High-end office furniture manufacturer Herman Miller, Inc. (NASDAQ:MLHR) released fiscal fourth-quarter 2018 earnings on Monday after the markets closed, and in the following Tuesday trading session, the company's shares jumped nearly 11%. Let's review the factors driving investors' warm enthusiasm after taking in the headline numbers below.
Herman Miller: The raw numbers
|Metric||Q4 2018||Q4 2017||Year-Over-Year Growth|
|Revenue||$618.0 million||$577.2 million||7.1%|
|Net income||$31.8 million||$33.4 million||(4.8%)|
|Diluted earnings per share||$0.53||$0.55||(3.6%)|
What happened at Herman Miller this quarter?
Record net sales of $618.0 million easily exceeded the top of management's projected fourth-quarter revenue range of between $590.0 million and $610.0 million. Similarly, organic revenue growth of 6.8% outpaced management's target of 4%.
Performance was led by Herman Miller's ELA (Europe, Middle East, Africa, Latin America, and Asia-Pacific) segment, which reported extremely brisk sales growth of nearly 30%, to $125.4 million.
As the global economy has revived, ELA has gradually transformed into the company's growth engine. Management singled out the following geographical units as particularly vibrant during the quarter: Continental Europe, the U.K., India, Australia, Mexico, and the Middle East.
Revenue for North America, the company's largest segment, fell 3.7% to $309.2 million. However, orders increased 3.8%, allaying investor fears about the strength of upcoming project work. As I discussed in a preview to earnings, North American orders dipped 5.7% in the fiscal third quarter. Management attributed the turnaround in order flow to activity across all project sizes, with notable strength in the computer equipment, energy, and financial services industries.
- Herman Miller's two smallest segments chalked up double-digit growth: The specialty segment improved 13% to $83.2 million, while the consumer segment expanded 11.3% to $100.2 million.
Gross margin decreased roughly 1.5 percentage points to 36.9%, but the reading was within the company's projected fourth-quarter range of 36.25% to 37.25%.
Operating expenses increased by $22.0 million to $184.3 million against the comparable prior-year quarter. After removing one-time items tied to the company's CEO transition (longtime CEO Brian Walker will retire at the end of August; a search is underway for his replacement), as well as consulting fees related to compensation, operating expenses jumped by $15.6 million. Thus, the company's nearly $41 million sales increase easily outpaced the rise in adjusted expenses.
The one-time items, coupled with the lower gross margin, caused net income and earnings per share to dip versus the prior-year quarter, as seen in the table above. The effect was mitigated by a $7 million tax benefit resulting from a lower tax rate, courtesy of last year's U.S. tax legislation.
Rising commodity costs from the Trump administration's tariffs on steel and aluminum continue to pose a concern for the manufacturer. Herman Miller expects steel inflation to add another $15 million-$20 million to its costs of goods sold annually going forward. However, the company anticipates offsetting this with $30 million-$60 million of yearly productivity savings from various cost-cutting initiatives.
- That the company quantified the expected effects of tariffs and predicted a productivity offset likely contributed to investors' buying interest following earnings. It's interesting to note that competitor Steelcase Inc. (NYSE:SCS) has taken an alternate route, and is raising list prices on customers to protect profitability.
The company hiked its quarterly dividend by 10% to 0.1975, which on an annualized basis yields 1.9% at the current share price.
What management had to say
As I discussed in my earnings preview, Herman Miller announced two acquisitions in the weeks leading up to its earnings report. The company acquired a 48% equity interest in Dutch glass wall and enclosure manufacturer Maars Living Walls. It also purchased a 33% stake in Nine United Denmark A/S (HAY). HAY is a well-respected Danish provider of ancillary furnishings.
In Herman Miller's earnings press release, Walker provided context on the two purchases:
[These] investments directly support our strategic priorities. Maars significantly enhances our dealer eco-system initiative with their industry leading designs and performance capabilities in the fast-growing moveable wall category. The investments in HAY immediately impact our focus on scaling the Consumer business given their deep catalog and renowned reputation as a design leader of furniture and lifestyle accessories at accessible price points. These additions to the Herman Miller family of brands serve our ultimate goal of expanding the size of the addressable markets we serve, and add fuel to our effort to leverage our global multi-channel distribution capability
In addition to the equity stake investments that total a combined $72 million, Herman Miller also acquired North American licensing rights for HAY's complete furnishings catalog for $5 million.
Both acquisitions will be accounted for as nonconsolidated equity investments, and while they'll be marginally accretive (i.e., net positive) to earnings per share (EPS) in 2019, the company expects the investments to add $0.27 to $0.35 to EPS annually within five years.
Herman Miller's management issued healthy first-quarter fiscal 2019 guidance alongside earnings. The company expects first-quarter revenue to land between $610 million and $630 million. The midpoint of this range implies an organic growth rate of 6%. Management sees diluted EPS of $0.63 to $0.67, which, if met, would represent improvement of between 14.5% and 21.8% over last year's first-quarter EPS of $0.55.