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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 December 2, 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 [_]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act                 [__]

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 January 8, 2018 - 59,670,283 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 Six Months Ended December 2, 2017 and December 3, 2016
 
Condensed Consolidated Balance Sheets — December 2, 2017 and June 3, 2017
 
Condensed Consolidated Statements of Cash Flows — Six Months Ended December 2, 2017 and December 3, 2016
 
Condensed Consolidated Statements of Stockholders' Equity — Six Months Ended December 2, 2017 and December 3, 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
 
Six Months Ended
 
December 2, 2017
 
December 3, 2016
 
December 2, 2017
 
December 3, 2016
Net sales
$
604.6

 
$
577.5

 
$
1,184.8

 
$
1,176.1

Cost of sales
382.5

 
359.5

 
745.8

 
728.1

Gross margin
222.1

 
218.0

 
439.0

 
448.0

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
152.4

 
149.0

 
299.6

 
303.2

Restructuring expenses and other charges
1.7

 
1.0

 
3.8

 
1.0

Design and research
18.0

 
18.4

 
36.5

 
37.8

Total operating expenses
172.1

 
168.4

 
339.9

 
342.0

Operating earnings
50.0

 
49.6

 
99.1

 
106.0

Other expenses:
 
 
 
 
 
 
 
Interest expense
3.7

 
3.9

 
7.4

 
7.6

Other, net
(0.7
)
 
0.4

 
(1.8
)
 
(0.2
)
Earnings before income taxes and equity income
47.0

 
45.3

 
93.5

 
98.6

Income tax expense
14.3

 
14.5

 
28.5

 
31.6

Equity income from nonconsolidated affiliates, net of tax
0.8

 
0.8

 
1.5

 
1.1

Net earnings
33.5

 
31.6

 
66.5

 
68.1

Net earnings (loss) attributable to noncontrolling interests

 
(0.1
)
 

 
0.1

Net earnings attributable to Herman Miller, Inc.
$
33.5

 
$
31.7

 
$
66.5

 
$
68.0

 
 
 
 
 
 
 
 
Earnings per share — basic
$
0.56

 
$
0.53

 
$
1.11

 
$
1.13

Earnings per share — diluted
$
0.55

 
$
0.53

 
$
1.10

 
$
1.13

Dividends declared, per share
$
0.180

 
$
0.170

 
$
0.360

 
$
0.340

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

 
$
(5.7
)
 
$
4.5

 
$
(10.4
)
Pension and other post-retirement plans
0.8

 
0.3

 
1.6

 
1.6

Interest rate swaps
2.6

 
4.2

 
1.0

 
4.2

Other comprehensive income (loss)
3.5

 
(1.2
)
 
7.1

 
(4.6
)
Comprehensive income
37.0

 
30.4

 
73.6

 
63.5

Comprehensive income (loss) attributable to noncontrolling interests

 
(0.1
)
 

 
0.1

Comprehensive income attributable to Herman Miller, Inc.
$
37.0

 
$
30.5

 
$
73.6

 
$
63.4


See accompanying notes to condensed consolidated financial statements.


3





Herman Miller, Inc.
Condensed Consolidated Balance Sheets
(Dollars in millions, except per share data)
(Unaudited)
 
December 2, 2017
 
June 3, 2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
114.6

 
$
96.2

Marketable securities
8.5

 
8.6

Accounts and notes receivable, net
189.8

 
186.6

Inventories, net
172.2

 
152.4

Prepaid expenses and other
41.1

 
48.1

Total current assets
526.2

 
491.9

Property and equipment, at cost
1,006.0

 
968.7

Less — accumulated depreciation
(675.2
)
 
(654.1
)
Net property and equipment
330.8

 
314.6

Goodwill
304.3

 
304.5

Indefinite-lived intangibles
78.1

 
78.1

Other amortizable intangibles, net
42.7

 
45.4

Other noncurrent assets
69.0

 
71.8

Total Assets
$
1,351.1

 
$
1,306.3

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS & STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
166.7

 
$
148.4

Accrued compensation and benefits
75.2

 
79.7

Accrued warranty
53.3

 
47.7

Other accrued liabilities
101.3

 
109.9

Total current liabilities
396.5

 
385.7

Long-term debt
200.0

 
199.9

Pension and post-retirement benefits
26.0

 
38.5

Other liabilities
73.9

 
69.9

Total Liabilities
696.4

 
694.0

Redeemable noncontrolling interests
23.9

 
24.6

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, 59,664,064 and 59,715,824 shares issued and outstanding in 2018 and 2017, respectively)
11.9

 
11.9

Additional paid-in capital
130.4

 
139.3

Retained earnings
564.4

 
519.5

Accumulated other comprehensive loss
(75.1
)
 
(82.2
)
Key executive deferred compensation plans
(1.0
)
 
(1.0
)
Herman Miller, Inc. Stockholders' Equity
630.6

 
587.5

Noncontrolling Interests
0.2

 
0.2

Total Stockholders' Equity
630.8

 
587.7

Total Liabilities, Redeemable Noncontrolling Interests, and Stockholders' Equity
$
1,351.1

 
$
1,306.3


See accompanying notes to condensed consolidated financial statements.

4



Herman Miller, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in millions)
(Unaudited)

Six Months Ended
December 2, 2017

December 3, 2016
Cash Flows from Operating Activities:



Net earnings
$
66.5

 
$
68.1

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
31.8

 
28.3

Stock-based compensation
3.0

 
6.5

Excess tax benefits from stock-based compensation

 
(0.4
)
Pension and post-retirement expenses
0.7

 
0.2

Pension contributions

(12.0
)
 

Earnings from nonconsolidated affiliates net of dividends received
(0.3
)
 
(1.0
)
Deferred taxes
(1.0
)
 
2.0

Gain on sales of property and dealers
(0.8
)
 

Restructuring expenses
3.8

 
1.0

Increase in current assets
(15.7
)
 
(13.2
)
Increase (decrease) in current liabilities
2.5

 
(1.4
)
Increase in non-current liabilities
3.0

 
4.1

Other, net

 
0.2

Net Cash Provided by Operating Activities
81.5

 
94.4

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Proceeds from sale of property and dealers
2.0

 

Equity investment in non-controlled entities

 
(14.5
)
Capital expenditures
(39.8
)
 
(46.7
)
Payments of loans on cash surrender value of life insurance

 
(15.3
)
Proceeds from life insurance policy
8.1

 

Net advances on notes receivable
(0.5
)
 

Other, net
(0.4
)
 
(0.8
)
Net Cash Used in Investing Activities
(30.6
)
 
(77.3
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Dividends paid
(20.9
)
 
(19.0
)
Proceeds from issuance of long-term debt
115.4

 
468.3

Payments of long-term debt
(115.4
)
 
(470.6
)
Payment of deferred financing costs

 
(1.4
)
Common stock issued
5.7

 
6.5

Common stock repurchased and retired
(17.3
)
 
(12.1
)
Excess tax benefits from stock-based compensation

 
0.4

Purchase of redeemable noncontrolling interests
(1.0
)
 
(1.5
)
Net proceeds from supplier financing program
0.4

 

Payment of contingent consideration
(0.1
)
 
(1.0
)
Other, net

 
0.1

Net Used in by Financing Activities
(33.2
)
 
(30.3
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
0.7

 
0.2

Net Increase (Decrease) in Cash and Cash Equivalents
18.4

 
(13.0
)
 
 
 
 
Cash and Cash Equivalents, Beginning of Period
96.2

 
84.9

Cash and Cash Equivalents, End of Period
$
114.6

 
$
71.9

 
 
 
 

See accompanying notes to condensed consolidated financial statements.

5



Herman Miller, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Dollars in millions)
(Unaudited)
 
Six Months Ended
December 2, 2017
 
December 3, 2016
Preferred Stock
 
 
 
Balance at beginning of year and end of period
$

 
$

Common Stock
 
 
 
Balance at beginning of year
$
11.9

 
$
12.0

Exercise of stock options

0.1

 

Repurchase and retirement of common stock
(0.1
)
 

Balance at beginning of year and end of period
$
11.9

 
$
12.0

Additional Paid-in Capital
 
 
 
Balance at beginning of year
$
139.3

 
$
142.7

Cumulative effect of accounting change
(0.3
)
 

Repurchase and retirement of common stock
(17.2
)
 
(12.0
)
Exercise of stock options
4.7

 
5.5

Stock-based compensation expense
1.1

 
4.4

Excess tax benefit for stock-based compensation

 
(0.3
)
Restricted stock units released
1.7

 
1.9

Employee stock purchase plan issuances
1.1

 
1.1

Balance at end of period
$
130.4

 
$
143.3

Retained Earnings
 
 
 
Balance at beginning of year
$
519.5

 
$
435.3

Cumulative effect of accounting change
0.1

 

Net income attributable to Herman Miller, Inc.
66.5

 
68.0

Dividends declared on common stock (per share - 2018: $0.36; 2017; $0.34)
(21.6
)
 
(20.4
)
Redeemable noncontrolling interests valuation adjustment
(0.1
)
 
0.3

Balance at end of period
$
564.4

 
$
483.2

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
$
(82.2
)
 
$
(64.5
)
Other comprehensive income (loss)
7.1

 
(4.6
)
Balance at end of period
$
(75.1
)
 
$
(69.1
)
Key Executive Deferred Compensation
 
 
 
Balance at beginning of year and end of period
$
(1.0
)
 
$
(1.1
)
Herman Miller, Inc. Stockholders' Equity
$
630.6

 
$
568.3

Noncontrolling Interests
 
 
 
Balance at beginning of year and end of period
$
0.2

 
$
0.3

Total Stockholders' Equity
$
630.8

 
$
568.6


See accompanying notes to condensed consolidated financial statements.


6



Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended December 2, 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 December 2, 2017. Operating results for the three and six months ended December 2, 2017, are not necessarily indicative of the results that may be expected for the year ending June 2, 2018. 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 June 3, 2017.

The company's fiscal year ends on the Saturday closest to May 31. Fiscal 2018, the year ending June 2, 2018, and fiscal 2017, the year ended June 3, 2017, contain 52 and 53 weeks, respectively. The six months ended December 2, 2017 and December 3, 2016 contained 26 and 27 weeks, respectively.

2. Recently Issued Accounting Standards

Recently Adopted Accounting Standards
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 may elect 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 4, 2017
 
The company adopted the accounting standard in the first quarter of fiscal 2018. As a result, the company elected to change its policy from estimating forfeitures to recognizing forfeitures when they occur, which resulted in an increase in Retained earnings of $0.2 million, a decrease in Additional paid in capital of $0.3 million and an increase in Other noncurrent assets of $0.1 million in the Condensed Consolidated Balance Sheets. The other impacts resulting from adoption did not have a material impact on the company's Financial Statements.
Recently Issued Accounting Standards Not Yet Adopted
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
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 has completed a preliminary review of the impact of the new standard and expects changes in the identification of performance obligations around product and service revenue. For commercial contracts in which the company sells directly to end customers, in most cases, the company currently delays revenue recognition until the products are shipped and installed and records third-party installation and certain other fees net. However, under the new standard, in most cases, the company will recognize product revenue when title and risk of loss have transferred and will recognize service revenue upon the completion of services. Additionally, the company will record certain product pricing elements related to its direct customer sales within revenue and Cost of Sales rather than net within revenue as is current practice. The company has determined that these elements relate to the product performance obligation which the company is considered to control under the new standard. The company is also in the process of implementing changes to its business processes, systems and controls to support recognition and disclosure under the new standard. The company expects to adopt the standard in fiscal 2019 using the modified retrospective approach.

7



Recently Issued Accounting Standards Not Yet Adopted (Continued)
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
 
The standard provides guidance for the measurement, presentation and disclosure of financial assets and liabilities. The standard requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any change in fair value in net income. The standard does not permit early adoption and at adoption a cumulative-effect adjustment to beginning retained earnings should be recorded.
 
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.


3. Acquisitions and Divestitures


Contract Furniture Dealerships
On July 31, 2017, the company completed the sale of a wholly-owned contract furniture dealership in Vancouver, Canada for initial cash consideration of $2.0 million. A pre-tax gain of $1.1 million was recognized as a result of the sale within the caption Selling, general and administrative within the Condensed Consolidated Statements of Comprehensive Income.

On January 1, 2017, the company completed the sale of a wholly-owned contract furniture dealership in Philadelphia, Pennsylvania in exchange for a $3.0 million note receivable. A pre-tax gain of $0.7 million was recognized as a result of the sale within the caption Selling, general and administrative within the Condensed Consolidated Statements of Comprehensive Income. The note receivable was deemed to be a variable interest in a variable interest entity. The carrying value of the note was $2.3 million and $1.4 million as of December 2, 2017 and June 3, 2017, respectively, and represents the company's maximum exposure to loss. The company is not deemed to be the primary beneficiary of the variable interest entity as the buyers of the dealership control the activities that most significantly impact the entity's economic performance, including sales, marketing and operations. 
 
Naughtone Holdings Limited
On June 3, 2016, the company acquired a 50 percent noncontrolling equity interest in Naughtone Holdings Limited ("Naughtone"), a leader in soft seating products, stools, occasional and meeting tables, for $12.4 million in cash consideration. 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.

4. Inventories, net


(In millions)
December 2, 2017
 
June 3, 2017
Finished goods
$
137.0

 
$
119.0

Raw materials
35.2

 
33.4

Total
$
172.2

 
$
152.4


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.


8



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 December 2, 2017 and June 3, 2017:
(In millions)
Goodwill
 
Indefinite-lived Intangible Assets
 
Total Goodwill and Indefinite-lived Intangible Assets
June 3, 2017
$
304.5

 
$
78.1

 
$
382.6

Foreign currency translation adjustments
0.1

 

 
0.1

Sale of owned contract furniture dealership
(0.3
)
 

 
(0.3
)
December 2, 2017
$
304.3

 
$
78.1

 
$
382.4



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 three and six months ended:
 
Three Months Ended
 
Six Months Ended
(In millions)
December 2, 2017
 
December 3, 2016
 
December 2, 2017
 
December 3, 2016
Interest cost
$
0.8

 
$
0.8

 
$
1.6

 
$
1.5

Expected return on plan assets
(1.8
)
 
(1.3
)
 
(3.5
)
 
(2.5
)
Net amortization loss
1.3

 
0.6

 
2.6

 
1.2

Net periodic benefit cost
$
0.3

 
$
0.1

 
$
0.7

 
$
0.2



The company made a voluntary contribution of $12.0 million to its International defined benefit pension plan in the six month period ended December 2, 2017.

7. Earnings Per Share


The following table reconciles the numerators and denominators used in the calculations of basic and diluted earnings per share (EPS) for the
three and six months ended:
 
Three Months Ended
 
Six Months Ended
 
December 2, 2017
 
December 3, 2016
 
December 2, 2017
 
December 3, 2016
Numerators:
 
 
 
 
 
 
 
Numerator for both basic and diluted EPS, net earnings attributable to Herman Miller, Inc. - in millions
$
33.5

 
$
31.7

 
$
66.5

 
$
68.0

 
 
 
 
 
 
 
 
Denominators:
 
 
 
 
 
 
 
Denominator for basic EPS, weighted-average common shares outstanding
59,747,932

 
59,954,194

 
59,753,271

 
59,942,049

Potentially dilutive shares resulting from stock plans
524,275

 
400,566

 
543,457

 
440,883

Denominator for diluted EPS
60,272,207

 
60,354,760

 
60,296,728

 
60,382,932

Antidilutive equity awards not included in weighted-average common shares - diluted
423,670

 
875,847

 
356,135

 
685,450



During fiscal 2017, the company had certain share-based payment awards that met the definition of participating securities. The company evaluated the impact on EPS of all participating securities under the two-class method, which had no impact on diluted EPS.


9



8. Stock-Based Compensation

The following table summarizes the stock-based compensation expense and related income tax effect for the three and six months ended:
(In millions)
Three Months Ended
 
Six Months Ended
 
December 2, 2017
 
December 3, 2016
 
December 2, 2017
 
December 3, 2016
Stock-based compensation expense
$
1.4

 
$
3.1

 
$
3.0

 
$
6.5

Related income tax effect
0.5

 
1.2

 
1.0

 
2.4



Stock-based compensation expense recognized in the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended December 3, 2016 has been reduced for estimated forfeitures, as it is based on awards ultimately expected to vest. Effective June 4, 2017, the company adopted ASU 2016-09 - Improvements to Employee Share-Based Payment Accounting. As of June 4, 2017, the company has elected to record forfeitures as they occur rather than estimating forfeitures.

The following table includes common stock issued by the company related to the exercise of stock options, vesting of restricted stock units and vesting of performance share units.
(Shares)
 
Six Months Ended
 
 
December 2, 2017
 
December 3, 2016
Stock Options
 
188,025

 
197,632

Restricted Stock Units
 
105,095

 
86,664

Performance Share Units
 
130,179

 
113,040



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 six months ended December 2, 2017 and December 3, 2016.

The company's recorded liability for potential interest and penalties related to uncertain tax benefits was:
(In millions)
 
December 2, 2017
 
June 3, 2017
Liability for interest and penalties
 
$
0.9

 
$
0.8

Liability for uncertain tax positions, current
 
3.0

 
2.8



The effective tax rates for the three and six months ended December 2, 2017 and December 3, 2016 were 30.5 percent and 32.0 percent, respectively. The company's United States federal statutory rate is 35 percent.

The decrease in the effective tax rate for the three months ended December 2, 2017 was a result of an increase in the mix of earnings in tax jurisdictions that had rates lower than the United States statutory rate.

The effective tax rates for the three months ended December 2, 2017 and December 3, 2016 were lower than the United States statutory rate due to the mix of earnings in taxing jurisdictions that had rates that were 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 effective tax rates for the six months ended December 2, 2017 and December 3, 2016 were lower than the United States statutory rate due to the mix of earnings in taxing jurisdictions that had rates that were 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



As a result of the passage of the Federal Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017, which was subsequent to the fiscal periods that ended on December 2, 2017, the company's United States statutory rate will be reduced from 35 percent to 21 percent effective January 1, 2018, which will result in a full year blended fiscal 2018 U.S. Federal statutory rate of approximately 29 percent. The impact of the lower statutory rate applied to the earnings before tax for the six-month period ended December 2, 2017 will be recorded as a discrete item in the company’s income tax expense for the three months ending March 3, 2018. Also recorded in the same three-month period will be a remeasurement of the deferred tax assets and liabilities to reflect the anticipated rate at which the deferred items will be realized. The TCJA introduces a new participation exemption system of taxation on foreign earnings. As part of the transition towards this system, in the three-month period ended March 3, 2018, the company anticipates recording a U.S. tax liability on certain undistributed foreign earnings. The analysis of the actual impact of these changes is not yet complete and the company intends to determine and disclose the estimated impact as part of its third quarter fiscal 2018 results.

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, interest rate swaps 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)
 
December 2, 2017
 
June 3, 2017
Carrying value
 
$
203.7

 
$
203.1

Fair value
 
$
209.3

 
$
213.0



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 agreements — The value of the company's interest rate swap agreements is determined using a market approach based on rates obtained from active markets. The interest rate swap agreements are designated as cash flow hedging instruments.

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.

Other — The company's contingent consideration liabilities and redeemable noncontrolling interests are deemed to be a nonrecurring level 3 fair value measurement. Refer to Note 14 for further information regarding redeemable noncontrolling interests. 


11



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 December 2, 2017 and June 3, 2017.
(In millions)
December 2, 2017
 
June 3, 2017


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:
 
 
 
 
 
 
 
Mutual funds - fixed income
$
7.6

 
$

 
$
7.7

 
$

Mutual funds - equity
0.9

 

 
0.9

 

Foreign currency forward contracts
0.4

 

 
0.5

 

Interest rate swap agreement
5.2

 

 
3.3

 

Deferred compensation plan
14.3

 

 
12.8

 

Total
$
28.4

 
$

 
$
25.2

 
$

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
Foreign currency forward contracts
$
0.5

 
$

 
$
0.6

 
$

Interest rate swap agreement
0.4

 

 

 

Contingent consideration

 
0.5

 

 
0.5

Total
$
0.9

 
$
0.5

 
$
0.6

 
$
0.5



The table below presents a reconciliation for liabilities measured at fair value using significant unobservable inputs (Level 3) (in millions).
Contingent Consideration
December 2, 2017
 
June 3, 2017
Beginning balance
$
0.5

 
$
2.7

Net realized losses (gains)
0.1

 
(0.2
)
Payments
(0.1
)
 
(2.0
)
Ending balance
$
0.5

 
$
0.5



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:
 
December 2, 2017
 
June 3, 2017
(In millions)
Cost
 
Unrealized
Gain/(loss)
 
Market
Value
 
Cost
 
Unrealized
Gain/(Loss)
 
Market
Value
Mutual funds - fixed income
$
7.6

 
$

 
$
7.6

 
$
7.6

 
$
0.1

 
$
7.7

Mutual funds - equity
0.8

 
0.1

 
0.9

 
0.9

 

 
0.9

Total
$
8.4

 
$
0.1

 
$
8.5

 
$
8.5

 
$
0.1

 
$
8.6



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 zero for the three and six month periods ended December 2, 2017 and December 3, 2016. 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.

12




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
Foreign Currency Forward Contracts
The company transacts business in various foreign currencies and has established a program that primarily utilizes foreign currency forward contracts to reduce the risks associated with the effects of certain foreign currency exposures. Under this program, the company's strategy is to have increases or decreases in our foreign currency exposures offset by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility associated with foreign currency transaction gains or losses. Foreign currency exposures typically arise from net liability or asset exposures in non-functional currencies on the balance sheets of our foreign subsidiaries. Foreign currency forward contracts generally settle within 30 days and are not used for trading purposes. These forward contracts are not designated as hedging instruments. Accordingly, we record the fair value of these contracts as of the end of the reporting period in the Consolidated Balance Sheets with changes in fair value recorded within the Consolidated Statements of Comprehensive Income. The balance sheet classification for the fair values of these forward contracts is to Other current assets for unrealized gains and to Other accrued liabilities for unrealized losses. The Consolidated Statements of Comprehensive Income classification for the fair values of these forward contracts is to Other expenses (income): Other, net, for both realized and unrealized gains and losses.

Interest Rate Swaps
The company enters into interest rate swap agreements to manage its exposure to interest rate changes and its overall cost of borrowing. The company's interest rate swap agreements were 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 agreements 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 agreements is recognized as an adjustment to interest expense.

The interest rate swaps were designated cash flow hedges at inception and remain an effective accounting hedge as of December 2, 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 derivatives is immediately recognized in earnings. The interest rate swap agreements are assessed for hedge effectiveness on a quarterly basis.

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 converted indebtedness anticipated to be borrowed on the company’s revolving line of credit up to the notional amount 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.

On June 12, 2017, the company entered into an interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $75.0 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 converted indebtedness anticipated to be borrowed on the company’s revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 2.387 percent fixed interest rate plus applicable margin under the agreement as of the forward start date.

Subsequent to December 2, 2017, on January 3, 2018, the company borrowed $225.0 million on its existing revolving line of credit. Of these proceeds, $150.0 million was used to settle its Series B senior notes, while the rest of the proceeds will be used for general business purposes.

As of December 2, 2017, the fair value of the company’s two outstanding interest rate swap agreements was an asset and liability of $5.2 million and $0.4 million, respectively. The asset fair value was recorded within Other noncurrent assets and the liability fair value was recorded in Other liabilities within the Condensed Consolidated Balance Sheets. The net unrealized gain recorded within Other comprehensive loss, net of tax, for the effective portion of the company's designated cash flow hedges was $2.6 million and $4.2 million for the three months ended December 2, 2017 and December 3, 2016, respectively. The net unrealized gain recorded within Other comprehensive loss, net of tax, for the effective portion of the company's designated cash flow hedges was $1.0 million and $4.2 million for the six months ended December 2, 2017 and December 3, 2016, respectively.


13



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 for three and six month periods ended December 2, 2017 and December 3, 2016, respectively.

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
 
Six Months Ended
 
December 2, 2017
 
December 3, 2016
 
December 2, 2017
 
December 3, 2016
Accrual Balance — beginning
$
52.6

 
$
43.9

 
$
47.7

 
$
43.9

Accrual for product-related matters
5.6

 
5.7

 
15.0

 
10.9

Settlements and adjustments
(4.9
)
 
(5.0
)
 
(9.4
)
 
(10.2
)
Accrual Balance — ending
$
53.3

 
$
44.6

 
$
53.3

 
$
44.6



Guarantees
The company is periodically required to provide performance bonds to do business with certain customers. These arrangements are common in the industry 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 December 2, 2017, the company had a maximum financial exposure related to performance bonds totaling approximately $9.7 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 December 2, 2017 or June 3, 2017.

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 December 2, 2017, the company had a maximum financial exposure from these standby letters of credit totaling approximately $8.2 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 December 2, 2017 and June 3, 2017.

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 December 2, 2017 and June 3, 2017 consisted of the following obligations:
(In millions)
December 2, 2017
 
June 3, 2017
Series B senior notes, due January 3, 2018
$
150.0

 
$
149.9

Debt securities, due March 1, 2021
50.0

 
50.0

Supplier financing program
3.7

 
$
3.2

Total debt
$
203.7

 
$
203.1

Less: Current debt
(3.7
)
 
(3.2
)
Long-term debt
$
200.0

 
$
199.9



The company's syndicated revolving line of credit 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

14



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 December 2, 2017, the total debt outstanding related to borrowings under the syndicated revolving line of credit was zero. Available borrowings against this facility were $391.8 million due to $8.2 million related to outstanding letters of credit. As of June 3, 2017, there were no outstanding borrowings against this facility and available borrowings were $391.7 million due to $8.3 million outstanding letters of credit.

Subsequent to the end of the quarter, on January 3, 2018, the company refinanced its Series B senior notes on a long-term basis through the use of its syndicated revolving line of credit.

Supplier Financing Program
The company has an agreement with a third party financial institution to provide a platform that allows certain participating suppliers the ability to finance payment obligations from the company. Under this program, participating suppliers may finance payment obligations of the company, prior to their scheduled due dates, at a discounted price to the third party financial institution.

The company has lengthened the payment terms for certain suppliers that have chosen to participate in the program. As a result, certain amounts due to suppliers have payment terms that are longer than standard industry practice and as such, these amounts have been excluded from the caption “Accounts payable” in the Condensed Consolidated Balance Sheets as the amounts have been accounted for by the company as a current debt obligation. Accordingly, $3.7 million and $3.2 million have been recorded within the caption “Other accrued liabilities” for the periods ended December 2, 2017 and June 3, 2017, respectively.

Construction-Type Lease
During fiscal 2015, the company entered into a lease agreement for the occupancy of a new studio facility in Palo Alto, California. In fiscal 2017, the company became the deemed owner of the leased building for accounting purposes as a result of the company's involvement during the construction phase of the project. The lease is therefore accounted for as a financing transaction and the recorded asset and related financing obligation have been recorded in the Consolidated Balance Sheets within both Construction in progress and Other accrued liabilities for the period ended December 2, 2017 and June 3, 2017, respectively. The fair value of the building and the related financing liability was $7.0 million at December 2, 2017 and June 3, 2017, respectively and represented a nonrecurring level 3 fair value measurement. The fair value of the building and financing liability was determined through a blend of an income approach, comparable property sales approach and a replacement cost approach. Upon completion of construction, the liability will be reclassified into Long-term debt.

13. Accumulated Other Comprehensive Loss

The following table provides an analysis of the changes in accumulated other comprehensive loss for the six months ended December 2, 2017 and December 3, 2016:
(In millions)
Cumulative Translation Adjustments
 
Pension and Other Post-retirement Benefit Plans
 
Unrealized
Gains 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 (loss) income
(10.4
)
 
1.1

 

 
6.4

 
(2.9
)
Tax benefit (expense)

 
0.5

 

 
(2.2
)
 
(1.7
)
Balance at December 3, 2016
$
(40.0
)
 
$
(33.3
)
 
$

 
$
4.2

 
$
(69.1
)
 
 
 
 
 
 
 
 
 
 
Balance at June 3, 2017
$
(36.8
)
 
$
(47.6
)
 
$
0.1

 
$
2.1

 
$
(82.2
)
Current period other comprehensive income
4.5

 
2.1

 

 
1.5

 
8.1

Tax benefit (expense)

 
(0.5
)
 

 
(0.5
)
 
(1.0
)
Balance at December 2, 2017
$
(32.3
)
 
$
(46.0
)
 
$
0.1

 
$
3.1

 
$
(75.1
)


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.


15



Changes in the company’s redeemable noncontrolling interests for the six months ended December 2, 2017 and December 3, 2016 are as follows:
(In millions)
December 2, 2017
 
December 3, 2016
Beginning Balance
$
24.6

 
$
27.0

Purchase of redeemable noncontrolling interests
(1.0
)
 
(1.5
)
Net income attributable to redeemable noncontrolling interests

 
0.1

Redemption value adjustment
0.2

 
(0.3
)
Other adjustments
0.1

 
0.1

Ending Balance
$
23.9

 
$
25.4



15. Operating Segments


Effective in the first quarter of fiscal 2018, the company moved the operating results of its Nemschoff subsidiary, which primarily focuses on healthcare, from its North America Furniture Solutions operating segment to its Specialty operating segment. This change was made to better leverage the skills and capabilities of the company's Specialty business teams, particularly in the areas of craft wood and upholstery manufacturing. Additionally, the company has refreshed its methodology of allocating selling, general and administrative costs to the operating segments. The company has also identified certain corporate support costs that will no longer be allocated to the operating segments and that will be tracked and reported as "Corporate Unallocated Expenses". The company made these changes in the way that it allocates and reports its costs to better reflect the utilization of functional services across its operating segments and to also more closely align to industry practice. Prior year results disclosed in the table below have been revised to reflect 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 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. The business associated with the company's owned contract furniture dealers is also included in the North American Furniture Solutions segment. The ELA Furniture Solutions segment includes EMEA, Latin America and Asia-Pacific. ELA includes the operations associated with the design, manufacture, and sale of furniture products, primarily for work-related settings, in these geographic regions. The Specialty segment includes the operations associated with the design, manufacture, and sale of high-craft furniture products and textiles including Geiger wood products, Maharam textiles, Nemschoff and Herman Miller Collection products. The Consumer segment includes 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 Design Within Reach retail studios.

The company also reports a “Corporate” category consisting primarily of unallocated expenses related to general corporate functions, including, but not limited to, certain legal, executive, corporate finance, information technology, administrative and acquisition-related costs. Management regularly reviews corporate costs and believes disclosing such information provides more visibility and transparency regarding how the chief operating decision maker reviews results of the Company. The accounting policies of the reportable operating segments are the same as those of the company.

The following is a summary of certain key financial measures for the respective fiscal periods indicated.
 
Three Months Ended
 
Six Months Ended
(In millions)
December 2, 2017
 
December 3, 2016
 
December 2, 2017
 
December 3, 2016
Net Sales:
 
 
 
 
 
 
 
North American Furniture Solutions
$
330.5

 
$
313.9

 
$
659.0

 
$
661.1

ELA Furniture Solutions
113.0

 
107.6

 
206.4

 
204.9

Specialty
74.4

 
76.4

 
149.5

 
155.1

Consumer
86.7

 
79.6

 
169.9

 
155.0

Total
$
604.6

 
$
577.5

 
$
1,184.8

 
$
1,176.1

 
 
 
 
 
 
 
 
Operating Earnings (Loss):
 
 
 
 
 
 
 
North American Furniture Solutions
$
45.1

 
$
38.9

 
$
93.8

 
$
89.8

ELA Furniture Solutions
12.3

 
12.1

 
18.9

 
20.6

Specialty
2.1

 
5.2

 
3.7

 
10.9

Consumer
1.0

 
1.8

 
1.3

 
2.6

Corporate
(10.5
)
 
(8.4
)
 
(18.6
)
 
(17.9
)
Total
$
50.0

 
$
49.6

 
$
99.1

 
$
106.0



16



(In millions)
December 2, 2017
 
June 3, 2017
Total Assets:
 
 
 
North American Furniture Solutions
$
500.4

 
$
533.6

ELA Furniture Solutions
259.4

 
230.3

Specialty
176.9

 
157.9

Consumer
286.0

 
276.4

Corporate
128.4