- Year-over-year organic order growth of 8%; broad-based across all segments
- Operating margin expansion of 100 basis points on a reported basis and 50 basis points on an adjusted basis
- 35% increase in reported EPS (Earnings per Share); adjusted EPS growth of 28%
Herman Miller, Inc. (NASDAQ: MLHR) today announced results for its third quarter ended March 2, 2019. Net sales in the quarter totaled $619.0 million, an increase of 7.0% from the same quarter last fiscal year. New orders in the third quarter of $610.7 million were 8.4% above the prior year level.
On an organic basis, which excludes the impact of foreign currency translation and the adoption of the new revenue recognition standard at the start of fiscal 2019, net sales and orders in the third quarter increased by 6.3% and 7.6%, respectively, compared to the same quarter last fiscal year.
‘Growth led by International and Consumer business’
Herman Miller reported net earnings of $0.66 per share on a diluted basis in the third quarter compared to diluted earnings per share of $0.49 in the same quarter last fiscal year. Excluding restructuring expenses, other special charges and the final adjustment related to the adoption of U.S. tax reform, adjusted earnings per share in the third quarter totaled $0.64 compared to adjusted earnings per share of $0.50 in the third quarter of last fiscal year.
Andi Owen, Chief Executive Officer, stated, “Broad-based order growth for the quarter was led by our International and Consumer businesses, highlighting the power of our family of brands to drive growth through both our global dealer network and consumer channels. We leveraged revenue growth, gross margin expansion and well-managed operating expenses this quarter to deliver improved operating margins compared to the same quarter last year. While there is much work ahead to realize our strategic vision, our results this quarter offer a clear demonstration that we are moving in a positive direction and have a solid foundation of capabilities to build upon.”
Gross margin increased despite ASC 606 adoption
Consolidated gross margin in the third quarter of fiscal 2019 totaled 35.7%, representing a 10-basis point increase from the level reported in the same quarter of last fiscal year. The adoption of the new revenue recognition standard (ASC 606) at the beginning of fiscal 2019 required recording certain product pricing elements as expenses within cost of goods sold that were previously classified on a net basis within sales. This adoption reflected an unfavorable impact on gross margin of 60 basis points compared to the basis of presentation last year. Excluding this impact, gross margin expanded by 70 basis points compared to the same quarter last year.
Operating expenses increased
Operating expenses in the third quarter were $172.9 million compared to $167.1 million in the same quarter a year ago. Operating expenses included certain special charges totaling $0.5 million and $3.9 million in the third quarter of fiscal 2019 and 2018, respectively. The special charges related primarily to costs associated with the CEO transition and external consulting fees associated with the Company’s profit enhancement initiatives. Excluding these charges, operating expenses increased by $9.2 million compared to the same quarter last year.
The Company recognized pre-tax restructuring expenses totaling $0.3 million in the third quarter related to the consolidation of certain facilities in China and the United Kingdom that were announced in the fourth quarter of fiscal 2018.
Herman Miller’s effective income tax rate in the third quarter was 16.0%, compared to 19.0% in the same quarter last fiscal year. The rate in the current quarter included the final adjustment related to recognizing the impact of the U.S. Tax Cuts and Jobs Act (the Act). Excluding this adjustment, the effective tax rate in the period was 20.1%. The rate in the same quarter last year also included certain adjustments related to the adoption of the Act. Excluding these adjustments, the effective tax rate in the prior year was 25.8%.
‘Global trade tensions remain an outlook risk for our business’
Jeff Stutz, Chief Financial Officer, noted, “Gross margin expansion during the quarter was driven by manufacturing production leverage, favorable channel and product mix, and savings from our profit optimization strategic priority. Benefits from profit optimization will continue to ramp up over the next twelve months as implementation efforts proceed. This operating performance combined with a lower effective tax rate helped drive a significant increase in earnings per share compared to last year, which exceeded the expectations that we established in December. While global trade tensions remain an outlook risk for the business, industry fundamentals remain supportive and we are hopeful and encouraged that ongoing trade negotiations between the U.S. and China will result in relief from the impact of tariffs on our business.”
The Company ended the third quarter with total cash and cash equivalents of $113.5 million. Cash flow generated from operations was $39.1 million in the current quarter compared to $29.2 million in the same quarter last fiscal year.
Fourth Quarter Fiscal 2019 Guidance
Looking forward, Herman Miller expects net sales in the fourth quarter of fiscal 2019 to be in the range of $645 million to $665 million. On an organic basis, adjusted for foreign currency translation and the impact of reclassification related to the new revenue recognition standard, this forecast implies sales growth of 5% compared to the fourth quarter of the prior year at the mid-point of the range. The Company expects adjusted diluted earnings per share to range between $0.76 to $0.80.