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EX-31.1 - EXHIBIT 31.1 - MILLER HERMAN INChmi10q_02282015ex311.htm
EX-32.1 - EXHIBIT 32.1 - MILLER HERMAN INChmi10q_02282015ex321.htm
EX-32.2 - EXHIBIT 32.2 - MILLER HERMAN INChmi10q_02282015ex322.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


FORM 10-Q

[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
[ _ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended February 28, 2015
 
Commission File No. 001-15141


HERMAN MILLER, INC.

A Michigan Corporation
 
ID No. 38-0837640
 
 
 
855 East Main Avenue, Zeeland, MI 49464-0302
 
Phone (616) 654 3000


Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes [ X ] No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ X ]
 Accelerated filer [_]
Non-accelerated filer [_]
Smaller reporting company [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [ X ]


Common Stock Outstanding at April 6, 2015 - 59,654,160 shares





HERMAN MILLER, INC. FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2015
INDEX
 
 
Page No.
Part I — Financial Information
 
 
Item 1 Financial Statements (Unaudited)
 
 
Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended February 28, 2015 and March 1, 2014
 
Condensed Consolidated Balance Sheets — February 28, 2015 and May 31, 2014
 
Condensed Consolidated Statements of Cash Flows — Nine Months Ended February 28, 2015 and March 1, 2014
 
Condensed Consolidated Statements of Stockholders' Equity - Nine Months Ended February 28, 2015 and May 31, 2014
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
Note 3 - Fiscal Year
 
 
 
 
 
 
 
Note 10 - Income Taxes
 
 
 
Note 13 - Debt
 
 
 
 
 
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3 Quantitative and Qualitative Disclosures about Market Risk
 
Item 4 Controls and Procedures
Part II — Other Information
 
 
Item 1   Legal Proceedings
 
Item 1A Risk Factors
 
Item 2   Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3   Defaults upon Senior Securities
 
Item 4   Mine Safety Disclosures
 
Item 5   Other Information
 
Item 6   Exhibits
 
Signatures
 

2






HERMAN MILLER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Millions, Except Per Share Data)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
February 28, 2015
 
March 1, 2014
 
February 28, 2015
 
March 1, 2014
Net sales
$
516.4

 
$
455.9

 
$
1,591.5

 
$
1,394.5

Cost of sales
325.9

 
293.0

 
1,009.7

 
942.7

Gross margin
190.5

 
162.9

 
581.8

 
451.8

Operating expenses:
 
 
 
 
 
 
 
Selling, general, and administrative
133.0

 
111.7

 
400.8

 
449.6

Restructuring and impairment expenses
1.9

 
1.1

 
1.9

 
5.1

Design and research
18.2

 
16.0

 
52.8

 
49.0

Total operating expenses
153.1

 
128.8

 
455.5

 
503.7

Operating earnings (loss)
37.4

 
34.1

 
126.3

 
(51.9
)
Other expenses:
 
 
 
 
 
 
 
Interest expense
4.4

 
4.5

 
13.7

 
13.3

Other, net
1.0

 
0.3

 
1.1

 
0.3

Earnings (loss) before income taxes and equity income
32.0

 
29.3

 
111.5

 
(65.5
)
Income tax expense (benefit)
10.8

 
9.8

 
37.3

 
(26.9
)
Equity earnings (loss) from nonconsolidated affiliates, net of tax

 
(0.1
)
 
0.1

 
(0.1
)
Net earnings (loss)
21.2

 
19.4

 
74.3

 
(38.7
)
Net earnings attributable to noncontrolling interests
0.2

 

 
0.2

 

Net earnings (loss) attributable to Herman Miller, Inc.
$
21.0

 
$
19.4

 
$
74.1

 
$
(38.7
)
 
 
 
 
 
 
 
 
Earnings (loss) per share — basic
$
0.35

 
$
0.33

 
$
1.25

 
$
(0.66
)
Earnings (loss) per share — diluted
$
0.35

 
$
0.33

 
$
1.23

 
$
(0.66
)
Dividends declared, per share
$
0.140

 
$
0.140

 
$
0.420

 
$
0.390

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(3.6
)
 
$
0.1

 
$
(9.5
)
 
$
2.2

Pension and post-retirement liability adjustments
0.3

 
0.3

 
1.2

 
87.9

Other comprehensive income (loss)
(3.3
)
 
0.4

 
(8.3
)
 
90.1

Comprehensive income
17.9

 
19.8

 
66.0

 
51.4

Comprehensive income attributable to noncontrolling interests
0.2

 

 
0.2

 

Comprehensive income attributable to Herman Miller, Inc.
$
17.7

 
$
19.8

 
$
65.8

 
$
51.4


See accompanying notes to condensed consolidated financial statements.


3



HERMAN MILLER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Share Data)
(Unaudited)
 
February 28, 2015
 
May 31, 2014
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
61.8

 
$
101.5

Marketable securities
6.4

 
11.1

Accounts and notes receivable, net
184.8

 
204.3

Inventories, net
128.5

 
78.4

Prepaid expenses and other
78.0

 
56.5

Total current assets
459.5

 
451.8

Property and equipment, at cost
849.6

 
789.2

Less — accumulated depreciation
(614.7
)
 
(594.0
)
Net property and equipment
234.9

 
195.2

Goodwill
303.7

 
228.2

Indefinite-lived intangibles
96.0

 
40.9

Other amortizable intangibles, net
54.3

 
44.2

Other noncurrent assets
44.4

 
30.6

Total Assets
$
1,192.8

 
$
990.9

 
 
 
 
LIABILITIES & STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt
$

 
$
50.0

Accounts payable
141.8

 
136.9

Accrued compensation and benefits
67.4

 
65.0

Accrued warranty
26.1

 
25.2

Other accrued liabilities
90.2

 
79.0

Total current liabilities
325.5

 
356.1

Long-term debt
326.0

 
200.0

Pension and post-retirement benefits
16.0

 
18.2

Other liabilities
73.3

 
44.5

Total Liabilities
740.8

 
618.8

Redeemable noncontrolling interests
27.7

 

Stockholders' Equity:
 
 
 
Preferred stock, no par value (10,000,000 shares authorized, none issued)

 

Common stock, $0.20 par value (240,000,000 shares authorized)
11.9

 
11.9

Additional paid-in capital
133.5

 
122.4

Retained earnings
326.3

 
277.4

Accumulated other comprehensive loss
(46.2
)
 
(37.9
)
Key executive deferred compensation plans
(1.2
)
 
(1.7
)
Total Stockholder's Equity
424.3

 
372.1

Total Liabilities, Redeemable Noncontrolling Interests, and Stockholders' Equity
$
1,192.8

 
$
990.9


See accompanying notes to condensed consolidated financial statements.

4



HERMAN MILLER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Dollars in Millions)
(Unaudited)

Nine Months Ended
February 28, 2015

March 1, 2014
Cash Flows from Operating Activities:



Net earnings (loss)
$
74.3

 
$
(38.7
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
38.6

 
32.3

Stock-based compensation
8.1

 
8.3

Excess tax benefits from stock-based compensation
(0.7
)
 
(0.9
)
Pension and post-retirement expenses
0.7

 
116.4

Deferred taxes
(2.5
)
 
(46.4
)
Gain on sales of property and dealers

 
(0.2
)
Restructuring and impairment expenses
1.9

 
5.1

Other, net
0.7

 
0.8

(Increase) decrease in current assets
3.2

 
(20.4
)
Increase (decrease) in current liabilities
(13.6
)
 
3.0

Decrease in non-current liabilities
(0.9
)
 
(8.9
)
Net Cash Provided by Operating Activities
109.8

 
50.4

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Proceeds from sales of property and dealers
0.3

 
0.2

Marketable securities purchases

 
(4.6
)
Marketable securities sales
4.6

 
4.3

Acquisitions, net of cash received
(154.0
)
 
(6.7
)
Capital expenditures
(43.2
)
 
(32.0
)
Other, net
(8.2
)
 
(0.1
)
Net Cash Used in Investing Activities
(200.5
)
 
(38.9
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Dividends paid
(24.9
)
 
(22.1
)
Proceeds from issuance of long-term debt
622.0

 

Payments of long-term debt
(546.0
)
 

Common stock issued
7.2

 
10.0

Common stock repurchased and retired
(3.3
)
 
(4.3
)
Excess tax benefits from stock-based compensation
0.7

 
0.9

Payment of contingent consideration obligation

 
(1.3
)
Purchase of noncontrolling interests
(5.8
)
 

Other, net
0.8

 
0.2

Net Cash Provided by (Used in) Financing Activities
50.7

 
(16.6
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
0.3

 
(0.5
)
Net Increase (Decrease) in Cash and Cash Equivalents
(39.7
)
 
(5.6
)
 
 
 
 
Cash and Cash Equivalents, Beginning of Period
101.5

 
82.7

Cash and Cash Equivalents, End of Period
$
61.8

 
$
77.1


See accompanying notes to condensed consolidated financial statements.

5



HERMAN MILLER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(Dollars in Millions)
(Unaudited)
 
Nine Months Ended
February 28, 2015
 
March 1, 2014
REDEEMABLE NONCONTROLLING INTERESTS
 
 
 
Balance at beginning of year
$

 
$

Redeemable noncontrolling interests related to DWR acquisition
25.7

 

Stock-based compensation expense
0.9

 

Sale of redeemable noncontrolling interests
0.1

 

Stock options exercised
0.8

 

Net income attributable to redeemable noncontrolling interests
0.2

 

Redeemable noncontrolling interests
$
27.7

 
$

 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
Preferred Stock
 
 
 
Balance at beginning of year and end of period
$

 
$

Common Stock
 
 
 
Balance at beginning of year
11.9

 
11.7

Exercise of stock options

 
0.1

Balance at end of period
11.9

 
11.8

Additional Paid-in Capital
 
 
 
Balance at beginning of year
122.4

 
102.9

Repurchase and retirement of common stock
(3.3
)
 
(4.2
)
Exercise of stock options
5.6

 
8.5

Stock-based compensation expense
7.2

 
8.3

Excess tax benefit for stock-based compensation
0.3

 
0.7

Restricted stock units released
0.2

 
0.2

Employee stock purchase plan issuances
1.2

 
1.1

Deferred compensation plan
(0.5
)
 
(0.3
)
Directors' fees
0.4

 
0.3

Balance at end of period
133.5

 
117.5

Retained Earnings
 
 
 
Balance at beginning of year
277.4

 
331.1

Net income attributable to Herman Miller, Inc.
74.1

 
(38.7
)
Dividends declared on common stock (per share - 2015: $0.420; 2014; $0.390)
(25.2
)
 
(23.2
)
Balance at end of period
326.3

 
269.2

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(37.9
)
 
(124.3
)
Other comprehensive income (loss)
(8.3
)
 
90.1

Balance at end of period
(46.2
)
 
(34.2
)
Key Executive Deferred Compensation
 
 
 
Balance at beginning of year
(1.7
)
 
(1.9
)
Deferred compensation plan
0.5

 
0.2

Balance at end of period
(1.2
)
 
(1.7
)
Noncontrolling Interests
 
 
 
Balance at beginning of year

 

Noncontrolling interests related to DWR acquisition
5.8

 

Purchase of noncontrolling interests
(5.8
)
 

Balance at end of period

 

Total Stockholders' Equity
$
424.3

 
$
362.6



6



HERMAN MILLER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by Herman Miller, Inc. (“the company”) in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management believes the disclosures made in this document are adequate with respect to interim reporting requirements.

The accompanying unaudited condensed consolidated financial statements, taken as a whole, contain all adjustments which are of a normal recurring nature necessary to present fairly the financial position of the company as of February 28, 2015. Operating results for the nine months ended February 28, 2015, are not necessarily indicative of the results that may be expected for the year ending May 30, 2015. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the company's Form 10-K filing for the year ended May 31, 2014.

2. NEW ACCOUNTING STANDARDS
Recently Adopted Accounting Guidance
During the first quarter of fiscal 2015, the company adopted Accounting Standards Update ("ASU") 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which defines the presentation requirements of an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements. The adoption of this standard did not have a material impact on the consolidated financial statements.

Accounting Guidance Issued But Not Adopted as of February 28, 2015
During the first quarter of fiscal 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period." This ASU provides more specificity regarding the treatment of share-based payment awards that require a specific performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. This guidance is effective for annual and interim reporting periods beginning after December 15, 2015. The adoption of this standard is not expected to have a material impact on the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the single, comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The core principle of the standard is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual and interim periods beginning on or after December 15, 2016. In April 2015, the FASB decided to defer the effective date of the new revenue standard by one year, resulting in the revenue standard being effective for annual reporting periods beginning after December 15, 2017. Under the proposal, companies would be permitted to early adopt the ASU as of the original effective date (annual periods beginning after December 15, 2016). The proposal to defer will be voted upon after the comment period has concluded. The company is currently evaluating the impact of adopting this guidance.

3. FISCAL YEAR
The company's fiscal year ends on the Saturday closest to May 31. Fiscal 2015, the year ending May 30, 2015, and fiscal 2014, the year ended May 31, 2014, each contain 52 weeks. The third quarters of fiscal 2015 and fiscal 2014 each contained 13 weeks.

4. ACQUISITIONS AND DIVESTITURES
Design Within Reach Acquisition
On July 28, 2014, the company acquired the majority of the outstanding equity of Design Within Reach, Inc. ("DWR"), a Stamford, Connecticut based, leading North American marketer and seller of modern furniture, lighting, and accessories primarily serving consumers and design trade professionals. The acquisition of DWR advances the company's strategy of being both an industry brand and a consumer brand by expanding the company's reach into the consumer sector.

The company purchased an ownership interest in DWR equal to approximately 81 percent for $155.2 million in cash. The acquisition was financed by using a combination of existing cash and $127.0 million of borrowings on the company's available, unsecured credit facility. As a result of the transaction, the company estimates it will receive future tax benefits with a present value of approximately $10 million measured as of the date of acquisition. Additionally, certain senior management of DWR received fully-vested stock options, with a value of $1.7 million, in the equity of a newly-formed consumer-facing subsidiary that DWR merged into as a result of the transaction. These fully-vested equity awards are recorded in the Condensed Consolidated Balance Sheet within "Redeemable noncontrolling interests".


7



Subsequent to the initial transaction, the company acquired an additional 4 percent of DWR stock from the remaining public shareholders for approximately $5.8 million in cash, all of which was paid during the first and second quarters of fiscal 2015. The remaining 15 percent of DWR stock was contributed by DWR executives into the newly formed consumer business subsidiary and the company contributed the assets of the existing Herman Miller Consumer business. After these transactions, the redeemable noncontrolling interests in the newly formed subsidiary, known as Herman Miller Consumer Holdings, Inc. ("HMCH"), was approximately 7 percent. The remaining HMCH shareholders have a put option to require the company to purchase their remaining interest over a five-year period from the date of issuance of such shares. As a result, these noncontrolling interests are not included within Stockholders' Equity within the Condensed Consolidated Balance Sheets, but rather are included within Redeemable noncontrolling interests.

During the measurement period, the company made certain post-closing adjustments related to the final settlement of net working capital, valuation of customer relationship intangible assets, valuation of accounts receivable, and deferred income taxes that resulted in a net increase to goodwill of $1.8 million. The following table summarizes the fair values of the assets acquired and the liabilities assumed from the acquisition. The allocation of the purchase price is still considered preliminary, and the company is finalizing information related to the valuation and useful lives of intangible assets, deferred income taxes, and goodwill. The final determination of the fair values may result in further adjustments to the values presented below:
Valuation as of July 28, 2014
 
 
(In millions)
At acquisition date - reported as of August 30, 2014
Measurement Period Adjustments
At acquisition date - reported as of February 28, 2015
Purchase price
$
155.0

$
0.2

$
155.2

Fair value of the assets acquired:
 
 
 
Cash
1.2


1.2

Accounts receivable
2.4

(0.2
)
2.2

Inventory
47.4


47.4

Current deferred tax asset

1.7

1.7

Other current assets
5.5


5.5

Long term deferred tax asset
3.7

(3.7
)

Goodwill
74.4

1.8

76.2

Other intangible assets
69.6

(0.3
)
69.3

Property
32.0


32.0

Other long term assets
2.4


2.4

Total assets acquired
238.6

(0.7
)
237.9

Fair value of liabilities assumed:
 
 
 
Accounts payable
20.8


20.8

Current deferred tax liabilities
0.6

(0.6
)

Accrued compensation and benefits
1.6


1.6

Other accrued liabilities
12.3

(0.1
)
12.2

Long term deferred tax liability
16.4

(0.2
)
16.2

Other long term liabilities
0.4


0.4

Total liabilities assumed
52.1

(0.9
)
51.2

Redeemable noncontrolling interests
25.7


25.7

Noncontrolling interests
5.8


5.8

Net assets acquired
$
155.0

$
0.2

$
155.2


The goodwill stemming from the transaction in the amount of $76.2 million was preliminarily recorded as "Goodwill" in the Condensed Consolidated Balance Sheet and allocated to the Consumer reportable segment. The goodwill recognized is attributable primarily to the assembled workforce and expected synergies from DWR and the total amount of this goodwill is not deductible for tax purposes.

Other intangible assets acquired as a result of the acquisition of DWR were preliminarily valued at $69.3 million. These amounts are reflected in the values presented in the following table:

8



Intangible Assets Acquired from the DWR Acquisition
 
(In millions)
Fair Value
Useful Life
Trade Names and Trademarks
$
55.1

Indefinite
Exclusive Distribution Agreements
0.2

1.5 years
Customer Relationships
12.8

10 - 16 years
Product Development Designs
1.2

7 years
Total Intangible Assets Acquired
$
69.3

 

The following table provides net sales and results of operations from DWR included in the company’s results since the July 28, 2014 acquisition.
DWR Results of Operations
 
 
 
Three Months Ended
Nine Months Ended
(In millions)
February 28, 2015
February 28, 2015
DWR Net sales
$
59.5

$
147.9

Intercompany sales elimination
(7.0
)
(14.4
)
Net sales impact to Herman Miller, Inc.
$
52.5

$
133.5

 
 
 
Net loss
$
(0.5
)
$
(4.3
)

DWR acquisition-related expenses were $2.2 million for the nine-month period ended February 28, 2015. These expenses included legal and professional services fees.

China Manufacturing and Distribution Acquisition
On September 30, 2013, the company acquired certain assets from Dongguan Sun Hing Steel Furniture Factory Ltd (DGSH) which together constituted the acquisition of a business. The acquired business is a manufacturing and distribution operation in Dongguan, China. Consideration transferred to acquire the net assets of DGSH consisted of $8.2 million in cash, of which $6.7 million was paid during the second and third quarters of fiscal 2014. The remaining payment is recorded in the Condensed Consolidated Balance Sheets within "Other Accrued Liabilities" and is expected to be made within the next nine months. The company has finalized the purchase accounting for the acquisition of the China manufacturing and distribution facility.

Divestitures
During the third quarter of fiscal 2014, the company completed the sale of one wholly-owned contract furniture dealership in Montreal, Canada. The effect of this transaction on the company's consolidated financial statements was not material. The company also completed the sale of one wholly-owned contract furniture dealership in Oregon and one wholly-owned contract furniture dealership in Arkansas during the first quarter and second quarter of fiscal 2014, respectively. The effects of these transactions on the company's consolidated financial statements were also not material.

5. INVENTORIES, NET
(In millions)
February 28, 2015
 
May 31, 2014
Finished goods
$
104.8

 
$
58.2

Raw materials
23.7

 
20.2

Total
$
128.5

 
$
78.4


Inventories are valued at the lower of cost or market and include material, labor, and overhead. The inventories of the majority of domestic manufacturing subsidiaries are valued using the last-in, first-out method ("LIFO"). The inventories of all other subsidiaries are valued using the first-in, first-out method ("FIFO").






9




6. GOODWILL AND INDEFINITE-LIVED INTANGIBLES
Goodwill and other indefinite-lived intangible assets included in the Condensed Consolidated Balance Sheets consisted of the following as of February 28, 2015 and May 31, 2014:
(In millions)
Goodwill
 
Indefinite-lived Intangible Assets
 
Total Goodwill and Indefinite-lived Intangible Assets
May 31, 2014
$
228.2

 
$
40.9

 
$
269.1

Foreign currency translation adjustments
(0.7
)
 

 
(0.7
)
DWR acquisition
76.2

 
55.1

 
131.3

February 28, 2015
$
303.7

 
$
96.0

 
$
399.7


7. EMPLOYEE BENEFIT PLANS
Pension Plans and Post-Retirement Medical Insurance
During the second quarter of fiscal 2014, the company settled the remaining obligations associated with its primary domestic defined benefit pension plans. Plan participants received vested benefits from the plan assets by electing a lump sum distribution, a roll-over contribution to other 401(k) or individual retirement plans, or an annuity contract with a qualifying third-party provider. These payments resulted in the settlement of the primary domestic defined benefit pension plans, thus relieving the company of any further obligation.
Components of Net Periodic Benefit Costs
(In millions)
Three Months Ended
 
Pension Benefits
 
Other Post-Retirement Benefits
 
February 28, 2015
 
March 1, 2014
 
February 28, 2015
 
March 1, 2014
Domestic:
 
 
 
 
 
 
 
Interest cost
$

 
$

 
$
0.1

 
$
0.1

Expected return on plan assets

 

 

 

Net amortization loss

 

 

 

Settlement loss recognized

 

 

 

Net periodic benefit cost
$

 
$

 
$
0.1

 
$
0.1

 
 
 
 
 
 
 
 
International:
 
 
 
 
 
 
 
Interest cost
$
1.2

 
$
1.0

 
 
 
 
Expected return on plan assets
(1.5
)
 
(1.2
)
 
 
 
 
Net amortization loss
0.5

 
0.4

 
 
 
 
Net periodic benefit cost
$
0.2

 
$
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
Pension Benefits
 
Other Post-Retirement Benefits
 
February 28, 2015
 
March 1, 2014
 
February 28, 2015
 
March 1, 2014
Domestic:
 
 
 
 
 
 
 
Interest cost
$

 
$
5.2

 
$
0.2

 
$
0.2

Expected return on plan assets

 
(3.8
)
 

 

Net amortization loss

 
4.8

 

 

Settlement loss recognized

 
158.2

 

 

Net periodic benefit cost
$

 
$
164.4

 
$
0.2

 
$
0.2

 
 
 
 
 
 
 
 
International:
 
 
 
 
 
 
 
Interest cost
$
3.5

 
$
3.0

 
 
 
 
Expected return on plan assets
(4.5
)
 
(3.6
)
 
 
 
 
Net amortization loss
1.5

 
1.2

 
 
 
 
Net periodic benefit cost
$
0.5

 
$
0.6

 
 
 
 

10







8. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the calculations of basic and diluted earnings per share (EPS).
 
Three Months Ended
Nine Months Ended
 
February 28, 2015
 
March 1, 2014
February 28, 2015
 
March 1, 2014
Numerators:
 
 
 
 
 
 
Numerator for both basic and diluted EPS, net earnings - in millions
$
21.0

 
$
19.4

$
74.1

 
$
(38.7
)
 
 
 
 
 
 
 
Denominators:
 
 
 
 
 
 
Denominator for basic EPS, weighted-average common shares outstanding
59,550,289

 
59,014,789

59,430,575

 
58,888,514

Potentially dilutive shares resulting from stock plans
547,900

 
638,628

566,292

 

Denominator for diluted EPS
60,098,189

 
59,653,417

59,996,867

 
58,888,514

Antidilutive equity awards not included in weighted-average common shares - diluted
676,405

 
780,800

703,364

 
2,782,663


The total antidilutive equity awards not included in the weighted-average common shares for the third quarters of fiscal 2015 and fiscal 2014 were 676,405 shares and 780,800 shares, respectively. Included within these amounts were options to purchase 676,405 shares and 765,448 shares, respectively.

For the nine months ended February 28, 2015 and March 1, 2014, the total antidilutive equity shares not included in the weighted-average common shares were 703,364 shares and 2,782,663 shares, respectively. Included within these amounts were options to purchase 703,364 shares and 2,134,500 shares, respectively.

The company has certain share-based payment awards that meet the definition of participating securities. The company has evaluated the impact on EPS of all participating securities under the two-class method, noting the impact on EPS was immaterial.

9. STOCK-BASED COMPENSATION
The company's stock-based compensation expense for the three month periods ended February 28, 2015 and March 1, 2014 was $2.4 million and $2.7 million, respectively. The related income tax effect for the three month periods ended February 28, 2015 and March 1, 2014 was $0.8 million and $1.0 million, respectively. For the nine months ended February 28, 2015 and March 1, 2014, compensation costs were $8.1 million and $8.3 million, respectively. The related income tax effect for the respective nine month periods was $2.9 million and $3.0 million, respectively.

Stock-based compensation expense recognized in the Condensed Consolidated Statements of Comprehensive Income for the three and nine month periods ended February 28, 2015 and March 1, 2014 has been reduced for estimated forfeitures, as it is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ. Forfeitures are estimated based on historical experience.

For the nine month period ended February 28, 2015, the company issued 258,927 shares of common stock related to the exercise of stock options and 130,144 of common stock related to the vesting of restricted stock units.

For the nine month period ended March 1, 2014, the company issued 412,541 shares of common stock related to the exercise of stock options and 108,947 shares of common stock related to the vesting of restricted stock units.

Stock Option Plans
The company has stock option plans under which options to purchase the company's stock are granted to employees, directors, and consultants at a price not less than the market price of the company's common stock on the date of grant. Under the current award program, all options become exercisable between one year and three years from date of grant and expire ten years from date of grant. Most options are subject to graded vesting with the related compensation expense recognized on a straight-line basis over the requisite service period. The company estimates the issuance date fair value of stock options on the date of grant using the Black-Scholes model.


11



Herman Miller Consumer Holdings Stock (HMCH) Option Plan
Certain employees have been granted, as rollover grants from the acquisition of DWR, options to purchase stock of HMCH, a subsidiary of the company, at a price equal to the exercise price of the original DWR stock options. These awards are fully vested and exercisable at the rollover grant date, and expire at the end of the window period that follows the fifth anniversary of the grant date.
Certain employees were also granted new options to purchase stock of HMCH at a price not less than the market price of HMCH common stock on the date of grant. For the grants of new options under the award program, options are potentially exercisable between one year and five years from date of grant and expire at the end of the window period that follows the fifth anniversary of the grant date. Vesting is based on the performance of HMCH over a period of five years. Compensation expense is determined based on grant-date fair value and the number of common shares of HMCH projected to be issued and is recognized over the requisite service period. The company estimates the issuance date fair value of HMCH stock options on the date of grant using the Black-Scholes model.
Employee Stock Purchase Program
Under the terms of the company's Employee Stock Purchase Plan, 4 million shares of authorized common stock were reserved for purchase by plan participants at 85 percent of the market price. The company recognizes pre-tax compensation expense related to the market value discount.

Restricted Stock Grants
The company periodically grants restricted common stock to certain key employees. Shares are granted in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions on transferability and risk of forfeiture. The grants are subject to either cliff-based or graded vesting over a period not exceeding five years, and are subject to forfeiture if the employee ceases to be employed by the company for certain reasons. After the vesting period, the risk of forfeiture and restrictions on transferability lapse. The compensation expense for these awards is based on the closing stock price on the date of grant. The company recognizes the related compensation expense on a straight-line basis over the requisite service period.

Restricted Stock Units
The company grants restricted stock units to certain key employees. The awards generally cliff-vest after a three or five-year service period, with prorated vesting under certain circumstances and full or partial accelerated vesting upon retirement. Each restricted stock unit represents one equivalent share of the company's common stock to be issued, free of restrictions, after the vesting period. The compensation expense for these awards is based on the closing stock price on the date of grant. Compensation expense related to these awards is recognized over the requisite service period. Dividend equivalent awards are credited quarterly. The units do not entitle participants to the rights of shareholders of common stock, such as voting rights, until shares are issued after the vesting period.

Performance Share Units
The company has granted performance share units to certain key employees. Each unit represents one equivalent share of the company's common stock. The number of common shares ultimately issued in connection with these performance share units is determined based on the company's financial performance over the related three-year service period or the company's financial performance based on certain total shareholder return results as compared to a selected group of peer companies. Compensation expense is determined based on the grant-date fair value and the number of common shares projected to be issued and is recognized over the requisite service period.

10. INCOME TAXES
The effective tax rates for the three months ended February 28, 2015 and March 1, 2014, were 33.6 percent and 33.3 percent, respectively. The company's United States federal statutory rate is 35 percent. For the nine month periods ended February 28, 2015 and March 1, 2014, the effective tax rates were 33.5 percent and 41.1 percent, respectively. The decrease in the rate during the nine month period ended February 28, 2015 resulted from a shift in the relative mix of income and loss between the taxing jurisdictions from the prior year primarily due to legacy pension expenses recorded in the prior year.

The company had income tax accruals associated with uncertain tax benefits totaling $1.5 million and $1.7 million as of February 28, 2015 and March 1, 2014, respectively.

The company recognizes interest and penalties related to uncertain tax benefits through income tax expense in its Condensed Consolidated Statement of Comprehensive Income. Interest and penalties recognized in the company's Condensed Consolidated Statement of Comprehensive Income were $0.2 million for the three month period and $0.3 million for the nine month period ended February 28, 2015. Interest and penalties recognized in the company's Condensed Consolidated Statement of Comprehensive Income were negligible for the three and nine month periods ended March 1, 2014. The company's recorded liability for potential interest and penalties related to uncertain tax benefits totaled $0.9 million and $0.7 million as of February 28, 2015 and March 1, 2014, respectively.

The company is subject to periodic audits by domestic and foreign tax authorities. Currently, the company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next

12



twelve months as a result of the audits. Tax payments related to these audits, if any, are not expected to be material to the company's Condensed Consolidated Statements of Comprehensive Income.

For the majority of tax jurisdictions, the company is no longer subject to state, local, or non-United States income tax examinations by tax authorities for fiscal years before 2011.

11. FAIR VALUE MEASUREMENTS
The following describes the methods the company uses to estimate the fair value of financial assets and liabilities, which have not significantly changed in the current period:

Available-for-sale securities — The company's available-for-sale marketable securities primarily include mortgage-backed debt securities, government obligations and corporate debt securities and are recorded at fair value using quoted prices for similar securities.

Deferred compensation plan — The company's deferred compensation plan primarily includes various domestic and international mutual funds that are recorded at fair value using quoted prices for similar securities.

Foreign currency exchange contracts — The company's foreign currency exchange contracts are valued using an approach based on foreign currency exchange rates obtained from active markets. The estimated fair value of forward currency exchange contracts is based on month-end spot rates as adjusted by market-based current activity.

The following tables set forth financial assets and liabilities measured at fair value in the Condensed Consolidated Balance Sheets and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of February 28, 2015 and May 31, 2014.
(In millions)
Fair Value Measurements
 
February 28, 2015
 
May 31, 2014


Financial Assets
Quoted Prices with
Other Observable Inputs
(Level 2)
 
Quoted Prices with
Other Observable Inputs
(Level 2)
Available-for-sale marketable securities:
 
 
 
Asset-backed securities
$
0.3

 
$
0.4

Corporate securities
0.7

 
1.2

Government obligations
4.9

 
7.9

Mortgage-backed securities
0.5

 
1.6

Foreign currency forward contracts
0.6

 
0.2

Deferred compensation plan
7.6

 
6.3

Total
$
14.6

 
$
17.6

 
 
 
 
Financial Liabilities
 
 
 
Foreign currency forward contracts
$
0.5

 
$
0.1

Total
$
0.5

 
$
0.1



13



The company does not hold any level 3 investments. The following is a summary of the carrying and market values of the company's marketable securities as of the respective dates.
 
February 28, 2015
(In millions)
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Market
Value
Asset-backed securities
$
0.3

 
$

 
$

 
$
0.3

Corporate securities
0.7

 

 

 
0.7

Government obligations
4.9

 

 

 
4.9

Mortgage-backed securities
0.5

 

 

 
0.5

Total
$
6.4

 
$

 
$

 
$
6.4

 
 
 
 
 
 
 
 
 
May 31, 2014
(In millions)
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Market
Value
Asset-backed securities
$
0.4

 
$

 
$

 
$
0.4

Corporate securities
1.2

 

 

 
1.2

Government obligations
7.9

 

 

 
7.9

Mortgage-backed securities
1.6

 

 

 
1.6

Total
$
11.1

 
$

 
$

 
$
11.1


Adjustments to the fair value of available-for-sale securities are recorded as increases or decreases, net of income taxes, within accumulated other comprehensive loss in stockholders’ equity. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in the Condensed Consolidated Statements of Comprehensive Income within "Other, net".

The company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and require the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the company's intent to hold the investment, and whether it is more likely than not that the company will be required to sell the investment before recovery of the cost basis. The company also considers the type of security, related industry and sector performance, and published investment ratings. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments, or macro-economic environments deteriorate, the company could incur future impairments.

Maturities of debt securities included in marketable securities as of February 28, 2015, are as follows.
(In millions)
Cost
 
Fair Value
Due within one year
$
2.7

 
$
2.7

Due after one year through five years
3.6

 
3.6

Due after five years through ten years

 

Due after more than ten years
0.1

 
0.1

Total
$
6.4

 
$
6.4


The company views its available-for-sale portfolio as available for use in its current operations. Accordingly, the investments are recorded within Current Assets within the Condensed Consolidated Balance Sheets.

12. COMMITMENTS AND CONTINGENCIES
Product Warranties
The company provides warranty coverage to the end-user for parts and labor on products sold. The standard length of warranty is twelve years for the majority of products sold; however, this varies depending on the product classification. The company does not sell or otherwise issue warranties or warranty extensions as stand-alone products. Reserves have been established for the various costs associated with the company's warranty program and are included in the Condensed Consolidated Balance Sheets under “Accrued warranty.” General warranty reserves are based on historical claims experience and other currently available information. These reserves are adjusted once an issue is identified and the actual cost of correction becomes known or can be estimated.

14



(In millions)
Three Months Ended
 
Nine Months Ended
 
February 28, 2015
 
March 1, 2014
 
February 28, 2015
 
March 1, 2014
Accrual Balance — beginning
$
26.0

 
$
24.8

 
$
25.2

 
$
24.8

Accrual for warranty matters
5.4

 
5.1

 
18.1

 
15.4

Settlements and adjustments
(5.3
)
 
(4.5
)
 
(17.2
)
 
(14.8
)
Accrual Balance — ending
$
26.1

 
$
25.4

 
$
26.1

 
$
25.4


Guarantees
The company is periodically required to provide performance bonds in order to do business with certain customers. These arrangements are common and generally have terms ranging between one and three years. The bonds are required to provide assurance to customers that the products and services they have purchased will be installed and/or provided properly and without damage to their facilities. The bonds are provided by various bonding agencies; however, the company is ultimately liable for claims that may occur against them. As of February 28, 2015, the company had a maximum financial exposure related to performance bonds totaling approximately $9.1 million. The company has no history of claims, nor is it aware of circumstances that would require it to pay, under any of these arrangements. The company also believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the company's financial statements. Accordingly, no liability has been recorded in respect to these bonds as of February 28, 2015 and May 31, 2014.

The company has entered into standby letter of credit arrangements for purposes of protecting various insurance companies and lessors against default on insurance premium and lease payments. As of February 28, 2015, the company had a maximum financial exposure from these standby letters of credit totaling approximately $8.3 million, all of which is considered usage against the company's revolving credit facility. The company has no history of claims, nor is it aware of circumstances that would require it to perform under any of these arrangements, and believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the company's financial statements. Accordingly, no liability has been recorded in respect of these arrangements as of February 28, 2015 and May 31, 2014.

Contingencies
The company leases a facility in the United Kingdom under an agreement that expired in June 2011, and the company is currently leasing the facility on a month-to-month basis. Under the terms of the lease, the company is required to perform the maintenance and repairs necessary to address the general dilapidation of the facility. The ultimate cost of this provision to the company is dependent on a number of factors including, but not limited to, the future use of the facility by the lessor and whether the company chooses and is permitted to renew the lease term. The company has estimated the cost of these maintenance and repairs to be between $0 million and $3.0 million, depending on the outcome of future plans and negotiations. As a result, an estimated liability of $1.2 million and $1.5 million was recorded under the caption “Other accrued liabilities” in the Condensed Consolidated Balance Sheets as of February 28, 2015, and May 31, 2014, respectively.

The company is also involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the company's consolidated financial statements.

13. DEBT
On January 3, 2015, $50.0 million of the company’s Series A senior notes became due and payable. This debt was paid through the use of borrowings on the company’s revolving line of credit.

On July 21, 2014, the company entered into a third amendment and restatement of its syndicated revolving line of credit, which provides the company with up to $250 million in revolving variable interest borrowing capacity and includes an "accordion feature" allowing the company to increase, at its option and subject to the approval of the participating banks, the aggregate borrowing capacity of the facility by $125 million. The facility expires in July 2019 and outstanding borrowings bear interest at rates based on the prime rate, federal funds rate, LIBOR, or negotiated rates as outlined in the agreement. Interest is payable periodically throughout the period if borrowings are outstanding. As of February 28, 2015, the total debt outstanding related to borrowings against this facility was $126.0 million. These borrowings are included within Long-term debt in the Condensed Consolidated Balance Sheet. As of that date, the total usage against the facility was $134.3 million, of which $8.3 million related to outstanding letters of credit.

During the second quarter of fiscal 2014, the company entered into a revolving line of credit, which provides the company with approximately $5.0 million in revolving variable interest borrowing capacity. The company intends to utilize the revolver, which is denominated in Chinese Renminbi, to meet working capital cash flow needs at its South China operations. The uncommitted facility is subject to changes in bank approval and outstanding borrowings bear interest at rates based on a benchmark lending rate. As of February 28, 2015 and May 31, 2014, there were no borrowings against this facility.


15



During the second quarter of fiscal 2013, the company entered into a revolving line of credit, which provides the company with approximately $5.0 million in revolving variable interest borrowing capacity. The company intends to utilize the revolver, which is denominated in Chinese Renminbi, to meet working capital cash flow needs at its Ningbo, China operations. The uncommitted facility is subject to changes in bank approval and outstanding borrowings bear interest at rates based on a benchmark lending rate. Each draw on the line of credit is subject to a maximum period of one year and corresponding interest is payable on the maturity date of each draw. As of February 28, 2015 and May 31, 2014, there were no borrowings against this facility.

During the second quarter of fiscal 2012, the company entered into an amendment and restatement of the syndicated revolving line of credit, which provided the company with up to $150 million in revolving variable interest borrowing capacity and included an "accordion feature", which allowed the company to increase, at its option and subject to the approval of the participating banks, the aggregate borrowing capacity of the facility by $75 million. This facility was replaced by the third amendment and restatement that occurred on July 21, 2014. As of May 31, 2014, total usage against this facility was $4.9 million, all of which related to outstanding letters of credit.

14. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table provides an analysis of the changes in accumulated other comprehensive income (loss) for the nine months ended February 28, 2015 and March 1, 2014:


Nine Months Ended
(In millions)

February 28, 2015

March 1, 2014
Cumulative translation adjustments at beginning of period

$
(11.1
)

$
(14.0
)
Translation adjustments

(9.5
)

2.2

Balance at end of period

(20.6
)

(11.8
)
Pension and other post-retirement benefit plans at beginning of period

(26.8
)

(110.3
)
Adjustments to pension and other post-retirement benefit plans



(2.0
)
Reclassification to earnings - cost of sales (net of tax $0.0, $(15.9))



27.6

Reclassification to earnings - operating expenses (net of tax $(0.3), $(35.7))

1.2


62.3

Balance at end of period

(25.6
)

(22.4
)
Total accumulated other comprehensive loss

$
(46.2
)

$
(34.2
)

15. RESTRUCTURING AND IMPAIRMENT ACTIVITIES
During the third quarter of fiscal 2015 the company announced restructuring actions involving targeted workforce reductions within the North American segment. These actions resulted in the recognition of restructuring expenses related to severance and outplacement costs totaling $1.9 million during the quarter.

During the third quarter of fiscal 2014 the company recognized restructuring expenses of $1.1 million. This restructuring charge was related to actions taken to improve the efficiency of the North American sales and distribution channel and Geiger manufacturing operations. These actions focused primarily on targeted workforce reductions.

Due to the acquisition of a manufacturing and distribution operation in Dongguan, China in the second quarter of 2014, the company
decided not to pursue the construction of a new manufacturing and distribution facility on property that it previously acquired in Ningbo,
China. In connection with this decision, the company evaluated the fair value of this property and recorded an asset impairment of $4.0 million during the second quarter of fiscal 2014. This impairment charge was recorded to the "Restructuring and impairment expenses" line item within the Condensed Consolidated Statements of Comprehensive Income. The impairment charge is included within the "Corporate" category within the segment reporting.

16. OPERATING SEGMENTS
Following the acquisition of DWR, we realigned the composition of our reportable segments to reflect the new operational and management divisions of the business. As a result, our previously defined "Specialty and Consumer" structure has been divided into two separate segments. The "Specialty" segment includes the operations associated with our Geiger, Maharam, and Herman Miller Collection business units. Under the new structure, the company's "Consumer" business segment includes the results of our combined North American consumer wholesale and retail business, including DWR. Prior year results have been revised to reflect this change. The North American and ELA segments were not affected by these changes.

The company's reportable segments consist of North American Furniture Solutions, ELA ("EMEA, Latin America, and Asia Pacific") Furniture Solutions, Specialty, and Consumer. The North American Furniture Solutions reportable segment includes the operations associated with the

16



design, manufacture, and sale of furniture products for work-related settings, including office, education, and healthcare environments, throughout the United States and Canada. ELA Furniture Solutions includes the operations associated with the design, manufacture, and sale of furniture products, primarily for work-related settings, in the EMEA, Latin America, and Asia-Pacific geographic regions. Specialty includes the operations associated with the design, manufacture, and sale of high-craft furniture products and textiles including Geiger wood products, Maharam textiles, and Herman Miller Collection products. The Consumer segment includes the operations associated with the sale of modern design furnishings and accessories to third party retail distributors, as well as direct to consumer sales through eCommerce and DWR studios.

The company also reports a “Corporate” category consisting primarily of unallocated corporate expenses including restructuring, impairment, acquisition-related costs, and other unallocated corporate costs.

The accounting policies of the reportable operating segments are the same as those of the company. Additionally, the company employs a methodology for allocating corporate costs and assets with the underlying objective of this methodology being to allocate corporate costs according to the relative usage of the underlying resources and to allocate corporate assets according to the relative expected benefit. The company has determined that allocation based on relative net sales is appropriate. The majority of corporate costs are allocated to the operating segments; however, certain costs generally considered the result of isolated business decisions are not subject to allocation and are evaluated separately from the rest of the regular ongoing business operations. For example, restructuring charges that are reflected in operating earnings are allocated to the “Corporate” category.

The performance of the operating segments is evaluated by the company's management using various financial measures. The following is a summary of certain key financial measures for the respective fiscal periods indicated.


17



 
Three Months Ended
 
Nine Months Ended
(In millions)
February 28, 2015
 
March 1, 2014
 
February 28, 2015
 
March 1, 2014
Net Sales:
 
 
 
 
 
 
 
North American Furniture Solutions
$
296.0

 
$
293.9

 
$
932.4

 
$
909.2

ELA Furniture Solutions
97.3

 
97.9

 
307.0

 
282.6

Specialty
50.5

 
47.5

 
160.5

 
152.7

Consumer
72.6

 
16.6

 
191.6

 
50.0

Corporate

 

 

 

Total
$
516.4

 
$
455.9

 
$
1,591.5

 
$
1,394.5

 
 
 
 
 
 
 
 
Depreciation and Amortization:
 
 
 
 
 
 
 
North American Furniture Solutions
$
7.2

 
$
7.0

 
$
21.4

 
$
20.8

ELA Furniture Solutions
1.9

 
1.8

 
6.3

 
5.7

Specialty
1.9

 
1.6

 
5.4

 
4.9

Consumer
2.3

 
0.3

 
5.3

 
0.9

Corporate
0.1

 

 
0.2

 

Total
$
13.4

 
$
10.7

 
$
38.6

 
$
32.3

 
 
 
 
 
 
 
 
Operating Earnings (Loss):
 
 
 
 
 
 
 
North American Furniture Solutions
$
26.7

 
$
26.7

 
$
95.2

 
$
(58.3
)
ELA Furniture Solutions
6.2

 
4.7

 
19.7

 
12.9

Specialty
1.9

 
(0.2
)
 
7.6

 
(7.3
)
Consumer
4.6

 
3.8

 
8.4

 
5.9

Corporate
(2.0
)
 
(0.9
)
 
(4.6
)
 
(5.1
)
Total
$
37.4

 
$
34.1

 
$
126.3

 
$
(51.9
)
 
 
 
 
 
 
 
 
Capital Expenditures:
 
 
 
 
 
 
 
North American Furniture Solutions
$
8.0

 
$
7.1

 
$
23.7

 
$
22.3

ELA Furniture Solutions
7.3

 
3.0

 
13.6

 
5.6

Specialty
0.6

 
1.9

 
2.8

 
4.1

Consumer
0.6

 

 
3.1

 

Corporate

 

 

 

Total
$
16.5

 
$
12.0

 
$
43.2

 
$
32.0

(In millions)
February 28, 2015
 
May 31, 2014
Total Assets:
 
 
 
North American Furniture Solutions
$
512.9

 
$
457.0

ELA Furniture Solutions
236.2

 
244.8

Specialty
154.1

 
157.7

Consumer
221.4

 
18.8

Corporate
68.2

 
112.6

Total
$
1,192.8

 
$
990.9

 
 
 
 
Total Goodwill:
 
 
 
North American Furniture Solutions
$
135.8

 
$
135.8

ELA Furniture Solutions
41.9

 
42.6

Specialty
49.8

 
49.8

Consumer
76.2

 

Corporate

 

Total
$
303.7

 
$
228.2



18



17. SUBSEQUENT EVENTS
Sale of Land in Ningbo, China
On March 12, 2015, the company entered into an agreement for the sale of land in Ningbo, China. For the third quarter of fiscal 2015, this land qualified to be classified as an Asset Held for Sale. Accordingly, during the third quarter of fiscal 2015 the land was written down to its fair value, less estimated selling expenses, to an amount of $4.2 million and is now classified as a current asset and has been included within "prepaid expenses and other" on the Consolidated Balance Sheet for the period ended February 28, 2015. Impairment recorded during the period was not material.



19



Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of certain significant factors that affected the company's financial condition, earnings and cash flows during the periods included in the accompanying condensed consolidated financial statements and should be read in conjunction with the company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014. References to “Notes” are to the footnotes included in the condensed consolidated financial statements.

Discussion of Current Business Conditions
During the third quarter of fiscal 2015, we reported sales of $516.4 million, an increase of 13.3 percent as compared to the prior year. Gross margin improved 120 basis points, due mainly to the acquisition of DWR, increases in net pricing, and operational improvements within our Specialty and ELA segments. We were pleased to deliver year over year growth in sales and gross margin, in spite of the significant currency headwinds resulting from continued strengthening of the U.S. Dollar against other major currencies.

Diluted earnings per share totaled $0.35, an increase of 6.1 percent compared to the prior year. Excluding the impact of restructuring charges incurred during the quarter, earnings were $0.37(1) per share, an increase of 8.8 percent from the prior year.

The improvement in earnings was bolstered by continued growth in our Specialty, Consumer, and ELA segments, all three posted earnings expansion over last year's third quarter level. While we were excited by the continued strength of these segments, order rates within our North American segment again lagged our expectations this quarter. In response to this, we have taken several steps aimed at improving our project win-rates and improving our overall market competitiveness within the North American contract market. To that end, we have completed or are in the process of completing the following:

Filled open sales positions to increase overall selling capacity and market coverage
Accelerated new product introductions
Reset showrooms in key markets to ensure they reflect our most current product and design solutions
Increased focus on competing successfully on small and medium-sized project opportunities
Realigned the leadership structure of our Sales and Operations teams in the North American business

We believe we have a clear understanding of the issues that have impacted the North American segment and we are addressing them with a sense of urgency. We believe we have the right strategy, leadership, and processes in place to improve our competitive position in the North American contract industry.

As previously mentioned, the Specialty and Consumer segments continued to produce growth, which we believe evidences the progress of our SHIFT strategy, as we continue to build a lifestyle brand that serves customers in multiple settings. The Specialty segment achieved growth in sales ($3.0 million), operating earnings ($2.1 million), and Adjusted EBITDA ($2.4 million(1)).

Our Consumer segment also saw growth in sales ($56.0 million), operating earnings ($0.8 million), and Adjusted EBITDA ($2.8 million(1)). The majority of this growth was related to the acquisition of DWR ($52.5 million), but we were pleased to see organic revenue growth ($3.6 million), which adjusts for the impact of acquisitions, divestitures and foreign currency translation, related to the legacy consumer wholesale and eCommerce business as well. The integration of DWR continues, and we are making progress toward our exclusive product goals, which includes introducing more DWR exclusives and increasing the mix of Herman Miller brand products sold through DWR, while also expanding our e-Commerce business.

Sales attributable to our ELA segment were down slightly ($0.6 million), from the same quarter last year, but excluding the negative impact of foreign currency, ELA delivered growth of 5.5 percent. This organic growth was led by increased sales in the Asia-Pacific region, primarily Australia and India, and continued growth in project activity in the EMEA region.

Capital expenditures totaled $43.2 million for the nine months ended February 28, 2015, an increase of $11.2 million compared to the same nine month period of fiscal 2014. The increase was mostly attributable to the construction of our new consolidated manufacturing and distribution facility in the United Kingdom. We anticipate our full year capital spending to be between $65.0 million and $70.0 million.

In light of the most recent BIFMA forecast, including the activity related to its underlying leading indicators, such as service sector employment, non-residential construction forecasts, and ABI trends, we believe that the economic environment is supportive of near-term growth within the North American contract market.

The remaining sections within Item 2 include additional analysis of our three and nine months ended February 28, 2015, including discussion of significant variances compared to the prior year periods.

(1) Non-GAAP measurements; see accompanying reconciliations and explanations.

20



Reconciliation of Non-GAAP Financial Measures
This report contains references to Adjusted gross margin, Adjusted operating expenses, Adjusted operating earnings, Adjusted EBITDA and Adjusted earnings per share diluted, all of which are non-GAAP financial measures (referred to collectively as the "Adjusted financial measures"). The Adjusted financial measures are calculated by excluding from Gross Margin, Operating expenses, Operating earnings, and Earnings per share – diluted items that we believe are not indicative of our ongoing operating performance. Such items consist of expenses associated with restructuring actions taken to adjust our cost structure to the current business climate, transition-related expenses, including amortization and settlement expenses, relating to defined benefit pension plans that we have terminated ("legacy pension expenses"), expenses associated with acquisition-related inventory adjustments, and transaction expenses associated with our acquisition of DWR. The legacy pension expenses include settlements caused by the transition to a defined contribution program and the net periodic benefit expenses associated with the terminated plans, subsequent to September 1, 2012. Adjusted EBITDA is calculated by excluding depreciation, amortization and other net income or expense from Adjusted Operating Earnings. We present the Adjusted financial measures because we consider them to be important supplemental measures of our performance and believe them to be useful in analyzing ongoing results from operations.
The Adjusted financial measures are not measurements of our financial performance under GAAP and should not be considered an alternative to Gross margin, Operating expenses, Operating earnings and Earnings per share diluted under GAAP. The Adjusted financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of the Adjusted financial measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing prominence of our GAAP results and using the Adjusted financial measures only as a supplement.
The following table reconciles Gross margin to Adjusted gross margin for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions) 
February 28, 2015
March 1, 2014
 
February 28, 2015
March 1, 2014
Gross margin
$
190.5

$
162.9

 
$
581.8

$
451.8

Percentage of net sales
36.9
%
35.7
%
 
36.6
%
32.4
%
Add: Acquisition-related inventory adjustments


 
7.8

1.4

Add: Legacy pension expenses


 

51.3

Adjusted gross margin
$
190.5

$
162.9

 
$
589.6

$
504.5

 
 
 
 
 
 
Adjusted gross margin as a percentage of net sales
36.9
%
35.7
%
 
37.0
%
36.2
%

The following table reconciles Operating expenses to Adjusted operating expenses for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions) 
February 28, 2015
March 1, 2014
 
February 28, 2015
March 1, 2014
Operating expenses
$
153.1

$
128.8

 
$
455.5

$
503.7

Percentage of net sales
29.6
%
28.3
%
 
28.6
%
36.1
%
Less: Restructuring and impairment expenses
(1.9
)
(1.1
)
 
(1.9
)
(5.1
)
Less: Acquisition expenses


 
(2.2
)

Less: Legacy pension expenses


 

(113.1
)
Adjusted operating expenses
$
151.2

$
127.7

 
$
451.4

$
385.5

 
 
 
 
 
 
Adjusted operating expenses as a percentage of net sales
29.3
%
28.0
%
 
28.4
%
27.6
%


21



The following table reconciles Operating earnings to Adjusted operating earnings and Adjusted EBITDA for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions) 
February 28, 2015
March 1, 2014
 
February 28, 2015
March 1, 2014
Operating earnings (loss)
$
37.4

$
34.1

 
$
126.3

$
(51.9
)
Percentage of net sales
7.2
%
7.5
%
 
7.9
%
(3.7
)%
Add: Restructuring and impairment expenses
1.9

1.1

 
1.9

5.1

Add: Acquisition-related inventory adjustments


 
7.8

1.4

Add: Acquisition expenses


 
2.2


Add: Legacy pension expenses


 

164.4

Adjusted operating earnings
$
39.3

$
35.2

 
$
138.2

$
119.0

Less: Other, net
1.0

0.4

 
1.1

0.3

Add: Depreciation and amortization
13.4

10.7

 
38.6

32.3

Adjusted EBITDA
$
51.7

$
45.5

 
$
175.7

$
151.0

 
 
 
 
 
 
Adjusted operating earnings as a percentage of net sales
7.6
%
7.7
%
 
8.7
%
8.5
 %

The following table reconciles Earnings per share diluted to Adjusted earnings per share diluted for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
 
February 28, 2015
March 1, 2014
 
February 28, 2015
March 1, 2014
Earnings (loss) per share – diluted
$
0.35

$
0.33

 
$
1.23

$
(0.66
)
Add: Restructuring and impairment expenses
0.02

0.01

 
0.02

0.07

Add: Acquisition-related inventory adjustments


 
0.08

0.01

Add: Acquisition expenses


 
0.02


Add: Legacy pension expenses


 

1.76

Adjusted earnings per share – diluted
$
0.37

$
0.34

 
$
1.35

$
1.18



22



Analysis of Third Quarter Results
The following table presents certain key highlights from the results of operations for the periods indicated.
(In millions, except per share data)
Three Months Ended
 
Nine Months Ended
 
February 28, 2015
 
March 1, 2014
 
Percent
Change
 
February 28, 2015
 
March 1, 2014
 
Percent
Change
Net sales
$
516.4

 
$
455.9

 
13.3
%
 
$
1,591.5

 
$
1,394.5

 
14.1
 %
Cost of sales
325.9

 
293.0

 
11.2
%
 
1,009.7

 
942.7

 
7.1
 %
Gross margin
190.5

 
162.9

 
16.9
%
 
581.8

 
451.8

 
28.8
 %
Operating expenses
151.2

 
127.7

 
18.4
%
 
453.6

 
498.6

 
(9.0
)%
Restructuring and impairment expenses
1.9

 
1.1

 
72.7
%
 
1.9

 
5.1

 
(62.7
)%
Total operating expenses
153.1

 
128.8

 
18.9
%
 
455.5

 
503.7

 
(9.6
)%
Operating earnings (loss)
37.4

 
34.1

 
9.7
%
 
126.3

 
(51.9
)
 
343.4
 %
Other expenses, net
5.4

 
4.8

 
12.5
%
 
14.8

 
13.6

 
8.8
 %
Earnings (loss) before income taxes and equity income
32.0

 
29.3

 
9.2
%
 
111.5

 
(65.5
)
 
270.2
 %
Income tax expense (benefit)
10.8

 
9.8

 
10.2
%
 
37.3

 
(26.9
)
 
238.7
 %
Equity income (loss), net of tax

 
(0.1
)
 
n/a

 
0.1

 
(0.1
)
 
200.0
 %
Net earnings (loss)
$
21.2

 
$
19.4

 
9.3
%
 
$
74.3

 
$
(38.7
)
 
292.0
 %
Net earnings attributable to redeemable noncontrolling interests
0.2

 

 
n/a

 
0.2

 

 
n/a

Net earnings (loss) attributable to Herman Miller, Inc.
$
21.0

 
$
19.4

 
8.2
%
 
$
74.1

 
$
(38.7
)
 
291.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - diluted
$
0.35

 
$
0.33

 
6.1
%
 
$
1.23

 
$
(0.66
)
 
286.4
 %
Orders
$
500.5

 
$
464.0

 
7.9
%
 
$
1,589.6

 
$
1,438.2

 
10.5
 %
Backlog
$
316.6

 
$
315.8

 
0.3
%
 
 
 
 
 
 

The following table presents, for the periods indicated, select components of the company's Condensed Consolidated Statements of Comprehensive Income as a percentage of net sales.
 
Three Months Ended
 
Nine Months Ended
 
February 28, 2015
 
March 1, 2014
 
February 28, 2015
 
March 1, 2014
Net sales
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
 %
Cost of sales
63.1

 
64.3

 
63.4

 
67.6

Gross margin
36.9

 
35.7

 
36.6

 
32.4

Operating expenses
29.3

 
28.0

 
28.5

 
35.8

Restructuring and impairment expenses
0.4