Good morning, everyone, and welcome to this Herman Miller, Inc. Third Quarter Fiscal Year 2014 Earnings Results Conference Call. This call is being recorded. This presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

These risks and uncertainties include those risk factors discussed in the company's reports on Form 10-K and 10-Q and other reports filed with the Securities and Exchange Commission. Today's presentation will be hosted by Mr. Brian Walker, President and Chief Executive Officer; and Mr. Greg Bylsma, Executive Vice President and Chief Financial Officer.

Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of the financials by Mr. Bylsma. We'll also -- we'll then open the call to your questions. [Operator Instructions].

At this time, I would like to begin the presentation by turning the call over to Mr. Walker. Please go ahead, sir. .

Good morning, everyone. We appreciate you joining us for today's call. As we noted in yesterday's release, Herman Miller's third quarter demonstrated solid performance across the business.

We were pleased with our operating results, and, in fact, our reported sales, gross margins, operating expenses and EPS were all in line with the guidance we provided to you in December.

Greg will share more of the specifics in his review, but I'll open with a few highlights and some added context, including both recent industry indicators and the broader economy, as well as for our consolidated business and within the reporting segments. .

Our industry's general backdrop, like the larger economy, continued to show signs of strengthening. The most recent BIFMA forecast calls for modest growth in calendar '14 and outlines a more bullish outlook for 2015, with a growth forecasted at better than 10%.

If you've been following this forecast, you will note that the timing of stronger demand has continued to shift out. At the same time, the underlying drivers of demand look to be firming, and the downdraft in the federal government should have less of an impact as we move forward.

In addition, employment trends, the Architecture Billing Index Outlook on Construction and less focus on partisanship in Washington are all more positive than we've seen in several quarters. There are still uncertainties in the global economy related to China's domestic economy and more recently, the geopolitical events unfolding in Eastern Europe.

With that said, we are optimistic that we will see continued strengthening in the global business climate. For Herman Miller specifically, the clear headline for this past quarter was order momentum, highlighted by an improving trend that drove organic order growth of 11% compared to the same period of last year.

Organic sales growth in the quarter was more modest but even at 4% demonstrated acceleration from the levels we've reported in recent quarters. Likewise, consolidated gross margins and operating earnings were also up relative to last year. In short, no matter how you slice it, the organization performed well. .

Looking back over the past couple of years, each quarter had a mix of pluses and minuses within and across our operating segments that impacted our consolidated results. Cumulatively, over that time, we've reported steady progress, but in any given quarter, there's been one or more areas of rough water to navigate.

That's a reflection of the economic conditions and operational challenges we've been working through in our respective segment businesses -- business units and geographies. While we've been steadily executing our strategy of investment and diversification, these headwinds have acted as a damper on performance each quarter. .

Simply put, this third quarter, Herman Miller was firing on virtually every cylinder. To be clear, we are a long way from fulfilling our strategic vision. There's a lot more work to do in building the offer and optimizing our operations. And there are still economic uncertainties in front of us, both regionally and globally.

As a company, we will continue to be challenged, including in this current quarter, but our recent segment and consolidated performance is encouraging, and we are working hard to sustain that momentum. .

In North America, we had solid organic sales and order growth for the quarter. Both measures were helped by general strength in our core work business, including some large projects that have been in the pipeline. But we again experienced double-digit decline in sales to the federal government, which also had an impact on our health care shipments.

However, health care recorded strong orders for the quarter in both the Nemschoff and Herman Miller brands. And for the first time in 10 quarters, I'm pleased to report order growth within the federal government segment.

To be frank, that gain was modest, and we are far from declaring a turnaround in government demand, but we told you in Q2 that we believe we're starting to see signs of a bottom forming. We will continue to take a cautious attitude, but it's encouraging to see the first real signs of stabilization in that sector. .

Turning to our International segment, which we have renamed ELA to better reflect the geographic market it describes, we reported solid sales and order growth across nearly every region, with the largest percentage growth in EMEA and Latin America.

The Asia-Pacific order growth was a particular highlight given the year-on-year decline we've seen in recent quarters. But here again, we still have work in front of us. We must work to expand our global brand recognition and product offer, and we are continuing to work through integration of our newly acquired POSH manufacturing operations.

But I'm pleased to see the progress made by our ELA teams. .

Specialty & Consumer, the segment's year-over-year sales gains were driven by Maharam, which offset a flat to modest sales decline in the collection and retail and a more significant drop in Geiger's more project-driven business. However, consistent with the third quarter's trend, the orders for Specialty & Consumer were outstanding segment-wide.

We recorded strong double-digit order gains in all of our year-over-year comparisons. And with the addition of Maharam, we achieved a better than 110% growth in total segment orders. We believe some of the growth is a reflection of seasonal order pacing related to our consumer channel and several important new product introductions.

But even accounting for that influence, we still see momentum in this key segment. In addition to contributing to strong margins and business diversification, the Specialty & Consumer segment continues to play a vital role in our overall brand strategy, enhancing our visibility and reputation among both consumers and key design audiences. .

As an example, in the latest furniture brand value scorecard study made by the Dwell Insights Group, which is an independent market research division of Dwell Media, Herman Miller ranked #1 as the brand that best exemplifies design leadership in a survey of affluent consumers and design professionals.

While we are gaining traction among consumers, Herman Miller also remains committed to our leadership position and workplace knowledge and settings, exemplified by our award-winning Living Office initiative. And we continue to look further to wherever people learn, heal and live.

This is the core of our strategy and ambition, to be a lifestyle brand that crosses the human experience and virtually every application in the built environment. We are doing that both domestically and internationally and with a practiced ability to respond to the current of social change that we see unfolding in global culture.

As I said earlier, we have a great deal of work still in front of us, but we believe this quarter shows the people of Herman Miller are making real progress in delivering our strategy. .

With that brief introduction, let me turn the call over to Greg for more details on the quarter. .

Thanks, Brian. As a reminder, we provided supplemental financial information specific to the quarter on the investor website at hermanmiller.com. .

And now for the details on the quarter. Consolidated sales of $456 million were almost 8% higher than the same quarter last year. Orders in the period of $464 million were 21% above the prior year level. At the beginning of February, we increased our generalist prices an average of 2.5%.

As a result, we estimate orders totaling approximately $22 million were pulled ahead into the third quarter, that would otherwise have been entered in the fourth quarter. Excluding the impact of the Maharam acquisition, the order divestitures and foreign currency translation, sales increased 4% from the prior year.

Organic order growth, which adjust for the pull ahead impact of the price increase, totaled approximately 11% in the third quarter. Although our results in the quarter were again negatively impacted by lower sales to the U.S. federal government, we are very encouraged to see year-over-year order growth in this sector for the first time in 2.5 years.

As Brian mentioned, while it's too early to reach any firm conclusions here, this is a welcome sign that the government headwinds are beginning to subside. .

Sequentially, net sales in the quarter decreased 3% from the second quarter, a change consistent with the average historical seasonal patterns for our business.

New orders decreased 8% relative to our second quarter, an amount that compares favorably to historical seasonality, due in part to the acceleration of the orders in advance of the price increase. .

Within our North American segment, sales were $294 million in the third quarter. This represents an increase of 3% from Q3 of last year. Adjusting for the impact of the order divestitures and foreign currency translation, segment sales were up approximately 6% from last year. New orders in this segment totaled $292 million in the third quarter.

This result is 9% higher than Q3 last year, and it's 6% higher on an organic basis. .

Our ELA segment reported sales of $98 million for the quarter. This represents an 8% increase from Q3 of last year, with the largest contributors of this growth coming from the EMEA and the Latin America regions. Orders in the quarter were $101 million. This is up almost 25% from last year, and the increase was seen across nearly all the regions.

We were especially pleased with our order growth of approximately 10% in the Asia-Pacific region after seeing year-over-year declines in recent quarters. Adjusted for the impact of changes in foreign currency translation, ELA segment sales increased almost 10%, while orders were up 26% from the prior year third quarter. .

Within our Specialty & Consumer segment, sales in the quarter totaled $64 million, an increase of over 35% over the same quarter last year. This increase is attributed to the addition of Maharam, which was not included in our consolidated numbers at this time last year.

Excluding the impact from this acquisition, segment sales decreased 16% on a year-over-year basis. The majority of the decline resulted from a relative decrease in large projects at our Geiger subsidiary. New orders in this segment were almost $72 million in the third quarter. This represents an increase of 111% on a year-over-year basis.

On an organic basis, excluding the impact from Maharam acquisition and the estimated impact from the price increase, segment orders increased nearly 17% compared to last year. This order growth was broad based across the segment, included double-digit growth at Geiger, the Consumer business and the Herman Miller Collection.

We estimate the translation impact from changes in currency exchange rates reduced our consolidated net sales and orders in the quarter by approximately $4 million and $3 million, respectively, relative to the third quarter of last year. This resulted from the strengthening of the U.S. dollar against certain other currencies compared to a year ago. .

I'll now move on to expenses and earnings in the quarter. Our consolidated gross margin this quarter was 35.7%. By comparison, consolidated gross margin during Q3 of last year was 34.1%, or 34.3% after adjusting for the impact of legacy pension charges.

The year-over-year improvement in gross margin percentage is primarily attributable to favorable product and channel mix, improved labor and other operational cost savings. These factors were partially offset this quarter by the negative impact of foreign currency exchange rates relative to Q3 last year. .

Operating expenses in the third quarter came in line with our expectations at $128 million. This compares to adjusted operating expenses of $114 million in the third quarter of last year. The primary contributor of this increase relates to the operating expenses at Maharam.

Additionally, during the third quarter, we incurred restructuring expenses aimed at improving efficiencies at our North American sales and distribution channel and Geiger manufacturing operations. These actions focused primarily on targeted workforce reductions and resulted in the recognition of pre-tax restructuring expenses of $1.1 million. .

On a GAAP basis, including restructuring expenses, we reported operating income of $34 million or 7.5% of sales in the quarter. Excluding these charges, adjusted operating earnings were $35 million or 7.7% of sales. .

In the third quarter of last fiscal year, operating earnings totaled $27 million on a GAAP basis. In that same period, adjusted operating earnings were $31 million or 7.4% of sales. .

Our effective tax rate in the third quarter was 33.3% compared to 29.4% in the same quarter last year. The prior year rate was lower due primarily to benefits associated with the extension of the R&D Tax Credit legislation, which was signed into law last year. .

Finally, net earnings in the third quarter totaled $19 million or $0.33 per share on a diluted basis. Excluding the impact of restructuring charges, adjusted earnings per share totaled $0.34, which compares to adjusted earnings of $0.32 last year in Q3. .

With that, I'll now move on to give you an update on cash flow and balance sheet. We ended the third quarter with a total cash and cash equivalents of $77 million, an increase of approximately $4 million from the end of November.

Net cash from operating activities in the quarter totaled $23 million, while changes in working capital resulted in a net use of cash of $11 million. Capital expenditures in the quarter totaled $12 million, bringing the year-to-date total to $32 million. We expect our full year capital spending to be approximately $50 million.

Cash dividends paid in the quarter were $7.4 million compared to $5 million paid in Q3 of last year. The dividend increase we announced last December will be reflected in our upcoming April payment and will increase our annual payout by approximately $4 million. We remain in compliance with all our debt covenants.

And as of quarter-end, our gross debt-to-EBITDA ratio was approximately 1.2:1. The available capacity in our bank credit facilities stands at $143 million, and we're confident we can meet the financing needs of the business moving forward given our cash position, expected cash flows from ongoing operations and our available borrowing capacity. .

With that overview, I'll move on to cover our sales and earnings guidance for the fourth quarter of fiscal '14. In determining the estimated sales range, we consider the volume of orders in our backlogs scheduled to ship beyond the end of the fourth quarter.

The percentage of these orders is a bit higher than normal, and we anticipate seeing a similar scheduling pattern at some of the projects we expect to enter early -- in the early part of the fourth quarter. .

Taking these factors into consideration, we expect sales to range between $485 million and $505 million in the quarter. This implies total revenue growth between 5% and 10% over Q4 of last year, and on an organic basis, suggests year-over-year growth of 2% to 7%.

Earnings in the quarter are expected to be between $0.43 a share and $0.47 a share, and this assumes an effective tax rate of between 32% and 33%. .

We expect our consolidated gross margin in the fourth quarter to improve from the third quarter level, driven primarily by higher factory production levels and some initial benefit from the February price increase. And these positive factors will be likely partially offset by increases in some material costs.

In total, we expect our gross margin to range between 36% and 37%. .

We anticipate a sequential ramp-up in the operating expenses this quarter, driven by higher sales volume and increased spending on program marketing in support of upcoming new product launches in the NeoCon trade show. In total, our fourth quarter operating expenses are expected to range between $134 million and $137 million. .

And with that, I'll turn the call back over to the operator, so we can take your questions. .

[Operator Instructions] And our first question comes from Josh Borstein from Longbow Research. .

Just with respect to the GSA business, you noted it wasn't down as much as you expected, and orders actually were positive for the first time in 2.5 years.

And I know you don't want to call a trend here with one quarter, but what are you hearing from your customers regarding the outlook for GSA?.

Well, I mean, that there is no singular customer, called GSA is the difficult thing, and it's always going to be based on what's going on in projects. So I don't know that I would actually put a lot of stock in what people tell you. I think what we are seeing is -- and we saw this, and we talked to you about it in the second quarter.

What you're starting to see is relative stability quarter-over-quarter sort of on a sequential basis of what we're seeing in order patterns. And I would say, right now, that's probably the best predictor we've -- we have, as actually looking at what the patterns are and what the types of projects.

Now again, this is a lower part of the year typically for orders. I mean, the really heavy time is late summer, early fall. So this isn't the meat of the, if you will, "the government selling season." On the other hand, I think what you're starting to see is a pattern where it looks like it has done some stabilizing. We also did some of our own work.

We actually went out and looked at some kind of metric models around the government, particularly, and that actually is the pattern as a lot of that detail work told us, that eventually, we'd start to see the thing sort of normalize.

And while I wouldn't go there yet, and we'd love to say it can't go any further down than it has until you get to 0, that's not really true, but we certainly have seen a much firmer pattern over the last bit here. .

Okay, great. I appreciate that. And then the North American segment, you guys put up some nice margins in that business and actually have done a very nice job all year long.

Is there anything structurally different in this segment of the business to suggest that EBIT margins in the high single, low double-digit margins are sustainable?.

We think they're sustainable. I don't think there's anything that would tell us that they're not. We've -- we're constantly -- as you guys all have been following us closely, we're constantly working on how we're getting new products out that drive higher margins, how do we infuse our work in Lean to actually drive costs out of the business.

And if we get volume increases, we'll get good leverage on operating expenses. And that's probably been the hardest one to come by is when you're growing at 2% to 3%, it's hard to get over the kind of inflationary costs that come into the business.

As soon as we start to get up into the 5% and above, you start to get better leverage on those costs for sure. .

Okay. And then just one more for me. And the BIFMA forecast for 2015, some nice strength there, strength we really haven't seen for a while.

Is that an outlook that you subscribe to? And what are you seeing or hearing that may suggest that 10% growth may be possible?.

It -- this is always hard because you're using forecasted numbers to forecast numbers, which always makes you nervous. And I -- so I don't know that I would ever opine on the absolute number.

I think that the factors -- if you read the detailed report and you look at the factors behind it, it makes reasonable sense that we should see a improving picture for the industry, particularly when you take the negative downdraft of the government out.

And we probably -- if you looked at, and I would guess is a 1 to 2 points of growth that have been -- you got a negative headwind in the industry over the last couple years in the federal government.

So you just take that factor out, if that really is hitting a point of stability, that's going to be a big factor already on what we're seeing in the industry. But if you look at the other measures that are underneath there, corporate profits, we're starting to get to a spot that employment is starting to pick up at one level.

I think the other big question is that -- there is a fair amount of activity of folks realizing that we're at this point, that a lot of the stock of furniture that was sold at the peak was in the late '90s.

And you can imagine that, that stuff is now nearly 15 years old, we are now in the meat [ph] of the generational shift of the baby boomers ending their career, and companies are realizing they got to get the next generation in, and I think the question is, do those things catalyze together to start a kind of a period of reenergizing the industry? And I would say the data underneath it [ph] looks reasonable.

I don't know if I would -- could tell you one way or the other whether it's the exact number. As much as I would say directionally, it feels like there's a good chance of having stronger dynamics in the industry through the second half of '14 and as we get into '15.

I think the other maybe big wildcard out there is we seem to always, as a global population, constantly have these little things that show up, like Ukraine, that's a little thing, that you don't know if they derail other positive trends. But assuming we don't see some other factor that we can't predict today, that looks pretty reasonable. .

And our next question comes from Todd Schwartzman from Sidoti & Company. .

Jeff (sic) [Brian] and Greg, I wanted to ask for an update on -- timetable update on the shipping of the large energy project, and maybe you can give us a sense of what transpired in Q3 and how that's expected to ship over the next year or so. .

Yes, sure, Todd. So like we said, this thing is going to start shipping in the second quarter, which it did in November, and it's going to really ship over 14 months. And for the most part, that's pretty stable over that time period because the revenue would be recognized as the 4s are completed and installed.

Think about kind of orders into revenue on a 1-quarter delay. So the third quarter was the first quarter where we had significant revenue. And I think that revenue will continue to be about the same amount over this kind of 14-month period.

Does that help?.

Yes, it does.

In terms of commercial construction in North America, any -- are you seeing anything different than 3 months ago?.

I don't thing we see anything different than we saw 3 months ago. I think if you read the BIFMA or the IHS forecast, maybe to be more specific, if you read the details of it, the one thing that I picked out in there that I haven't seen is, yes, they're talking about continued construction.

And as I've always said, that's not as important as an immediate driver. It's longer term that you want to make sure people have places to move to at reasonable rents. That's a bigger driver.

But I think the thing that they note that was interesting to me was that they're expecting a good size uptick in health care facilities over the next 24 months in terms of construction. What they didn't break down is how much of that is hospitals versus other things.

My -- our belief is a lot of that is going to be outpatient clinic, ambulatory things, doc practices and the like that you're seeing as people respond to how does the whole health care system sort of reform itself. .

Got it.

With regard to raw materials, are there any headwinds pertaining to specific input or maybe even in the aggregate that you'd want to address, maybe taking a 6-month view of things?.

Well, Todd, if you look -- if you go back to the fall, there was a lot of noise that steel was really going to start to increase, and the mills were sort of running down that path. You did see a little bounce up in Q3 in prices, not a big one. That seems to have tapered off a bit.

And as you know, we kind of have a 3-month lag with prices, so we'll see a little bit of an impact in our numbers in the fourth quarter that will really relate to the increases that kind of came around in January. That looks pretty level. Copper's come down here recently. You had some things like aluminum bounce up a little bit.

But net-net, we think the pricing action that we took covers any risk we have on that front. .

And then can you maybe remind us, with the order pull forward from Q4 to Q3, what is the extent of the price increases?.

Are you talking about the $22 million, Todd? I'm not sure about your question. .

Yes, yes.

So what's happening with the ASPs?.

So they went up, on average, 2.5%. And as you know, we -- typically, whenever we do a price increase like this, we have a bulk of orders that kind of gets pulled forward into the picture. And so it's -- we get a big rush of orders that week.

And the following week, as we try to get things through the system, which came -- which was basically February 1.

And then the way we do the math on the $22 million, as we look at the schedule of the backlog right now and say, well, how much of this backlog has scheduled out farther than normal and relative to historical trends, and then we basically subtract historical [ph] trends from what we have and then voila, you get $22 million.

So is that a perfect number? No, but plus or minus a couple million bucks is probably -- it's probably not. .

And Maharam, what was the sales and EPS contribution for Q3?.

Sales were $24.8 million, I think, Todd, on the top of my head. .

And if you saw -- I mean, if you looked at the segment reporting, you'll note that the Specialty & Consumer segment operating margins were lower than what we've seen, particularly from last year. There were 2 real factors on that, Todd, as we get to your question about EPS.

First of all, Geiger had a very light quarter in terms of shipments -- a good quarter in terms of orders, but a light quarter in terms of shipments. So that hurt part of the profitability. The other thing that happened in this quarter with Maharam, their volume was lighter than we had seen in prior quarters.

To be frank, some of this is, I think, we didn't expect them to see as much seasonality. This is our first time going through a through quarter -- third quarter with them. In fact, their seasonality looked a lot more like what we see in our core business. And that probably shouldn't have surprised us, to be frank, but it did.

They also had a higher level of operating expenses related to sampling and putting new SKUs in place that, that with lower volume -- and remember, when you got the kind of gross margins they have, when you drop a couple million dollars worth of volume out of that business, it's a big impact.

And we actually raised operating expenses a bit to get some marketing programs ahead of some of the new offers they're launching for the spring.

You'll see a lot of activity around Maharam with some new carpet -- a new carpet offering from Danskina, one of the companies that's part of the Maharam Group, and a joint venture that we have with Kvadrat, and then a bunch of new SKUs on the textile side. So that actually, the EPS addition from Maharam was quite small this quarter. .

So with that in mind, are you -- or have you have adjusted your initial full year contribution, EPS guidance?.

For Maharam, particularly?.

For Maharam, yes. .

Not -- I mean, not a ton. It might be up[ph] maybe $0.01 or so. .

Yes, that's probably about right. .

And with Geiger, I know -- I think you said that orders were up in Q3.

But regarding that shipment decline, was there something about the prior year quarter that made the bar -- that set the bar abnormally high? What were the issues going on with regards to the Geiger shipments during the quarter?.

I mean, that business always -- given its size and the size of projects that can roll through there, you'd always get a bunch of lumpiness. There's not anything special. I mean, Q3 was pretty good last year. And the orders in the fall that would -- that drove revenue in Q3 this year weren't quite as good.

But last fall, that team was saying, hey, look, a lot of stuff in the pipeline, and that showed up in terms of orders in the third quarter. And so there's nothing -- it's always a very volatile, lumpy business due to the size of the total business relative to the size of the projects that we win. .

Our next question comes from Matt McCall from BB&T Capital Markets. .

So on the SG&A front, looks like, historically, there's been about a 5 million -- or 5% -- I've looked at it a couple different ways -- increase in SG&A spend in Q3 to Q4. Is there -- it looks like it's a little higher than that this year on a little bit higher base. So I'm just curious as to what's driving that.

You talked about new product introductions. And then, as you look out in the next year, I think we've talked about for a while now the potential of incremental margins rebounding a little bit after a couple years of spending.

So can you discuss the spending expectations and the incremental margin expectations next year?.

Yes, Matt. The biggest thing that's -- that has the operating expense up a little more than what we'd normally see is we are in a really heavy phase around the Living Office and a heavy phase around some of the work we've been doing with the sales force on rescaling them around solution-based selling.

Those 2 things alone are the -- are probably the biggest drivers of it. We have a lot of -- a lot of the products we launched last year at NeoCon was I would describe as a soft launch. We didn't have all the marketing materials out.

One of the things we've got going on right now here is, you see we are -- you are implementing those products in a lot of dealer showrooms, a lot of our showrooms across the country.

So you got a lot of investment to sort of restock showrooms, if you will, not only just in terms of product but also in terms of marketing brochures, those kind of things. So there is that really heavy marketing effort going on right now.

In fact, in some ways, while there's a lot of R&D work, which is another driver of the uptick as well, is as you're down to those final throws, you've got lots of work being done in R&D not only in the new product -- on the new product platforms for the Living Office, but as well, we're trying to make sure the pipeline doesn't dry up, and we're starting to push into new areas that will build on the work we've done.

So to be frank, it's really sort of we're at the end -- not -- I don't want to say at the end, but we're near the end of a big snake of work around the Living Office, and that's a big drive for it.

What was the second part of your question, I think?.

Well, you kind of alluded to that you're going to continue to invest, so I think my anticipation was that we would see a pullback in some of this growth spending next year as you started to reap some of the benefits.

But it sounds like it's going to continue or should we see the incrementals rebound further?.

Matt, I'd say it this way that our thought process is that, hey, look, that -- I think year-to-date, our leverage is about 18% over the prior year. That that's probably about what you would tend to see next year if the average BIFMA growth rate is -- in our model when we put this together was we were thinking around 3%.

Given the uptick, if you start to see volume increases that go higher than sort of like Brian described earlier, you'll see better leverage than 18%. .

Okay. And that kind of leads to the next question. You got, I think, a target or a goal, I don't know exactly what you call it, but for revenue to hit $2.2 billion and then for EBIT margins to hit 10%. So maybe if you could reference where you stand there and your view on that.

But more specifically, I'm curious about the segment margin targets, but given -- I think, Brian, you just talked about the ELA segment, Specialty & Consumer stepped a little bit lower, what's the target margin that you're looking for, for each one of your segments?.

one of them in our control, that is that we still got some integration work to get through with POSH; the second one is not in our control, is what's happened with exchange rates. Exchange rates -- if you look at and go through Greg's numbers, exchange rates have put a real dent in gross margin in the International side this year.

So we'll look at how much of that we can recoup through pricing, but you want to be careful of the lever between pricing and margins. So longer term, those 2 segments, I actually think the Specialty & Consumer segment, longer run, should be higher than our average. It has higher gross margins than average. We got to figure out how to get it up there.

Now some of those gross margins also come up in the higher operating expenses, especially on the Consumer side and on Maharam, where you spend more money on the marketing side of things. But net-net, I would tell you, longer term, I think S&C should run higher than our average, and International should be right about our average is my gut.

Now it will take us a while to get through the question of the exchange rates. And I think the other thing is where are we forward investing. And Of course, in the U.S., we got a fairly stable base, a big thing to play off from and we sort of are doing incremental growth. When you get to the other 2, we're investing in them.

And you take as an example in International, this next year, we're going to open a new assembly facility in India, where we're going to have costs setting up the assembly facility to be able to drive demand, but we're really not going to drive much revenue out of that new facility until probably fiscal 2016.

So you're going to constantly have sort of lumpiness in those businesses if we're making investments to open new capabilities.

I think the trickier question here, longer term, is going to be what is the sort of running profitability of those businesses versus what we report when we go through kind of step-ups in investments as we open up new channels to market or new capabilities to enable us to continue to get the growth.

Does that make sense?.

It does. So if I do that math, it sounds like 10% is not the longer-term target, that was a 3-year target. And if we just add up what you just said, it seems like it has to be something higher than that, longer term.

And it seems like that the North American business needs more volume, whereas the other businesses, maybe it's just some of the investments lapse and some of the integration lapses, things like that, is that correct?.

Well, I'm not going to say correct to your first part because I didn't give you that number. You forecasted a number. And as I told you, we'll come out with a new set of 3-year guidelines when we get to the end of the year. Until then, we don't have that work done, Matt, to be frank.

And again, I think you're going to have to take this mix of where the investments are as well.

So that's why I'm trying to be -- I want to be careful that you don't run away and say, well, geez, we're going to take out a few items -- I was trying to be careful to say, yes, there'll be an operating level of profitability, but then you're going to have investments you're making to extend the reach of some of those businesses.

So there may be some offset for that as we're ramping some of them up. If you look at the growth rates we've got in the ELA business right now, to keep that up, you got to put infrastructure in place.

If you look at S&C, where we're starting to try to open new channels, we're going to have some investment as we go forward around marketing to continue to drive the kind of growth we're getting.

And so that's my only caution to you is be careful with just taking that and say, hey, well, I'm going to add these all up, and they're going to be significantly higher. That's my one caution. .

And our next question comes from Budd Bugatch from Raymond James. .

This is Bobby filling in for Budd.

Quickly, can you maybe -- is there any other issues besides the currency that's affecting the International margins and if maybe, is there -- if we're trying to back in to, x currency, what the margin would've looked like because it's down from year-over-year?.

Yes, Bobby, this is Greg. Now this is going to be have Canada in it too which is going to play across the North American segment. But the total impact in terms of dollars on gross margin year-on-year, it's about $3 million in the gross margin line.

So one of the things we've talked about internally, it's -- we were really pleased with 35.7%, given that headwind that we were facing, so I don't remember off the top of my head what's the difference between Canada and the rest of the business. I think it was in the neighborhood, Canada was a pretty healthy part of that $3 million.

I want to say more than $1 million, but I can't remember off the top of my head, Bobby. .

All right. I appreciate that. It's -- that color is helpful. And then maybe just for modeling purposes, a little color on -- for next quarter, some revenue by segment. Last quarter, you called out strength again in the International revenue.

Are you expecting to see that again going forward next quarter?.

Bobby, for that question, I look at your order -- our orders this quarter and say that's -- for modeling purposes, that's what I'd use. .

All right.

And then can you give us the percentage of federal government as a percentage of sales?.

Yes. I didn't do the exact math. It's in the neighborhood of about 4%, Bobby, maybe 3.7%, somewhere between 3.5% and 4%. .

All right, perfect. I appreciate it.

And one last quick one on -- you did give some color on the large energy project, but is it possible to get the dollar value that contributed to the quarter?.

I'd say, on the order side, organic order growth without that was just under 10%. .

The next question comes from Josh Borstein from Longbow Research. .

It's a quick follow-up.

On the restructuring actions that you took with the Geiger subsidiary, what exactly are those, and are there any estimated savings associated with that, and if so, when should they be realized?.

Yes, so it was a combination of things. And at Geiger, there was a shift change, where we combined some 2 shifts in kind of into -- for the -- for purposes of 1 shift. That's where the biggest savings will come from. My guess is you're talking about in the neighborhood of about equal to the amount of the restructuring on an annual basis. .

And then just lastly, with the improvement in the economy and the pickup in orders and the acceleration you're seeing, have you also seen a step-up in the quality of products or price points that customers are purchasing right now?.

I don't know that we've seen any change in -- Josh, in the patterns of what folks are purchasing, from our perspective. It might -- if you looked at the industry overall, you might see that, but of course, we wouldn't have that data. For us, of course, we sell what we have, and we don't really play across that broad of a spectrum in that case.

So for us, mix has not changed a great deal. .

And I'm showing no further questions at this time, gentlemen. I would like to hand the conference back over for any closing remarks. .

Well, thank you, all, for taking time to join us this morning. Before our next reporting window, we hope to see you personally at NeoCon. Meanwhile, we'll remain focused on delivering great business performance for our shareholders, and we look forward to sharing those results in June. Thanks, and we'll talk to you soon. .

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day..