Healthy sales and order flow kindled investor enthusiasm for shares of global office furnishings and accessories provider Herman Miller (MLKN 1.21%), which released fiscal second-quarter 2019 results on Wednesday after the close of trading. The company is benefiting from continued global economic growth, as well as the recent expansion of its product portfolio via acquisitions. As we delve into the details of the last three months, note that all comparative numbers are presented against the prior-year quarter (the fiscal first quarter of 2018).

Herman Miller: The raw numbers

Metric Q2 2019 Q2 2018 Year-Over-Year Growth
Revenue $652.6 million $604.6 million 7.9%
Net income $39.3 million $33.5 million 17.3%
Diluted earnings per share $0.66 $0.55 20%

Data source: Herman Miller.  

What happened at Herman Miller this quarter?

  • Reported revenue growth of 7.9% was undergirded by organic growth of 7%. Organic growth is determined by Herman Miller by removing currency translation effects and adjusting for the company's adoption of a new revenue recognition accounting standard (ASC 606) at the beginning of fiscal 2019.

  • New orders increased 11.6% to a new record of $702.6 million in the second quarter. On an organic basis, new orders rose by an impressive 10.3%.

  • In the company's largest segment, North America, sales expanded by 7% to $352.3 million, paced by a 9% increase in orders. While Herman Miller's second-largest segment, ELA (Europe, Latin America, and Asia), turned in an uncharacteristically muted sales increase of 5% to $118.5 million, new orders jumped 16.4%, implying higher revenue in upcoming quarters.

  • Herman Miller's two smaller segments, specialty and consumer, reported solid growth. Specialty sales rose 9.7% to $81.6 million, and consumer sales advanced by 14.5% to $99.3 million. Specialty and consumer orders leaped by 13% and 15.5%, respectively.

  • Management attributed the company's success during the quarter to strong demand across all business segments, as well as successful integrations of recent acquisitions HAY and Maars Living Walls into Herman Miller's operations. The company opened its first North American retail studios of Europe-based design house Hay in Portland, Oregon, and Costa Mesa, California, during the quarter. 
  • Herman Miller's order backlog increased by 4.3% over the first quarter of 2018, to $364.4 million.

  • The company's gross margin declined by 0.6 percentage points, which management attributed to the adoption of ASC 606. Adjusting for effects of ASC 606, gross margin was flat against the prior-year quarter.

  • While operating expenses rose by more than $12 million to $182.2 million, part of this rise was attributable to Herman Miller's recent CEO transition, as well as fees paid to consultants in conjunction with profit enhancement initiatives. Adding back $5.7 million in one-time charges, operating margin improved by 0.7% to 9%.

Contemporary chair next to a desk and shelving in wood.

Image source: Herman Miller.

What management had to say

While the company has exhibited vivid growth in the first two quarters of fiscal 2019, the potential remains for external disruption throughout the year. In a discussion of current performance within the company's earnings press release, CFO Jeff Stutz addressed the global economic backdrop as well as the impact of potentially higher of import tariffs in the quarters ahead:

Adjusted earnings per share for the quarter exceeded the expectations that we established in September. Profit growth was driven by robust sales growth, well-managed operating expenses and a lower effective tax rate. In our view, the overall macro-economic backdrop for our business is supportive for continued growth, although the ultimate resolution of global trade tensions remains an outlook risk for the business. That said, our strategic focus on profit optimization was designed to help mitigate the potential for inflationary pressures and our teams have line of sight to savings that can offset these pressures.

Looking forward

Looking ahead to the third quarter of fiscal 2019, Herman Miller's management has outlined a revenue target of $615 million to $630 million, which translates to an organic growth rate of 7% at the midpoint. Adjusted diluted earnings per share are slated to land between $0.59 and $0.63. At the midpoint of this range, Herman Miller will exceed prior-year adjusted EPS of $0.50 by 22%. In other words, over the next three months, executives expect both revenue and earnings to maintain the year-over-year growth rates achieved in the current quarter.