false--06-03Q320172017-03-040000066382YesLarge Accelerated FilerMILLER HERMAN INCP3YP1YP12Y0.200.20240000000240000000598682765978358400000010000000100000000000<div style="font-family:Times New Roman;font-size:10pt;"><div style="line-height:120%;text-align:justify;font-size:10pt;"><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;font-weight:bold;">Subsequent Event</font></div><div style="line-height:120%;text-align:left;"><hr></hr></div><div style="line-height:120%;text-align:justify;font-size:10pt;"><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">On January 1, 2017, the company completed the sale of a wholly-owned contract furniture dealership in Philadelphia. As a result of the transaction, the consideration to be received and the gain to be recognized in the third quarter of fiscal 2017 will be negligible. In addition to the initial payment from the buyer as consideration for the sale, additional amounts could become due from the buyer based on the future performance of the divested dealership. The operations associated with the dealership relate to the North American Furniture Solutions segment.</font></div></div> 0000066382 2016-05-29 2017-03-04 0000066382 2017-04-10 0000066382 2015-05-31 2016-02-27 0000066382 2016-12-04 2017-03-04 0000066382 2015-11-29 2016-02-27 0000066382 2016-05-28 0000066382 2017-03-04 0000066382 2016-02-27 0000066382 mlhr:WhollyownedcontractfurnituredealershipMember stpr:PA 2016-05-29 2017-03-04 0000066382 2015-05-30 0000066382 us-gaap:AdditionalPaidInCapitalMember 2015-05-31 2016-02-27 0000066382 us-gaap:NoncontrollingInterestMember 2016-02-27 0000066382 us-gaap:AdditionalPaidInCapitalMember 2016-05-29 2017-03-04 0000066382 us-gaap:DeferredCompensationShareBasedPaymentsMember 2015-05-31 2016-02-27 0000066382 us-gaap:NoncontrollingInterestMember 2016-05-28 0000066382 us-gaap:NoncontrollingInterestMember 2016-05-29 2017-03-04 0000066382 us-gaap:RetainedEarningsMember 2015-05-30 0000066382 us-gaap:RetainedEarningsMember 2016-05-28 0000066382 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2017-03-04 xbrli:shares iso4217:USD xbrli:shares xbrli:pure iso4217:USD


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 March 4, 2017
 
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 10, 2017 - 59,785,399 shares





Herman Miller, Inc. Form 10-Q
Table of Contents

 
 
Page No.
Part I — Financial Information
 
 
Item 1 Financial Statements (Unaudited)
 
 
Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended March 4, 2017 and February 27, 2016
 
Condensed Consolidated Balance Sheets — March 4, 2017 and May 28, 2016
 
Condensed Consolidated Statements of Cash Flows — Nine Months Ended March 4, 2017 and February 27, 2016
 
Condensed Consolidated Statements of Stockholders' Equity — Nine Months Ended March 4, 2017 and February 27, 2016
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
Note 9 - Income Taxes
 
 
 
Note 12 - 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
 
March 4, 2017
 
February 27, 2016
 
March 4, 2017
 
February 27, 2016
Net sales
$
524.9

 
$
536.5

 
$
1,701.0

 
$
1,682.3

Cost of sales
329.4

 
328.7

 
1,057.6

 
1,033.3

Gross margin
195.5

 
207.8

 
643.4

 
649.0

Operating expenses:
 
 
 
 
 
 
 
Selling, general, and administrative
140.4

 
143.6

 
443.5

 
436.4

Restructuring expenses
2.7

 

 
3.7

 

Design and research
17.4

 
19.9

 
55.2

 
57.7

Total operating expenses
160.5

 
163.5

 
502.4

 
494.1

Operating earnings
35.0

 
44.3

 
141.0

 
154.9

Other expenses:
 
 
 
 
 
 
 
Interest expense
3.8

 
3.8

 
11.4

 
11.6

Other, net
(0.8
)
 
0.6

 
(1.0
)
 
0.7

Earnings before income taxes and equity income
32.0

 
39.9

 
130.6

 
142.6

Income tax expense
9.5

 
11.9

 
41.1

 
46.1

Equity income from nonconsolidated affiliates, net of tax

 
0.2

 
1.1

 
0.4

Net earnings
22.5

 
28.2

 
90.6

 
96.9

Net earnings attributable to noncontrolling interests

 
0.3

 
0.1

 
0.8

Net earnings attributable to Herman Miller, Inc.
$
22.5

 
$
27.9

 
$
90.5

 
$
96.1

 
 
 
 
 
 
 
 
Earnings per share — basic
$
0.38

 
$
0.46

 
$
1.51

 
$
1.61

Earnings per share — diluted
$
0.37

 
$
0.46

 
$
1.50

 
$
1.59

Dividends declared, per share
$
0.170

 
$
0.148

 
$
0.510

 
$
0.443

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(0.4
)
 
$
(6.0
)
 
$
(10.8
)
 
$
(10.5
)
Pension and other post-retirement plans
0.5

 
0.6

 
2.1

 
2.0

Interest rate swap agreement
1.1

 

 
5.3

 

Unrealized holding gain
0.2

 

 
0.2

 

Other comprehensive income (loss)
1.4

 
(5.4
)
 
(3.2
)
 
(8.5
)
Comprehensive income
23.9

 
22.8

 
87.4

 
88.4

Comprehensive income attributable to noncontrolling interests

 
0.3

 
0.1

 
0.8

Comprehensive income attributable to Herman Miller, Inc.
$
23.9

 
$
22.5

 
$
87.3

 
$
87.6


See accompanying notes to condensed consolidated financial statements.


3





Herman Miller, Inc.
Condensed Consolidated Balance Sheets
(Dollars in millions, except per share data)
(Unaudited)
 
March 4, 2017
 
May 28, 2016
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
78.4

 
$
84.9

Marketable securities
8.0

 
7.5

Accounts and notes receivable, net
174.8

 
211.0

Inventories, net
155.7

 
128.2

Prepaid expenses and other
49.1

 
48.9

Total current assets
466.0

 
480.5

Property and equipment, at cost
970.5

 
929.0

Less — accumulated depreciation
(667.7
)
 
(648.9
)
Net property and equipment
302.8

 
280.1

Goodwill
304.4

 
305.3

Indefinite-lived intangibles
85.2

 
85.2

Other amortizable intangibles, net
46.3

 
50.8

Other noncurrent assets
73.6

 
33.3

Total Assets
$
1,278.3

 
$
1,235.2

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS & STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
147.9

 
$
165.6

Accrued compensation and benefits
65.6

 
85.2

Accrued warranty
46.5

 
43.9

Other accrued liabilities
98.3

 
95.3

Total current liabilities
358.3

 
390.0

Long-term debt
234.5

 
221.9

Pension and post-retirement benefits
20.6

 
25.8

Other liabilities
58.6

 
45.8

Total Liabilities
672.0

 
683.5

Redeemable noncontrolling interests
25.0

 
27.0

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, 59,783,584 and 59,868,276 shares issued and outstanding in 2017 and 2016, respectively)
12.0

 
12.0

Additional paid-in capital
141.9

 
142.7

Retained earnings
495.8

 
435.3

Accumulated other comprehensive loss
(67.7
)
 
(64.5
)
Key executive deferred compensation plans
(1.0
)
 
(1.1
)
Herman Miller, Inc. Stockholders' Equity
581.0

 
524.4

Noncontrolling Interests
0.3

 
0.3

Total Stockholders' Equity
581.3

 
524.7

Total Liabilities, Redeemable Noncontrolling Interests, and Stockholders' Equity
$
1,278.3

 
$
1,235.2


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
March 4, 2017

February 27, 2016
Cash Flows from Operating Activities:



Net earnings
$
90.6

 
$
96.9

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
43.0

 
39.9

Stock-based compensation
9.2

 
9.3

Excess tax benefits from stock-based compensation
(0.5
)
 
(1.1
)
Pension and post-retirement expenses
0.3

 
1.1

Earnings from nonconsolidated affiliates net of dividends received
(1.0
)
 
0.3

Deferred taxes
3.9

 
(2.1
)
(Gain) loss on sales of property and dealers
(0.7
)
 
0.1

Restructuring expenses
3.7

 

Increase in current assets
(8.4
)
 
(26.0
)
Decrease in current liabilities
(23.2
)
 
(0.1
)
Increase in non-current liabilities
4.2

 
6.3

Other, net
1.0

 
1.3

Net Cash Provided by Operating Activities
122.1

 
125.9

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Proceeds from sales of property

 
3.2

Marketable securities purchases
(1.2
)
 
(7.3
)
Marketable securities sales
0.8

 
5.7

Acquisitions, net of cash received

 
(3.6
)
Equity investment in non-controlled entities
(13.3
)
 

Capital expenditures
(70.5
)
 
(55.2
)
Payments of loans on cash surrender value of life insurance
(15.3
)
 

Net receipts from notes receivable
1.4

 
0.1

Other, net
(0.9
)
 
(0.9
)
Net Cash Used in Investing Activities
(99.0
)
 
(58.0
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Dividends paid
(29.2
)
 
(26.0
)
Proceeds from issuance of long-term debt
659.3

 
615.2

Payments of long-term debt
(646.7
)
 
(664.9
)
Payment of deferred financing costs
(1.4
)
 

Common stock issued
7.6

 
6.7

Common stock repurchased and retired
(17.2
)
 
(8.7
)
Excess tax benefits from stock-based compensation
0.5

 
1.1

Purchase of redeemable noncontrolling interests
(1.5
)
 

Payment of contingent consideration
(1.1
)
 

Other, net
0.1

 

Net Cash Provided by (Used in) Financing Activities
(29.6
)
 
(76.6
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents

 
0.3

Net Decrease in Cash and Cash Equivalents
(6.5
)
 
(8.4
)
 
 
 
 
Cash and Cash Equivalents, Beginning of Period
84.9

 
63.7

Cash and Cash Equivalents, End of Period
$
78.4

 
$
55.3

 
 
 
 
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
March 4, 2017
 
February 27, 2016
Preferred Stock
 
 
 
Balance at beginning of year and end of period
$

 
$

Common Stock
 
 
 
Balance at beginning of year
$
12.0

 
$
11.9

Restricted stock units released

 
0.1

Balance at end of period
$
12.0

 
$
12.0

Additional Paid-in Capital
 
 
 
Balance at beginning of year
$
142.7

 
$
135.1

Repurchase and retirement of common stock
(17.1
)
 
(8.7
)
Exercise of stock options
5.8

 
4.6

Stock-based compensation expense
6.0

 
6.8

Excess tax benefit for stock-based compensation
(0.3
)
 
0.5

Restricted stock units released
2.9

 
2.5

Employee stock purchase plan issuances
1.7

 
1.5

Deferred compensation plan
(0.1
)
 
(0.1
)
Directors' fees
0.3

 
0.6

Balance at end of period
$
141.9

 
$
142.8

Retained Earnings
 
 
 
Balance at beginning of year
$
435.3

 
$
330.2

Net income attributable to Herman Miller, Inc.
90.5

 
96.1

Dividends declared on common stock (per share - 2017: $0.510; 2016; $0.443)
(30.7
)
 
(26.7
)
Redeemable noncontrolling interests valuation adjustment
0.7

 
3.4

Balance at end of period
$
495.8

 
$
403.0

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
$
(64.5
)
 
$
(56.2
)
Other comprehensive loss
(3.2
)
 
(8.5
)
Balance at end of period
$
(67.7
)
 
$
(64.7
)
Key Executive Deferred Compensation
 
 
 
Balance at beginning of year
$
(1.1
)
 
$
(1.2
)
Deferred compensation plan
$
0.1

 
$
0.1

Balance at end of period
$
(1.0
)
 
$
(1.1
)
Herman Miller, Inc. Stockholders' Equity
$
581.0

 
$
492.0

Noncontrolling Interests
 
 
 
Balance at beginning of year
$
0.3

 
$
0.5

Net income attributable to noncontrolling interests

 
0.3

Balance at end of period
$
0.3

 
$
0.8

Total Stockholders' Equity
$
581.3

 
$
492.8



6



Notes to Condensed Consolidated Financial Statements
Three and Nine Months Ended March 4, 2017
(in millions)

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 U.S. GAAP 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 that are of a normal recurring nature necessary to present fairly the financial position of the company as of March 4, 2017. Operating results for the three and nine months ended March 4, 2017, are not necessarily indicative of the results that may be expected for the year ending June 3, 2017. 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 annual report on Form 10-K for the year ended May 28, 2016.

The company's fiscal year ends on the Saturday closest to May 31. Fiscal 2017, the year ending June 3, 2017, and fiscal 2016, the year ended May 28, 2016, contain 53 and 52 weeks, respectively. The nine months ended March 4, 2017 and February 27, 2016 contained 40 and 39 weeks, respectively.

2. Recently Issued Accounting Standards Not Yet Adopted

Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
Simplifying the Measurement of Inventory
 
Under the updated standard, an entity should measure inventory that is measured using either the first-in, first-out ("FIFO") or the average cost methods at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The updated standard should be applied prospectively.
 
June 4, 2017
 
The company has evaluated the impact of the update and it is expected to be immaterial.
 
 
 
 
 
 
 
Revenue from Contracts with Customers
 
The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. The standard allows for two adoption methods, a full retrospective or modified retrospective approach.
 
June 3, 2018
 
The company is currently evaluating the possible adoption methodologies and the implications of adoption on our consolidated financial statements.
 
 
 
 
 
 
 
Statement of Cash Flows
 
The standard amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the standard is to reduce the diversity in practice by laying out consistent principles. The standard must be adopted under a modified retrospective approach and early adoption is permitted.
 
June 3, 2018
 
The company is currently evaluating the impact of adopting this guidance.
 
 
 
 
 
 
 
Leases
 
Under the updated standard a lessee's rights and obligations under most leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet. The standard must be adopted under a modified retrospective approach and early adoption is permitted.
 
June 2, 2019
 
The standard is expected to have a significant impact on our Consolidated Financial Statements; however, the company is currently evaluating the impact.




7



Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
Improvements to Employee Share-Based Payment Accounting.
 
Under the new guidance, all excess tax benefits/deficiencies should be recognized as income tax expense/benefit; entities can make elections on how to account for forfeitures; and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity on the cash flow statement.
 
June 3, 2018
 
The company expects the most significant impact from the share-based compensation standard to be driven by the treatment of excess tax benefits/deficiencies, and expects the other impacts from the standard to be nominal. The company is currently evaluating the impact of the standard and will implement it at the start of fiscal 2018.


3. Acquisitions and Divestitures


Naughtone Holdings Limited
On June 3, 2016, the company acquired 50 percent of the outstanding equity of Naughtone Holdings Limited ("Naughtone"), a leader in soft seating products, stools, occasional and meeting tables, for $12.4 million in consideration. Consequently, the company acquired a noncontrolling equity interest in Naughtone. In the second quarter of fiscal 2017, the company paid additional purchase consideration of approximately $0.6 million as part of the final net equity adjustment.

Dealership
On January 1, 2017, the company completed the sale of a wholly-owned contract furniture dealership in Pennsylvania. A gain of $0.7 million
was recognized as a result of the sale.

4. Inventories, net


(In millions)
March 4, 2017
 
May 28, 2016
Finished goods
$
123.4

 
$
102.1

Raw materials
32.3

 
26.1

Total
$
155.7

 
$
128.2


Inventories are valued at the lower of cost or market and include material, labor, and overhead. The inventories at our West Michigan manufacturing operations are valued using the last-in, first-out (LIFO) method, whereas inventories of certain other operations are valued using the first-in, first-out (FIFO) method.

5. 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 March 4, 2017 and May 28, 2016:
(In millions)
Goodwill
 
Indefinite-lived Intangible Assets
 
Total Goodwill and Indefinite-lived Intangible Assets
May 28, 2016
$
305.3

 
$
85.2

 
$
390.5

Foreign currency translation adjustments
(0.8
)
 

 
(0.8
)
Sale of owned dealer
(0.1
)
 

 
(0.1
)
March 4, 2017
$
304.4

 
$
85.2

 
$
389.6




8



6. Employee Benefit Plans

The following table summarizes the components of net periodic benefit costs for the company's International defined benefit pension plan for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
(In millions)
March 4, 2017
 
February 27, 2016
 
March 4, 2017
 
February 27, 2016
Interest cost
$
0.7

 
$
1.0

 
$
2.2

 
$
2.9

Expected return on plan assets
(1.2
)
 
(1.4
)
 
(3.7
)
 
(4.1
)
Net amortization loss
0.6

 
0.6

 
1.8

 
2.0

Net periodic benefit cost
$
0.1

 
$
0.2

 
$
0.3

 
$
0.8

 
 
 
 
 
 
 
 


7. 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
 
March 4, 2017
 
February 27, 2016
 
March 4, 2017
 
February 27, 2016
Numerators:
 
 
 
 
 
 
 
Numerator for both basic and diluted EPS, net earnings attributable to Herman Miller, Inc. - in millions
$
22.5

 
$
27.9

 
$
90.5

 
$
96.1

 
 
 
 
 
 
 
 
Denominators:
 
 
 
 
 
 
 
Denominator for basic EPS, weighted-average common shares outstanding
59,846,034

 
59,885,597

 
59,910,844

 
59,837,132

Potentially dilutive shares resulting from stock plans
537,152

 
565,251

 
511,134

 
569,544

Denominator for diluted EPS
60,383,186

 
60,450,848

 
60,421,978

 
60,406,676

Antidilutive equity awards not included in weighted-average common shares - diluted
554,320

 
531,021

 
745,583

 
585,770



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.

8. Stock-Based Compensation

The following table summarizes the stock-based compensation expense and related income tax effect for the periods indicated:
(In millions)
Three Months Ended
 
Nine Months Ended
 
March 4, 2017
 
February 27, 2016
 
March 4, 2017
 
February 27, 2016
Stock-based compensation expense
$
2.7

 
$
2.7

 
$
9.2

 
$
9.3

Related income tax effect
1.0

 
1.0

 
3.3

 
3.4



Stock-based compensation expense recognized in the Condensed Consolidated Statements of Comprehensive Income for the three and nine month periods ended March 4, 2017 and February 27, 2016 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.

The following is a detail of the company issued common stock related to the exercise of stock options and vesting of restricted stock and performance share units:
(Shares)
 
Nine Months Ended
 
 
March 4, 2017
 
February 27, 2016
Stock Options
 
211,566

 
187,829

Restricted Stock Units
 
89,290

 
179,265

Performance Share Units
 
113,040

 
55,825




9



9. Income Taxes


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 negligible for the three and nine month periods ended March 4, 2017 and February 27, 2016, respectively.

The company's recorded liability for potential interest and penalties related to uncertain tax benefits was:
(In millions)
 
March 4, 2017
 
May 28, 2016
Liability for interest and penalties
 
$
0.8

 
$
0.7

Liability for uncertain tax positions, current
 
2.9

 
2.4



The effective tax rate for the three month periods ended March 4, 2017 and February 27, 2016 was 29.8 percent. The effective tax rates for the nine month periods ended March 4, 2017 and February 27, 2016 were 31.5 percent and 32.3 percent, respectively. The company's United States federal statutory rate is 35 percent.

The decrease in the effective tax rate for the three and nine month periods ended March 4, 2017 was a result of an increase in the mix of earnings in tax jurisdictions that have rates lower than the United States statutory rate.

The effective tax rates for the three and nine month periods ended March 4, 2017 and February 27, 2016 were lower than the United States statutory rate due to the mix of earnings in taxing jurisdictions that have rates that are lower than the United States statutory rate along with the manufacturing deduction under the American Jobs Creation Act of 2004 (“AJCA”)  and the research and development tax credit under the Protecting Americans from Tax Hikes ("PATH") Act of 2015.

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 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 2012.

10. Fair Value Measurements


The company's financial instruments consist of cash equivalents, marketable securities, accounts and notes receivable, deferred compensation plan, accounts payable, debt, redeemable noncontrolling interests, an interest rate swap agreement and foreign currency exchange contracts. The company's financial instruments, other than long-term debt, are recorded at fair value. The carrying value and fair value of the company's long-term debt, including current maturities, is as follows for the periods indicated:
(In millions)
 
March 4, 2017
 
May 28, 2016
Carrying value
 
$
234.5

 
$
221.9

Fair value
 
$
246.1

 
$
241.7



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 equity and fixed income mutual funds and government obligations. These investments 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. These forward contracts are not designated as hedging instruments.

Interest rate swap agreement — The company's interest rate swap agreement value is determined using a market approach based on rates obtained from active markets. The interest rate swap agreement is designated as a cash flow hedging instrument.

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.

10




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 March 4, 2017 and May 28, 2016.
(In millions)
Fair Value Measurements
 
March 4, 2017
 
May 28, 2016


Financial Assets
Quoted Prices with
Other Observable Inputs (Level 2)
Management Estimate (Level 3)
 
Quoted Prices with
Other Observable Inputs (Level 2)
Management Estimate (Level 3)
Available-for-sale marketable securities:
 
 
 
 
 
Government obligations
$

$

 
$
0.4

$

Mutual funds - fixed income
7.2


 
6.4


Mutual funds - equity
0.8


 
0.7


Foreign currency forward contracts
0.7


 
0.5


Interest rate swap agreement
8.2


 


Deferred compensation plan
9.7


 
7.9


Total
$
26.6

$

 
$
15.9

$

 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Foreign currency forward contracts
$
0.3

$

 
$
0.8

$

Contingent consideration

1.6

 

2.7

Total
$
0.3

$
1.6

 
$
0.8

$
2.7



The table below presents a reconciliation for liabilities measured at fair value using significant unobservable inputs (Level 3) (in millions).
Contingent Consideration
March 4, 2017
 
May 28, 2016
Beginning balance
$
2.7

 
$
2.6

Foreign currency translation adjustments

 
(0.1
)
Settlements
(1.1
)
 
(2.5
)
Purchases or additions

 
2.7

Ending balance
$
1.6

 
$
2.7



The contingent consideration liabilities represent future payment obligations that relate to business and product line acquisitions. These payments are based on the future performance of the acquired businesses or product line. The contingent consideration liabilities are valued using estimates based on discount rates that reflect the risk involved and the projected sales and earnings of the acquired businesses. The estimates are updated and the liabilities are adjusted to fair value on a quarterly basis.

The following is a summary of the carrying and market values of the company's marketable securities as of the respective dates.
 
March 4, 2017
 
May 28, 2016
(In millions)
Cost
 
Unrealized
Gain/(Loss)
 
Market
Value
 
Cost
 
Unrealized
Gain/(Loss)
 
Market
Value
Government obligations
$

 
$

 
$

 
$
0.4

 
$

 
$
0.4

Mutual funds - fixed income
7.1

 
0.1

 
7.2

 
6.4

 

 
6.4

Mutual funds - equity
0.7

 
$
0.1

 
0.8

 
0.7

 

 
0.7

Total
$
7.8

 
$
0.2

 
$
8.0

 
$
7.5

 
$

 
$
7.5



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. These adjustments are also included within the caption Unrealized holding gain within the Condensed Consolidated Statements of Comprehensive Income. Unrealized gains recognized in the company's Condensed Consolidated Statement of Comprehensive Income related to available-for-sale securities were $0.2 million and nil for the three and nine month periods ended March 4, 2017 and February 27, 2016, respectively. 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

11



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.

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.

Derivative Instruments and Hedging Activities
In September, 2016, the company entered into an interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $150.0 million with a forward start date of January 3, 2018 and a termination date of January 3, 2028. As a result of the transaction, the company effectively will convert $150.0 million of its outstanding indebtedness from a LIBOR-based floating interest rate plus applicable margin to a 1.949 percent fixed interest rate plus applicable margin under the agreement as of the forward start date.

The company entered into the interest rate swap agreement to manage its exposure to interest changes and its overall cost of borrowing. The interest rate swap agreement was entered into to exchange variable rate interest payments for fixed rate payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amount of the interest rate swap agreement is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreement is recognized as an adjustment to interest expense.

The interest rate swap was a designated cash flow hedge at inception and remains an effective accounting hedge as of March 4, 2017. Since a designated derivative meets hedge accounting criteria, the fair value of the hedge is recorded in the Consolidated Statement of Stockholders’ Equity as a component of Accumulated other comprehensive loss, net of tax. The ineffective portion of the change in fair value of the derivative is immediately recognized in earnings. The interest rate swap agreement is assessed for hedge effectiveness on a quarterly basis.

As of March 4, 2017, the fair value of the company’s interest rate swap was $8.2 million and was recorded within Other noncurrent assets within the Condensed Consolidated Balance Sheets. The unrealized gain recorded within Other comprehensive loss, net of tax, for the effective portion of the designated cash flow hedge was $1.1 million and $5.3 million for the three and nine month periods ended March 4, 2017, respectively. For three and nine month periods ended March 4, 2017, there were no gains or losses recognized against earnings for hedge ineffectiveness and there were no gains or losses reclassified from Accumulated other comprehensive loss into earnings.

11. Commitments and Contingencies


Product Warranties
The company provides coverage to the end-user for parts and labor on products sold under its warranty policy and for other product-related matters. 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.
(In millions)
Three Months Ended
 
Nine Months Ended
 
March 4, 2017
 
February 27, 2016
 
March 4, 2017
 
February 27, 2016
Accrual Balance — beginning
$
44.6

 
$
40.6

 
$
43.9

 
$
39.3

Accrual for product-related matters
6.7

 
5.7

 
17.6

 
17.9

Settlements and adjustments
(4.8
)
 
(4.7
)
 
(15.0
)
 
(15.6
)
Accrual Balance — ending
$
46.5

 
$
41.6

 
$
46.5

 
$
41.6



Guarantees
The company is periodically required to provide performance bonds 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 March 4, 2017, the company had a maximum financial exposure related to performance bonds totaling approximately $10.2 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 either March 4, 2017 or May 28, 2016.

12




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 March 4, 2017, 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 line of credit. 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 March 4, 2017 and May 28, 2016.

Contingencies
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.

12. Debt


Long-term debt as of March 4, 2017 and May 28, 2016 consisted of the following obligations:
(In millions)
March 4, 2017
 
May 28, 2016
Series B senior notes, due January 3, 2018
$
149.9

 
$
149.9

Debt securities, due March 1, 2021
50.0

 
50.0

Syndicated revolving line of credit, due September 2021
34.6

 
22.0

Total
$
234.5

 
$
221.9



On September 13, 2016, the company entered into a fourth amendment and restatement of its unsecured syndicated revolving line of credit which provides the company with up to $400 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 up to $200 million. The facility will expire in September 2021 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 March 4, 2017, the total debt outstanding related to borrowings under the syndicated revolving line of credit was $34.6 million. These borrowings are included within Long-term debt in the Condensed Consolidated Balance Sheet. As of March 4, 2017, the total usage against the facility was $42.9 million, of which $8.3 million related to outstanding letters of credit. As of May 28, 2016, total usage against the previous syndicated revolving line of credit was $30.7 million, $8.7 million of which related to outstanding letters of credit.

While the Series B senior notes mature in less than one year, the company classified the outstanding borrowings as long-term based on the ability and intent to refinance the notes on a long-term basis.  

13. Accumulated Other Comprehensive Loss

The following table provides an analysis of the changes in accumulated other comprehensive loss for the nine months ended March 4, 2017:
(In millions)
Cumulative Translation Adjustments
 
Pension and Other Post-retirement Benefit Plans
 
Unrealized
Gains (Losses) on Available-for-sale Securities
 
Interest Rate Swap Agreement
 
Accumulated Other Comprehensive income
Balance at May 28, 2016
$
(29.6
)
 
$
(34.9
)
 
$

 
$

 
$
(64.5
)
Current period other comprehensive income (loss)
(10.8
)
 
1.7

 
0.2

 
8.2

 
(0.7
)
Tax (expense) benefit

 
0.4

 

 
(2.9
)
 
(2.5
)
Balance at March 4, 2017
$
(40.4
)
 
$
(32.8
)
 
$
0.2

 
$
5.3

 
$
(67.7
)

The following table provides an analysis of the changes in accumulated other comprehensive loss for the nine months ended February 27, 2016:

13



(In millions)
Cumulative Translation Adjustments
 
Pension and Other Post-retirement Benefit Plans
 
Unrealized
Gains (Losses) on Available-for-sale Securities
 
Interest Rate Swap Agreement
 
Accumulated Other Comprehensive income
Balance at May 30, 2015
$
(20.8
)
 
$
(35.4
)
 
$

 
$

 
$
(56.2
)
Current period other comprehensive income (loss)
(10.5
)
 
2.3

 

 

 
(8.2
)
Tax (expense) benefit

 
(0.3
)
 

 

 
(0.3
)
Balance at February 27, 2016
$
(31.3
)
 
$
(33.4
)
 
$

 
$

 
$
(64.7
)


14. Redeemable Noncontrolling Interests

Redeemable noncontrolling interests are reported on the Consolidated Balance Sheets in mezzanine equity in “Redeemable noncontrolling interests.” The company recognizes changes to the redemption value of redeemable noncontrolling interests as they occur and adjusts the carrying value to equal the redemption value at the end of each reporting period. The redemption amounts have been estimated based on the fair value of the subsidiary, determined based on a weighting of the discounted cash flow and market methods. This represents a level 3 fair value measurement.

Changes in the company’s redeemable noncontrolling interests for the nine months ended March 4, 2017 and February 27, 2016 are as follows:
 
 
Nine Months Ended
(In millions)
 
March 4, 2017
 
February 27, 2016
Beginning Balance
 
$
27.0

 
$
30.4

Purchase of redeemable noncontrolling interests
 
(1.5
)
 

Net income attributable to redeemable noncontrolling interests
 
0.1

 
0.5

Redemption value adjustment
 
(0.7
)
 
(3.4
)
Other adjustments
 
0.1

 
0.1

Ending Balance
 
$
25.0

 
$
27.6



15. Operating Segments


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 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 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.

14



 
Three Months Ended
 
Nine Months Ended
(In millions)
March 4, 2017
 
February 27, 2016
 
March 4, 2017
 
February 27, 2016
Net Sales:
 
 
 
 
 
 
 
North American Furniture Solutions
$
309.8

 
$
312.7

 
$
1,004.4

 
$
998.9

ELA Furniture Solutions
88.0

 
98.9

 
292.9

 
302.1

Specialty
54.0

 
54.7

 
175.6

 
170.2

Consumer
73.1

 
70.2

 
228.1

 
211.1

Corporate

 

 

 

Total
$
524.9

 
$
536.5

 
$
1,701.0

 
$
1,682.3

 
 
 
 
 
 
 
 
Operating Earnings (Loss):
 
 
 
 
 
 
 
North American Furniture Solutions
$
27.9

 
$
30.6

 
$
102.1

 
$
112.8

ELA Furniture Solutions
5.2

 
6.8

 
23.2

 
20.7

Specialty
2.5

 
3.4

 
13.6

 
11.9

Consumer
(0.2
)
 
2.8

 
2.4

 
9.3

Corporate
(0.4
)
 
0.7

 
(0.3
)
 
0.2

Total
$
35.0

 
$
44.3

 
$
141.0

 
$
154.9


(In millions)
March 4, 2017
 
May 28, 2016
Total Assets:
 
 
 
North American Furniture Solutions
$
529.9

 
$
531.7

ELA Furniture Solutions
225.7

 
218.4

Specialty
151.3

 
147.3

Consumer
275.4

 
245.3

Corporate
96.0

 
92.5

Total
$
1,278.3

 
$
1,235.2



16. Restructuring Activities

During the second and third quarters of fiscal 2017, the company announced restructuring actions involving targeted workforce reductions within the North American, ELA and Specialty segments. These actions resulted in the recognition of restructuring expenses related to severance costs of $2.7 million and $3.7 million in the third quarter and nine month periods, respectively. The restructuring actions are deemed to be complete at March 4, 2017 and final payments are expected to be made over the next two quarters.

The following table provides an analysis of the changes in restructuring costs reserve for the nine months ended March 4, 2017:
(In millions)
 
March 4, 2017
Beginning Balance
 
$
0.4

Restructuring expenses
 
3.7

Payments
 
(1.6
)
Ending Balance
 
$
2.5


 

15



Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Three and Nine Months Ended March 4, 2017
(in millions)

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 28, 2016. References to “Notes” are to the footnotes included in the accompanying condensed consolidated financial statements.
Discussion of Current Business Conditions

During the third quarter of fiscal 2017, net sales totaled $524.9 million, a decrease of 2.2 percent from the same quarter of the prior year period. Orders of $543.2 million represented growth of 6.8 percent as compared to the third quarter of the prior fiscal year. While order entry patterns did strengthen throughout the quarter, the company estimates its most recent price increase, which became effective on February 6, 2017, had the effect of pulling ahead approximately $21 million of orders (of the $34 million increase) that would have otherwise been entered in the fourth quarter of fiscal 2017. On an organic basis, which adjusts for the impact this order acceleration on orders as well as impact of foreign currency translation and dealer divestitures on both orders and net sales, orders increased by 4.8 percent in the third quarter and net sales increased by 0.1 percent(*) from the same quarter last fiscal year.

Consolidated gross margin percentage for the current three month period was 37.2 percent, which was 150 basis points lower than the prior year period. This decrease was caused principally by a reduction in net sales and gross profit from incremental price discounting along with higher commodity costs. The price increase at the beginning of February 2017 was targeted at products most impacted by commodity pricing pressures.

Operating expenses in the third quarter totaled $160.5 million. This is $3.0 million lower than the same quarter last fiscal year. The year-over-year reduction was driven mainly by the impact of dealer divestitures, lower employee incentive costs and company-wide cost savings initiatives. The company also sold its Philadelphia-based contract dealership during the third quarter, which generated a gain on sale and reduced Selling, general and administrative expenses. These cost savings were offset by higher occupancy and staffing costs related to DWR studios and the recognition of severance and outplacement restructuring expenses totaling approximately $2.7 million.

The company reported diluted earnings per share of $0.37 during the third quarter of fiscal 2017, which was $0.09 per share less than the $0.46 per share reported in the prior year period. After adjusting for restructuring costs and the gain on sale related to the disposition of the Philadelphia dealership, adjusted diluted earnings per share of $0.39(*) were $0.07 per share less than the prior year amount.

We believe that the cautious macro-economic environment contributed to rather inconsistent order patterns in our North American business segment during the first nine months of this fiscal year. This, in turn, contributed to comparatively soft net sales levels in the third quarter ended March 4, 2017. Sales within our North American segment for the quarter were $309.8 million, a decrease of 0.9 percent as compared to the same period of the prior year. Conversely, the pace of orders within the North American segment improved throughout the quarter, resulting in year-over-year order growth of 12.3 percent. After adjusting for the impact of the acceleration of orders due to the price increase, foreign currency translation and dealer divestitures, orders within the North American segment increased approximately 6.8 percent in the third quarter of fiscal 2017 as compared to the third quarter of fiscal 2016. Future growth in net sales and operating earnings of the North America segment will continue to be challenged by a competitive pricing environment and the increased price of commodities.

The ELA segment reported sales during the third quarter of fiscal 2017 of $88.0 million, reflecting a decrease of 11.0 percent from the prior year period. On an organic basis, net sales decreased 0.8 percent(*) from last year's level. Orders for the ELA segment decreased 9.5 percent and, on an organic basis, decreased 1.8 percent as compared to the third quarter of last fiscal year. The decrease in sales was driven primarily by lower demand in the Middle East, where we have seen fewer large projects than in the prior year, owing in part to a relative reduction in the market price of oil. Demand also slowed in Mexico and India, which was driven primarily by project timing. These decreases were offset by increased demand in Continental Europe and Japan.

Net sales and orders within the Specialty segment were $54.0 million and $51.8 million, respectively, for the third quarter of fiscal 2017. Net sales decreased by 1.3 percent while orders decreased by 3.2 percent from the third quarter of fiscal 2016. These decreases were driven mainly by challenging prior year comparisons for the company's Geiger subsidiary, principally due to certain large projects that occurred in the prior year.



*Non-GAAP measurements; see accompanying reconciliations and explanations.

16



Net sales an