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Herman Miller Maintains Its Momentum as It Enters the Back Half of Fiscal 2019

Asit Sharma, The Motley Fool

Contemporary office furniture manufacturer and design house Herman Miller (NASDAQ: MLHR) exceeded its own earnings projections in its fiscal third quarter of 2019 (the three months ended March 2). Released after market close on Wednesday, the global brand's earnings report revealed robust contributions from its consumer and ELA (European, Latin America, and Asia) segments, as well as a double-digit improvement in order backlog. Below, let's dig into the quarter's essentials. Note that all comparative numbers are presented against the prior-year quarter (the fiscal third quarter of 2018).

Herman Miller: The raw numbers

Metric Q3 2019 Q3 2018 Growth (YOY)
Revenue $619.0 million $578.4 million 7%
Net income $39.3 million $30.0 million 31%
Diluted earnings per share $0.66 $0.49 34.7%

Data source: Herman Miller. YOY = year over year. 

What happened at Herman Miller this quarter?

A furniture set displayed including tables, chairs, and multiple whiteboards and screens.

Image source: Herman Miller. 

  • The company achieved 6.3% organic revenue growth over the last three months. Herman Miller determines organic growth by adjusting for its adoption of a new revenue recognition accounting standard (ASC 606) at the beginning of fiscal 2019, and by excluding foreign currency effects.

  • New orders as reported increased by 8.4% to $610.7 million, while rising by 7.6% on an organic basis to $615.1 million.

  • The company's order backlog jumped 13.5% to $387.8 million, reflecting broad-based strength across major business lines.

  • Diluted earnings per share (EPS) of $0.66 exceeded the guidance range provided last quarter of $0.59 to $0.63.
  • Net sales in the North America segment rose just 1.4% to $320.9 million. In ELA, net sales improved by 22.8% to $126 million.

  • The organization's specialty segment recorded a net sales increase of 4.8% to $76.1 million, while the consumer segment's net sales advanced by 10.6% to $96 million.

  • Third-quarter sales across the company's four segments fell squarely within a larger trend: In the first nine months of the fiscal year, ELA's sales jumped by 16.5% against the comparable prior-year period, while North America sales increased by only 4.4%. The specialty segment's top line improved by 5.8% during this period, while consumer sales climbed by 10.4%. Essentially, the ELA and consumer businesses have provided most of the company's sales growth in dollars so far this fiscal year.

  • Due to the adoption of ASC 606 last year, Herman Miller's gross margin increased by just 10 basis points to 35.7%. However, after adjusting for effects of the new accounting principle, gross margin went up 70 basis points. 

  • A lower level of expenses per sales dollar combined with the gross margin improvement to lift operating margin by 100 basis points to 7.7%.

What management had to say

In the company's earnings press release, CFO Jeff Stutz provided detail on Herman Miller's gross margin and net earnings improvements, while commenting on macroeconomic factors that shareholders are watching carefully in 2019:

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.

Looking forward

Herman Miller released its typical pared-down financial outlook alongside earnings on Wednesday. It anticipates fourth-quarter revenue to land between $645 million and $655 million, a target that, if met, will represent 5% organic year-over-year growth at the midpoint of the range. Diluted earnings per share are forecast to fall between $0.76 and $0.80. Despite ongoing uncertainty over trade, a lack of resolution on Brexit, and tariff impacts, Herman Miller has so far been able to maintain its momentum across its global footprint and appears to be well positioned for the remainder of the fiscal year.  

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.