitions, with the Retail reporting unit's fair value exceeding carrying value by 13.0% - The fair value of the Retail reporting unit exceeded its carrying value by $32.7 million (13.0%) at the last annual impairment test, indicating some risk of future impairment if performance declines[59] Change in Goodwill (in millions) | Date | Goodwill Amount | | :--- | :--- | | June 1, 2019 | $303.8 | | Acquisition of HAY | +$104.8 | | Acquisition of naughtone | +$57.5 | | February 29, 2020 | $466.1 | Note 16: Operating Segments North America Contract was the largest sales and earnings contributor, while the Retail segment reported an operating loss Segment Performance (Nine Months Ended Feb 29, 2020) | Segment (in millions) | Net Sales | Operating Earnings (Loss) | | :--- | :--- | :--- | | North America Contract | $1,322.5 | $176.4 | | International Contract | $388.1 | $37.3 | | Retail | $300.2 | ($6.4) | Note 17: Restructuring Expense The company incurred restructuring expenses across all segments related to retirement plans, facilities consolidation, and leadership changes - Incurred $3.0 million in restructuring costs related to the Nemschoff operation in Wisconsin[110] - Recognized $1.7 million in severance and employee-related restructuring expense due to a reorganization of the Retail segment's leadership team[117] Note 19: Subsequent Event The COVID-19 pandemic led to facility closures, expected material adverse impacts, and proactive liquidity measures post-quarter - The COVID-19 pandemic, declared a subsequent event, has led to temporary closures of manufacturing facilities and retail stores globally[119][120] - The company expects a material adverse impact on its financial results and has implemented cost reduction actions, including compensation reductions and suspension of 401(k) contributions[121][122] - To safeguard its capital position, the company borrowed $265 million from its revolving credit line in March 2020 and postponed its quarterly cash dividend[123] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 7.5% Q3 sales increase driven by acquisitions, improved gross margin, and the significant impact of COVID-19 COVID-19 Update The pandemic reduced Q3 International sales by $6 million and prompted global cost-cutting and employee safety measures - The temporary closure of the manufacturing plant in Dongguan, China due to COVID-19 reduced International sales by approximately $6 million in the third quarter[129] - In response to the pandemic, the company implemented cost reductions including a 10% reduction in cash compensation for the majority of its salaried workforce and suspended certain employer-paid retirement contributions[137] Analysis of Results for Three and Nine Months Q3 net sales rose 7.5% due to acquisitions, with gross margin expanding 80 basis points from pricing and lower input costs - Q3 net sales increased 7.5% year-over-year, primarily driven by approximately $50 million from the acquisitions of HAY and naughtone[144][145] - Q3 gross margin improved by 80 basis points, with a 90 basis point increase from price hikes and a 110 basis point increase from lower steel costs and efficiency efforts, partially offset by a 70 basis point decrease from acquisition impacts[144][145] - A pre-tax gain of $30.5 million was recognized in the nine-month period related to the remeasurement to fair value of the initial equity-method investment in naughtone upon its full acquisition[151] Reportable Operating Segment Results North America Contract sales grew organically, while International Contract sales declined organically and Retail margins compressed Q3 Segment Performance vs. Prior Year | Segment | Net Sales Change | Organic Sales Change | Operating Margin | | :--- | :--- | :--- | :--- | | North America Contract | +4.1% | +2.5% | 12.4% (+230 bps) | | International Contract | +23.9% | -10.4% | 7.2% (-570 bps) | | Retail | +0.2% | +0.2% | -1.7% (-410 bps) | Liquidity and Capital Resources Cash from operations increased significantly, and the company enhanced liquidity by drawing on its credit facility post-quarter - Cash from operations increased by $61.2 million for the nine-month period, driven by higher net earnings and favorable changes in working capital[170] - Total liquidity stood at $385.0 million at quarter-end, and subsequently, the company drew down an additional $265 million from its credit facility as a precautionary measure[175][178] - The Board of Directors approved postponing the payment of the current quarter's dividend and temporarily suspending future dividends to safeguard the company's capital position[173] Item 3: Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure remains foreign currency exchange risk from its global manufacturing and sales operations - The company's primary market risk is foreign currency exchange risk due to its global operations, with principal exposures including the British pound sterling, euro, Canadian dollar, and Chinese renminbi[189][190] Item 4: Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[191] Part II — Other Information Item 1A: Risk Factors A new risk factor was added to address the potential adverse impacts of disease outbreaks like the COVID-19 pandemic - A new risk factor was added to address the adverse impact of disease outbreaks, specifically citing the COVID-19 pandemic, on global manufacturing, supply chains, and business operations[196] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 440,954 shares of its common stock during the third quarter under its share repurchase program Issuer Purchases of Equity Securities (Q3 FY2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | 12/1/19 - 12/28/19 | 13,572 | $42.69 | | 12/29/19 - 1/25/20 | 148,671 | $41.20 | | 1/26/20 - 2/29/20 | 278,711 | $40.44 | | Total | 440,954 | N/A |