Herman Miller reports strong Q1 2015 results. American professional furniture maker Herman Miller announced results for its first quarter ended August 30, 2014.
Net sales in the quarter totalled USD 509.7 million, an increase of 8.9% from the same quarter last fiscal year. New orders in the first quarter of USD 517.0 million were 9.7% above the prior year level.
Herman Miller’s results include a partial quarter of activity related to the acquisition of Design Within Reach (DWR), which closed on July 28, 2014. On an organic basis, which adjusts for the impact of acquisitions and divestitures and foreign currency translation, sales and orders in the first quarter increased 5.0% and 6.0%, respectively, from the same quarter last fiscal year.
Operating earnings in the first quarter were 8.3% of net sales compared to 8.4% reported in the prior year. Herman Miller’s earnings in the quarter were reduced by USD 5.0 million in costs associated with the DWR acquisition, including transaction expenses and the amortization of costs capitalized in inventory under purchase accounting. Excluding these expenses, adjusted operating earnings in the first quarter were 9.3% of net sales, equal to the adjusted operating earnings percentage in the first quarter of fiscal 2014.
Herman Miller reported net earnings of USD 0.42 per share on a diluted basis in the first quarter. This compares to diluted earnings per share of USD 0.38 in the same quarter last fiscal year. Excluding acquisition-related expenses recognized in the current period, adjusted diluted earnings per share in the first quarter totalled USD 0.47. This compares to adjusted earnings of USD 0.43 per share in the first quarter of fiscal 2014.
Brian Walker, Chief Executive Officer, stated, “This quarter we delivered solid financial performance highlighted by strong sales and order growth and improved gross margins. We also made important progress executing on our strategic priorities. The acquisition of DWR is another keystone investment that immediately accelerates our consumer business. Importantly, DWR will also enhance Herman Miller’s brand exposure and product portfolio to the benefit of both our contract and consumer channels.”
First Quarter Fiscal 2015 Financial Results
Following the acquisition of DWR, Herman Miller realigned the composition of its reportable segments to reflect the new operational and management structure of the business. As a result, the company’s previously defined “Specialty and Consumer” structure has been split into two separate reportable segments. The “Specialty” segment includes the operations associated with the company’s Geiger, Maharam, and Herman Miller Collection business units. Under the new structure, the company’s “Consumer” business segment reflects the results associated with its combined North American consumer wholesale business and retail business, including DWR. The company’s North American and ELA segments were not affected by this change.
Sales for the quarter within Herman Miller’s North American reportable segment were $321.1 million, an increase of 0.9% from the same quarter last fiscal year. On an organic basis, segment sales increased 2.0% on a year-over-year basis. New orders in the first quarter totalled $312.7 million and reflected continued improvement in U.S. federal government project activity. In total, segment orders were up 4.7% from the year ago period. On an organic basis, segment orders in the first quarter were 5.9% higher than last year.
Net sales within the ELA segment totalled $95.4 million in the first quarter of fiscal 2015. This represents a 16.9% increase from the same quarter of last fiscal year and reflects growth across each of the segment’s primary geographic regions. New orders in this segment totalled $111.8 million in the first quarter, representing a year-over-year increase of 12.7%. On an organic basis, segment sales increased 14.6% and orders increased 10.7% from the first quarter of last year.
Net sales in the first quarter within Herman Miller’s Specialty segment totalled $54.6 million. This represents a 5.0% increase over sales in the same quarter last year. New orders in the quarter of $57.1 million increased 6.9% from the year ago period.
The Consumer segment reported net sales of $38.6 million in the first quarter, which is an increase of 136.8% from the same quarter last fiscal year. Orders in the first quarter of $35.4 million were 77.9% above the prior year. On an organic basis, adjusting for the partial-quarter consolidation of DWR, segment sales increased 14.1% and orders decreased 19.1%.
Herman Miller’s consolidated gross margin in the first quarter totalled 36.4%. This compares to 36.3% reported in the same quarter of last fiscal year. In each of these periods, the reported gross margin was reduced by certain expenses associated with the valuation of acquired inventories as required under GAAP purchase accounting. The company’s results this quarter reflect $3.0 million of these charges related to the DWR acquisition. By comparison, the prior year first quarter included $1.4 million of purchase accounting expenses associated with Maharam inventories.
Additionally, Herman Miller’s reported gross margin in the first quarter of last fiscal year included approximately $1 million of legacy pension expenses associated with defined benefit pension plans that have since been terminated. Adjusting for these items, the company’s first quarter gross margin improved 20 basis points from the same period in fiscal year 2014. This year-over-year improvement is primarily attributed to favourable product and channel mix, including the addition of DWR.
Greg Bylsma, Chief Financial Officer, stated, “We continue to be pleased with our adjusted gross margin performance. While our results reflect only five weeks of DWR’s operations, the acquisition had a meaningful impact on the quarter. The results also demonstrate improvements we’ve made across our existing operations through an ongoing focus on lean initiatives, strategic sourcing, and incremental pricing benefit. These improvements helped drive strong cash generation in the quarter, enabling us to pay down $27 million of the debt used to finance the acquisition.”
Herman Miller reported operating expenses in the first quarter of $143.4 million compared to $130.9 million in the same quarter a year ago. The expenses this quarter reflect $2.0 million in professional fees and other non-recurring transaction expenses relating to the DWR acquisition. Operating expenses in the prior year included approximately $2.0 million of legacy pension charges. Adjusting for these items, operating expenses increased $12.5 million, the majority of which relates to the addition of DWR and variability driven by net sales growth.
Herman Miller’s effective income tax rate in the first quarter was 33.0% compared to 34.7% in the same quarter last fiscal year.
The company ended the first quarter with total cash and cash equivalents of $66.7 million, a decrease of $34.8 million from the balance at the end of fiscal year 2014. Cash used for the acquisition of DWR drove the decrease. Cash flow generated from operations in the first quarter was $42.0 million compared to $38.2 million in the same quarter last fiscal year.
Herman Miller ended the first quarter with total debt of $350 million, down from $377 million immediately following the closing of the DWR acquisition.
Herman Miller expects net sales in the second quarter of fiscal 2015 to be in the range of $550 million to $570 million. Diluted earnings per share in the quarter are expected to range between $0.46 and $0.50. On an adjusted basis, excluding the impact of anticipated expenses associated with the initial valuation of DWR inventories, earnings per share in the quarter are expected to be between $0.50 and $0.54.
Mr. Walker concluded, “The people of Herman Miller are focused on delivering solid performance both today and over the long-run through the successful execution of our strategic priorities. We are encouraged by the progress we are making toward our strategic vision and the positive reactions to it from our customers and channel partners. We look forward to building on that momentum.”