MillerKnoll, Inc.
Table of Contents
| Page No. | |||||
| Part I | |||||
| Item 1 Business | |||||
| Item 1A Risk Factors | |||||
| Item 1B Unresolved Staff Comments | |||||
| Item 2 Properties | |||||
| Item 3 Legal Proceedings | |||||
| Additional Item: Executive Officers of the Registrant | |||||
| Item 4 Mine Safety Disclosures | |||||
| Part II | |||||
| Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities | |||||
| Item 6 | |||||
| Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||
| Item 7A Quantitative and Qualitative Disclosures about Market Risk | |||||
| Item 8 Financial Statements and Supplementary Data | |||||
| Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | |||||
| Item 9A Controls and Procedures | |||||
| Item 9B Other Information | |||||
| Part III | |||||
| Item 10 Directors, Executive Officers, and Corporate Governance | |||||
| Item 11 Executive Compensation | |||||
| Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||||
| Item 13 Certain Relationships and Related Transactions, and Director Independence | |||||
| Item 14 Principal Accountant Fees and Services | |||||
| Part IV | |||||
| Item 15 Exhibits and Financial Statement Schedule | |||||
| Schedule II Valuation and Qualifying Accounts | |||||
| Signatures | |||||
PART I
Item 1 Business
General Development of Business
The Company researches, designs, manufactures and distributes interior furnishings for use in various environments including residential, office, healthcare educational, and residentialeducational settings, and provides related services that support organizations and individuals all over the world. Through research, the company seeks to understand, define and clarify customer needs and problems existing in its markets and to design products, systems and services that serve as innovative solutions to such needs and problems. The company'sCompany’s products are sold primarily through the following channels: Owned and independent contract furniture dealers, direct customer sales, owned and independent retailers, direct-mail catalogs, and the company's online stores.Company’s eCommerce platforms.
In July 2021, the Company finalized the acquisition of Knoll, Inc. (“Knoll”) in a cash and stock transaction valued at approximately $1.8 billion.
Powering the world's most dynamic design brands, MillerKnoll includes Herman Miller, Inc. was incorporated in Michigan in 1905. OneMiller® and Knoll®, as well as Colebrook Bosson Saunders®, DatesWeiser®, Design Within Reach®, Edelman® Leather, Geiger®, HAY®, Holly Hunt®, KnollTextiles®, Maars® Living Walls, Maharam®, Muuto®, NaughtOne®, and Spinneybeck®|FilzFelt®. All of these companies are considered controlled subsidiaries, except for Maars of which the company's major plants and itsCompany owns 48.2% of as of June 3, 2023. MillerKnoll's corporate offices are located at 855 East Main Avenue, PO Box 302, Zeeland, Michigan, 49464-0302 and its telephone number is (616) 654-3000.616 654 3000. Unless otherwise noted or indicated by the context, the term “company” includes Herman Miller,all references to "MillerKnoll," "we," "our," "Company" and similar references are to MillerKnoll, Inc., and its predecessors, and majority-ownedcontrolled subsidiaries. Further information relating to principles of consolidation is provided in Note 1 to the Consolidated Financial Statements included in Item 8 of this report.
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Segments
Financial information relating to segments is provided in Note 1314 to the Consolidated Financial Statements included in Item 8 of this report.
MillerKnoll is a global leader of design. Our brands have led conversations on design for over 100 years, and we continue to drive our industry forward with visionary thinking and a purposeful approach. The company'sCompany's principal business consists of the research, design, manufacture, selling and distribution of officeseating products, furniture systems, seating products, other freestanding furniture elements, textiles, leather, felt, home furnishings and related services. Most of these systems and products are designed to be used together.
The company'sCompany's ingenuity and design excellence create award-winning products and services, which have made usthe Company a leader in the design and development of furniture, furniture systems, textiles, leather, felt and related technology and acoustical solutions. This leadership is exemplified by the innovative concepts introduced by the companyCompany in its modular systems (including Canvas Office Landscape®, Locale®, Public Office Landscape®, Layout Studio®, Action Office®, Ethospace®, Arras® and Resolve®). The company also offers a broad array of seating (including Embody®, Aeron®, Mirra2™, Setu®, Sayl®, Verus®, Celle®, Equa®, Taper™ and Ergon® office chairs), storage (including Meridian® and Tu® products), wood casegoods (including Geiger® products), freestanding furniture products (including Abak™, Intent®, Sense™ and Envelop®), healthcare products (including Palisade™, Compass™, Nala®, Ava® and other Nemschoff® products), the Thrive portfolio of ergonomic solutions and the textiles of Maharam Fabric Corporation (Maharam). The Live OSSM system of cloud-connected furnishings, applications and dashboards provides a data analytics solution for the company's customers.
product offerings.
The company also offers products for residential settings, including Eames®, Eames (lounge chair configuration)®, Eames (management chair configuration)®, Eames Soft Pad™, Nelson™ basic cabinet series, Nelson™ end table, Nelson™ lanterns, Nelson™ marshmallow sofa, Nelson™ miniature chests, Nelson™ platform bench, Nelson™ swag leg group, Nelson™ tray table, Bubble Lamps®, Airia™, Ardea®, Bumper™, Burdick Group™, Everywhere™ tables, Claw™, Caper®, Distil™, Envelope™, Formwork®, Full Round™, H Frame™, I Beam™, Landmark™, Logic Mini™, Logic Power Access Solutions™, Renew™, Rolled Arm™, Scissor™, Sled™, Soft Pad™, Swoop™, Tone™, Twist™, Ward Bennett™ and Wireframe™.
The Company's products are marketed worldwide by its own sales staff, independent dealers and retailers, via its eCommerce websites, and through its owned Herman Miller, Design Within Reach ("DWR"), HAY, Knoll, and Muuto retail stores and studios. Salespeople work with dealers, the architecture and design community, and directly with end-users. Independent dealerships concentrate on the sale of MillerKnoll products and some complementary product lines of other manufacturers. It is estimated that approximately 56.2% of the Company's sales in the fiscal year ended June 3, 2023, were made to or through independent dealers. The remaining sales were made directly to end-users, including federal, state and local governments and several business organizations by the Company's own sales staff, retail channels, or independent retailers.
The Company is a recognized leader within its industry for the use, development, and integration of customer-centered technologies that enhance the reliability, speed, and efficiency of our customers' operations. This includes proprietary sales tools, interior design and product specification software, order entry and manufacturing scheduling and production systems, and direct connectivity to the Company's suppliers.
Raw Materials
The company'sCompany's manufacturing materials are available from a significant number of sources within the United States, Canada,North America, South America, Europe and Asia. To date, the company has not experienced any difficulties in obtaining its raw materials. The costs of certain direct materials used in the company'sCompany's manufacturing and assembly operations are sensitive to shifts in commodity market prices. In particular, the costs of steel, plastic, aluminum components and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber and resins. Increases in the market prices for these commodities can have an adverse impact on the company'sCompany's profitability. Further information regarding the impact of direct material costs on the company'sCompany's financial results is provided in Management's Discussion and Analysis in Item 7 of this report, "Management's Discussion and Analysis of Financial Condition and Results of Operations”.
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Patents and Trademarks Licenses, Etc.
The company hasCompany believes its intellectual property rights are an important component supporting the long-term success of its brands and its competitive position, and it strategically applies for, registers, and maintains its intellectual property rights in the United States and a number of foreign countries where such protection is available. These rights include patent, trademark, copyright and trade secrets, among other proprietary rights. The Company also maintains a robust intellectual property enforcement program to protect its intellectual property rights against third party infringements.
The Company and its subsidiaries hold many active utility and design patents in the United States. Many of the inventions covered by these patents also have been patentedStates as well as in a number of foreign countries. VariousThe Company has also registered various trademarks, including the name and stylized “Herman Miller” andtrademark, the “Herman Miller Circled Symbolic M” trademark, are registeredand the name and stylized “Knoll” trademark in the United States and many foreign countries. countries, which it considers to be among its most valuable intellectual property rights.
The company does not believe that any material part of its business depends on the continued availability of any one or all of its patents or trademarks, or that its business would be materially adversely affected by the loss of any such marks, except forCompany considers the following trademarks:trademarks and any associated stylized depictions of the word marks to be among its most important trademarks for distinguishing the Company, its subsidiaries and its goods from those of others: MillerKnollTM, Herman Miller®, Herman Miller Circled Symbolic M®, Knoll®, Maharam®, Geiger®, Design Within Reach®, DWR®, Nemschoff®HAY®, Action Office®NaughtOne®, Living Office®, Ethospace®Nemschoff®, Aeron®, Mirra®, Embody®, Setu®, Sayl®, Cosm®, Caper®, Eames®, PostureFit®Knoll®, Meridian®KnollExtra®, Knoll Luxe®, KnollStudio®, KnollTextiles®, Edelman® Leather, Spinneybeck® Leather,Generation by Knoll®, Regeneration by Knoll®, MultiGeneration by Knoll®, Remix®, Holly Hunt®, Vladimir Kagan®, Muuto®, Barcelona®, and Canvas Office Landscape®. It is estimated that the average remaining lifeWomb®, as well as trademark registrations for trade dress and common law rights in trade dress for some of the company's patents and trademarks is approximately 6 years.
Company’s significant product designs.
Working Capital Practices
Information concerning the company's inventoryCompany's working capital levels relative to its sales volume can be found under the Executive Overview section in Item 7 of this report, “Management's Discussion and Analysis of Financial Condition and Results of Operations”.Operations.” Beyond this discussion, the companyCompany does not believe that it or the industry in general has any special practices or special conditions affecting working capital items that are significant for understanding the company'sCompany's business.
Customer Base
The company estimatesCompany approximates that no single dealer accounted forfor more than 5 percent4% of the company'sCompany's net sales in the fiscal year ended June 3, 2017.2023. The companyCompany estimates that the largest single end-user customer accounted for $102$174.9 million, $88$114.4 million and $97$113.0 million of the company'sCompany's net sales in fiscal 2017, 2016,2023, 2022, and 2015,2021, respectively. This represents approximately 5 percent, 4 percent and 5 percent4% of the company'sCompany's net sales in fiscal 2017, 20162023, 3% in fiscal 2022, and 2015, respectively.5% in fiscal 2021. The company's 10Company's ten largest customers in the aggregate accounted for approximately 18 percent, 18 percent, and 20 percent14% of net sales in fiscal 2017, 2016,2023, 11% in fiscal 2022, and 2015, respectively.
17% in fiscal 2021.
Backlog of Unfilled Orders
As of June 3, 2017,2023, the company'sCompany's backlog of unfilled orders was $322.6$698.0 million. At May 28, 2016,2022, the company'sCompany's backlog totaled $323.5 million. The backlog as of the end of fiscal 2017 was lower as compared to the ending backlog as of the end of fiscal 2016 due in part to the sale of an owned dealer in Philadelphia, which resulted in a decrease in backlog of $11.6$932.5 million. It is expected that substantially all of the orders forming the backlog at June 3, 2017,2023 will be filled during the next fiscal year. Many orders received by the companyCompany are reflected in the backlog for only a short period while other orders specify delayed shipmentsrequest extended delivery dates and are carried in the backlog for up to one year. Accordingly, the amount of the backlog at any particular time does not necessarily indicate the level of net sales for a particular succeeding period.
Government Contracts
Other than standard provisions contained in contracts with the United States Government, the companyCompany does not believe that any significant portion of its business is subject to material renegotiation of profits or termination of contracts or subcontracts at the election of various government entities. The companyCompany sells to the U.S. Government both through a General Services Administration ("GSA") Multiple Award Schedule ContractContracts and through competitive bids. The GSA Multiple Award Schedule Contract pricing is principally based upon the company'sCompany's commercial price list in effect when the contract is initiated, rather than being determined on a cost-plus-basis. The companyCompany is required to receive GSA approval to apply list price increases during the term of the Multiple Award Schedule Contract period.
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Competition
All aspects of the company'sCompany's business are highly competitive. From an officea furniture perspective, the companyCompany competes largely on design, product and service quality, speed of delivery and product pricing. Although the companyCompany is one of the largest office furniture manufacturers in the world, it competes with manufacturers that have significant resources and sales as well as many smaller companies. The company'sCompany's most significant competitors are Haworth, HNI Corporation, Kimball International, Knoll and Steelcase.
Steelcase Inc.
The companyCompany also competes in the home furnishings industry, primarily against national, regional and national independent home furnishings retailers who market high-craft furniture to end-user customers and the interior design community. These competitors include companies such as Crate & Barrel Holdings, Inc., Hive Modern, Restoration Hardware, Room & Board, Inc., Wayfair Inc., and Williams-Sonoma, Inc. Similar to our officeits furniture product offerings, the companyCompany competes primarily on design, product and service quality, speed of delivery and product pricing in this consumer market.
Research, Design and Development
The companyCompany believes it draws great competitive strength from its research, design and development programs. Accordingly, the company believes that its research and design activities are of significant importance. Through research, the companyCompany seeks to understand, define and clarify customer needs and problems they are trying to solve.problems. The companyCompany designs innovative products and services that address customer needs and solve their problems. The companyCompany uses both internal and independent research resources and independent design resources. Exclusive of royalty payments, the companyCompany spent approximately $58.6$67.6 million, $62.4$71.1 million and $56.7$50.8 million on researchdesign and developmentresearch activities in fiscal 2017, 20162023, 2022 and 2015,2021, respectively. Generally, royalties are paid to designers of the company'sCompany's products as the products are sold and are included in the Design and Researchresearch line item within the Consolidated Statements of Comprehensive Income.
Environmental Matters
Increased focus by U.S. and overseas governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. While we cannot predict the precise nature of these initiatives, we expect that they may impact our business both directly and indirectly. Although the impact would likely vary by world region and/or market, we believe that adoption of new regulations and execution of the Company's sustainability strategy will increase costs for the Company. Also, there is a possibility that governmental initiatives, or actual or perceived effects of changes in weather patterns, climate, or water resources could have a direct impact on the operations of the Company in ways which we cannot predict at this time.
The Company monitors developments related to environmental matters and plans to respond to governmental initiatives in a timely and appropriate manner. The Company’s commitment to the planet is embedded in its corporate strategy and will continue to develop as the Company works to meet sustainability goals by 2030. The Company is focused on operating its global footprint with minimal impact on the environment has been more than good business practiceand designing products with materials and processes that are safe for us - it isboth people and the right thing to do. Our 10-year sustainability strategy - Earthright - begins with three principles: positive transparency, products as living things, and becoming greener together. Our goals are focused around the smart use of resources, eco-inspired design, and becoming community driven. Based on current facts known to management, the company does not believe that existing environmental laws and regulations have had or will have any material effect upon the capital expenditures, earnings or competitive position of the company. However, there can be no assurance that environmental legislation and technology in this area will not result in or require material capital expenditures or additional costs to our manufacturing process.
planet.
Human Resources
The companyCompany considers its employees to be another of its major competitive strengths. The companyCompany stresses individual employee participation and incentives, believing that this emphasis has helped attract and retain a competent and motivated workforce. The company'sCompany's human resources group provides employee recruitment, education and development, as well as compensation planning and counseling. Additionally, thereThere have been no work stoppages or labor disputes inthe company's history.Company's history. As of June 3, 2017, approximately 15 percent2023, approximately 4% of the company'sCompany's employees are covered by collective bargaining agreements, most of whom are employees of its Nemschoff, Herman Miller Ningbolocated in the United States, the United Kingdom, Italy, and Herman Miller Dongguan subsidiaries.Brazil.
As of June 3, 2017,2023, the companyCompany had 7,478 employees, representing a 2 percent decrease as compared with May 28, 2016.approximately 10,900 employees. In addition to its employee workforce, the companyCompany uses temporary labor to meet unevenfluctuating demand in its manufacturing operations.
Diversity, Equity, Inclusion, and Belonging
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tenure with the Company or may be reentering the workforce for a variety of reasons. We are committed to ensuring we support a culture of belonging to ensure all individuals thrive, and we focus on building diverse leadership across MillerKnoll. We believe that embracing diverse perspectives contributes to an inclusive workplace and strengthens the communities where we live and work.
We continue to build inclusivity into our everyday practices by focusing on:
•An ongoing commitment to educate ourselves and integrate cultural competency across the organization;
•Driving a sense of belonging. We want every employee to be fully seen, heard, understood and to feel connected to MillerKnoll in meaningful ways that matter to each person;
•Recruiting, developing, retaining, and promoting inclusive and diverse talent through concerted efforts that drive better results; and
•Implementing and taking action on appropriate metrics and measures to hold ourselves accountable to our commitments.
Compensation
The Company's policy is to competitively compensate all employees for their contributions and to appropriately reward and motivate employees to deliver our business goals. We do this, in part, by closely monitoring and benchmarking compensation matters and working to ensure that our programs provide our employees with the right features to provide for their families and prepare for retirement. We provide competitive health and welfare benefits and retirement savings plans (401k). Retention of our talent is exceedingly important and drives how we design our programs.
International Operations
The company'sCompany's sales in international markets are made primarily to office/institutional customers and residential retail customers. Foreign sales consist mostly of office furniture products such as Aeron®, Mirra®, Sayl®, Setu®, Layout Studio®, other seating and storage products (including POSH products) and ergonomic accessories Colebrook, Bosson and Saunders. The companyCompany conducts business in the following major international markets: Europe, the Middle East, Africa, Latin America and the Asia/Pacific region.
The Company's products currently sold in international markets are manufactured primarily by controlled subsidiaries in the United States, the United Kingdom, Italy, China, Brazil, Mexico and India. A portion of the Company's products sold internationally are also manufactured by third-party suppliers. Sales are made through wholly owned subsidiaries or branches in Canada, the United Kingdom, Italy, France, Denmark, the Netherlands, Mexico, Australia, Singapore, Japan, China (including Hong Kong), India and Brazil. The Company's products are offered in Canada, Europe, the Middle East, Africa, Latin America and the Asia/Pacific region.region primarily through dealer and retail channels.
Additional information with respect to operations by geographic area appears in Note 132 of the Consolidated Financial Statements included in Item 8 of this report. Fluctuating exchange rates and factors beyond the control of the company,Company, such as tariff and foreign economic policies, may affect future results of international operations. Refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk,, for further discussion regarding the company'sCompany's foreign exchange risk.
Available Information
The company'sCompany's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the “Investors” section of the company's internetCompany's website at www.hermanmiller.com,www.millerknoll.com, as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The company'sCompany's filings with the SEC are also available for the public to read via the SEC's internet website at www.sec.gov.
www.sec.gov.
Item 1A Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-Kreport should be carefully considered. The risks and uncertainties described below are not the only ones we face; others, either unforeseen or currently deemed less significant,not material, may also have a negative impact on our company.Company. If any of the following actually occurs, our business, operating results, cash flows, and financial condition could be materially adversely affected.
Business Related Risks
We may not be successful in implementing and managing our growth strategy.
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We have established a growth strategy for the business based on a changing and evolving world. Through this strategy, we are focused on taking advantage of the changing composition of the office floor plate, the greater desire for customization from our customers, new technologies, and trends towards urbanization.
home.
While we have confidence that our strategic plan reflects opportunities that are appropriate and achievable, and that we have anticipated and will manage the associated risks, there is the possibility that the strategy may not deliver the projected results due to inadequate execution, incorrect assumptions, sub-optimal resource allocation, or changing customer requirements.
Certain growth opportunities may require us to invest in acquisitions, alliances, and the startup of new business ventures. These investments, if available, may not perform according to plan and may involve the assumption of business, operational, or other risks that are new to our business.
Future efforts to expand our business within developing economies, particularly within China and India, may expose us to the effects of political and economic instability. Such instability may impact our ability to compete for business. It may also put the availability and/or value of our capital investments within these regions at risk. These expansion efforts expose us to operating environments with complex, changing, and in some cases, inconsistently-applied legal and regulatory requirements. Developing knowledge and understanding of these requirements poses a significant challenge, and failure to remain compliant with them could limit our ability to continue doing business in these locations.
Pursuing our strategic plan in new and adjacent markets, as well as within developing economies, will require us to find effective new channels of distribution. There is no assurance that we can developidentify or otherwise identifydevelop these channels of distribution.
In connection with the July 2021 acquisition of Knoll, we incurred significant additional indebtedness, which has increased our interest expense and could adversely affect us, including by decreasing our business flexibility.
The consolidated long-term debt of MillerKnoll as of June 3, 2023 was $1.37 billion. As a result of our acquisition of Knoll, we substantially increased our indebtedness, which has increased our interest expense and could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions. We have also incurred various costs and expenses associated with such indebtedness. The amount of cash required to pay interest on our increased indebtedness levels and thus the demands on our cash resources are greater than the amount of cash flows previously required to service our indebtedness. The increased levels of indebtedness will also reduce funds available for working capital, capital expenditures, acquisitions, and other general corporate purposes and may create competitive disadvantages for MillerKnoll relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the acquisition, or if the financial performance of the combined company does not meet current expectations, then our ability to service our indebtedness may be adversely impacted.
The indebtedness incurred in connection with the acquisition of Knoll contains various covenants that impose restrictions on us that may affect our ability to operate our business. These include both affirmative and negative covenants that, subject to certain significant exceptions, restrict the ability of us and certain of our subsidiaries to, among other things, incur liens on our property, incur additional indebtedness, enter into sale and lease-back transactions, make loans, advances, or other investments, make non-ordinary course asset sales, declare or pay dividends, engage in share repurchases or make other distributions with respect to equity interests, and/or merge or consolidate with any other person or sell or convey certain assets to any one person. In addition, the definitive documentation governing such indebtedness contains a financial maintenance covenant that requires us to maintain a certain leverage ratio at the end of each fiscal quarter. Our ability to comply with these provisions may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations under such indebtedness.
In addition, we may be required to raise substantial additional financing to fund working capital, capital expenditures, acquisitions, or other general corporate requirements. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. There is no assurance we will be able to obtain such additional financing on terms acceptable to us or at all.
We have incurred and may continue to incur significant costs in connection with the integration of Knoll, which may be in excess of those we anticipate.
We have incurred and expect to continue to incur a number of non-recurring fees and costs associated with combining the operations of Herman Miller and Knoll and achieving desired synergies. These costs and expenses include those related to
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formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
Macroeconomic and Workplace Trends Related Risks
Adverse economic and industry conditions could have had a negative impact on our business, results of operations and financial condition.
Customer demand within the contract office furniture industryand retail furnishings industries is affected by various macro-economic factors;macroeconomic factors with general corporate profitability, white-collarservice sector employment levels, new office construction rates, and existing office vacancy rates arebeing among the most influential factors. History has shown that declinesDeclines in these measures can have had an adverse effect on overall office furniture demand. We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. The U.S., the European Union and a number of other countries are actively pursuing changes to fiscal and tax policies. Such tax reforms, if enacted, could have a material effect on our business, operating results or financial position. Additionally, factors and changes specific to our industry, such as developments in technology, governmental standards and regulations, and health and safety issues, can influence demand. There are current and future economic and industry conditions that could adversely affect our business, operating results, or financial condition.
The markets in which we operate are highly competitive and we may not be successful in winning new business.
We are one of several companies competing for new business within the furniture industry. Many of our competitors offer similar categories of products, including office seating, systems and freestanding office furniture, casegoods, storage products, as well as residential, education and healthcare furniture solutions. Although we believe that our innovative product design, functionality, quality, depth of knowledge, and strong network of distribution partners differentiate us in the marketplace, increased market pricing pressure and other factors could make it difficult for us to win new business with certain customers and within certain market segments at acceptable profit margins.
The retail furnishings market is highly competitive. We compete with national and regional furniture retailers, and department stores. In addition, we compete with mail order catalogs and online retailers focused on home furnishings. We compete with these and other retailers for customers, suitable retail locations, vendors, qualified employees and management personnel. Some of our competitors have significantly greater financial, marketing and other resources than we possess. This may result in ourthese competitors being quicker at the following:important metrics such as adapting to changes, devoting greater resources to the marketing and sale of their products, generating greater national brand recognition, or adopting more aggressive pricing and promotional policies.policies, including free shipping offers. In addition, increased catalog mailings and/or digital marketing campaigns by our competitors may adversely affect response rates to our own catalog mailings.marketing efforts. As a result, increased competition may adversely affect our future financial performance.
Our business presence outside the United States exposes us to certain risks that could negatively affect our results of operations and financial condition.
We have significant manufacturing and sales operations in the United Kingdom, which represents our largest single marketplace outside the United States. Concerns exist relating to potential tariffs and customs regulations and the potential for short term logistics disruption as any such changes are implemented. This will impact both our suppliers and customers, including distributors, and could result in product delays and inventory issues. Further uncertainty in the marketplace also brings risk to accounts receivable and could result in delays in collection and greater bad debt expense. There also remains a risk for the value of the British Pound, Danish Krone, and/or the Euro to further deteriorate, reducing the purchasing power of customers in these regions and potentially undermining the financial health of the Company's suppliers and customers in other parts of the world.
We also have manufacturing operations in China, India, Italy, Canada, Mexico and India.Brazil. Additionally, our products are sold internationally through wholly-ownedcontrolled subsidiaries or branches in various countries including Canada, Denmark, Italy, Korea, Mexico, Australia, China (including Hong Kong), India, Brazil, France, Germany, Italy, Netherlands, Japan, Australia, Singapore, China, Hong Kong and India. In certain other regions of the world, ourEuropean countries. The Company's products are offered in Canada, Europe, the Middle East, Africa, Latin America and the Asia/Pacific region primarily through independent dealerships.
dealers and retail channels.
Doing business internationally exposes us to certain risks, many of which are beyond our control and could potentially impact our ability to design, develop, manufacture, or sell products in certain countries. These factors could include, but would not necessarily be limited to:
rates.
In some countries, the currencies in which we import and export products can differ. Fluctuations in the rate of exchange between these currencies could negatively impact our business and our financial performance. Additionally, tariff and import
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regulations, international tax policies and rates, and changes in U.S. and international monetary policies may have an adverse impact on results of operations and financial condition.
Further escalation of geopolitical tensions could have a broader impact that expands into other markets where we collect, we cannot guarantee thatdo business, which could adversely affect our security measures will effectively prevent others from obtaining unauthorized access tobusiness and/or our information and our customers’ information. The techniques used to obtain unauthorized access to systems change frequently and are not often recognized until after they have been launched.
Company.
A sustained downturn in the economy could adversely impact our access to capital.
The disruptions in the global economic and financial markets of the last decadeduring 2007 to 2009 adversely impacted the broader financial and credit markets, at times reducing the availability of debt and equity capital for the market as a whole. Conditions such as these could re-emerge in the future. Accordingly, our ability to access the capital markets could be restricted at a time when we would like, or need, to access those markets, which could have an adverse impact on our flexibility to react to changing economic and business conditions. The resulting lack of available credit, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations, our ability to take advantage of market opportunities and our ability to obtain and manage our liquidity. In addition, the cost of debt financing and the proceeds of equity financing may be materially and adversely impacted by these market conditions. The extent of any impact would depend on several factors, including our operating cash flows, the duration of tight credit conditions and volatile equity markets, our credit capacity, the cost of financing, and other general economic and business conditions. Our credit agreements contain performance covenants, such as a limit on the ratio of debt to earnings before interest, taxes, depreciation and amortization, and limits on subsidiary debt and incurrence of liens. Although we believe none of these covenants is currently restrictive to our operations, our ability to meet the financial covenants can be affected by events beyond our control.
Recent events affecting the financial services industry could have an adverse impact on the Company's business operations, financial condition, and results of operations.
The 2023 closures of certain banks have created bank-specific and broader financial institution liquidity risk and concerns. Future adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages, impair the ability of companies to access working capital needs, and create additional market and economic uncertainty.
Although the Company does not have any deposits with any of the banks that have been placed into receivership to date, some of our customers may have deposits with them, which may expose us to potential risks that could impact our financial position and operations. This could include an adverse impact on the ability of our customers to pay amounts they owe to the Company. In addition, if any of our vendors have relationships with any of the banks that have been closed, it could negatively impact their ability to deliver goods and services to the Company.
More generally, these events have resulted in market disruption and volatility and could lead to greater instability in the credit and financial markets and a deterioration in confidence in economic conditions. Our operations may be adversely affected by any such economic downturn, liquidity shortages, volatile business environments, or unpredictable market conditions. These events could also make any necessary debt or equity financing more difficult and/or costly.
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The future effect of these events on the financial services industry and broader economy are unknown and difficult to predict but could include failures of other financial institutions to which we or our customers, vendors, or other counterparties face direct or more significant exposure. Any such developments could adversely impact our results of operation and financial position. There may be other risks we have not yet identified. We are working to identify any potential impact of these events on our business in order to minimize any disruptions to our operations. However, we cannot guarantee we will be able to avoid any negative consequences relating to these recent developments or any future related developments.
Manufacturing, Supply Chain and Distribution Related Risks
Tariffs imposed by the U.S. government could have a material adverse effect on our results of operations.
The imposition of tariffs by the U.S. government on various products imported from certain countries, as well as countering tariffs on the export of U.S. goods, has had, and will likely continue to have, an adverse impact on our business, including as a result of increased costs for certain of our raw materials and increasing the costs for certain products that we export to other countries. Accordingly, these tariffs and the possibility of broader trade conflicts stemming from the tariffs could negatively impact our business in the future. The tariffs on imports, most notably imports from China, have impacted the cost of steel, a key commodity that we consume in producing products. Given the significance of steel costs to our direct materials costs, we closely monitor trade tensions between the U.S. and China. The potential impact to our direct material costs due to tariffs on Chinese imports is somewhat limited, however, as purchases of direct materials (mainly component parts and products manufactured by third parties) from China represented an estimated 3% of our consolidated cost of sales for fiscal 2023. Going forward, continued or increased tariffs could negatively impact our gross margin and operating performance. These factors also have the potential to significantly impact global trade and economic conditions in many of the regions where we do business.
Disruptions in the supply of raw and component materials could adversely affect our manufacturing and assembly operations.
We rely on outside suppliers to provide on-time shipments of the various raw materials and component parts used in our manufacturing and assembly processes. The timeliness of these deliveries is critical to our ability to meet customer demand. Any disruptionsDisruptions in this flow of delivery may have a negative impact on our business, results of operations, and financial condition.
In fiscal year 2022, the price of steel was impacted by shortages and disruptions in the steel industry as a result of the COVID-19 pandemic. These disruptions have not had a significant impact on our ability to manufacture and supply products to our customers, but they have negatively impacted the cost of procuring such materials. In the short-term, significant increases in raw material, commodity and other input costs can be difficult to offset with price increases because of existing contractual commitments with our customers. As a result, our gross margins can be adversely affected in the short-term by significant increases in these costs. If we are not successful in passing along higher commodity and other input costs to our customers over the long-term because of competitive pressures, our profitability could be negatively impacted.
Increases in the market prices of manufacturing materials may negatively affect our profitability.
The costs of certain manufacturing materials used in our operations are sensitive to shifts in commodity market prices.prices, including the impact of the U.S. and retaliatory tariffs. In particular, the costs of steel, plastic, aluminum components, and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins. Increases in the market prices of these commodities suchdue to the recent ban on Russian oil imports as what we experienced throughout fiscal 2017 for steel,a result of the current war between Russia and Ukraine may have an adverse impact on our profitability if we are unable to offset them with strategic sourcing, continuous improvement initiatives or increased prices to our customers.
Disruptions within our dealer network could adversely affect our business.
Our ability to manage existing relationships within our network of independent dealers is crucial to our ongoing success. Although the loss of any single dealer would not have a material adverse effect on the overall business, our business within a given market could be negatively affectedimpacted by disruptions in our dealer network caused by the termination of commercial working relationships, ownership transitions, or dealer financial difficulties.
If dealers go out of business or restructure, we may suffer losses because they may not be able to pay for products already delivered to them. Also, dealers may experience financial difficulties, creating the need for outside financial support, which may not be easily obtained. In the past, we have,The company has, on occasion, agreed to provide direct financial assistance through term loans, lines of credit, and/or loan guarantees to certain dealers. Those activities increase our financial exposure.
A continued shortage of qualified labor could negatively affect our business and materially reduce earnings.
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The future success of our operations depends on our ability, and the ability of third parties on which we rely, to identify, recruit, develop and retain qualified and talented individuals in order to supply and deliver our products. Any shortage of qualified labor could have a negative impact on our business. Employee recruitment, development and retention efforts that we or such third parties undertake may not be successful, which could result in a shortage of qualified individuals in future periods. Any such shortage could decrease our ability to effectively produce and meet customer demand. Such a shortage would also likely lead to higher wages for employees (or higher costs to purchase the services of such third parties) and a corresponding reduction in our results of operations. In the current operating environment, we are experiencing a shortage of qualified labor in certain geographies, particularly with plant production workers, resulting in increased costs from certain temporary wage actions, such as hiring and referral bonus programs. A continuation of such shortages for a prolonged period of time could have a material adverse effect on our operating results.
Financial Related Risks
We are unablesubject to control manyrisks associated with self-insurance related to health benefits.
We are self-insured for our health benefits and maintain per employee stop loss coverage; however, we retain the insurable risk at an aggregate level. Therefore unforeseen or catastrophic losses in excess of our insured limits could have a material adverse effect on the Company’s financial condition and operating results. See Note 1 of the factors affecting consumer spending,Consolidated Financial Statements for information regarding the Company’s retention level.
Goodwill and declines in consumer spendingindefinite-lived intangible asset impairment charges may adversely affect our operating results.
We have a substantial amount of goodwill and indefinite-lived intangible assets, primarily trademarks, on furnishings could reduce demandour balance sheet. We test the goodwill and intangible assets for our products.
time, an increase in the housing market, interestmarket-based weighted average cost of capital, or a decrease in royalty rates, sales tax rates and rate increases, inflation, and consumer confidence in future economic conditions. Adverse changes in theseamong other factors, may reduce consumer demand for our products, resulting in reduced sales and profitability.
Impairment of business transacted through other channels, including our consumer e-commerce and direct-mail catalog platforms, as many customers utilize these physical spaces to view and experience products prior to placing an order online or through the catalog call center. Our ability to open additional studios or close existing studios successfully will depend upon a number of factors beyond our control, including:
Our long-lived asset groups are subject to an impairment assessment when certain triggering events or circumstances indicate that their carrying value may be impaired. If the carrying value exceeds our estimate of future undiscounted cash flows of the operations related to the asset group, an impairment is recorded for the difference between the carrying amount and the fair value of the asset group. The successful implementationresults of these tests for potential impairment may be adversely affected by unfavorable market conditions, our financial performance trends, or an increase in interest rates, among other factors. If as a result of the impairment test we determine that the fair value of any of our business strategy depends, in part,long-lived asset groups is less than its carrying amount, we may incur an impairment charge that could have a material adverse effect on our ability to attract and retain a skilled workforce. The increasing competition for highly skilled and talented employees could result in higher compensation costs, difficulties in maintaining a capable workforce, and leadership succession planning challenges.
financial statements.
Costs related to product defects could adversely affect our profitability.
We incur various expenses related to product defects, including product warranty costs, product recall and retrofit costs, and product liability costs. These expenses relative to product sales vary and could increase. We maintain reserves for product defect-related costs based on estimates and our knowledge of circumstances that indicate the need for such reserves. We cannot, however, be certain that these reserves will be adequate to cover actual product defect-related claims in the future. Any significant increase in the rate of our product defect expenses could have a material adverse effect on operations.
General Risks
We are subject to risks and costs associated with self-insurance relatedprotecting the integrity and security of our systems and confidential information.
We collect certain customer-specific data, including credit card information, in connection with orders placed through our eCommerce websites, direct-mail catalog marketing program, and retail studios. For these sales channels to health benefits.function and develop successfully, we and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information and other personal information regarding our customers, securely over public and private networks. Third parties may have or develop the technology or knowledge to breach, disable, disrupt or interfere
11
with our systems or processes or those of our vendors. While we believe we take reasonable steps to protect the security and confidentiality of the information we collect, we cannot guarantee that our security measures will effectively prevent others from obtaining unauthorized access to our information and our customers’ information. The techniques used to obtain unauthorized access to systems change frequently and are not often recognized until after they have been launched.
Any person who circumvents our security measures could destroy or steal valuable information or disrupt our operations. Any security breach could cause consumers to lose confidence in the security of our information systems, including our eCommerce websites or retail studios and choose not to purchase from us. Any security breach could also expose us to risks of data loss, litigation, regulatory investigations, and other significant liabilities. Such a breach could also seriously disrupt, slow or hinder our operations and harm our reputation and customer relationships, any of which could damage our business.
A security breach includes a third party wrongfully gaining unauthorized access to our systems for the purpose of misappropriating assets or sensitive information, loading corrupting data, or causing operational disruption. These actions may lead to a significant disruption of the Company’s IT systems and/or cause the loss of business and business information resulting in an adverse business impact, including: (1) an adverse impact on future financial results due to theft, destruction, loss misappropriation, or release of confidential data or intellectual property; (2) operational or business delays resulting from the disruption of IT systems, and subsequent clean-up and mitigation activities; and (3) negative publicity resulting in reputation or brand damage with customers, partners or industry peers.
The United States federal and state governments are increasingly enacting laws and regulations to protect consumers against identity theft. Also, as our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions. If we are the target of a cybersecurity attack resulting in unauthorized disclosure of our customer data, we may be required to undertake costly notification procedures. Compliance with these laws will likely increase the costs of doing business. If we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential fines, claims for damages and other remedies, which could harm our business.
Due to the political uncertainty and military actions involving Russia, Ukraine, and surrounding regions, we and the third parties upon which we rely may be vulnerable to a currently heightened risk of information technology breaches, computer malware, or other cyber-attacks, including attacks that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our products.
We are self-insuredunable to control many of the factors affecting consumer spending. Declines in consumer spending on furnishings could reduce demand for our health benefits and maintain per employee stop loss coverage; however, we retain the insurable risk at an aggregate level. Therefore unforeseen or catastrophic losses in excessproducts.
The operations of our insured limits couldGlobal Retail segment are sensitive to a number of factors that influence consumer spending, including general economic conditions, consumer disposable income, unemployment, inclement weather, availability of consumer credit, consumer debt levels, conditions in the housing market, interest rates, sales tax rates and rate increases, inflation, and consumer confidence in future economic conditions. Adverse changes in these factors have reduced, and in the future may further reduce consumer demand for our products, resulting in reduced sales and profitability.
A number of factors that affect our ability to successfully implement our retail studio strategy, including opening new locations and closing existing studios, are beyond our control. These factors may harm our ability to increase the sales and profitability of our retail operations.
Approximately 28% of the sales within our Global Retail segment are transacted within our retail stores. Additionally, we believe our retail stores have a material adverse effectdirect influence on the company’svolume of business transacted through other channels, including our consumer eCommerce and direct-mail catalog platforms, as many customers utilize these physical spaces to view and experience products prior to placing an order online or through the catalog call center. Our ability to open additional stores or close existing stores successfully will depend upon a number of factors beyond our control, including, without limitation:
•general economic conditions;
•identification and availability of suitable locations;
•success in negotiating new leases and amending or terminating existing leases on acceptable terms;
•success of other retailers in and around our retail locations;
•ability to secure required governmental permits and approvals;
•hiring and training skilled studio operating personnel; and
12
•landlord financial conditionstability.
We may incur significant increased costs and operating results. See Note 1become subject to additional potential liabilities under environmental and other laws and regulations aimed at combating climate change.
We expect to incur significant costs as we work to implement the 2030 sustainability goals we announced in 2022, which include efforts to reduce our carbon footprint, design out waste, and source better materials. Also, increased focus by the U.S. and other governmental authorities on climate change and other environmental matters has led to enhanced regulation in these areas, which is expected to result in increased compliance costs and could subject us to additional potential liabilities. The extent of these costs and risks is difficult to predict and will depend in large part on the Consolidated Financial Statements for information regardingextent of final regulations and the company’s retention level.
ways in which those regulations are enforced. We operate and have manufacturing facilities in multiple regions across the globe, and the impact of additional regulations in this area is likely to vary by region. It is expected the costs we incur to comply with any such final regulations and implement our own sustainability goals could be material.
Government and other regulations could adversely affect our business.
Government and other regulations apply to the manufacture and sale of many of our products. Failure to comply with these regulations or failure to obtain approval of products from certifying agencies could adversely affect the sales of these products and have a material negative impact on operating results.
Item 1B Unresolved Staff Comments
None
Item 2 Properties
The companyCompany owns or leases facilities located throughout the United States and several foreign countries. The location, square footage and use of the most significant facilities at June 3, 20172023 were as follows:
| Owned Locations | Square Footage | Use | ||||||||||
| Zeeland, Michigan | Manufacturing, Warehouse, Office | |||||||||||
| East Greenville, Pennsylvania | 735 | Manufacturing, Warehouse, Office | ||||||||||
| Spring Lake, Michigan | Manufacturing, Warehouse, Office | |||||||||||
| Manufacturing, Warehouse, Office | ||||||||||||
| Muskegon, Michigan | 367 | Manufacturing, Office | ||||||||||
| Holland, Michigan | 357 | Warehouse | ||||||||||
| Holland, Michigan | 293 | Manufacturing, Office | ||||||||||
| Dongguan, China | 269 | Manufacturing | ||||||||||
| Foligno, Italy | 260 | Manufacturing, Warehouse, Office | ||||||||||
| Holland, Michigan | 242 | Office, Design | ||||||||||
| Sheboygan, Wisconsin | 208 | Manufacturing, Warehouse, Office | ||||||||||
| Melksham, United Kingdom | Manufacturing, Warehouse, Office | |||||||||||
| Manufacturing, Warehouse, Office | ||||||||||||
Square Footage (in Thousands) | Use | |||||||||||
| Alburtis, Pennsylvania | 718 | Warehouse | ||||||||||
| Batavia, Ohio | 618 | Warehouse | ||||||||||
| Dongguan, China | Manufacturing, Office | |||||||||||
| Ringsted, Denmark | 274 | Warehouse | ||||||||||
| West Chester, Ohio | 220 | Warehouse | ||||||||||
| Berlin, Germany | 220 | Warehouse | ||||||||||
| LeGrange Highlands, Illinois | 210 | Warehouse | ||||||||||
| Atlanta, Georgia | 205 | Manufacturing, Warehouse, Office | ||||||||||
| Manufacturing, Warehouse | ||||||||||||
The properties above are primarily used in the Company's segments as indicated below:
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| Segment Primarily Supported | Owned | Leased | Total | ||||||||||||||
| Americas Contract | 8 | 3 | 11 | ||||||||||||||
| International Contract & Specialty | 4 | 4 | 8 | ||||||||||||||
| Global Retail | — | 2 | 2 | ||||||||||||||
| Corporate | 1 | — | 1 | ||||||||||||||
As of June 3, 2017,2023, the company leased 31Company operated 75 retail stores (including 38 operating under the DWR retail studios, includingbrand, 3 under the HAY brand, 27 Herman Miller Flagship store in New Yorkstores, 3 Muuto stores, 3 Knoll stores and a multi-brand Chicago store) that totaled approximately 320,000641,800 square feet of selling space. The companyCompany also operated 4 retail outlet stores. The Company maintains administrative and sales offices and showrooms in various other locations throughout North America, Europe, Asia/Asia Pacific and Latin America. The companyCompany considers its existing facilities to be in good condition and adequate for its design, production, distribution, and selling requirements.
Item 3 Legal Proceedings
The companyCompany is 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’sCompany’s consolidated operations, cash flows and financial condition.
Certain information relating to Executive Officersexecutive officers of the companyCompany as of June 3, 20172023 is as follows.follows:
 | Andrea R. Owen President and Chief Executive Officer Age 58, elected as an executive officer in 2018 |  | Jeffrey M. Stutz Chief Financial Officer Age 52, elected as an executive officer in 2009 | |||||||||||||||||
 | Chris Baldwin Group President, MillerKnoll Age 50, elected as an executive officer in 2021 |  | Megan Lyon Chief Strategy Officer Age 43, elected as an executive officer in 2019 | |||||||||||||||||
 | John Michael President, Americas Contract Age 61, elected as an executive officer in 2020 |  | Debbie Propst President, Global Retail Age 42, elected as an executive officer in 2020 | |||||||||||||||||
 | Jacqueline H. Rice General Counsel and Corporate Secretary Age 51, elected as an executive officer in 2019 |  | B. Ben Watson Chief Creative and Product Officer Age 58, elected as an executive officer in 2010 | |||||||||||||||||
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| Name | Age | Year Elected an Executive Officer | Position with the Company |
| Brian C. Walker | 55 | 1996 | President and Chief Executive Officer |
| Andrew J. Lock | 63 | 2003 | President, Herman Miller International |
| Gregory J. Bylsma | 52 | 2009 | President, North America Contract |
| Steven C. Gane | 62 | 2009 | President, Specialty Brands |
| Jeffrey M. Stutz | 46 | 2009 | Executive Vice President, Chief Financial Officer |
| B. Ben Watson | 52 | 2010 | Chief Creative Officer |
| Michael F. Ramirez | 52 | 2011 | Executive Vice President, People, Places & Administration |
| H. Timothy Lopez | 46 | 2014 | Senior Vice President of Legal Services, General Counsel and Secretary |
| John McPhee | 54 | 2015 | President, Herman Miller Consumer |
| John Edelman | 50 | 2015 | Chief Executive Officer, Herman Miller Consumer |
| Kevin Veltman | 42 | 2015 | Vice President, Investor Relations & Treasurer |
| Jeremy Hocking | 56 | 2017 | Executive Vice President, Strategy and Business Development |
Except as discussed below, each of the named officers has served the companyCompany in antheir current executive capacityposition for more than five years.
Mr. EdelmanBaldwin joined Herman Miller, Inc.MillerKnoll in 2015 subsequent2021 and serves as Group President. Prior to the company'sCompany's acquisition of DWR.Knoll in July 2021, Mr. Baldwin was Chief Operating Officer & President, Workplace at Knoll and also held leadership positions at Kohler Co.
Ms. Lyon joined MillerKnoll in 2019 and serves as Chief Strategy Officer. Prior to joining DWRMillerKnoll, Ms. Lyon spent eleven years with The Boston Consulting Group where she was a Partner and Managing Director leading the firm’s West Coast Consumer and Retail Practice.
Mr. Michael joined MillerKnoll, Inc. in 2017 and serves as President, The Americas. Prior to joining MillerKnoll, Mr. Michael held leadership positions at Staples, Ivan Allen Workspace, and Steelcase
Ms. Propst joined MillerKnoll in 2020 and serves as President of the Company's Global Retail segment. Prior to joining MillerKnoll, Ms. Propst spent seven years at Bed Bath and Beyond where she most recently served as President and Chief ExecutiveMerchandising Officer of One Kings Lanes, as well as Chief Brand Officer for Bed Bath and Beyond.
Ms. Rice joined MillerKnoll in 2010, he served as President and CEO of Edelman Leather and Sam & Libby, Inc., where he was responsible for its U.S. business.
Chief Compliance Officer at General Motors Co.
There are no family relationships between or among the above-named executive officers. There are no arrangements or understandings between any of the above-named officers pursuant to which any of them was named an officer.
Item 4 Mine Safety Disclosures-
Not applicable
PART II
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Share Price, Earnings and Dividends Summary
Per Share and Unaudited | Market Price High (at close) | Market Price Low (at close) | Market Price Close | Earnings Per Share- Diluted | Dividends Declared Per Share | ||||||||||||||
| Year ended June 3, 2017: | |||||||||||||||||||
| First quarter | $ | 36.46 | $ | 27.87 | $ | 35.94 | $ | 0.60 | $ | 0.1700 | |||||||||
| Second quarter | 36.14 | 26.99 | 32.65 | 0.53 | 0.1700 | ||||||||||||||
| Third quarter | 36.45 | 29.75 | 30.45 | 0.37 | 0.1700 | ||||||||||||||
| Fourth quarter | 34.05 | 28.55 | 32.70 | 0.55 | 0.1700 | ||||||||||||||
| Year | $ | 36.46 | $ | 26.99 | $ | 32.70 | $ | 2.05 | $ | 0.6800 | |||||||||
| Year ended May 28, 2016: | |||||||||||||||||||
| First quarter | $ | 30.50 | $ | 26.75 | $ | 26.99 | $ | 0.56 | $ | 0.1475 | |||||||||
| Second quarter | 32.69 | 26.28 | 32.14 | 0.57 | 0.1475 | ||||||||||||||
| Third quarter | 32.11 | 22.92 | 26.29 | 0.46 | 0.1475 | ||||||||||||||
| Fourth quarter | 31.64 | 26.09 | 31.64 | 0.67 | 0.1475 | ||||||||||||||
| Year | $ | 32.69 | $ | 22.92 | $ | 31.64 | $ | 2.26 | $ | 0.5900 | |||||||||
Dividends were declared and paid quarterly duringfor fiscal 2017 and 20162023 as approved by the Board of Directors.Directors. On April 18, 2023, the Company's Board of Directors approved a quarterly cash dividend of 18.75 cents ($0.1875) per share that was paid on July 15, 2023, to shareholders of record on June 3, 2023. While it is anticipated that the companyCompany will continuecontinue to pay quarterly cash dividends, the amount and timing of such dividends is subject to the discretion of the Board depending on the company'sCompany's future results of operations, financial condition, capital requirements and other relevant factors.
Issuer Purchases of Equity Securities
The Company has one share repurchase plan authorized by the Board of Directors on January 16, 2019, which provides a share repurchase authorization of $250.0 million with no specified expiration date. The approximate dollar value of shares available for purchase under the plan at June 3, 2023 was $204.5 million.
The following is a summary of share repurchase activity during the company's fourth fiscal quarter ended June 3, 2017.2023:
| Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share or Unit | (c) Total Number of Share (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares(or Units) that May Yet be Purchased Under the Plans or Programs (1) | ||||||||
| 3/5/17 - 4/1/17 | — | — | — | $ | 115,162,898 | |||||||
| 4/2/17 - 4/29/17 | 146,255 | 32.17 | 146,255 | $ | 110,457,467 | |||||||
| 4/30/17 - 6/3/17 | 58,697 | 33.04 | 58,697 | $ | 108,517,876 | |||||||
| Total | 204,952 | 204,952 | ||||||||||
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c ) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs (in millions) (1) | |||||||||||||||||||
| 3/5/23-4/1/23 | 1,560 | $ | 20.85 | 1,560 | $ | 204.6 | |||||||||||||||||
| 4/2/23-4/29/23 | — | — | — | — | |||||||||||||||||||
| 4/30/23-6/3/23 | 5,989 | $ | 16.15 | 5,989 | $ | 204.5 | |||||||||||||||||
| Total | 7,549 | 7,549 | |||||||||||||||||||||
(1) Amounts are as of the end of the period indicated
The company has aCompany may repurchase shares from time to time for cash in open market transactions, privately negotiated transactions, pursuant to accelerated share repurchase plan authorizedprograms or otherwise in accordance with applicable federal securities laws. The timing and amount of the repurchases will be determined by the BoardCompany's management based on their evaluation of Directors on September 28, 2007, which providedmarket conditions, share price and other factors. The share repurchase authorization of $300,000,000 with no specified expiration date.
discontinued at any time.
During the period covered by this report, the companyCompany did not sell any shares of common stock that were not registered under the Securities Act of 1933.
17
Stockholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the company'sCompany's common stock with that of the cumulative total return of the Standard & Poor's 500 Stock Index and the NASD Non-Financial IndexNasdaq Composite Total Return for the five-year period ended June 3, 2017.2023. The graph assumes an investment of $100 on June 3, 20122, 2018 in the company'sCompany's common stock, the Standard & Poor's 500 Stock Index and the NASD Non-Financial Index,Nasdaq Composite Total Return, with dividends reinvested.
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||
| Herman Miller, Inc. | $ | 100 | $ | 159 | $ | 180 | $ | 163 | $ | 189 | $ | 199 | |||||||||||
| S&P 500 Index | $ | 100 | $ | 128 | $ | 151 | $ | 165 | $ | 164 | $ | 191 | |||||||||||
| NASD Non-Financial | $ | 100 | $ | 128 | $ | 159 | $ | 192 | $ | 189 | $ | 240 | |||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||||||||||||||||||||||||||||||
| MillerKnoll, Inc. | $ | 100 | $ | 110 | $ | 74 | $ | 155 | $ | 102 | $ | 50 | |||||||||||||||||||||||
| S&P 500 Index | 100 | 101 | 111 | 154 | 152 | 157 | |||||||||||||||||||||||||||||
| Nasdaq Composite Total Return | 100 | 100 | 128 | 187 | 166 | 179 | |||||||||||||||||||||||||||||
Information required by this item is also contained in Item 12 of this report.
Item 6 Selected Financial Data[Reserved]
19
| Review of Operations | ||||||||||||||||||||
| (In millions, except key ratios and per share data) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Operating Results | ||||||||||||||||||||
| Net sales | $ | 2,278.2 | $ | 2,264.9 | $ | 2,142.2 | $ | 1,882.0 | $ | 1,774.9 | ||||||||||
| Gross margin | 864.2 | 874.2 | 791.4 | 631.0 | 605.2 | |||||||||||||||
Selling, general, and administrative (8) | 600.3 | 585.6 | 556.6 | 590.8 | 430.4 | |||||||||||||||
| Design and research | 73.1 | 77.1 | 71.4 | 65.9 | 59.9 | |||||||||||||||
| Operating earnings (loss) | 190.8 | 211.5 | 163.4 | (25.7 | ) | 114.9 | ||||||||||||||
| Earnings (loss) before income taxes | 177.6 | 196.6 | 145.2 | (43.4 | ) | 97.2 | ||||||||||||||
| Net earnings (loss) | 124.1 | 137.5 | 98.1 | (22.1 | ) | 68.2 | ||||||||||||||
| Cash flow from operating activities | 202.1 | 210.4 | 167.7 | 90.1 | 136.5 | |||||||||||||||
| Cash flow used in investing activities | (116.3 | ) | (80.8 | ) | (213.6 | ) | (48.2 | ) | (209.7 | ) | ||||||||||
| Cash flow (used in) provided by financing activities | (74.6 | ) | (106.5 | ) | 6.8 | (22.4 | ) | (16.0 | ) | |||||||||||
| Depreciation and amortization | 58.9 | 53.0 | 49.8 | 42.4 | 37.5 | |||||||||||||||
| Capital expenditures | 87.3 | 85.1 | 63.6 | 40.8 | 50.2 | |||||||||||||||
| Common stock repurchased plus cash dividends paid | 63.2 | 49.0 | 37.0 | 43.0 | 22.7 | |||||||||||||||
| Key Ratios | ||||||||||||||||||||
| Sales growth | 0.6 | % | 5.7 | % | 13.8 | % | 6.0 | % | 2.9 | % | ||||||||||
Gross margin (1) | 37.9 | 38.6 | 36.9 | 33.5 | 34.1 | |||||||||||||||
Selling, general, and administrative (1) (8) | 26.3 | 25.9 | 26.0 | 31.4 | 24.3 | |||||||||||||||
Design and research (1) | 3.2 | 3.4 | 3.3 | 3.5 | 3.4 | |||||||||||||||
Operating earnings (1) | 8.4 | 9.3 | 7.6 | (1.4 | ) | 6.5 | ||||||||||||||
| Net earnings growth (decline) | (9.7 | ) | 40.2 | 543.9 | (132.4 | ) | (9.3 | ) | ||||||||||||
After-tax return on net sales (4) | 5.4 | 6.1 | 4.6 | (1.2 | ) | 3.8 | ||||||||||||||
After-tax return on average assets (5) | 9.8 | 11.3 | 9.0 | (2.3 | ) | 7.6 | ||||||||||||||
After-tax return on average equity (6) | 22.3 | % | 29.1 | % | 25.0 | % | (6.5 | )% | 24.7 | % | ||||||||||
| Share and Per Share Data | ||||||||||||||||||||
| Earnings (loss) per share-diluted | $ | 2.05 | $ | 2.26 | $ | 1.62 | $ | (0.37 | ) | $ | 1.16 | |||||||||
| Cash dividends declared per share | 0.68 | 0.59 | 0.56 | 0.53 | 0.43 | |||||||||||||||
Book value per share at year end (9) | 9.82 | 8.76 | 7.04 | 6.14 | 5.31 | |||||||||||||||
| Market price per share at year end | 32.70 | 31.64 | 27.70 | 31.27 | 28.11 | |||||||||||||||
| Weighted average shares outstanding-diluted | 60.6 | 60.5 | 60.1 | 59.0 | 58.8 | |||||||||||||||
| Financial Condition | ||||||||||||||||||||
| Total assets | $ | 1,306.3 | $ | 1,235.2 | $ | 1,192.7 | $ | 995.6 | $ | 951.2 | ||||||||||
Working capital (3) | 106.2 | 90.5 | 110.1 | 83.2 | 96.8 | |||||||||||||||
Current ratio (2) | 1.3 | 1.2 | 1.3 | 1.2 | 1.3 | |||||||||||||||
Interest-bearing debt and related swap agreements (10) | 197.8 | 221.9 | 290.0 | 250.0 | 250.0 | |||||||||||||||
| Stockholders' equity | 587.7 | 524.7 | 420.3 | 364.3 | 311.7 | |||||||||||||||
Total capital (7) | 785.5 | 746.6 | 710.3 | 614.3 | 561.7 | |||||||||||||||
| Review of Operations | |||||||||||||||||||||||
| (In millions, except key ratios and per share data) | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||
| Operating Results | |||||||||||||||||||||||
| Net sales | $ | 1,724.1 | $ | 1,649.2 | $ | 1,318.8 | $ | 1,630.0 | $ | 2,012.1 | $ | 1,918.9 | |||||||||||
| Gross margin | 590.6 | 538.1 | 428.5 | 527.7 | 698.7 | 645.9 | |||||||||||||||||
Selling, general, and administrative (8) | 400.3 | 369.0 | 334.4 | 359.2 | 400.9 | 395.8 | |||||||||||||||||
| Design and research | 52.7 | 45.8 | 40.5 | 45.7 | 51.2 | 52.0 | |||||||||||||||||
| Operating earnings | 137.6 | 123.3 | 53.6 | 122.8 | 246.6 | 198.1 | |||||||||||||||||
| Earnings before income taxes | 119.5 | 102.5 | 34.8 | 98.9 | 230.4 | 187.0 | |||||||||||||||||
| Net earnings | 75.2 | 70.8 | 28.3 | 68.0 | 152.3 | 129.1 | |||||||||||||||||
| Cash flow from operating activities | 90.1 | 89.0 | 98.7 | 91.7 | 213.6 | 137.7 | |||||||||||||||||
| Cash flow used in investing activities | (58.4 | ) | (31.4 | ) | (77.6 | ) | (29.5 | ) | (51.0 | ) | (37.4 | ) | |||||||||||
| Cash flow used in financing activities | (1.6 | ) | (50.2 | ) | (78.9 | ) | (16.5 | ) | (86.5 | ) | (131.5 | ) | |||||||||||
| Depreciation and amortization | 37.2 | 39.1 | 42.6 | 41.7 | 43.2 | 41.2 | |||||||||||||||||
| Capital expenditures | 28.5 | 30.5 | 22.3 | 25.3 | 40.5 | 41.3 | |||||||||||||||||
| Common stock repurchased plus cash dividends paid | 7.9 | 6.0 | 5.7 | 19.5 | 287.9 | 185.6 | |||||||||||||||||
| Key Ratios | |||||||||||||||||||||||
| Sales growth (decline) | 4.5 | % | 25.1 | % | (19.1 | )% | (19.0 | )% | 4.9 | % | 10.5 | % | |||||||||||
Gross margin (1) | 34.3 | 32.6 | 32.5 | 32.4 | 34.7 | 33.7 | |||||||||||||||||
Selling, general, and administrative (1) (8) | 23.2 | 22.4 | 25.4 | 22.0 | 19.9 | 20.6 | |||||||||||||||||
Design and research (1) | 3.1 | 2.8 | 3.1 | 2.8 | 2.5 | 2.7 | |||||||||||||||||
Operating earnings (1) | 8.0 | 7.5 | 4.1 | 7.5 | 12.3 | 10.3 | |||||||||||||||||
| Net earnings growth (decline) | 6.2 | 150.2 | (58.4 | ) | (55.4 | ) | 18.0 | 30.1 | |||||||||||||||
After-tax return on net sales (4) | 4.4 | 4.3 | 2.1 | 4.2 | 7.6 | 6.7 | |||||||||||||||||
After-tax return on average assets (5) | 9.0 | 8.9 | 3.7 | 8.7 | 20.9 | 19.2 | |||||||||||||||||
After-tax return on average equity (6) | 34.4 | % | 52.5 | % | 78.1 | % | 860.8 | % | 186.4 | % | 92.7 | % | |||||||||||
| Share and Per Share Data | |||||||||||||||||||||||
| Earnings per share-diluted | $ | 1.29 | $ | 1.06 | $ | 0.43 | $ | 1.25 | $ | 2.56 | $ | 1.98 | |||||||||||
| Cash dividends declared per share | 0.09 | 0.09 | 0.09 | 0.29 | 0.35 | 0.33 | |||||||||||||||||
Book value per share at year end (9) | 4.13 | 3.42 | 1.27 | — | 0.28 | 2.35 | |||||||||||||||||
| Market price per share at year end | 17.87 | 24.56 | 19.23 | 14.23 | 24.80 | 36.53 | |||||||||||||||||
| Weighted average shares outstanding-diluted | 58.5 | 57.7 | 57.5 | 54.5 | 59.6 | 65.1 | |||||||||||||||||
| Financial Condition | |||||||||||||||||||||||
| Total assets | $ | 843.8 | $ | 819.1 | $ | 775.3 | $ | 772.0 | $ | 787.9 | $ | 670.9 | |||||||||||
Working capital (3) | 189.1 | 193.4 | 69.2 | 155.2 | 170.2 | 87.7 | |||||||||||||||||
Current ratio (2) | 1.7 | 1.7 | 1.2 | 1.5 | 1.5 | 1.3 | |||||||||||||||||
Interest-bearing debt and related swap agreement (10) | 250.0 | 250.0 | 301.2 | 377.4 | 375.5 | 176.2 | |||||||||||||||||
| Stockholders' equity | 240.5 | 197.2 | 72.3 | 0.2 | 15.6 | 147.8 | |||||||||||||||||
Total capital (7) | 490.5 | 447.2 | 373.5 | 377.6 | 391.1 | 324.0 | |||||||||||||||||
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the issues discussed in Management's Discussion and Analysis in conjunction with the company'sCompany's Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
MillerKnoll is a collective of dynamic brands that comes together to design the world we live in. From the spaces we make that help us live and work better, to how we manufacture our products, to the ways we solve challenges facing our customers and global community, design is our tool for creating positive impact. Our optimism leads us as we redefine modern for the 21st century, shaping a future that’s more sustainable, caring, and beautiful for all people and our planet.
MillerKnoll's products are sold internationally through wholly-ownedcontrolled subsidiaries or branches in various countries including the United Kingdom, Canada,Denmark, Italy, France, Germany, Italy,the Netherlands, Canada, Japan, Mexico, Australia, Singapore, China, Hong Kong, India, Brazil and the Netherlands.Brazil. The company'sCompany’s products are offered elsewheresold in the worldover 100 countries primarily through independent dealerships or joint ventures with customers in over 100 countries.
contract furniture dealers, direct customer sales, owned and independent retailers, direct-mail catalogs, and the Company’s eCommerce platforms.
The companyCompany is globally positioned in terms of manufacturing operations. In North America, manufacturing and distribution operations are in Georgia, New York, North Carolina, Michigan, Pennsylvania, and Texas in the United States, manufacturing operations are located in Michigan, Georgia, Wisconsinas well as Toronto and North Carolina.Mexico City. In Europe, itsthe Company's manufacturing presence is located withinin the United Kingdom.Kingdom and Italy. Manufacturing operations globally also include facilities located in Dongguan and Ningbo,Brazil, China, Brazil and India. The companyCompany manufactures products using a system of lean manufacturing techniques collectively referred to as the Herman MillerMillerKnoll Performance System (HMPS)(MKPS). Herman MillerFor its contract furniture business, MillerKnoll strives to maintain efficiencies and cost savings by minimizing the amount of inventory on hand. Accordingly, production is order-driven with direct materials and components purchased as needed to meet demand. The standard manufacturing lead time for the majority of our products is 10 to 20 days. These factors result in a high rate of inventory turns related to our manufactured inventories.
A key element of the company'sCompany's manufacturing strategy is to limit fixed production costs by sourcing component parts from strategic suppliers. This strategy has allowed the companyCompany to increase the variable nature of its cost structure, while retaining proprietary control over those production processes that the companyCompany believes provide a competitive advantage. As a result of this strategy, the company'sCompany's manufacturing operations are largely assembly-based.
A key element of the Company's growth strategy is to scale the Global Retail business through the Company's Design Within Reach ("DWR"), HAY, Knoll, Muuto, and Herman Miller retail operations. The Global Retail business provides a channel to bring MillerKnoll's iconic and design-centric products to retail customers, along with other proprietary and third-party products, with a focus on modern design.
The businessCompany is comprised of various operating segments as defined by generally accepted accounting principles in the United States (U.S. GAAP). The operating segments are determined on the basis of how the companyCompany internally reports and evaluates financial information used to make operating decisions. The companyCompany has identified the following reportable segments:
physical retail stores.
The companyCompany also reports a corporate category consisting primarily of unallocated corporate expenses related to general corporate functions, including, acquisition-related costsbut not limited to, certain legal, executive, corporate finance, information technology, administrative, and other unallocated corporateacquisition-related costs.
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Core Strengths
The companyCompany relies on the following core strengths in delivering solutions to customers.customers:
•Product Portfolio of Leading Brandsand Brand Collective - Herman MillerMillerKnoll is a globally-recognized, authentic brandcollective of globally recognized design brands known for working with some of the most outstandingwell-known and respected designers in the world. Combined, the Company represents over 100 years of design research and exploration in service of humanity. Within the industries in which the companyCompany operates, Herman Miller DWR, Geiger, Maharam, POSH, Nemschoff, Colbrookand Knoll, along withColebrook Bosson Saunders, ("CBS")DatesWeiser, Design Within Reach, Edelman Leather, Geiger, HAY, Holly Hunt, Maars Living Walls, Maharam, Muuto, NaughtOne, and NaughtoneSpinneybeck|FilzFelt are acknowledged as leading brands that inspire architects and designers to create their best design solutions. This portfolio has enabled Herman MillerMillerKnoll to connect with new audiences, channels, geographies, and product categories. Leveraging the company'scollective brand equity of MillerKnoll across the lines of business is an important element of the company'sCompany's business strategy.
•Global Scale and Reach - In addition to its global omni-channel distribution capability, the Company has a global network of designers, suppliers, manufacturing operations, and research and development centers that position the Company to serve contract and residential customers globally. The Company believes that leveraging this global scale will be an important enabler to executing its strategy.
•Extraordinary People - We believe that our employees are a critical success factor for our business. We strive to identify, hire, develop, motivate and retain the best employees. Our ability to attract, engage, and retain key employees has been and will remain critical to our success.
Channels of Distribution
The company'sCompany's products and services are offered to most of its customers under standard trade credit terms between 30 and 45 daysdays. For all the items below, revenue is recognized when control transfers to the customer. The Company's products and services are sold through the following distribution channels.channels:
•Independent and Owned Contract Furniture Dealers - Most of the company'sCompany's product sales are made to a network of independently owned and operated contract furniture dealerships doing business in many countries around the world. These dealers purchase the company'sCompany's products and distribute them to end customers. The company recognizes revenue on product sales through this channel once products are shipped and title passes to the dealer. Many of these dealers also offer furniture-related services, including product installation.
•Direct CustomerContract Sales - The company alsoCompany sells products and services directly to end customers without an intermediary (e.g., sales to the U.S. federal government). In most of these instances, the companyCompany contracts separately with a dealershipdealer or third-party installation company to provide sales-related services.
•eCommerce - The company recognizes revenue on these sales onceCompany sells products in its portfolio of brands across the related product is shipped to the end customer and installation, if applicable, is substantially complete.
•Wholesale – Through the customer of both title and risk of loss.
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•Retail Locations - As of June 3, 2023, the Company operated 75 retail studios (including 38 operating under the DWR brand, 3 under the HAY brand, 27 Herman Miller stores, 3 Muuto stores, 3 Knoll stores and a multi-brand Chicago store). The business also operated 4 outlet studios.
Challenges Ahead
Like all businesses, the companyCompany is faced with a host of challenges and risks. The companyCompany believes its core strengths and values, which provide the foundation for its strategic direction, have well prepared the companyCompany to respond to the inevitable challenges it will face in the future. While the companyCompany is confident in its direction, it acknowledges the risks specific to theour business and industry. Refer to Item 1A for discussion of certain of these risk factors and Item 7A for disclosures of market risk. In particular, the company experienced the negative impact of higher steel costs and increased pressures from competitive price discounting, particularly in the North America and ELA markets.
Areas of Strategic Focus
Bring MillerKnoll to Life
We are following a detailed and challenges,deliberate plan to bring the company believesbest of all our brands together, enabling us to achieve our purpose of design for the good of humankind as we remake modern for the 21st century. Our priorities include establishing and building the MillerKnoll culture; delivering on our synergy commitment of $145 million in run-rate savings by the end of year three of the Knoll acquisition; successfully executing our integration plans and initiatives; cultivating and enabling a strong global dealer network; and establishing worldwide supply chain and manufacturing capabilities to effectively serve our customers across all our channels.
Build a Customer-Centric, Digitally Enabled Business Model
Building a customer-centric and digitally enabled business model is foundational to bringing MillerKnoll to life and encompasses both our internal technology foundation and our digital go-to-market capabilities. Our goals include integrating our systems and processes, shifting to a simpler systems architecture, serving our customers around the world through global eCommerce capabilities, harnessing data to enable our teams to make effective and timely decisions, and accelerating global automation and manufacturing 4.0 initiatives to improve the employee experience and increase accuracy, quality, and performance. Our launch of the combined North America MillerKnoll dealer network at the start of fiscal year 2023 expanded access to our proprietary end-to-end digital solution that makes it easier for our dealers to respond to customer requests faster with differentiated solutions.
Accelerate Profitable Growth
We believe there is wellopportunity for meaningful long-term growth in each of our business segments and MillerKnoll is uniquely positioned to successfully pursue its missioncapitalize on these opportunities given the breadth of inspiring designsour Contract and Global Retail businesses and product portfolios, global reach, and omni-channel distribution and fulfillment capabilities. To capitalize on the opportunity ahead, we will seek to help people do great things. As our businesslead the industry in product innovation and industry continue to evolve, we are constantly focused on staying aheaddesign excellence; fortify the flagship Knoll and Herman Miller brands while nurturing and growing each of the curve. Withbrands within MillerKnoll; position the compositionAmericas Contract business to lead; drive outsized growth in International Contract & Specialty; and continue transforming our Global Retail business.
Attract, Develop, and Retain World-Class Talent
In creating MillerKnoll, we created one of the office floor plate moving toward a broader variety of furnishings, a greater desire for customization from our customers, new technologies, and trends towards urbanization and more seamless transactionsmost talented teams in the retail world, we have centeredindustry. We are committed to nurturing this distinct competitive advantage and will create a premiere employee experience while continuing to invest in our overall value creation strategy on five key priorities.people so they can do their best work every day. Our priorities include enabling a seamless MillerKnoll employee experience via a global Human Resources technology platform; delivering an externally competitive and internally equitable compensation and benefits program; growing internal capabilities through development opportunities for all career levels; and investing to make MillerKnoll an employer of choice around the world.
Reinforce Our Commitment to Our People, Our Planet, and Our Communities
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We intend to hold ourselves accountable for forward progress against our diversity, equity, and inclusion initiatives, building on the foundation of the DEIB actions we announced in 2020; our 2030 sustainability goals, which we introduced in April 2022; being a combination of new and repositioned studios. Studio expansions will be complemented by a continued focus on improving margins through the development of exclusive product designs and leveraging additional salesforce for good in our contract, catalogcommunities worldwide; and digital channels.
externally.
The companyCompany believes its strategy continues to respond well to current and future realities in its markets. AsThe Company's strategic priorities are aimed at creating a sustainable and diverse revenue model that puts the company has expanded addressable market overcustomer at the past five years, these initiatives will help leverage its unique multi-channelcenter of everything we do and leverages enabling digital capabilities to deliver its leading designsfully realize that vision.
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Business Overview
The following is a summary of the significant events and innovationsitems impacting the Company's operations for the year ended June 3, 2023:
•Net sales were $4,087.1 million, representing an increase of 3.6% when compared to new audiences virtually anywherethe prior year. The increase in net sales was driven primarily by incremental price increases, the consolidation of Knoll results from the date of acquisition of July 19, 2021, as well as growth in the world.
•Gross margin was 35.0% as compared to 34.3% in foreign currency translation ratesthe prior year. The change in gross margin was primarily driven by the realization of price optimization strategies and benefits from integration synergies. These positive factors were partially offset by increased commodity, storage and handling costs, freight, product distribution costs, and labor costs.
•Operating expenses decreased by $5.2 million or 0.4% as compared to the prior year. The decrease was primarily due to a reduction in variable expenses, including certain forms of employee compensation and benefits, and the impactcontinued focus on cost optimization and synergy capture. These decreases were partially offset by $75.0 million of restructuring charges related to voluntary and involuntary reductions in the Company's workforce, charges for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand, charges related to the impairment of the extra week, net sales increased by 1.4 percent(1) comparedKnoll trade name, and $50.0 million related to lastthe consolidation of Knoll results for the entire first quarter of fiscal year. Growth2023 (versus a partial quarter of consolidation in fiscal 2022).
•The integration of the Consumer segment helped offset a mixed demand environment across the contract business segments tiedKnoll acquisition continues to macro-economic and geopolitical uncertaintyprogress as planned. We made good progress implementing cost synergies throughout the year.
•The effective tax rate was 8.8% for fiscal 2023 compared to negative 130.1% for the end of the fiscal year, announce a 6 percent increase in the quarterly dividend to $0.18prior year.
•Diluted earnings per share for the full year totaled $0.55 compared to a loss per share - the highest quarterly rateof $0.37 in Herman Miller's history.
•The Company declared cash dividends of restructuring$0.75 per share in both fiscal 2023 and impairment charges recognized in the current fiscal year and non-recurring gains related to the prior year, adjusted operating earnings improvedby 9 percent(1) in spite of the uncertain environment.2022.
•The current macroeconomic environment in North America — which includes higher interest rates, complications from a regional banking crisis and low CEO and consumer confidence levels — continues to pose challenges for the industry. These factors are expected to persist, posing difficulties particularly for the luxury housing market and discretionary spending on goods. However, when it comes to the overall dynamics of returning to the office, the Company maintains an optimistic outlook based on the project funnel and latest trends which suggest more structured return-to-office practices in the near-term.
•The Company's financial performance is sensitive to changes in certain input costs, including steel and steel component parts. Ongoing cost reduction initiatives and price increase actions have been implemented to help offset these cost pressures, and the benefit from these initiatives is expected to increase over time. Additionally, the substantial inflationary pressures for certain key input costs, including goods and services tied to energy prices, are beginning to ease.
•The Americas Contract segment reported a net sales acrossincrease of 5.0% and an organic sales increase of 0.3%(*) year-over-year. Operating margin increased 610 basis points year-over year and 620 basis points on an adjusted basis.(*) The increase was primarily driven by pricing optimization and benefits from synergies.
•International Contract and Specialty reported a net sales increase of 9.6% and an organic sales increase of 7.0%(*) year-over-year. Operating margin increased 220 basis points year-over-year and 50 basis points on an adjusted basis.(*) The increase was primarily driven by pricing optimization strategies and product mix.
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•Global Retail reported a net sales decrease of 4.1% and an organic sales decrease of 5.1%(*) year-over-year. On a reported basis, operating margin as a percentage of sales was a loss of 1.5% in fiscal 2023 and earnings of 12.4% in fiscal 2022. On an adjusted basis, operating margin as a percentage of sales was 3.8%(*) in fiscal 2023 and 13.1%(*) in fiscal 2022. The decrease was primarily driven by a combination of lower volume, mix of product, and increased freight expenses.
The remaining sections of Item 7 include additional analysis of the multiple channels that DWR serves,fiscal year ended June 3, 2023, including studios, outlets, contract, catalog, phone and e-commerce. Comparable brand growth was presented on a pro forma basis using a 52-week averagediscussion of significant variances compared to normalize resultsthe prior year period. A detailed review of our fiscal 2022 performance compared to our fiscal 2021 performance is set forth in Part II, Item 7 of our Form 10-K for the impact of an extra week of operations in the first quarter of fiscal 2017.year ended May 28, 2022.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
Reconciliation of Non-GAAP Financial Measures
This reportpresentation contains references to Adjusted diluted earnings per share ("EPS"), Organic net sales and Adjusted operating earnings, all of which are non-GAAP financial measures (referred to collectively as the "Adjusted financial measures"). Adjusted diluted EPS and Adjusted operating earnings are calculated by excluding from Earnings per share - diluted and Operating earnings, items that we believe are not indicative of our ongoing operating performance, such as non-recurring gain, expenses associatedin accordance with, restructuring actions takennor an alternative to, adjust our cost structure to the current business climategenerally accepted accounting principles (GAAP) and non-cash impairment expenses. Organic net sales represents the change in sales excluding currency translation effects, the divestiture of owned dealers and the impact of an extra week of operations in fiscal 2017 as compared to fiscal 2016.may be different from non-GAAP measures presented by other companies. These adjustments are made to provide enhanced comparability of the company's current results with historical results.
more comparative basis for the periods presented.
The following table reconciles Net sales tonon-GAAP financial measures referenced within this presentation include: Adjusted Earnings per Share, Adjusted Operating Earnings (Loss), Adjusted Operating Margin, and Organic Growth (Decline).
Adjusted Earnings per Share represents reported diluted earnings per share excluding the impact from amortization of purchased intangibles, acquisition and integration charges, debt extinguishment charges, restructuring expenses, impairment charges, other special charges or gains and the related tax effect of these adjustments. These adjustments are described further below.
Adjusted Operating Earnings (Loss) represents reported operating earnings plus acquisition and integration charges, amortization of purchased intangibles, restructuring expenses, impairment charges, and other special charges or gains. These adjustments are described further below.
Adjusted Operating Margin represents Adjusted Operating Earnings (Loss) for the Company or a business segment divided by the related net sales by segment:for the Company or a business segment.
| Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||
| June 3, 2017 | May 28, 2016 | |||||||||||||||||||||||||||||
| North America | ELA | Specialty | Consumer | Total | North America | ELA | Specialty | Consumer | Total | |||||||||||||||||||||
| Net sales, as reported | $ | 1,342.2 | $ | 385.5 | $ | 232.4 | $ | 318.1 | $ | 2,278.2 | $ | 1,331.8 | $ | 412.6 | $ | 231.8 | $ | 288.7 | $ | 2,264.9 | ||||||||||
| % change from PY | 0.8 | % | (6.6 | )% | 0.3 | % | 10.2 | % | 0.6 | % | ||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||||||
| Dealer divestitures | — | — | — | — | — | (8.8 | ) | (30.8 | ) | — | — | (39.6 | ) | |||||||||||||||||
Currency translation effects (1) | 0.7 | 13.9 | — | — | 14.6 | — | — | — | — | — | ||||||||||||||||||||
| Impact of extra week in FY17 | (22.7 | ) | (6.3 | ) | (3.3 | ) | (4.7 | ) | (37.0 | ) | — | — | — | — | — | |||||||||||||||
| Organic net sales | $ | 1,320.2 | $ | 393.1 | $ | 229.1 | $ | 313.4 | $ | 2,255.8 | $ | 1,323.0 | $ | 381.8 | $ | 231.8 | $ | 288.7 | $ | 2,225.3 | ||||||||||
| % change from PY | (0.2 | )% | 3.0 | % | (1.2 | )% | 8.6 | % | 1.4 | % | ||||||||||||||||||||
| Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||
| May 28, 2016 | May 30, 2015 | |||||||||||||||||||||||||||||
| North America | ELA | Specialty | Consumer | Total | North America | ELA | Specialty | Consumer | Total | |||||||||||||||||||||
| Net sales, as reported | $ | 1,331.8 | $ | 412.6 | $ | 231.8 | $ | 288.7 | $ | 2,264.9 | $ | 1,241.9 | $ | 409.9 | $ | 219.9 | $ | 270.5 | $ | 2,142.2 | ||||||||||
| % change from PY | 7.2 | % | 0.7 | % | 5.4 | % | 6.7 | % | 5.7 | % | ||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||||||
Currency translation effects (1) | 12.5 | 26.1 | 0.6 | 0.8 | 40.0 | — | — | — | — | — | ||||||||||||||||||||
| Acquisition | — | — | — | (30.2 | ) | (30.2 | ) | — | — | — | — | — | ||||||||||||||||||
| Organic net sales | $ | 1,344.3 | $ | 438.7 | $ | 232.4 | $ | 259.3 | $ | 2,274.7 | $ | 1,241.9 | $ | 409.9 | $ | 219.9 | $ | 270.5 | $ | 2,142.2 | ||||||||||
| % change from PY | 8.2 | % | 7.0 | % | 5.7 | % | (4.1 | )% | 6.2 | % | ||||||||||||||||||||
•Amortization of purchased intangibles:Includes expenses associated with the amortization of inventory step-up and amortization of acquisition related intangibles acquired as part of the Knoll acquisition. The revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. We exclude the impact of the amortization of purchased intangibles, including the fair value adjustment to inventory, as such non-cash amounts were significantly impacted by the size of the Knoll acquisition. Furthermore, we believe that this adjustment enables better comparison of our results as Amortization of Purchased Intangibles will not recur in future periods once such intangible assets have been fully amortized. Any future acquisitions may result in the amortization of additional intangible assets. Although we exclude the Amortization of Purchased Intangibles in these non-GAAP measures, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.
•Acquisition and integration charges: Includes costs related directly to the comparable prior year periodKnoll acquisition including legal, accounting and other professional fees as well as integration-related costs. Integration-related costs include severance, accelerated stock-based compensation expenses, asset impairment charges, and other cost reduction efforts or reorganization initiatives.
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•Debt extinguishment charges: Includes expenses associated with the extinguishment of debt as part of financing the Knoll acquisition. We excluded these items from our non-GAAP measures because they relate to a specific transaction and are not reflective of our ongoing financial performance.
•Gain on sale of dealer: Includes the gain recorded on the divestiture of an owned dealership.
•Restructuring charges: Includes actions involving targeted workforce reductions as well as non-impairment charges related to the closure of the Fully business.
•Impairment charges: Includes non-cash, pre-tax charges for the impairment of intangible assets, right of use assets, and other assets related to the closure of the Fully business as well as the impairment of the Knoll trade name.
•Special charges: Include certain costs arising as a direct result of COVID-19 pandemic.
•Tax related items: We excluded the income tax benefit/provision effect of the tax related items from our non-GAAP measures because they are not associated with the tax expense on our ongoing operating results.
Tables below summarize select financial information, for the periods indicated, related to each of the Company’s reportable segments. The Americas Contract segment includes the operations associated with the design, manufacture and sale of furniture products directly or indirectly through an independent dealership network for office, healthcare, and educational environments throughout North and South America. The International Contract & Specialty segment includes the operations associated with the design, manufacture and sale of furniture products, indirectly or directly through an independent dealership network in Europe, the Middle East, Africa and Asia-Pacific as well as the global activities of the Specialty brands, which include Holly Hunt, Spinneybeck, Maharam, Edelman, and Knoll Textiles. The Global Retail segment includes global operations associated with the sale of modern design furnishings and accessories to third party retailers, as well as direct to consumer sales through eCommerce, direct-mail catalogs, and physical retail stores. Corporate costs represent unallocated expenses related to general corporate functions, including, but not limited to, certain legal, executive, corporate finance, information technology, administrative and acquisition-related costs.
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The following table reconciles Operating earningsEarnings (Loss) to Adjusted operating earningsOperating Earnings (Loss) by segment:Segment for the years ended as indicated below (in millions):
| Three Months Ended | Twelve Months Ended | ||||||||||||||||||||||||||||
| June 3, 2023 | May 28, 2022 | June 3, 2023 | May 28, 2022 | ||||||||||||||||||||||||||
| Americas | |||||||||||||||||||||||||||||
| Net sales | $ | 474.4 | 100.0 | % | $ | 539.2 | 100.0 | % | $ | 2,026.1 | 100.0 | % | $ | 1,929.1 | 100.0 | % | |||||||||||||
| Gross margin | 158.7 | 33.5 | % | 137.6 | 25.5 | % | 611.2 | 30.2 | % | 493.1 | 25.6 | % | |||||||||||||||||
| Total operating expenses | 137.3 | 28.9 | % | 131.6 | 24.4 | % | 511.6 | 25.3 | % | 517.1 | 26.8 | % | |||||||||||||||||
| Operating earnings (loss) | $ | 21.4 | 4.5 | % | $ | 6.0 | 1.1 | % | $ | 99.6 | 4.9 | % | $ | (24.0) | (1.2) | % | |||||||||||||
| Adjustments | |||||||||||||||||||||||||||||
| Restructuring | 5.2 | 1.1 | % | — | — | % | 22.8 | 1.1 | % | — | — | % | |||||||||||||||||
| Acquisition and integration charges | 3.5 | 0.7 | % | 3.7 | 0.7 | % | 9.7 | 0.5 | % | 29.9 | 1.5 | % | |||||||||||||||||
| Amortization of purchased intangibles | 3.2 | 0.7 | % | 3.1 | 0.6 | % | 12.9 | 0.6 | % | 28.7 | 1.5 | % | |||||||||||||||||
| Gain on Sale of Dealer | — | — | % | — | — | % | — | — | % | (2.0) | (0.1) | % | |||||||||||||||||
| Impairment charges | 14.4 | 3.0 | % | — | — | % | 14.4 | 0.7 | % | — | — | % | |||||||||||||||||
| Adjusted operating earnings | $ | 47.7 | 10.1 | % | $ | 12.8 | 2.4 | % | $ | 159.4 | 7.9 | % | $ | 32.6 | 1.7 | % | |||||||||||||
| International & Specialty | |||||||||||||||||||||||||||||
| Net sales | $ | 237.4 | 100.0 | % | $ | 273.3 | 100.0 | % | $ | 1,017.3 | 100.0 | % | $ | 928.5 | 100.0 | % | |||||||||||||
| Gross margin | 101.3 | 42.7 | % | 113.0 | 41.3 | % | 424.3 | 41.7 | % | 372.6 | 40.1 | % | |||||||||||||||||
| Total operating expenses | 84.2 | 35.5 | % | 81.4 | 29.8 | % | 325.7 | 32.0 | % | 302.7 | 32.6 | % | |||||||||||||||||
| Operating earnings | $ | 17.1 | 7.2 | % | $ | 31.6 | 11.6 | % | $ | 98.6 | 9.7 | % | $ | 69.9 | 7.5 | % | |||||||||||||
| Adjustments | |||||||||||||||||||||||||||||
| Restructuring | 0.6 | 0.3 | % | — | — | % | 1.3 | 0.1 | % | — | — | % | |||||||||||||||||
| Acquisition and integration charges | 0.5 | 0.2 | % | 0.1 | — | % | 2.5 | 0.2 | % | 1.2 | 0.1 | % | |||||||||||||||||
| Amortization of purchased intangibles | 2.1 | 0.9 | % | 2.3 | 0.8 | % | 8.3 | 0.8 | % | 26.9 | 2.9 | % | |||||||||||||||||
| Impairment charges | 1.8 | 0.8 | % | — | — | % | 1.8 | 0.2 | % | — | — | % | |||||||||||||||||
| Adjusted operating earnings | $ | 22.1 | 9.3 | % | $ | 34.0 | 12.4 | % | $ | 112.5 | 11.1 | % | $ | 98.0 | 10.6 | % | |||||||||||||
| Retail | |||||||||||||||||||||||||||||
| Net sales | $ | 244.9 | 100.0 | % | $ | 288.0 | 100.0 | % | $ | 1,043.7 | 100.0 | % | $ | 1,088.4 | 100.0 | % | |||||||||||||
| Gross margin | 94.7 | 38.7 | % | 131.9 | 45.8 | % | 394.5 | 37.8 | % | 487.0 | 44.7 | % | |||||||||||||||||
| Total operating expenses | 105.5 | 43.1 | % | 94.5 | 32.8 | % | 410.0 | 39.3 | % | 352.5 | 32.4 | % | |||||||||||||||||
| Operating (loss) earnings | $ | (10.8) | (4.4) | % | $ | 37.4 | 13.0 | % | $ | (15.5) | (1.5) | % | $ | 134.5 | 12.4 | % | |||||||||||||
| Adjustments | |||||||||||||||||||||||||||||
| Restructuring Charges | 8.4 | 3.4 | % | — | — | % | 9.9 | 0.9 | % | — | — | % | |||||||||||||||||
| Acquisition and integration charges | — | — | % | — | — | % | 0.2 | — | % | 0.3 | — | % | |||||||||||||||||
| Amortization of purchased intangibles | 0.6 | 0.2 | % | 1.3 | 0.5 | % | 4.1 | 0.4 | % | 7.8 | 0.7 | % | |||||||||||||||||
| Impairment charges | 3.5 | 1.4 | % | — | — | % | 40.7 | 3.9 | % | — | — | % | |||||||||||||||||
| Adjusted operating earnings | $ | 1.7 | 0.7 | % | $ | 38.7 | 13.4 | % | $ | 39.4 | 3.8 | % | $ | 142.6 | 13.1 | % | |||||||||||||
| Corporate | |||||||||||||||||||||||||||||
| Operating expenses | $ | 16.1 | — | % | $ | 18.0 | — | % | $ | 60.4 | — | % | $ | 140.6 | — | % | |||||||||||||
| Operating (loss) | $ | (16.1) | — | % | $ | (18.0) | — | % | $ | (60.4) | — | % | $ | (140.6) | — | % | |||||||||||||
| Adjustments | |||||||||||||||||||||||||||||
| Acquisition and integration charges | 1.3 | — | % | 3.7 | — | % | 5.6 | — | % | 93.1 | — | % | |||||||||||||||||
| Adjusted operating (loss) | $ | (14.8) | — | % | $ | (14.3) | — | % | $ | (54.8) | — | % | $ | (47.5) | — | % | |||||||||||||
| MillerKnoll, Inc. | |||||||||||||||||||||||||||||
| Net sales | $ | 956.7 | 100.0 | % | $ | 1,100.5 | 100.0 | % | $ | 4,087.1 | 100.0 | % | $ | 3,946.0 | 100.0 | % | |||||||||||||
| Gross margin | 354.7 | 37.1 | % | 382.5 | 34.8 | % | 1,430.0 | 35.0 | % | 1,352.7 | 34.3 | % | |||||||||||||||||
| Total operating expenses | 343.1 | 35.9 | % | 325.5 | 29.6 | % | 1,307.7 | 32.0 | % | 1,312.9 | 33.3 | % | |||||||||||||||||
| Operating earnings | $ | 11.6 | 1.2 | % | $ | 57.0 | 5.2 | % | $ | 122.3 | 3.0 | % | $ | 39.8 | 1.0 | % | |||||||||||||
| Adjustments | |||||||||||||||||||||||||||||
| Restructuring Charges | 14.2 | 1.5 | % | — | — | % | 34.0 | 0.8 | % | — | — | % | |||||||||||||||||
| Acquisition and integration charges | 5.3 | 0.6 | % | 7.5 | 0.7 | % | 18.0 | 0.4 | % | 124.5 | 3.2 | % | |||||||||||||||||
| Amortization of purchased intangibles | 5.9 | 0.6 | % | 6.7 | 0.6 | % | 25.3 | 0.6 | % | 63.4 | 1.6 | % | |||||||||||||||||
| Gain on Sale of Dealer | — | — | % | — | — | % | — | — | % | (2.0) | (0.1) | % | |||||||||||||||||
| Impairment charges | 19.7 | 2.1 | % | — | — | % | 56.9 | 1.4 | % | — | — | % | |||||||||||||||||
| Adjusted operating earnings | $ | 56.7 | 5.9 | % | $ | 71.2 | 6.5 | % | $ | 256.5 | 6.3 | % | $ | 225.7 | 5.7 | % | |||||||||||||
27
| Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||||||||
| June 3, 2017 | May 28, 2016 | |||||||||||||||||||||||||||||||||||
| North America | ELA | Specialty | Consumer | Corporate | Total | North America | ELA | Specialty | Consumer | Corporate | Total | |||||||||||||||||||||||||
| Operating earnings (loss) | $ | 137.7 | $ | 30.8 | $ | 17.7 | $ | 5.3 | $ | (0.7 | ) | $ | 190.8 | $ | 152.0 | $ | 35.3 | $ | 16.4 | $ | 8.1 | $ | (0.3 | ) | $ | 211.5 | ||||||||||
| % Net sales | 10.3 | % | 8.0 | % | 7.6 | % | 1.7 | % | n/a | 8.4 | % | 11.4 | % | 8.6 | % | 7.1 | % | 2.8 | % | n/a | 9.3 | % | ||||||||||||||
| Adjustments | ||||||||||||||||||||||||||||||||||||
| Less: Non-recurring gain | — | — | — | — | — | — | — | (6.1 | ) | — | — | — | (6.1 | ) | ||||||||||||||||||||||
| Less: Gain on sale of dealer | (0.7 | ) | — | — | — | — | (0.7 | ) | — | — | — | — | — | — | ||||||||||||||||||||||
| Add: Restructuring and impairment expenses | 10.3 | 1.0 | 0.6 | 0.6 | — | 12.5 | — | — | — | — | — | — | ||||||||||||||||||||||||
| Adjusted operating earnings (loss) | $ | 147.3 | $ | 31.8 | $ | 18.3 | $ | 5.9 | $ | (0.7 | ) | $ | 202.6 | $ | 152.0 | $ | 29.2 | $ | 16.4 | $ | 8.1 | $ | (0.3 | ) | $ | 205.4 | ||||||||||
| Twelve Months Ended | |||||||||||||||||
| June 3, 2023 | |||||||||||||||||
| Americas | International & Specialty | Retail | Total | ||||||||||||||
| Net sales, as reported | $ | 2,026.1 | $ | 1,017.3 | $ | 1,043.7 | $ | 4,087.1 | |||||||||
| % change from PY | 5.0 | % | 9.6 | % | (4.1) | % | 3.6 | % | |||||||||
| Adjustments | |||||||||||||||||
| Acquisition | (77.2) | (55.5) | (31.1) | (163.8) | |||||||||||||
Currency translation effects (1) | 6.1 | 42.9 | 26.8 | 75.8 | |||||||||||||
| Impact of extra week in FY23 | (27.4) | (11.6) | (13.7) | (52.7) | |||||||||||||
| Net sales, organic | $ | 1,927.6 | $ | 993.1 | $ | 1,025.7 | $ | 3,946.4 | |||||||||
| % change from PY | 0.3 | % | 7.0 | % | (5.1) | % | 0.4 | % | |||||||||
| Twelve Months Ended | |||||||||||||||||
| May 28, 2022 | |||||||||||||||||
| Americas | International & Specialty | Retail | Total | ||||||||||||||
| Net sales, as reported | $ | 1,929.1 | $ | 928.5 | $ | 1,088.4 | $ | 3,946.0 | |||||||||
| Adjustments | |||||||||||||||||
| Divestitures | (6.7) | — | (7.9) | (14.6) | |||||||||||||
| Net sales, organic | $ | 1,922.4 | $ | 928.5 | $ | 1,080.5 | $ | 3,931.4 | |||||||||
| (1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period. | |||||||||||||||||
28
The following tables reconcile orders as reported to organic orders for the periods ended as indicated below (in millions):
| Twelve Months Ended | ||||||||||||||
| June 3, 2023 | ||||||||||||||
| Americas | International & Specialty | Retail | Total | |||||||||||
| Orders, as reported | $ | 1,901.3 | $ | 944.0 | $ | 989.0 | $ | 3,834.3 | ||||||
| % change from PY | (9.1) | % | (4.1) | % | (10.7) | % | (8.3) | % | ||||||
| Adjustments | ||||||||||||||
| Acquisition | (80.3) | (57.5) | (32.3) | (170.1) | ||||||||||
Currency translation effects (1) | 3.9 | 39.8 | 25.2 | 68.9 | ||||||||||
| Impact of extra week in FY23 | (24.0) | (10.3) | (12.4) | (46.7) | ||||||||||
| Orders, organic | $ | 1,800.9 | $ | 916.0 | $ | 969.5 | $ | 3,686.4 | ||||||
| % change from PY | (13.4) | % | (7.0) | % | (11.8) | % | (11.5) | % | ||||||
| Twelve Months Ended | ||||||||||||||
| May 28, 2022 | ||||||||||||||
| Americas | International & Specialty | Retail | Total | |||||||||||
| Orders, as reported | $ | 2,091.5 | $ | 984.7 | $ | 1,107.3 | $ | 4,183.5 | ||||||
| Adjustments | ||||||||||||||
| Divestitures | (11.4) | — | (8.5) | (19.9) | ||||||||||
| Orders, organic | $ | 2,080.1 | $ | 984.7 | $ | 1,098.8 | $ | 4,163.6 | ||||||
| (1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period. | ||||||||||||||
The following table reconciles EPS to Adjusted EPS for the years indicated:ended as of indicated below:
| Twelve Months Ended | ||||||||
| June 3, 2023 | May 28, 2022 | |||||||
| (Loss) Earnings per Share - Diluted | $ | 0.55 | $ | (0.37) | ||||
| Add: Amortization of purchased intangibles | 0.33 | 0.87 | ||||||
| Add: Acquisition and integration charges | 0.24 | 1.71 | ||||||
| Add: Restructuring charges | 0.45 | — | ||||||
| Add: Impairment charges | 0.76 | — | ||||||
| Add: Special charges | — | (0.01) | ||||||
| Add: Debt extinguishment | — | 0.18 | ||||||
| Less: Gain on sale of dealer | — | (0.03) | ||||||
| Tax impact on adjustments | (0.48) | (0.43) | ||||||
| Adjusted earnings per share - diluted | $ | 1.85 | $ | 1.92 | ||||
| Weighted Average Shares Outstanding (used for Calculating Adjusted Earnings per Share) – Diluted | 76,024,368 | 73,160,212 | ||||||
29
| Fiscal Year Ended | ||||||
| June 3, 2017 | May 28, 2016 | |||||
| Earnings per Share - Diluted | $ | 2.05 | $ | 2.26 | ||
| After Tax Adjustments | ||||||
| Less: Non-recurring gain | — | (0.09 | ) | |||
| Less: Gain on sale of dealer | (0.02 | ) | — | |||
| Add: Restructuring and impairment expenses | 0.13 | — | ||||
| Adjusted Earnings per Share - Diluted | $ | 2.16 | $ | 2.17 | ||
Weighted Average Shares Outstanding (used for Calculating Adjusted Earnings per Share) – Diluted | 60,554,589 | 60,529,269 | ||||
Financial Results
The following is a comparison of our annual results of operations and year-over-year percentage changes for the periods indicated.indicated:
(Dollars In millions) | Fiscal 2017 | % Change from 2016 | Fiscal 2016 | % Change from 2015 | Fiscal 2015 | ||||||||||||
| 53 weeks | 52 weeks | 52 weeks | |||||||||||||||
| Net sales | $ | 2,278.2 | 0.6 | % | $ | 2,264.9 | 5.7 | % | $ | 2,142.2 | |||||||
| Cost of sales | 1,414.0 | 1.7 | % | 1,390.7 | 3.0 | % | 1,350.8 | ||||||||||
| Gross margin | 864.2 | (1.1 | )% | 874.2 | 10.5 | % | 791.4 | ||||||||||
| Operating expenses | 673.4 | 1.6 | % | 662.7 | 5.5 | % | 628.0 | ||||||||||
| Operating earnings | 190.8 | (9.8 | )% | 211.5 | 29.4 | % | 163.4 | ||||||||||
| Net other expenses | 13.2 | (11.4 | )% | 14.9 | (18.1 | )% | 18.2 | ||||||||||
| Earnings before income taxes | 177.6 | (9.7 | )% | 196.6 | 35.4 | % | 145.2 | ||||||||||
| Income tax expense | 55.1 | (7.4 | )% | 59.5 | 26.1 | % | 47.2 | ||||||||||
| Equity income from nonconsolidated affiliates, net of tax | 1.6 | 300.0 | % | 0.4 | 300.0 | % | 0.1 | ||||||||||
| Net earnings | 124.1 | (9.7 | )% | 137.5 | 40.2 | % | 98.1 | ||||||||||
| Net earnings attributable to noncontrolling interests | 0.2 | (75.0 | )% | 0.8 | 33.3 | % | 0.6 | ||||||||||
| Net earnings attributable to Herman Miller, Inc. | $ | 123.9 | (9.4 | )% | $ | 136.7 | 40.2 | % | $ | 97.5 | |||||||
| (Dollars in millions) | Fiscal 2023 | Fiscal 2022 | % Change | ||||||||||||||
| Net sales | $ | 4,087.1 | $ | 3,946.0 | 3.6 | % | |||||||||||
| Cost of sales | 2,657.1 | 2,593.3 | 2.5 | % | |||||||||||||
| Gross margin | 1,430.0 | 1,352.7 | 5.7 | % | |||||||||||||
| Operating expenses | 1,307.7 | 1,312.9 | (0.4) | % | |||||||||||||
| Operating earnings | 122.3 | 39.8 | 207.3 | % | |||||||||||||
| Other expenses, net | 70.9 | 48.4 | 46.5 | % | |||||||||||||
| Earnings (loss) before income taxes and equity income | 51.4 | (8.6) | 697.7 | % | |||||||||||||
| Income tax expense | 4.5 | 11.1 | (59.5) | % | |||||||||||||
| Equity (loss) from nonconsolidated affiliates, net of tax | (0.8) | — | — | % | |||||||||||||
| Net earnings (loss) | 46.1 | (19.7) | 334.0 | % | |||||||||||||
| Net earnings attributable to redeemable noncontrolling interests | 4.0 | 7.4 | (45.9) | ||||||||||||||
| Net earnings (loss) attributable to MillerKnoll, Inc. | $ | 42.1 | $ | (27.1) | 255.4 | % | |||||||||||
The following table presents, for the periods indicated, the components of the company'sCompany's Consolidated Statements of Comprehensive Income as a percentage of net sales.Net sales:
| Fiscal 2023 | Fiscal 2022 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of sales | 65.0 | % | 65.7 | % | |||||||
| Gross margin | 35.0 | % | 34.3 | % | |||||||
| Operating expenses | 32.0 | % | 33.3 | % | |||||||
| Operating earnings | 3.0 | % | 1.0 | % | |||||||
| Other expenses, net | 1.7 | % | 1.2 | % | |||||||
| Earnings (loss) before income taxes and equity income | 1.3 | % | (0.2) | % | |||||||
| Income tax expense | 0.1 | % | 0.3 | % | |||||||
| Equity income from nonconsolidated affiliates, net of tax | — | % | — | % | |||||||
| Net earnings (loss) | 1.1 | % | (0.5) | % | |||||||
| Net earnings attributable to redeemable noncontrolling interests | 0.1 | % | 0.2 | % | |||||||
| Net earnings (loss) attributable to MillerKnoll, Inc. | 1.0 | % | (0.7) | % | |||||||
30
| Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | ||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
| Cost of sales | 62.1 | 61.4 | 63.1 | |||||
| Gross margin | 37.9 | 38.6 | 36.9 | |||||
| Selling, general, and administrative expenses | 25.8 | 25.9 | 25.4 | |||||
| Restructuring and impairment expenses | 0.5 | — | 0.6 | |||||
| Design and research expenses | 3.2 | 3.4 | 3.3 | |||||
| Total operating expenses | 29.6 | 29.3 | 29.3 | |||||
| Operating earnings | 8.4 | 9.3 | 7.6 | |||||
| Net other expenses | 0.6 | 0.7 | 0.8 | |||||
| Earnings before income taxes | 7.8 | 8.7 | 6.8 | |||||
| Income tax expense | 2.4 | 2.6 | 2.2 | |||||
| Equity income from nonconsolidated affiliates, net of tax | 0.1 | — | — | |||||
| Net earnings | 5.4 | 6.1 | 4.6 | |||||
| Net earnings attributable to noncontrolling interests | — | — | — | |||||
| Net earnings attributable to Herman Miller, Inc. | 5.4 | 6.0 | 4.6 | |||||
Net Sales Orders
The following chart presents graphically the primary drivers of the year-over-year change in Net sales. The amounts presented in the bar graph are expressed in millions and Backlog - Fiscal 2017 Compared to Fiscal 2016
have been rounded.
have been rounded.
•Incremental price increases, net of price discounting drove an increase in net sales of approximately $246 million.
•The additional week increased netduring the first quarter of the current year contributed approximately $53 million of the Net sales by approximately $37 million.increase.
•Increased sales volumes within the North AmericanInternational Contract & Specialty segment of approximately $23 million resulted primarily from increased demand within the company's Healthcare business unit, along withcontributed to sales growth late in the fiscal year by approximately $43 million. The International Contract & Specialty segment's growth was driven, in part, by a strong backlog of orders in the North America office furniture business.
•Foreign currency translation had a negative impact on netdecreased Net sales of approximately $15 million.
Gross Margin
Gross margin was due the fact that 52 weeks of DWR results were included in our consolidated results35.0% for fiscal 20162023 as compared to 44 weeks in fiscal 2015.
•The impact of amortization of purchased intangibles related to fiscal 2016.
•Unfavorable channel and product mix, as well as charges related to last fiscal year.the recording of obsolete inventory along with the closure of the Fully business contributed to the remaining decrease in gross margin.
31
Operating Expenses - Fiscal 2017 Compared to Fiscal 2016
Operating expenses in fiscal 2017 were $673.4decreased by $5 million or 29.6 percent of net sales, which compares0.4% compared to $662.7 million, or 29.3 percent of net sales inthe prior year fiscal 2016.period. The following factors contributed to the change:
•Knoll deal and integration related costs and amortization expense decreased $132 million from the prior year period;
•Favorable foreign currency translation of approximately $11 million primarily related to the International and Specialty segment. These factors were offset in part by;
•Restructuring charges related to targetedvoluntary and involuntary reductions in the Company's workforce, reductions increasedcharges for the impairment of assets associated with the decision to cease operating expenses by $5.4 million, whileFully as a stand-alone brand and charges related to the impairment of the NemschoffKnoll trade name contributed to an increase in Operating expenses of approximately $75 million;
•The consolidation of Knoll results for the entirety of the first quarter of fiscal 2023, which increased operatingOperating expenses by $7.1 million.$50 million;
•The impact of an extra week in the first quarter of fiscal 20172023, which increased operatingOperating expenses by approximately $9 million.$13 million;
•Warranty costs, which increased by approximately $8 million forin the twelve month comparative period.
32
Other Expenses and Income
Income/Expense
Income/Expense
Net other expenses for fiscal 20172023 were $13.2 million, a decrease of $1.7$70.9 million compared to net other expenses$48.4 million in fiscal 20162022. Other income/expense in the twelve months ended May 28, 2022 included a loss on extinguishment of $14.9 million. The decrease in net other expenses in fiscal 2017debt of approximately $13.4 million which represented the premium on early debt redemption. This was primarily related to higher investment income associated with the company's deferred compensation plan.
33
The business is comprised of various operating segments as defined by generally accepted accounting principles in the United States.U.S. GAAP. These operating segments are determined on the basis of how the companyCompany internally reports and evaluates financial information used to make operating decisions. The company hassegments identified by the following reportable segments:
Company include Americas Contract, International Contract & Specialty, and Global Retail. The companyCompany also reports a corporate“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. Effective as applicable, unallocated corporate expenses including acquisition-related costs and other unallocated corporate costs.
of May 29, 2022, the start of fiscal year 2023, the Company implemented an organizational change that resulted in a change in the reportable segments.The Company has recast historical results to reflect this change. For descriptions of each segment, refer to Note 14 of the Consolidated Financial Statements.
The charts below present the relative mix of net sales and operating earnings across each of the company's reportableCompany's segments. This is followed by a discussion of the company'sCompany's results, by segment, for each reportable segment.
34
Americas Contract ("North America"Americas")
| (Dollars in millions) | Fiscal 2023 | Fiscal 2022 | Change | ||||||||||||||
| Net sales | $ | 2,026.1 | $ | 1,929.1 | $ | 97.0 | |||||||||||
| Gross margin | 611.2 | 493.1 | 118.1 | ||||||||||||||
| Gross margin % | 30.2 | % | 25.6 | % | 4.6 | % | |||||||||||
| Operating earnings (loss) | 99.6 | (24.0) | 123.6 | ||||||||||||||
| Operating earnings % | 4.9 | % | (1.2) | % | 6.1 | % | |||||||||||
Net sales in the North American segment were $1,342.2 million in fiscal 2017,increased 5.0%, or 0.3%(*) on an increase of 0.8 percent from fiscal 2016 net sales of $1,331.8 million. Orders for fiscal 2017 totaled $1,347.6 million, an increase of 0.9 percent from the prior year. Operating earnings for North America in fiscal 2017 were $137.7 million or 10.3 percent of sales as compared to $152.0 million or 11.4 percent of sales in the prior year.
•An increase of approximately $27 million related to the additional week in the first quarter; offset in part by
•The unfavorable impact of foreign currency translation which increased netdecreased sales by $0.8approximately $6 million; and
•Decreased sales volume of approximately $199 million, net sales for the Consumer segment decreased $11.2 million as compared to fiscal 2015. This
which was driven by the closing of legacy DWR studios, selling activity interruptions from the implementationimpact of a new ERP systemchallenging macro-economic environment compounded by pandemic-driven pent-up demand at DWRthe start of the prior year.
Operating earnings increased $123.6 million compared to the same period of the prior year due to:
•Increased gross margin of $118.1 million due to the increase in net sales discussed above and the rationalization of independent retail distributors.
◦The impact of incremental list price increases, net of contract price discounting, that increased gross margin percentage by 800 basis points; and
◦Amortization of purchased intangibles related to the Knoll acquisition recorded in the prior year that did not occur in the current period. These increases were offset in part by higher commodity and labor costs that decreased gross margin percentage by 320 basis points.
◦Realization of incremental synergies realized in fiscal year 2023 associated with the Knoll acquisition. Partially offset by;
•Decreased operating expenses of $5.5 million. The following factors contributed to the change:
◦Lower amortization and deal and integration charges of $36 million.
◦A decrease in variable based compensation and benefits of $18 million.
◦A decrease in technology program costs of approximately $10 million, Partially offset by;
◦Increased restructuring expenses of approximately $23 million related to voluntary and involuntary reductions in the Company's workforces.
◦An increase of approximately $20 million from consolidating Knoll results for the entirety of the first quarter of fiscal 2023.
◦An increase of approximately $14 million related to the impairment of the Knoll Product trade name.
◦An increase of approximately $6 million related to the additional week in the first quarter of fiscal 2023.
◦The remaining difference is due to a shiftdecrease in mixmarketing spend and costs related to lower margin channels,product development, incremental savings realized through synergies associated with the Knoll acquisition, offset in part by increased warranty expense in the current year.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
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International Contract and Specialty ("International & Specialty")
| (Dollars in millions) | Fiscal 2023 | Fiscal 2022 | Change | ||||||||||||||
| Net sales | $ | 1,017.3 | $ | 928.5 | $ | 88.8 | |||||||||||
| Gross margin | 424.3 | 372.6 | 51.7 | ||||||||||||||
| Gross margin % | 41.7 | % | 40.1 | % | 1.6 | % | |||||||||||
| Operating earnings | 98.6 | 69.9 | 28.7 | ||||||||||||||
| Operating earnings % | 9.7 | % | 7.5 | % | 2.2 | % | |||||||||||
Net sales increased 9.6%, or 7.0%(*) on an organic basis, over the prior year due to:
•An increase in sales of $56 million due to the Knoll acquisition that was completed on July 19, 2021. The increase represents the impact of promotional activityconsolidating Knoll results for the entirety of the first quarter of fiscal 2023; and
•Increased sales volume of approximately $43 million; and
•Price increases, net of incremental discounting of $22 million; and
•The positive impact of the additional sales from the additional week in the first quarter of $12 million. Offset in part by;
•Unfavorable foreign currency translation, which reduced sales by approximately $43 million.
Operating earnings increased $28.7 million, or 41.1%, compared to the prior year due to:
•Increased gross margin of $51.7 million due to the increase in sales explained above as well as increased gross margin percentage of 160 basis points due primarily to the leverage of fixed costs on higher sales volume as well as from the impact of amortization of purchased intangibles related to shippingthe Knoll acquisition recorded in the prior year that did not occur in the current period; offset in part by
•Increased operating expenses of $23.0 million driven primarily from consolidating Knoll results for the entirety of the first quarter of fiscal 2023, the impact of the additional week in the current period as compared to the prior year, partially offset by the favorable impact of foreign currency translation of $7.7 million and certainlower amortization and acquisition related deal and integration charges as compared to the same period of the prior year.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
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Global Retail
| (Dollars in millions) | Fiscal 2023 | Fiscal 2022 | Change | ||||||||||||||
| Net sales | $ | 1,043.7 | $ | 1,088.4 | $ | (44.7) | |||||||||||
| Gross margin | 394.5 | 487.0 | (92.5) | ||||||||||||||
| Gross margin % | 37.8 | % | 44.7 | % | (6.9) | % | |||||||||||
| Operating (loss) earnings | (15.5) | 134.5 | (150.0) | ||||||||||||||
| Operating earnings % | (1.5) | % | 12.4 | % | (13.9) | % | |||||||||||
Net sales decreased 4.1% as reported and 5.1%(*) on an organic basis, over the prior year due to:
•Decreased sales volumes of approximately $79 million which were driven primarily by changes in customer spending trends;
•Decreased sales in the Fully business of $8 million year over year due to changing demand patterns for Fully product which led to the closure of Fully in the third quarter of fiscal 2023; and
•The unfavorable impact of foreign currency translation, which decreased sales by approximately $27 million. Partially offset by;
•An increase in sales of $31 million due to the Knoll acquisition that was completed on July 19, 2021. The increase represents the impact of consolidating Knoll results for the entirety of the first quarter of fiscal 2023;
•Incremental price increases, net of discounting, of approximately $24 million; and
•The positive impact of additional sales from the extra week in fiscal 2023 of $14 million.
Operating earnings decreased $150.0 million over the prior year due to:
•Decreased gross margin of $92.5 million driven by:
◦Decrease in net sales discussed above as well as decreased gross margin percentage of 690 basis points attributable to the impact of impairment of inventory associated with the decision to cease operating Fully as a stand-alone brand;
◦The unfavorable impact of higher commodity and inventory storage costs;
◦Unfavorable changes in product mix, partially offset in part by the favorable impact of pricing; and
•Increased operating expenses of $57.5 million driven primarily by:
◦Consolidating Knoll results for the entirety of the first quarter of fiscal 2023;
◦Charges for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand;
◦The impact of the additional week in the current period as compared to the prior year; and
◦Increased costs associated with an ERP implementation.
Corporate
Corporate unallocated expenses totaled $60.4 million for fiscal 2023, a decrease of $80.2 million from fiscal 2022. The decrease was driven primarily by inventory-related purchase accounting adjustments that reduced prior year operating earnings by approximately $7.8a decrease in deal and integration costs related to the Knoll acquisition of $87.5 million.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
Liquidity and Capital Resources
The table below presents certain keysummarizes the net change in cash flow and capital highlightscash equivalents for the fiscal years indicated.
| Fiscal Year Ended | |||||||||||
| (In millions) | 2017 | 2016 | 2015 | ||||||||
| Cash and cash equivalents, end of period | $ | 96.2 | $ | 84.9 | $ | 63.7 | |||||
| Marketable securities, end of period | $ | 8.6 | $ | 7.5 | $ | 5.7 | |||||
| Cash provided by operating activities | $ | 202.1 | $ | 210.4 | $ | 167.7 | |||||
| Cash used for investing activities | $ | (116.3 | ) | $ | (80.8 | ) | $ | (213.6 | ) | ||
| Cash provided by (used for) financing activities | $ | (74.6 | ) | $ | (106.5 | ) | $ | 6.8 | |||
| Pension and post-retirement benefit plan contributions | $ | (1.1 | ) | $ | (1.2 | ) | $ | 1.4 | |||
| Capital expenditures | $ | (87.3 | ) | $ | (85.1 | ) | $ | (63.6 | ) | ||
| Stock repurchased | $ | (23.7 | ) | $ | (14.1 | ) | $ | (3.7 | ) | ||
| Interest-bearing debt, end of period | $ | 199.9 | $ | 221.9 | $ | 289.8 | |||||
Available unsecured credit facilities, end of period (1) | $ | 391.7 | $ | 232.1 | $ | 164.5 | |||||
| Fiscal Year Ended | |||||||||||
| (In millions) | 2023 | 2022 | |||||||||
| Cash provided by (used in): | |||||||||||
| Operating activities | $ | 162.9 | $ | (11.9) | |||||||
| Investing activities | (76.5) | (1,172.4) | |||||||||
| Financing activities | (86.8) | 1,039.9 | |||||||||
| Effect of exchange rate changes | (6.4) | (21.7) | |||||||||
| Net change in cash and cash equivalents | $ | (6.8) | $ | (166.1) | |||||||
Cash Flow — Operating Activities
•The timing of $19.4 million, an increasecollection of our receivables;
•The timing of of planned promotional events in the Retail segment;
•Customer demand trends for in-stock products;
•Changes in supply chain lead times; and
•Timing of spending commitments and payments of our accounts payable, of $8.7 millionaccrued expenses, accrued compensation and an increase in other accrued liabilities of $14.1 million.
related benefits.
Cash Flow — Investing Activities
| (In millions) | 2017 | 2016 | 2015 | ||||||||
| Naughtone Holdings Limited | $ | 11.6 | |||||||||
| George Nelson Bubble Lamp Product Line | $ | 3.6 | |||||||||
| Design Within Reach (DWR) | $ | 154.0 | |||||||||
Company's sustainability goals.
Cash Flow — Financing Activities
Sources of Liquidity
In addition to cash flowssteps taken to protect its workforce and manage business operations, the Company has taken actions to safeguard its capital position in the current environment. The Company is closely managing spending levels, capital investments, and working capital.
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The Company maintains an open market share repurchase program under our existing share repurchase authorization and may repurchase shares from operating activities,time to time based on management’s evaluation of market conditions, share price and other factors.
At the companyend of fiscal 2023, the Company has a well-positioned balance sheet and liquidity profile. The Company has access to liquidity through credit facilities, cash and cash equivalents and short-term investments. These sources have been summarized below. For additional information, seerefer to Note 56 to the consolidated financial statements.Consolidated Financial Statements.
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Cash and cash equivalents | $ | 223.5 | $ | 230.3 | |||||||
Availability under revolving lines of credit(1) | 284.2 | 296.6 | |||||||||
| Total liquidity | $ | 507.7 | $ | 526.9 | |||||||
| (In millions, ) | June 3, 2017 | May 28, 2016 | |||||
| Cash and cash equivalents | $ | 96.2 | $ | 84.9 | |||
| Marketable securities | $ | 8.6 | $ | 7.5 | |||
| Availability under revolving lines of credit | $ | 391.7 | $ | 232.1 | |||
The Company’s revolving line of $96.2credit, which matures in July, 2026, provides the Company with up to $725 million includingin revolving variable interest borrowing capacity and allows the Company to borrow incremental amounts, at its option, subject to negotiated terms as outlined in the agreement. Outstanding borrowings bear interest at rates based on the prime rate, federal funds rate, SOFR or negotiated terms as outlined in the agreement.
As of June 3, 2023, the total debt outstanding related to borrowings under the syndicated revolving line of credit was $426.7 million with available borrowings against this facility of $284.2 million.
The Company intends to repatriate $169.4 million of undistributed foreign earnings, all of which is held in cash in certain foreign jurisdictions. The Company has recorded a $5.8 million deferred tax liability related to foreign withholding taxes on these future dividends received in the U.S. from foreign subsidiaries. A significant portion of the $169.4 million of undistributed foreign earnings was previously taxed under the U.S. Tax Cut and cash equivalents of $78.5 million. In addition,Jobs Act (TCJA). The Company intends to remain indefinitely reinvested in the company had foreign marketable securities of $8.6 million. The foreign subsidiary holding the company's marketable securities is taxed as a U.S. taxpayer at the company's election. Consequently, for tax purposes, all U.S. tax impacts for this subsidiary have been recorded. The company's intent is to permanently reinvest the foreign cash amountsremaining undistributed earnings outside the U.S. which is estimated to be approximately $282.2 million on June 3, 2023.
The company's plans do not demonstrate a need to repatriate these balances to fund U.S. operations. The company repatriated zero, $0.7 million and zero of foreign earnings during fiscal years 2017, 2016 and 2015, respectively.
Contingencies
The companyCompany is 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'sCompany's Consolidated Financial Statements. Refer to Note 13 of the Consolidated Financial Statements for more information relating to contingencies.
Basis of Presentation
The company'sCompany's fiscal year ends on the Saturday closest to May 31. The fiscal year ended June 3, 2017 had2023, contained 53 weeks of operations whileand the fiscal years ended May 28, 20162022 and May 30, 2015 each29, 2021 contained 52 weeks. The first quarter of fiscal 2023 contained 14 weeks while the first quarter of operations.fiscal year 2022 and 2021 contained 13 weeks.
Contractual Obligations
Contractual obligations associated with our ongoing business and financing activities will result in cash payments in future periods. The following table summarizes the amounts and estimated timing of these future cash payments. Further information regarding debt obligations can be found in Note 56 of the Consolidated Financial Statements. Additional information related to operating leases can be found in Note 67 of the Consolidated Financial Statements.
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| (In millions) | Payments due by fiscal year | ||||||||||||||||||
| Total | 2018 | 2019-2020 | 2021-2022 | Thereafter | |||||||||||||||
Long-term debt (1) | $ | 199.9 | $ | — | $ | — | $ | 50.0 | $ | 149.9 | |||||||||
Estimated interest on debt obligations (2) | 83.3 | 11.4 | 19.3 | 15.5 | 37.1 | ||||||||||||||
| Operating leases | 329.2 | 47.0 | 77.5 | 63.2 | 141.5 | ||||||||||||||
Purchase obligations (3) | 45.4 | 35.2 | 6.2 | 1.0 | 3.0 | ||||||||||||||
Pension plan funding (4) | 0.9 | 0.4 | 0.1 | 0.1 | 0.3 | ||||||||||||||
Stockholder dividends (5) | 10.2 | 10.2 | — | — | — | ||||||||||||||
Other (6) | 18.9 | 1.7 | 3.3 | 3.1 | 10.8 | ||||||||||||||
| Total | $ | 687.8 | $ | 105.9 | $ | 106.4 | $ | 132.9 | $ | 342.6 | |||||||||
| Payments due by fiscal year | |||||||||||||||||||||||||||||
| (In millions) | Total | 2024 | 2025-2026 | 2027-2028 | Thereafter | ||||||||||||||||||||||||
Short-term borrowings and long-term debt (1) | $ | 1,414.4 | $ | 33.4 | $ | 87.5 | $ | 709.2 | $ | 584.3 | |||||||||||||||||||
Estimated interest on debt obligations (1) | 163.9 | 38.1 | 76.2 | 44.6 | 5.0 | ||||||||||||||||||||||||
| Operating leases | 561.8 | 81.5 | 171.4 | 123.9 | 185.0 | ||||||||||||||||||||||||
| Purchase obligations | 91.4 | 74.7 | 16.7 | — | — | ||||||||||||||||||||||||
Pension and other post employment benefit plans funding (2) | 5.2 | 4.7 | 0.1 | 0.1 | 0.3 | ||||||||||||||||||||||||
Stockholder dividends (3) | 14.5 | 14.5 | — | — | — | ||||||||||||||||||||||||
Other (4) | 6.9 | 0.8 | 1.4 | 1.2 | 3.5 | ||||||||||||||||||||||||
| Total | $ | 2,258.1 | $ | 247.7 | $ | 353.3 | $ | 879.0 | $ | 778.1 | |||||||||||||||||||
(1) The notes maturing in fiscal 2018 have been included asIncludes the current portion of long-term debt. Contractual cash payments on long-term debt inobligations are disclosed herein based on the table aboveamounts borrowed as of June 3, 2023 and the company has bothmaturity date of the intent and ability to refinance this short-term obligation on a long-term basis, through the use of its syndicated revolving line of credit.
Critical Accounting Policies and Estimates
Our goal is to report financial results clearly and understandably. We follow accounting principles generally accepted in the United States in preparing our Consolidated Financial Statements, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. These policies and disclosures are reviewed at least annually with the Audit Committee of the Board of Directors. Following is a summary
We believe that of our more significant accounting policies, that require the use of estimates and judgments in preparing the financial statements.
Business Combinations
We allocate the fair value of purchase consideration to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill. The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates are reviewed with our advisors and can include, but are not limited to:
•future expected cash flows from acquired customer relationships and trade names,
•assumed royalty rates that could be payable if we did not own the trademarks, and
•discount rates
Our estimates of fair value are based upon reasonable assumptions but are inherently uncertain and unpredictable, and as a result, actual results couldmay differ from ourthese estimates.
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Goodwill and Indefinite-lived Intangibles
When the Company performs a quantitative assessment, the Company makes estimates about fair value by using a weighting of events suggest thatthe income and the market approach. The income approach is based on projected discounted cash flows using a market participant discount rate. The market approach is based on financial multiples of companies comparable to each reporting unit and applies a control premium. We corroborate the fair value through a market capitalization reconciliation to determine if the implied control premium is reasonable based on the qualitative considerations, such as recent market transactions.
The Company believes its assumptions for assessing the impairment exists. The company performs the annualof its long-lived assets, goodwill and indefinite-lived intangibletrade names are reasonable, but future changes in the underlying assumptions could occur due to the inherent uncertainty in making such estimates.
Further declines in the Company’s operating results due to challenging economic conditions, an unfavorable industry or macroeconomic development or other adverse changes in market conditions could change one of the key assumptions the Company uses to calculate the fair value of its long-lived assets, goodwill and indefinite-lived trade names, which could result in a further decline in fair value and require the Company to record an impairment testingcharge in future periods.
Goodwill
Certain business acquisitions have resulted in the recording of goodwill. At June 3, 2023 and May 28, 2022, we had goodwill recorded within the Consolidated Balance Sheets of $1,221.7 million and $1,226.2 million, respectively.
During the third quarter of fiscal year 2023, the Company assessed changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units were below their carrying amounts. Although our annual impairment test is performed during the fourth quarter, we perform this qualitative assessment each interim reporting period.
While there was no single determinate event, the consideration in totality of several factors that developed during the fiscal year.
Accordingly, the Company performed an interim quantitative impairment test was unnecessary. Foranalysis as of March 4, 2023 to determine the fair value of the Global Retail reporting units that were tested underunit as compared to the carrying value. In performing the quantitative impairment test, the companyCompany determined that the fair value of the Global Retail reporting unitsunit exceeded the carrying amount and, as such, the reporting units were not impaired and the second step of the impairment testunit was not necessary.
impaired. The test for impairment requiresCompany determined that the company to make severalGlobal Retail reporting unit exceeded its carrying value by 1% and therefore has a heightened risk of future impairments if any assumptions, estimates aboutor market factors change in the future. In completing the quantitative analysis the fair value mostwas estimated using a discount rate of which are based on projected11.0% and long-term growth rate of 2.5%.
Generally, changes in estimates of expected future cash flows and market valuation multiples. Wewould have a similar effect on the estimated the fair value of the reporting unit. For example, a 1.0% decrease in estimated annual future cash flows would decrease the estimated fair value of the reporting unit by approximately 1.0%. The estimated long-term growth rate can have a significant impact on the estimated future cash flows, and therefore, the fair value of each reporting unit. Of the other key assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to changes in the estimated discount rate.
The Company evaluated the sensitivity of changes in forecasted sales, operating margin and the discount rate for the Global Retail reporting unit. Reducing the Global Retail reporting unit's forecasted sales by 5% in all years, and leaving all other assumptions static, would result in an impairment of $26.0 million. A decrease in the operating margin of 100 basis points would result in an impairment of $60.0 million. An increase in the discount rate of 100 basis points would result in an impairment of $46.0 million.
Each of the reporting units was reviewed for impairment using a qualitative assessment as of March 31, 2023. The Company elected to test each reporting unit qualitatively, as is permitted under ASU 2011-08, Intangibles-Goodwill and Other (Topic
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350): Testing Goodwill for Impairment, as the Company concluded it to be more likely than not that their estimated fair values are greater than their respective carrying values. No goodwill impairment charges were recorded in fiscal 2023, 2022, or 2021.
In instances in which a quantitative assessment is performed, the Company utilizes a weighting of the income approach and the market method to estimate the fair value of each reporting unit. These approaches are based on a discounted cash flow analysis and reconciled the sum of the fair values ofobservable comparable company information that use several inputs, including:
•forecasted sales growth rates and operating margins,
•discount rates based on the reporting units to total market capitalization of the company, plus a control premium. The control premium represents an estimate associated with obtaining control of the company in an acquisition. The discounted cash flow analysis used the present value of projected cash flows and a residual value.
•revenue and EBITDA of comparable companies
Indefinite-lived Intangible Assets
Certain business as a whole. The results of the impairment test are sensitive to changesacquisitions have resulted in the discount ratesrecording of trade names as indefinite-lived intangible assets, which are not amortized. At June 3, 2023 and changes inMay 28, 2022, the discount rate may result in future impairment.
Company held trade name assets with a carrying value of $480.7 million and $501.0 million, respectively.
The company performs both qualitative and quantitative assessments to determine whether anCompany evaluates indefinite-lived trade name intangible asset is impaired. Aassets for impairment using a qualitative assessment is performed first to determine whetherannually. The Company also tests for impairment using a quantitative assessment if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is impaired. If, after consideringbelow its carrying amount. An impairment charge is recorded if the totalitycarrying amount of events and circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is not impaired, then calculatingexceeds the estimated fair value of such asset is unnecessary. The quantitative impairment test, when necessary, is based on the relief from royalty methodmeasurement date.
During fiscal 2023, the Company determined through a qualitative assessment that the Knoll trade name carrying value was more then likely above its fair value. As a result, the Company performed a quantitative assessment to determine the fair value ofand as a result recognized a $19.7 million non-cash impairment charge to the indefinite-lived intangible assets,trade name.
In performing this quantitative assessment, we estimated the fair value using the relief-from-royalty method which is both requires assumptions related to:
•forecasted sales growth rates,
•assumed royalty rates that could be payable if we did not own the trademark, and
•a market-based approach and an income-based approach. The relief from royalty method focuses on the level of royalty payments that the user of an intangible asset would have to pay a third party for the use of the asset if it were not owned by the user. This method involves estimating theoretical future after tax royalty paymentsmarket participant discount rate based on the company's forecasted revenues attributable to the trade names. These payments are then discounted to present value utilizing a discount rate that considers the after-corporate tax required rateweighted-average cost of return applicable to the asset. capital.
The projected revenuesassumptions used reflect themanagement’s best estimate of management for the trade names;estimate; however, actual revenuesresults could differ from our estimates.
In completing our annual indefinite-lived trade name impairment test, fair value of the Knoll trade name was estimated using a discount rate of 12.0%, royalty rate of 2.00% and long-term growth rate of 2.5%. The discount rates selected represent market ratesCompany’s estimates of return equal to what the company believes a reasonable investor would expect to achieve on investmentsfair value of similar size and type to theits Knoll indefinite-lived intangible asset being tested. The company believes the discount rates selected are appropriate in that, in all cases, they exceed the estimated weighted average cost of capital for our business as a whole. The results of the impairment test areis sensitive to changes in the discount rates and changeskey assumptions above as well as projected financial performance. Therefore, a sensitivity analysis was performed on certain key assumptions.
Keeping all other assumptions constant, a 10% decrease in forecasted sales at June 3, 2023 would have resulted in $15.3 million of additional pre-tax impairment charges. Keeping all other assumptions constant, a 100 basis point increase in the discount rate maywould have resulted in an additional $15.0 million of impairment charges. A decrease in the royalty rate of 25 basis points would result in future impairment.an additional $20.0 million of impairment charges.
charge.
Long-lived Assets
The companyCompany evaluates other long-lived assets and acquired business units for indicators of impairment when events or changes in circumstances indicate that an impairment riskthe carrying amount of assets may not be present.recoverable. If such indicators are present, the future undiscounted cash flows attributable to the asset group are compared to the carrying value of the asset or asset group. The judgments regarding the existence of impairment are based on market conditions, operational performance, and estimated future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded to adjust the asset to its estimated fair value.
In the third quarter of fiscal 2023 the decision was made to cease operating Fully as a stand-alone brand and sales channel and instead sell certain Fully products through other channels already existing within the Global Retail business. Management identified this decision as a indicator of impairment, and accordingly recorded impairment of certain long-lived assets within the Fully asset group. Impairment charges of long-lived assets within the Fully business were $21.5 million in fiscal 2023 and
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are recorded within "Impairment charges" within the Consolidated Statements of Comprehensive Income. No other asset groups were identified as having indicators of impairment.
The table below provides information related to the impairment of long-lived assets within the Fully asset group during fiscal 2023.
| (In millions) | Fully Long-Lived Asset Impairment | ||||
| Property and equipment | $ | 3.8 | |||
| Right of use assets | 6.1 | ||||
| Definite lived trade name | 11.6 | ||||
| Total | $ | 21.5 | |||
In fiscal 2022 the Company recorded a non-cash impairment charge of $15.5 million related to the discontinued use of a long-lived asset that was a direct result of integration activities associated with the Knoll acquisition.
The Company believes its assumptions for assessing the impairment of its long-lived assets, goodwill and indefinite-lived trade names are reasonable, but if actual results are not consistent with management's estimates and assumptions, a material impairment charge could occur, which could have a material adverse effect on our consolidated financial statements.
New Accounting Standards
Refer to Note 1 of the Consolidated Financial Statements for information related to new accounting standards.
Forward Looking Statements
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to future events and anticipated results of operations, business strategies, the anticipated benefits of our acquisition of Knoll, the anticipated impact of the Knoll acquisition on the combined company’s business and future financial and operating results, the expected amount and timing of synergies from the Knoll acquisition, and other aspects of our operations or operating results. These forward-looking statements generally can be identified by phrases such as “will,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of similar import. It is uncertain whether any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what impact they will have on the results of operations and financial condition of MillerKnoll or the price of MillerKnoll’s stock. These forward-looking statements involve certain risks and uncertainties, many of which are beyond MillerKnoll’s control, that could cause actual results to differ materially from those indicated in such forward-looking statements, including but not limited to: general economic conditions; the impact of and any related company stands behind companyor government policies and actions to protect the health and safety of individuals or government policies or actions to maintain the functioning of national or global economies, and the impact of public health crises, such as pandemics and epidemics; risks related to the additional debt incurred in connection with the Knoll acquisition; MillerKnoll’s ability to comply with its debt covenants and obligations; the risk that the anticipated benefits of the Knoll acquisition will be more costly to realize than expected; the effect of the announcement of the Knoll acquisition on the ability of MillerKnoll to retain and hire key personnel and maintain relationships with customers, suppliers and others with whom MillerKnoll does business, or on MillerKnoll’s operating results and business generally; the ability to successfully integrate Knoll’s operations; the ability of MillerKnoll to implement its plans, forecasts and other expectations with respect to MillerKnoll’s business after the completion of the Knoll acquisition and realize expected synergies; business disruption following the Knoll acquisition; the availability and pricing of raw materials; the financial strength of our dealers and the financial strength of our customers; the success of newly-introduced products; the pace and level of government procurement; and the outcome of pending litigation or governmental audits or investigations. For additional information about other factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer to MillerKnoll’s periodic reports and other filings with the SEC, including the risk factors identified in this report. The forward-looking statements included in this report are made only as of the date hereof. MillerKnoll does not undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances, except as required by law.
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Item 7A Quantitative and Qualitative Disclosures About Market Risk
The Company manufactures, markets, and sells its products throughout the world and, as a result, is subject to changing economic conditions, which could reduce the demand for its products.
Direct Material Costs
The Company is exposed to risks arising from price changes for certain direct materials and assembly components used in its operations. The largest of such costs incurred by the Company are for steel, plastics, textiles, wood particleboard and aluminum components. The impact from changes in all commodity prices decreased the Company's costs by approximately $3.5 million during fiscal 2023 compared to the prior year primarily due to increased plastic costs offset by decreased steel costs. The impact from changes in commodity prices increased the Company's costs by approximately $55.3 million during fiscal 2022 as compared to fiscal 2021. Note that these changes include the impact of Chinese tariffs on the Company's direct material costs.
The market prices for commodities will fluctuate over time and the Company acknowledges that such changes are likely to impact its costs for key direct materials and assembly components. Consequently, it views the prospect of such changes as an outlook risk to the business.
Significant increases in raw materials can be difficult to offset with price increases due to existing contractual agreements with customers as well as difficulty finding effective financial instruments to hedge these changes. In the short term, our gross margin has been and is expected to be negatively impacted by significant increases in these costs. Our profitability could be negatively impacted in the long term if we are not able to pass along these higher raw material costs to our customers.
Foreign Exchange Risk
The Company primarily manufactures its products in the United States, United Kingdom, Canada, China, Italy, India, Mexico and Brazil. It also sources completed products and product components from outside the promises it makesUnited States. The Company's completed products are sold in numerous countries around the world. Sales in foreign countries as well as certain expenses related to customers. Fromthose sales are transacted in currencies other than the Company's reporting currency, the U.S. dollar. Accordingly, production costs and profit margins related to these sales are affected by the currency exchange relationship between the countries where the sales take place and the countries where the products are sourced or manufactured. These currency exchange relationships can also impact the Company's competitive positions within these markets.
In the normal course of business, the Company enters into contracts denominated in foreign currencies. The principal foreign currencies in which the Company conducts its business are the British pound sterling, euro, Canadian dollar, Japanese yen, Mexican peso, Hong Kong dollar, Chinese renminbi, and the Danish krone. As of June 3, 2023, the Company had outstanding 35 forward currency instruments designed to offset either net asset or net liability exposure that is denominated in non-functional currencies.
44
| (In millions, except number of forward contracts) | ||||||||||||||
| Net Asset Exposure | ||||||||||||||
| Currency | Number of Forward Contracts | Net Exposure | ||||||||||||
| USD | 6 | 74.2 | ||||||||||||
| DKK | 3 | 11.1 | ||||||||||||
| EUR | 3 | 59.3 | ||||||||||||
| GBP | 3 | 6.5 | ||||||||||||
| KWN | 1 | 2,599.6 | ||||||||||||
| SEK | 2 | 21.8 | ||||||||||||
| NOK | 1 | 11.9 | ||||||||||||
| CNY | 1 | 19.5 | ||||||||||||
| JPY | 1 | 403.5 | ||||||||||||
| ZAR | 1 | 20.4 | ||||||||||||
| Net Liability Exposure | ||||||||||||||
| Currency | Number of Forward Contracts | Net Exposure | ||||||||||||
| USD | 6 | 25.4 | ||||||||||||
| GBP | 2 | 1.0 | ||||||||||||
| AUD | 1 | 5.5 | ||||||||||||
| CAD | 1 | 12.9 | ||||||||||||
| HKD | 1 | 222.6 | ||||||||||||
| CNH | 2 | 194.3 | ||||||||||||
As of May 28, 2022, the Company had outstanding, 22 forward currency instruments designed to offset either net asset or net liability exposure that is denominated in non-functional currencies.
| (In millions, except number of forward contracts) | ||||||||||||||
| Net Asset Exposure | ||||||||||||||
| Currency | Number of Forward Contracts | Net Exposure | ||||||||||||
| USD | 6 | 39.2 | ||||||||||||
| EUR | 3 | 66.6 | ||||||||||||
| NOK | 1 | 14.0 | ||||||||||||
| SEK | 1 | 23.4 | ||||||||||||
| GBP | 1 | 1.7 | ||||||||||||
| ZAR | 1 | 19.4 | ||||||||||||
| Net Liability Exposure | ||||||||||||||
| Currency | Number of Forward Contracts | Net Exposure | ||||||||||||
| USD | 6 | 14.9 | ||||||||||||
| CAD | 2 | 15.9 | ||||||||||||
| GBP | 1 | 41.5 | ||||||||||||
The cost of the foreign currency hedges and remeasuring all foreign currency transactions into the appropriate functional currency resulted in a net gain of $4.8 million in fiscal 2023 compared to net gain of $3.3 million in fiscal 2022 included in net earnings. These amounts are included in Other (income) expense, net in the Consolidated Statements of Comprehensive Income. Additionally, the cumulative effect of translating the balance sheet and income statement accounts from the functional currency into the United States dollar decreased the accumulated comprehensive loss component of total stockholders' equity by $20.1 million compared to an decrease of $90.0 million as of the end of fiscal 2023 and 2022, respectively.
45
Interest Rate Risk
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.
These interest rate swap derivative instruments are held and used by the Company as a tool for managing interest rate risk. They are not used for trading or speculative purposes. The counterparties to the swap instruments are large financial institutions that the Company believes are of high-quality creditworthiness. While the Company may be exposed to potential losses due to the credit risk of non-performance by these counterparties, such losses are not anticipated.
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 the interest rate on indebtedness anticipated to be borrowed on its revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 1.949% fixed interest rate plus applicable margin as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on February 3, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 1.910% modified fixed interest rate.
In June 2017, the Company entered into a second 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 the interest rate on indebtedness anticipated to be borrowed on its revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 2.387% fixed interest rate plus applicable margin under the agreement as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on February 3, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 2.348% modified fixed interest rate.
In January 2022, the Company entered into a third interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $575.0 million with a forward start date of January 31, 2022 and a maturity date of January 29, 2027. The interest rate swap locked in the Company’s interest rate on forecasted outstanding borrowings of $575 million at 1.689% exclusive of the credit spread on the variable rate debt. The Company effectively will convert LIBOR-based floating interest rate plus applicable margin indebtedness to a 1.689% fixed interest rate plus applicable margin under the agreement as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on January 31, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 1.650% modified fixed interest rate.
In February 2023, the Company entered into a fourth interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $150.0 million with a forward start date of March 3, 2023 and a termination date of January 3, 2029. As a result of the transaction, under the terms of the agreement the Company effectively will convert one month Spread Adjusted Term SOFR floating interest rate plus applicable margin to 3.950% fixed interest rate and adjustment % plus applicable margin as of the forward start date. "Spread Adjusted Term SOFR" means Term SOFR plus an adjustment % that varies with tenor. The Company typically selects a one month tenor and that is calculated as the one month Term SOFR rate plus 0.11448%.
The fair market value of the effective interest rate swap instruments was a net asset of $56.9 million at June 3, 2023 compared to a net asset of $31.9 million at May 28, 2022. All cash flows related to the Company's interest rate swap instruments are denominated in U.S. Dollars. For further information, refer to Note 6 and Note 12 of the Consolidated Financial Statements.
Expected cash outflows (notional amounts) over the next five years and thereafter related to debt instruments are as follows.
46
| (In millions) | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total(1) | ||||||||||||||||||||||||||||||||||
| Long-Term Debt Instruments: | |||||||||||||||||||||||||||||||||||||||||
Interest rate 1.650%(2) | $ | — | $ | — | $ | — | $ | 575.0 | $ | — | $ | — | $ | 575.0 | |||||||||||||||||||||||||||
Interest rate 1.910%(2) | $ | — | $ | — | $ | — | $ | — | $ | 150.0 | $ | — | $ | 150.0 | |||||||||||||||||||||||||||
Interest rate 2.348%(2) | $ | — | $ | — | $ | — | $ | — | $ | 75.0 | $ | — | $ | 75.0 | |||||||||||||||||||||||||||
Interest rate 3.950%(2) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 150.0 | $ | 150.0 | |||||||||||||||||||||||||||
(1) Amount does not include the recorded fair value of the swap instruments.
(2) The Company's revolving credit facility and Term Loans have a variable interest rate, but due to the interest rate swaps, the rate on $150.0 million, $75.0 million, $575.0 million and $150.0 million will be fixed at 1.65%, 1.91%, 2.348% and 3.95%, respectively.
47
Item 8 Financial Statements and Supplementary Data
MillerKnoll, Inc.
Consolidated Statements of Comprehensive Income
| Year Ended | |||||||||||||||||
| (In millions, except per share data) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Net sales | $ | 4,087.1 | $ | 3,946.0 | $ | 2,465.1 | |||||||||||
| Cost of sales | 2,657.1 | 2,593.3 | 1,514.0 | ||||||||||||||
| Gross margin | 1,430.0 | 1,352.7 | 951.1 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Selling, general and administrative | 1,126.4 | 1,204.2 | 643.8 | ||||||||||||||
| Impairment charges | 41.2 | — | — | ||||||||||||||
| Restructuring expenses | 34.4 | — | 2.7 | ||||||||||||||
| Design and research | 105.7 | 108.7 | 72.1 | ||||||||||||||
| Total operating expenses | 1,307.7 | 1,312.9 | 718.6 | ||||||||||||||
| Operating earnings | 122.3 | 39.8 | 232.5 | ||||||||||||||
| Interest expense | 74.0 | 37.8 | 13.9 | ||||||||||||||
| Interest and other investment income | 2.8 | 1.6 | 2.1 | ||||||||||||||
| Other (income) expense, net | (0.3) | 12.2 | (7.6) | ||||||||||||||
| Earnings (loss) before income taxes and equity income | 51.4 | (8.6) | 228.3 | ||||||||||||||
| Income tax expense | 4.5 | 11.1 | 48.3 | ||||||||||||||
| Equity (loss) earnings from nonconsolidated affiliates, net of tax | (0.8) | — | 0.3 | ||||||||||||||
| Net earnings (loss) | 46.1 | (19.7) | 180.3 | ||||||||||||||
| Net earnings attributable to redeemable noncontrolling interests | 4.0 | 7.4 | 5.7 | ||||||||||||||
| Net earnings (loss) attributable to MillerKnoll, Inc. | $ | 42.1 | $ | (27.1) | $ | 174.6 | |||||||||||
| Earnings (loss) per share - basic | $ | 0.56 | $ | (0.37) | $ | 2.96 | |||||||||||
| Earnings (loss) per share - diluted | 0.55 | (0.37) | 2.94 | ||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||
| Foreign currency translation adjustments | (20.1) | (90.0) | 52.1 | ||||||||||||||
| Pension and post-retirement liability adjustments | 13.1 | 13.5 | 8.8 | ||||||||||||||
| Unrealized gains on interest rate swap agreement | 19.0 | 34.5 | 8.1 | ||||||||||||||
| Unrealized holding (losses) gains on securities | — | — | (0.1) | ||||||||||||||
| Other comprehensive income (loss), net of tax | 12.0 | (42.0) | 68.9 | ||||||||||||||
| Comprehensive income (loss) | 58.1 | (61.7) | 249.2 | ||||||||||||||
| Comprehensive income attributable to redeemable noncontrolling interests | 4.0 | 4.4 | 5.7 | ||||||||||||||
| Comprehensive income (loss) attributable to MillerKnoll, Inc. | $ | 54.1 | $ | (66.1) | $ | 243.5 | |||||||||||
48
MillerKnoll, Inc.
Consolidated Balance Sheets
| (In millions, except share and per share data) | June 3, 2023 | May 28, 2022 | |||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 223.5 | $ | 230.3 | |||||||
| Accounts receivable, net of allowances of $6.4 and $9.7 | 334.1 | 348.9 | |||||||||
| Unbilled accounts receivable | 29.4 | 32.0 | |||||||||
| Inventories, net | 487.4 | 587.3 | |||||||||
| Prepaid expenses | 92.7 | 112.1 | |||||||||
| Other current assets | 9.1 | 7.3 | |||||||||
| Total current assets | 1,176.2 | 1,317.9 | |||||||||
| Property and equipment, net of accumulated depreciation of $1,034.4 and $928.2 | 536.3 | 581.5 | |||||||||
| Right of use assets | 415.9 | 425.8 | |||||||||
| Goodwill | 1,221.7 | 1,226.2 | |||||||||
| Indefinite-lived intangibles | 480.7 | 501.0 | |||||||||
| Other amortizable intangibles, net of accumulated amortization of $185.2 and $134.7 | 313.1 | 362.4 | |||||||||
| Other noncurrent assets | 130.9 | 99.2 | |||||||||
| Total Assets | $ | 4,274.8 | $ | 4,514.0 | |||||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS & STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 269.5 | $ | 355.1 | |||||||
| Short-term borrowings and current portion of long-term debt | 33.4 | 29.3 | |||||||||
| Accrued compensation and benefits | 61.7 | 128.6 | |||||||||
| Short-term lease liability | 77.1 | 79.9 | |||||||||
| Accrued warranty | 20.8 | 18.8 | |||||||||
| Customer deposits | 93.8 | 125.3 | |||||||||
| Other accrued liabilities | 146.5 | 140.4 | |||||||||
| Total current liabilities | 702.8 | 877.4 | |||||||||
| Long-term debt | 1,365.1 | 1,379.2 | |||||||||
| Pension and post-retirement benefits | 7.5 | 25.0 | |||||||||
| Lease liabilities | 393.7 | 398.2 | |||||||||
| Other liabilities | 265.5 | 300.2 | |||||||||
| Total Liabilities | 2,734.6 | 2,980.0 | |||||||||
| Redeemable noncontrolling interests | 107.6 | 106.9 | |||||||||
| 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, 75,698,670 and 75,824,241 shares issued and outstanding in 2023 and 2022, respectively) | 15.1 | 15.2 | |||||||||
| Additional paid-in capital | 836.5 | 825.7 | |||||||||
| Retained earnings | 676.1 | 693.3 | |||||||||
| Accumulated other comprehensive loss | (95.1) | (107.1) | |||||||||
| Total Stockholders' Equity | 1,432.6 | 1,427.1 | |||||||||
| Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity | $ | 4,274.8 | $ | 4,514.0 | |||||||
49
MillerKnoll, Inc.
Consolidated Statements of Stockholders' Equity
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Deferred Compensation Plan | MillerKnoll, Inc. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||
| (In millions, except share and per share data) | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| May 30, 2020 | 58,793,275 | $ | 11.8 | $ | 81.6 | $ | 693.3 | $ | (134.0) | $ | (0.3) | $ | 652.4 | ||||||||||||||||||||||||||||
| Net earnings | — | — | — | 174.6 | — | — | 174.6 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 68.9 | — | 68.9 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 9.0 | — | — | — | 9.0 | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 86,238 | — | 2.6 | — | — | — | 2.6 | ||||||||||||||||||||||||||||||||||
| Restricted and performance stock units released | 114,103 | — | 0.2 | — | — | — | 0.2 | ||||||||||||||||||||||||||||||||||
| Employee stock purchase plan issuances | 71,468 | — | 2.1 | — | — | — | 2.1 | ||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (38,932) | — | (0.9) | — | — | — | (0.9) | ||||||||||||||||||||||||||||||||||
| Directors' fees | 3,013 | — | 0.1 | — | — | — | 0.1 | ||||||||||||||||||||||||||||||||||
| Deferred compensation plan | — | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||
| Dividends declared ($0.56 per share) | — | — | — | (33.4) | — | — | (33.4) | ||||||||||||||||||||||||||||||||||
| Redemption value adjustment | — | — | — | (15.0) | — | — | (15.0) | ||||||||||||||||||||||||||||||||||
| Other | — | — | — | (0.2) | — | — | (0.2) | ||||||||||||||||||||||||||||||||||
| May 29, 2021 | 59,029,165 | $ | 11.8 | $ | 94.7 | $ | 819.3 | $ | (65.1) | $ | (0.2) | $ | 860.5 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | (27.1) | — | — | (27.1) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (42.0) | — | (42.0) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 31.4 | — | — | — | 31.4 | ||||||||||||||||||||||||||||||||||
| Restricted stock issuance | 611,452 | 0.1 | (0.1) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 116,178 | 0.1 | 3.3 | — | — | — | 3.4 | ||||||||||||||||||||||||||||||||||
| Restricted and performance stock units released | 503,687 | 0.1 | (0.1) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Employee stock purchase plan issuances | 87,562 | — | 2.8 | — | — | — | 2.8 | ||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (390,979) | (0.1) | (16.1) | — | — | — | (16.2) | ||||||||||||||||||||||||||||||||||
| Directors' fees direct issuance | 23,255 | — | 0.9 | — | — | — | 0.9 | ||||||||||||||||||||||||||||||||||
| Director's fees deferred restricted stock units | — | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| Deferred compensation plan | — | — | — | — | — | 0.2 | 0.2 | ||||||||||||||||||||||||||||||||||
| Shares issued for the Acquisition of Knoll | 15,843,921 | 3.2 | 685.1 | — | — | — | 688.3 | ||||||||||||||||||||||||||||||||||
| Pre-combination expense from Knoll rollover | — | — | 22.4 | — | — | — | 22.4 | ||||||||||||||||||||||||||||||||||
| NCI Adjustment | — | — | 0.5 | — | — | — | 0.5 | ||||||||||||||||||||||||||||||||||
| NCI Valuation | — | — | — | (41.6) | — | — | (41.6) | ||||||||||||||||||||||||||||||||||
| Restricted stock units dividend reinvestment | — | — | 0.3 | (0.3) | — | — | — | ||||||||||||||||||||||||||||||||||
| Dividends declared ($0.75 per share) | — | — | — | (57.0) | — | — | (57.0) | ||||||||||||||||||||||||||||||||||
| May 28, 2022 | 75,824,241 | $ | 15.2 | $ | 825.7 | $ | 693.3 | $ | (107.1) | $ | — | $ | 1,427.1 | ||||||||||||||||||||||||||||
| Net earnings | — | — | — | 42.1 | — | — | 42.1 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 12.0 | — | 12.0 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | (39,839) | — | 20.2 | — | — | — | 20.2 | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 49,482 | — | 1.0 | — | — | — | 1.0 | ||||||||||||||||||||||||||||||||||
| Restricted and performance stock units released | 226,657 | — | 0.4 | — | — | — | 0.4 | ||||||||||||||||||||||||||||||||||
| Employee stock purchase plan issuances | 185,551 | — | 3.1 | — | — | — | 3.1 | ||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (575,207) | (0.1) | (15.9) | — | — | — | (16.0) | ||||||||||||||||||||||||||||||||||
| Deferred stock unit | — | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| Director's fees | 27,785 | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| NCI Valuation | — | — | — | (1.9) | — | — | (1.9) | ||||||||||||||||||||||||||||||||||
| Dividends declared ($0.75 per share) | — | — | — | (57.2) | — | — | (57.2) | ||||||||||||||||||||||||||||||||||
| Other | — | — | 0.8 | (0.2) | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| June 3, 2023 | 75,698,670 | $ | 15.1 | $ | 836.5 | $ | 676.1 | $ | (95.1) | $ | — | $ | 1,432.6 | ||||||||||||||||||||||||||||
50
MillerKnoll, Inc.
Consolidated Statements of Cash Flows
| Year Ended | |||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Cash Flows from Operating Activities: | |||||||||||||||||
| Net earnings (loss) | $ | 46.1 | $ | (19.7) | $ | 180.3 | |||||||||||
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | |||||||||||||||||
| Depreciation expense | 115.3 | 112.0 | 72.0 | ||||||||||||||
| Amortization expense | 39.8 | 78.6 | 15.2 | ||||||||||||||
| Loss (gain) on sales of property and dealers | — | (1.0) | — | ||||||||||||||
| Deferred taxes | (45.3) | (21.7) | 7.1 | ||||||||||||||
| Pension contributions | (11.7) | (5.0) | (5.4) | ||||||||||||||
| Impairment charges | 57.9 | 15.5 | — | ||||||||||||||
| Loss on extinguishment of debt | — | 13.4 | — | ||||||||||||||
| Restructuring expenses | 34.0 | — | 2.7 | ||||||||||||||
| Stock-based compensation | 20.2 | 31.4 | 9.0 | ||||||||||||||
| Amortization of deferred financing costs | 4.6 | 4.2 | 0.4 | ||||||||||||||
| (Increase) decrease in long-term assets | (4.7) | (1.6) | 1.2 | ||||||||||||||
| (Decrease) increase in long-term liabilities | (1.8) | (2.1) | 16.0 | ||||||||||||||
| Changes in current assets and liabilities: | |||||||||||||||||
| Decrease (increase) in accounts receivable & unbilled accounts receivable | 15.6 | (92.4) | (14.8) | ||||||||||||||
| Decrease (increase) in inventories | 81.5 | (166.4) | (10.4) | ||||||||||||||
| Decrease (increase) in prepaid expenses and other | 19.6 | (39.6) | (3.9) | ||||||||||||||
| (Decrease) increase in accounts payable | (82.5) | 51.5 | 43.2 | ||||||||||||||
| (Decrease) increase in accrued liabilities | (124.8) | 47.2 | 15.1 | ||||||||||||||
| Other, net | (0.9) | (16.2) | 4.6 | ||||||||||||||
| Net Cash Provided by (Used in) Operating Activities | 162.9 | (11.9) | 332.3 | ||||||||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||
| Notes receivable issued | (5.1) | (1.2) | (2.0) | ||||||||||||||
| Marketable securities purchases | — | — | (5.9) | ||||||||||||||
| Marketable securities sales | — | 7.7 | 5.3 | ||||||||||||||
| Capital expenditures | (83.3) | (94.7) | (59.8) | ||||||||||||||
| Proceeds from sales of property and dealers | 0.3 | 2.8 | 14.0 | ||||||||||||||
| Proceeds from life insurance policy | 13.5 | — | — | ||||||||||||||
| Acquisitions, net of cash received | — | (1,088.5) | — | ||||||||||||||
| Other, net | (1.9) | 1.5 | (11.5) | ||||||||||||||
| Net Cash (Used in) Investing Activities | (76.5) | (1,172.4) | (59.9) | ||||||||||||||
| Cash Flows from Financing Activities: | |||||||||||||||||
| Proceeds from issuance of debt, net of discounts | — | 1,007.0 | — | ||||||||||||||
| Payments of deferred financing costs | — | (9.3) | — | ||||||||||||||
| Repayments of long-term debt | (26.3) | (63.1) | (50.0) | ||||||||||||||
| Proceeds from credit facility | 929.9 | 1,026.5 | — | ||||||||||||||
| Repayments of credit facility | (916.2) | (838.5) | (265.0) | ||||||||||||||
| Payment of make whole premium on debt | — | (13.4) | — | ||||||||||||||
| Dividends paid | (57.1) | (54.5) | (34.5) | ||||||||||||||
| Common stock issued | 5.5 | 7.5 | 5.0 | ||||||||||||||
| Common stock repurchased and retired | (16.0) | (16.2) | (0.9) | ||||||||||||||
| Distribution to noncontrolling interest | (4.9) | (6.8) | — | ||||||||||||||
| Other, net | (1.7) | 0.7 | (2.3) | ||||||||||||||
| Net Cash (Used in) Provided by Financing Activities | (86.8) | 1,039.9 | (347.7) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (6.4) | (21.7) | 17.7 | ||||||||||||||
| Net (Decrease) In Cash and Cash Equivalents | (6.8) | (166.1) | (57.6) | ||||||||||||||
| Cash and cash equivalents, Beginning of Year | 230.3 | 396.4 | 454.0 | ||||||||||||||
| Cash and Cash Equivalents, End of Year | $ | 223.5 | $ | 230.3 | $ | 396.4 | |||||||||||
| Other Cash Flow Information | |||||||||||||||||
| Interest paid | $ | 70.6 | $ | 28.8 | $ | 12.5 | |||||||||||
| Income taxes paid, net of cash received | $ | 34.8 | $ | 36.9 | $ | 15.8 | |||||||||||
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Notes to the Consolidated Financial Statements
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1. Significant Accounting and Reporting Policies
The following is a summary of significant accounting and reporting policies not reflected elsewhere in the accompanying financial statements.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of MillerKnoll, Inc. and its controlled domestic and foreign subsidiaries. The consolidated entities are collectively referred to as “the Company.” All intercompany accounts and transactions have been eliminated in the Consolidated Financial Statements.
Description of Business
The Company researches, designs, manufactures, sells and distributes interior furnishings for use in various environments including office, healthcare, educational and residential settings and provides related services that support companies all over the world. The Company's products are sold primarily through independent contract furniture dealers, retail studios, the Company's eCommerce platforms, direct-mail catalogs, as well as direct customer sales and independent retailers.
MillerKnoll is a collective of dynamic brands that comes together to design the world we live in. A global leader in design, MillerKnoll includes Herman Miller® and Knoll®, as well as Colebrook Bosson Saunders®, DatesWeiser®, Design Within Reach®, Edelman® Leather, Geiger®, HAY®, Holly Hunt®, KnollTextiles®, Maars® Living Walls, Maharam®, Muuto®, NaughtOne®, and Spinneybeck®|FilzFelt®. Combined, MillerKnoll represents over 100 years of design research and exploration in service of humanity. The Company is united by a belief in design as a tool to create positive impact and shape a more sustainable, caring, and beautiful future for all people and the planet.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to May 31. The fiscal year ended June 3, 2023, contained 53 weeks and the fiscal years ended May 28, 2022 and May 29, 2021 contained 52 weeks.
Foreign Currency Translation
The functional currency for most of the foreign subsidiaries is their local currency. The cumulative effects of translating the balance sheet accounts from the functional currency into the United States dollar using fiscal year-end exchange rates and translating revenue and expense accounts using average exchange rates for the period are reflected as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets.
The financial statement impact of gains and losses resulting from remeasuring foreign currency transactions into the appropriate functional currency resulted in a net loss of $4.8 million, $3.3 million, and $0.8 million for the fiscal years ended June 3, 2023, May 28, 2022, and May 29, 2021, respectively. These amounts are included in Other (income) expense, net in the Consolidated Statements of Comprehensive Income.
Cash Equivalents
The Company holds cash equivalents as part of its cash management function. Cash equivalents include money market funds and time deposit investments with original maturities of less than three months. The carrying value of cash equivalents, which approximates fair value, totaled $40.8 million and $43.1 million as of June 3, 2023 and May 28, 2022, respectively. All cash equivalents are high-credit quality financial instruments and the amount of credit exposure to time, quality issues ariseany one financial institution or instrument is limited.
Marketable Securities
The Company previously maintained a portfolio of marketable securities primarily comprised of mutual funds. These investments were liquidated during fiscal year 2022 resulting in a cash in-flow in that year of approximately $7.7 million.
Allowances for Credit Losses
Allowances for credit losses related to accounts are managed at a level considered by management to be adequate to absorb an estimate of probable future losses existing at the needbalance sheet date.
In estimating probable losses, we review accounts based on known customer exposures, historical credit experience, and specific identification of other potentially uncollectible accounts. An accounts receivable balance is considered past due when payment is not received within the stated terms. Accounts that are considered to incur costs to correct problems with products or services. The company has established warranty reserveshave higher credit risk are reviewed using
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information available about the debtor, such as financial statements, news reports and published credit ratings. General information regarding industry trends, the economic environment is also used.
We arrive at an estimated loss for specific concerns and estimate an additional amount for the various costs associated with these obligations. General warranty reserves areremainder of trade balances based on historical claims experiencetrends and periodically adjustedother factors previously referenced. Balances are written off against the reserve once the Company determines the probability of collection to be remote. The Company generally does not require collateral or other security on trade accounts receivable. Subsequent recoveries, if any, are credited to bad debt expense when received.
Concentrations of Credit Risk
The Company's trade receivables are primarily due from independent dealers who, in turn, carry receivables from their customers. The Company monitors and manages the credit risk associated with individual dealers and direct customers where applicable. Dealers are responsible for business levels. Specific reserves are established once an issue is identified. The valuationassessing and assuming credit risk of such reserves is based on the estimated costs to correct the problem. Actual costs may varytheir customers and may result in an adjustmentrequire their customers to these reserves.provide deposits, letters of credit or other credit enhancement measures. Some sales contracts are structured such that the customer payment or obligation is direct to the Company. In those cases, the Company may assume the credit risk. Whether from dealers or customers, the Company's trade credit exposures are not concentrated with any particular entity.
Inventories
Inventories are valued at the lower of cost or market. net realizable value 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 subsidiaries are valued using the first-in, first-out (FIFO) method. The companyCompany establishes reserves for excess and obsolete inventory based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or marketnet realizable value may be adjusted in response to changing conditions.conditions, however inventory cannot be subsequently written back up, since the reserve establishes a new (lower) cost basis. Inventory cost is determined using the first in, first out (FIFO) method. Further information on the Company's recorded inventory balances can be found in Note 4 of the Consolidated Financial Statements.
Goodwill and Indefinite-lived Intangible Assets
The changes in the carrying amount of goodwill, by reporting segment, are as follows:
| (In millions) | Americas Contract | International Contract & Specialty | Global Retail | Total | |||||||||||||||||||||||||
| Balance at May 29, 2021 | |||||||||||||||||||||||||||||
| Goodwill | $ | 194.1 | $ | 103.0 | $ | 174.3 | $ | 471.4 | |||||||||||||||||||||
| Foreign currency translation adjustments | 3.3 | 8.2 | 6.8 | 18.3 | |||||||||||||||||||||||||
| Accumulated impairment losses | (36.7) | — | (88.8) | (125.5) | |||||||||||||||||||||||||
| Net goodwill as of May 29, 2021 | $ | 160.7 | $ | 111.2 | $ | 92.3 | $ | 364.2 | |||||||||||||||||||||
| Balance at May 28, 2022 | |||||||||||||||||||||||||||||
| Goodwill | $ | 197.4 | $ | 111.2 | $ | 181.1 | $ | 489.7 | |||||||||||||||||||||
| Sale of owned dealer | (0.3) | — | — | (0.3) | |||||||||||||||||||||||||
| Acquisition of Knoll | 346.0 | 226.8 | 330.7 | 903.5 | |||||||||||||||||||||||||
| Foreign currency translation adjustments | 23.7 | (33.7) | (31.2) | (41.2) | |||||||||||||||||||||||||
| Accumulated impairment losses | (36.7) | — | (88.8) | (125.5) | |||||||||||||||||||||||||
| Net goodwill as of May 28, 2022 | $ | 530.1 | $ | 304.3 | $ | 391.8 | $ | 1,226.2 | |||||||||||||||||||||
| Balance at June 3, 2023 | |||||||||||||||||||||||||||||
| Goodwill | $ | 566.8 | $ | 304.3 | $ | 480.6 | $ | 1,351.7 | |||||||||||||||||||||
| Foreign currency translation adjustments | (1.7) | (1.3) | (1.5) | (4.5) | |||||||||||||||||||||||||
| Accumulated impairment losses | (36.7) | — | (88.8) | (125.5) | |||||||||||||||||||||||||
| Net goodwill balance as of June 3, 2023 | $ | 528.4 | $ | 303.0 | $ | 390.3 | $ | 1,221.7 | |||||||||||||||||||||
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Other indefinite-lived assets included in the Consolidated Balance Sheets consist of the following:
| (In millions) | Indefinite-lived Intangible Assets | ||||||||||||||||
| Balance at May 29, 2021 | $ | 97.6 | |||||||||||||||
| Foreign currency translation adjustments | (14.6) | ||||||||||||||||
| Acquisition of Knoll | $ | 418.0 | |||||||||||||||
| Balance at May 28, 2022 | $ | 501.0 | |||||||||||||||
| Foreign currency translation adjustments | (0.6) | ||||||||||||||||
| Impairment charges | (19.7) | ||||||||||||||||
| Balance at June 3, 2023 | $ | 480.7 | |||||||||||||||
Goodwill is tested for impairment at the reporting unit level annually, or more frequently, when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. The Company may also elect to bypass the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value.
Each of the reporting units was reviewed for impairment using a qualitative assessment as of March 31, 2023. The Company elected to test each reporting unit qualitatively, as is permitted under ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The Company concluded it to be more likely than not that their estimated fair values are greater than their respective carrying values.
In connection with the segment reorganization, the Company’s reporting units have changed in composition, and goodwill was reallocated between such reporting units using a relative fair value approach. Accordingly, the Company performed interim goodwill impairment tests in the first quarter of 2023 for each reporting unit. Based on the results of the tests performed, the Company determined that the fair value of each reporting unit, both before and after the reorganization, exceeded its respective carrying amount.
During the third quarter of fiscal year 2023, the Company assessed changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units were below their carrying amounts. Although our annual impairment test is performed during the fourth quarter, we perform this qualitative assessment each interim reporting period.
While there was no single determinate event, the consideration in totality of several factors that developed during the third quarter of fiscal year 2023 led us to conclude that it was more likely than not that the fair value of the Global Retail reporting unit was below its carrying amount. These factors included: (i) the decision to discontinue stand-alone operations of the Fully brand and (ii) the assessment of our third quarter results, for which the performance of the Global Retail reporting unit was below management's expectations.
Accordingly, the Company performed an interim quantitative impairment analysis as of March 4, 2023 to determine the fair value of the Global Retail reporting unit as compared to the carrying value. The Company utilized a weighting of the income approach and the market approach to estimate the fair value of the Global Retail reporting unit. In performing the quantitative impairment test, the Company determined that the fair value of the Global Retail reporting unit exceeded the carrying amount and, as such, the reporting unit was not impaired. The Company determined that the Global Retail reporting unit exceeded its carrying value by 1% and therefore has a heightened risk of future impairments if any assumptions, estimates or market factors change in the future.
The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. We estimated the fair value of the Global Retail reporting unit using a discounted cash flow analysis. The discounted cash flow analysis used the present value of projected cash flows and a residual value.
The Company employed a market-based approach in selecting the discount rate used in our analysis. The discount rate selected represents the market rates of return equal to what the Company believes a reasonable investor would expect to achieve on investments of similar size to the Company's reporting units. The Company believes the discount rate selected in the quantitative assessment is appropriate in that exceeds the estimated weighted average cost of capital for our business as a
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whole. The results of the impairment test are sensitive to changes in the discount rates and changes in the discount rate may result in future impairment.
The Company evaluated the sensitivity of changes in forecasted sales, operating margin and the discount rate for the Global Retail reporting unit. Reducing the Global Retail reporting unit's forecasted sales by 5% in all years, and leaving all other assumptions static, would result in an impairment of $26.0 million. A decrease in the operating margin of 100 basis points would result in an impairment of $60.0 million. An increase in the discount rate of 100 basis points would result in an impairment of $46.0 million.
The Company evaluates indefinite-lived trade name intangible assets for impairment using a qualitative assessment annually. The Company also tests for impairment using a quantitative assessment if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date.
During fiscal 2023, the Company determined through a qualitative assessment that the Knoll trade name carrying value was more then likely above its fair value. As a result, the Company performed a quantitative assessment to determine the fair value and as a result recognized a $19.7 million non-cash impairment charge to the indefinite-lived trade name. The carrying value of the Knoll trade name as of the measurement date was $173.0 million. The fair value of the Knoll trade name as of the measurement date is $153.3 million.
In performing this quantitative assessment, we estimated the fair value using the relief-from-royalty method which requires assumptions related to:
•forecasted revenue growth rate,
•assumed royalty rates that could be payable if we did not own the trademark, and
•a market participant discount rate based on a weighted-average cost of capital.
The assumptions used reflect management’s best estimate; however, actual results could differ from our estimates. In completing our annual indefinite-lived trade name impairment test, fair value of the Knoll trade name was estimated using a discount rate of 12.0%, royalty rate of 2.00% and long-term growth rate of 2.5%. The Company’s estimates of the fair value of its Knoll indefinite-lived intangible asset is sensitive to changes in the key assumptions above as well as projected financial performance. Therefore, a sensitivity analysis was performed on certain key assumptions.
Keeping all other assumptions constant, a 10% decrease in forecasted sales at June 3, 2023 would have resulted in $15.3 million of additional pre-tax impairment charges. A decrease in the royalty rate of 25 basis points would result in an additional $20.0 million of impairment charges. Keeping all other assumptions constant, a 100 basis point increase in the discount rate would have resulted in an additional $15.0 million of impairment charges.
If the estimated cash flows related to the Company's indefinite-lived intangibles were to decline in future periods, the Company may need to record an impairment charge.
Property, Equipment and Depreciation
Property and equipment are stated at cost. The cost is depreciated over the estimated useful lives of the assets using the straight-line method. Estimated useful lives range from 3 to 10 years for machinery and equipment and do not exceed 40 years for buildings. Leasehold improvements are depreciated over the lesser of the lease term or the useful life of the asset. The Company capitalizes certain costs incurred in connection with the development, testing and installation of software for internal use and cloud computing arrangements. Software for internal use is included in property and equipment and is depreciated over an estimated useful life not exceeding 10 years. Depreciation and amortization expense is included in the Consolidated Statements of Comprehensive Income in the Cost of sales, Selling, general and administrative and Design and research line items.
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The following table summarizes our property as of the dates indicated:
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Land and improvements | $ | 55.1 | $ | 54.4 | |||||||
| Buildings and improvements | 393.5 | 377.2 | |||||||||
| Machinery and equipment | 1,066.6 | 1,027.0 | |||||||||
| Construction in progress | 55.5 | 51.1 | |||||||||
| Accumulated depreciation | (1,034.4) | (928.2) | |||||||||
| Property and equipment, net | $ | 536.3 | $ | 581.5 | |||||||
As of the end of fiscal 2023, outstanding commitments for future capital purchases approximated $44.8 million.
Other Long-Lived Assets
The Company reviews the carrying value of long–lived assets for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. If such indicators are present, the future undiscounted cash flows attributable to the asset or asset group are compared to the carrying value of the asset or asset group. If such assets are considered to be impaired, the impairment amount to be recognized is the amount by which the carrying value of the assets exceeds their fair value.
Amortizable intangible assets within Other amortizable intangibles, net in the Consolidated Balance Sheets consist primarily of patents, trademarks and customer relationships. The customer relationships intangible asset is comprised of relationships with customers, specifiers, networks, dealers and distributors. Refer to the following table for the combined gross carrying value and accumulated amortization for these amortizable intangibles.
| June 3, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | Patent and Trademarks | Customer Relationships | Designs and Patterns | Backlog | Other | Total | |||||||||||||||||||||||||||||||||||
| Gross carrying value | $ | 60.1 | $ | 355.1 | $ | 42.0 | $ | 28.4 | $ | 12.7 | $ | 498.3 | |||||||||||||||||||||||||||||
| Accumulated amortization | 30.8 | 95.8 | 9.2 | 28.4 | 9.4 | 173.6 | |||||||||||||||||||||||||||||||||||
| Impairment | 11.6 | — | — | — | — | 11.6 | |||||||||||||||||||||||||||||||||||
| Net | $ | 17.7 | $ | 259.3 | $ | 32.8 | $ | — | $ | 3.3 | $ | 313.1 | |||||||||||||||||||||||||||||
| May 28, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Patent and Trademarks | Customer Relationships | Designs and Patterns | Backlog | Other | Total | ||||||||||||||||||||||||||||||||||||
| Gross carrying value | $ | 57.9 | $ | 355.8 | $ | 42.0 | $ | 29.8 | $ | 11.6 | $ | 497.1 | |||||||||||||||||||||||||||||
| Accumulated amortization | 24.7 | 66.0 | 5.9 | 29.8 | 8.3 | 134.7 | |||||||||||||||||||||||||||||||||||
| Net | $ | 33.2 | $ | 289.8 | $ | 36.1 | $ | — | $ | 3.3 | $ | 362.4 | |||||||||||||||||||||||||||||
The Company amortizes these assets over their remaining useful lives using the straight-line method over periods ranging from 1 year to 20 years, or on an accelerated basis, to reflect the expected realization of the economic benefits. It is estimated that the weighted-average remaining useful life of the patents and trademarks is approximately 3.6 and the weighted-average remaining useful life of the customer relationships is 9.6.
Estimated amortization expense on existing amortizable intangible assets as of June 3, 2023, for each of the succeeding five fiscal years, is as follows:
| (In millions) | |||||
| 2024 | $ | 36.6 | |||
| 2025 | 36.4 | ||||
| 2026 | 35.8 | ||||
| 2027 | 33.2 | ||||
| 2028 | 29.0 | ||||
In the third quarter of fiscal 2023 the decision was made to cease operating Fully as a stand-alone brand and sales channel and instead sell certain Fully products through other channels of the Global Retail business. As a result of this decision, the
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Company recorded asset Impairment charges related to Other Long-Lived Assets of $21.5 million in the third quarter of fiscal 2023. Of this amount, $11.6 million of the impairment related to the Fully trade name.
The table below provides information related to the impairments recognized during the third quarter of fiscal 2023. These charges are included in "Impairment charges" and "Cost of sales" within the Consolidated Statements of Comprehensive Income.
| (In millions) | Impairment Charge | ||||
| Property and equipment | 3.8 | ||||
| Right of use asset | 6.1 | ||||
| Trade name | 11.6 | ||||
| Total | $ | 21.5 | |||
Self-Insurance
The Company is partially self-insured for general liability, workers' compensation and certain employee health and dental benefits under insurance arrangements that provide for third-party coverage of claims exceeding the Company's loss retention levels. The Company's health benefit and auto liability retention levels do not include an aggregate stop loss policy. The Company's retention levels designated within significant insurance arrangements as ofJune 3, 2023, are as follows:
| (In millions) | Retention Level (per occurrence) | ||||
| General liability | $ | 1.00 | |||
| Auto liability | $ | 1.00 | |||
| Workers' compensation | $ | 0.75 | |||
| Health benefit | $ | 0.50 | |||
The Company accrues for its self-insurance arrangements, as well as reserves for health, prescription drugs, and dental benefit exposures based on actuarial estimates, which are recorded in Other liabilities in the Consolidated Balance Sheets. The value of the liability as of June 3, 2023 and May 28, 2022 was $13.2 million and $14.7 million, respectively. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, payment lag times and changes in actual experience could cause these estimates to change. The general, auto, and workers' compensation liabilities are managed through the Company's wholly-owned insurance captive.
Research, Development and Other Related Costs
Research, development, pre-production and start-up costs are expensed as incurred. Research and development ("R&D") costs consist of expenditures incurred during the course of planned research and investigation aimed at discovery of new knowledge useful in developing new products or processes. R&D costs also include the enhancement of existing products or production processes and the implementation of such through design, testing of product alternatives or construction of prototypes. R&D costs included in Design and research expense in the accompanying Consolidated Statements of Comprehensive Income are $67.6 million, $71.1 million and $50.8 million, in fiscal 2023, 2022, and 2021, respectively.
Royalty payments made to designers of the Company's products as the products are sold are variable costs based on product sales. These expenses totaled $38.1 million, $37.6 million and $21.3 million in fiscal years 2023, 2022 and 2021 respectively. They are included in Design and research expense in the accompanying Consolidated Statements of Comprehensive Income.
Customer Payments and Incentives
We offer various sales incentive programs to our customers, such as rebates and discounts. Programs such as rebates and discounts are adjustments to the selling price and are therefore characterized as a reduction to net sales.
Revenue Recognition
The Company recognizes revenue when performance obligations, based on the terms of customer contracts, are satisfied. This happens when control of goods and services based on the contract have been conveyed to the customer. Revenue for the sale of products is recognized at the point in time when control transfers, generally upon transfer of title and risk of loss to the customer. Revenue for services is recognized over time as the services are provided. The method of revenue recognition may vary, depending on the type of contract with the customer, as noted in the section "Disaggregated Revenue" in Note 2 of the Consolidated Financial Statements.
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The Company's contracts with customers include master agreements and certain other forms of contracts, which do not reach the level of a performance obligation until a purchase order is received from a customer. At the point in time that a purchase order under a contract is received by the Company, the collective group of documents represent an enforceable contract between the Company and the customer. While certain customer contracts may have a duration of greater than a year, all purchase orders are less than a year in duration. As of June 3, 2023, all unfulfilled performance obligations are expected to be fulfilled in the next twelve months.
Variable consideration exists within certain contracts that the Company has with customers. When variable consideration is present in a contract with a customer, the Company estimates the amount that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. These estimates are primarily related to rebate programs which involve estimating future sales amounts and rebate percentages to use in the determination of transaction price. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Adjustments to net sales from changes in variable consideration related to performance obligations completed in previous periods are not material to the Company's financial statements. Also, the Company has no contracts with significant financing components.
The Company accounts for shipping and handling activities as fulfillment activities and these costs are accrued within Cost of sales at the same time revenue is recognized. The Company does not record revenue for sales tax, value added tax or other taxes that are collected on behalf of government entities. The Company’s revenue is recorded net of these taxes as they are passed through to the relevant government entities. The Company has recognized incremental costs to obtain a contract as an expense when incurred as the amortization period is less than one year. The Company has not adjusted the amount of consideration to be received for any significant financing components as the Company’s contracts have a duration of one year or less.
Leases
The Company accounts for leases in accordance with ASC Topic 842, Leases, (“ASC 842”). For any new or modified lease, the Company, at the inception of the contract, determines whether a contract is or contains a lease. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company records right-of use ("ROU") assets and lease obligations for its finance and operating leases, which are initially recognized based on the discounted future lease payments over the term of the lease. As the rate implicit in the Company's leases is not easily determinable, the Company’s applicable incremental borrowing rate is used in calculating the present value of the sum of the lease payments.
As none of the Company’s leases provide an implicit discount rate, the Company uses an estimated incremental borrowing rate at the lease commencement date in determining the present value of the lease payments. Relevant information used in determining the Company’s incremental borrowing rate includes the duration of the lease, location of the lease, and the Company’s credit risk relative to risk-free market rates.
Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. Leases, and any leasehold improvements, are depreciated over the expected lease term. Additionally, certain leases include renewal or termination options, which can be exercised at the Company’s discretion. Lease terms include the non-cancelable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods. The Company’s leases do not contain any residual value guarantees or material restrictive covenants.
Variable lease costs associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease costs are presented as Operating expenses in the Company’s Consolidated Statements of Comprehensive Income in the same line item as the expense arising from fixed lease payments for operating leases.
The Company determines if an arrangement is a lease at contract inception. Arrangements that are leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. If leased assets have leasehold improvements, the depreciable life of those leasehold improvements are limited by the expected lease term.
ROU assets for operating leases are subject to the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment. The Company monitors for events or changes in circumstances that require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying
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amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.
Cost of Sales
The Company includes material, labor and overhead in cost of sales. Included within these categories are items such as freight charges, warehousing costs, internal transfer costs and other costs of its distribution network.
Selling, General and Administrative
The Company includes costs not directly related to the manufacturing of its products in the Selling, general and administrative line item within the Consolidated Statements of Comprehensive Income. Included in these expenses are items such as compensation expense, rental expense, warranty expense and travel and entertainment expense.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
The Company's annual effective tax rate is based on income, statutory tax rates and tax planning strategies available in the various jurisdictions the Company operates. Complex tax laws can be subject to different interpretations by the Company and the respective government authorities. Judgment is required in evaluating tax positions and determining our tax expense. Tax positions are reviewed quarterly and tax assets and liabilities are adjusted as new information becomes available.
In evaluating ourthe Company's ability to recover our deferred tax assets within the jurisdiction from which they arise, we considerthe Company considers all available positive and negative evidence. TheThese assumptions require judgment about forecasts of future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.income.
| (In millions) | Retention Level (per occurrence) | |||
| General liability and auto liability/physical damage | $ | 1.00 | ||
| Workers' compensation and property | $ | 0.75 | ||
The company views stock-based compensationCompany 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.
These interest rate swap derivative instruments are held and used by the Company as a key componenttool for managing interest rate risk. They are not used for trading or speculative purposes. The counterparties to the swap instruments are large financial institutions that the Company believes are of total compensationhigh-quality creditworthiness. While the Company may be exposed to potential losses due to the credit risk of non-performance by these counterparties, such losses are not anticipated.
In September 2016, the Company entered into an interest rate swap agreement. The interest rate swap is for certain employees, non-employee directorsan aggregate notional amount of $150.0 million with a forward start date of January 3, 2018 and officers. The stock-based compensation programs have included grantsa termination date of restricted stock, restricted stock units, performance share units, employee stock purchases and stock options. The company recognizes expense related to each of these share-based arrangements. The Black-Scholes option pricing model is used in estimating the fair value of stock options issued in connection with compensation programs. This pricing model requires the use of several input assumptions. Among the most significant of these assumptions are the expected volatilityJanuary 3, 2028. As a result of the common stock price andtransaction, the expected timingCompany effectively converted the interest rate on indebtedness anticipated to be borrowed on its revolving line of future stock option exercises.
In June 2017, the Company entered into a second 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 the interest rate on indebtedness anticipated to be borrowed on its revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 2.387% fixed interest rate plus applicable margin under the agreement as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on February 3, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 2.348% modified fixed interest rate.
In January 2022, the Company entered into a third interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $575.0 million with a forward start date of January 31, 2022 and a maturity date of January 29, 2027. The interest rate swap locked in the market priceCompany’s interest rate on forecasted outstanding borrowings of $575 million at 1.689% exclusive of the company's common stock.credit spread on the variable rate debt. The Company effectively will convert LIBOR-based floating interest rate plus applicable margin indebtedness to a 1.689% fixed interest rate plus applicable margin under the agreement as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on January 31, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 1.650% modified fixed interest rate.
In February 2023, the Company entered into a fourth interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $150.0 million with a forward start date of March 3, 2023 and a termination date of January 3, 2029. As a pointresult of reference,the transaction, under the terms of the agreement the Company effectively will convert one month Spread Adjusted Term SOFR floating interest rate plus applicable margin to 3.950% fixed interest rate and adjustment % plus applicable margin as of the forward start date. "Spread Adjusted Term SOFR" means Term SOFR plus an adjustment % that varies with tenor. The Company typically selects a high volatility percentage would assume a wider expected range ofone month tenor and that is calculated as the one month Term SOFR rate plus 0.11448%.
The fair market returns for a particular security. All other assumptions held constant, this would yield a higher stock option valuation than a calculation using a lower measure of volatility. In measuring the fair value of the majorityeffective interest rate swap instruments was a net asset of stock options issued during fiscal 2017, we utilized an expected volatility$56.9 million at June 3, 2023 compared to a net asset of 26 percent. Certain options$31.9 million at May 28, 2022. All cash flows related to the Herman Miller Consumer Holdings (HMCH) Stock Option PlanCompany's interest rate swap instruments are classified as a liability within the Consolidated Balance Sheets. As of June 3, 2017, an expected volatility of 35 percent was useddenominated in the year end liability valuation.
Expected cash outflows (notional amounts) over the next five years and thereafter related to debt instruments are as follows.
46
| (In millions) | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total(1) | ||||||||||||||||||||||||||||||||||
| Long-Term Debt Instruments: | |||||||||||||||||||||||||||||||||||||||||
Interest rate 1.650%(2) | $ | — | $ | — | $ | — | $ | 575.0 | $ | — | $ | — | $ | 575.0 | |||||||||||||||||||||||||||
Interest rate 1.910%(2) | $ | — | $ | — | $ | — | $ | — | $ | 150.0 | $ | — | $ | 150.0 | |||||||||||||||||||||||||||
Interest rate 2.348%(2) | $ | — | $ | — | $ | — | $ | — | $ | 75.0 | $ | — | $ | 75.0 | |||||||||||||||||||||||||||
Interest rate 3.950%(2) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 150.0 | $ | 150.0 | |||||||||||||||||||||||||||
(1) Amount does not include the recorded fair value of the swap instruments.
(2) The Company's revolving credit facility and Term Loans have a variable interest rate, but due to the interest rate swaps, the rate on $150.0 million, $75.0 million, $575.0 million and $150.0 million will be fixed at 1.65%, 1.91%, 2.348% and 3.95%, respectively.
47
Item 8 Financial Statements for more information relatingand Supplementary Data
MillerKnoll, Inc.
Consolidated Statements of Comprehensive Income
| Year Ended | |||||||||||||||||
| (In millions, except per share data) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Net sales | $ | 4,087.1 | $ | 3,946.0 | $ | 2,465.1 | |||||||||||
| Cost of sales | 2,657.1 | 2,593.3 | 1,514.0 | ||||||||||||||
| Gross margin | 1,430.0 | 1,352.7 | 951.1 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Selling, general and administrative | 1,126.4 | 1,204.2 | 643.8 | ||||||||||||||
| Impairment charges | 41.2 | — | — | ||||||||||||||
| Restructuring expenses | 34.4 | — | 2.7 | ||||||||||||||
| Design and research | 105.7 | 108.7 | 72.1 | ||||||||||||||
| Total operating expenses | 1,307.7 | 1,312.9 | 718.6 | ||||||||||||||
| Operating earnings | 122.3 | 39.8 | 232.5 | ||||||||||||||
| Interest expense | 74.0 | 37.8 | 13.9 | ||||||||||||||
| Interest and other investment income | 2.8 | 1.6 | 2.1 | ||||||||||||||
| Other (income) expense, net | (0.3) | 12.2 | (7.6) | ||||||||||||||
| Earnings (loss) before income taxes and equity income | 51.4 | (8.6) | 228.3 | ||||||||||||||
| Income tax expense | 4.5 | 11.1 | 48.3 | ||||||||||||||
| Equity (loss) earnings from nonconsolidated affiliates, net of tax | (0.8) | — | 0.3 | ||||||||||||||
| Net earnings (loss) | 46.1 | (19.7) | 180.3 | ||||||||||||||
| Net earnings attributable to redeemable noncontrolling interests | 4.0 | 7.4 | 5.7 | ||||||||||||||
| Net earnings (loss) attributable to MillerKnoll, Inc. | $ | 42.1 | $ | (27.1) | $ | 174.6 | |||||||||||
| Earnings (loss) per share - basic | $ | 0.56 | $ | (0.37) | $ | 2.96 | |||||||||||
| Earnings (loss) per share - diluted | 0.55 | (0.37) | 2.94 | ||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||
| Foreign currency translation adjustments | (20.1) | (90.0) | 52.1 | ||||||||||||||
| Pension and post-retirement liability adjustments | 13.1 | 13.5 | 8.8 | ||||||||||||||
| Unrealized gains on interest rate swap agreement | 19.0 | 34.5 | 8.1 | ||||||||||||||
| Unrealized holding (losses) gains on securities | — | — | (0.1) | ||||||||||||||
| Other comprehensive income (loss), net of tax | 12.0 | (42.0) | 68.9 | ||||||||||||||
| Comprehensive income (loss) | 58.1 | (61.7) | 249.2 | ||||||||||||||
| Comprehensive income attributable to redeemable noncontrolling interests | 4.0 | 4.4 | 5.7 | ||||||||||||||
| Comprehensive income (loss) attributable to MillerKnoll, Inc. | $ | 54.1 | $ | (66.1) | $ | 243.5 | |||||||||||
48
MillerKnoll, Inc.
Consolidated Balance Sheets
| (In millions, except share and per share data) | June 3, 2023 | May 28, 2022 | |||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 223.5 | $ | 230.3 | |||||||
| Accounts receivable, net of allowances of $6.4 and $9.7 | 334.1 | 348.9 | |||||||||
| Unbilled accounts receivable | 29.4 | 32.0 | |||||||||
| Inventories, net | 487.4 | 587.3 | |||||||||
| Prepaid expenses | 92.7 | 112.1 | |||||||||
| Other current assets | 9.1 | 7.3 | |||||||||
| Total current assets | 1,176.2 | 1,317.9 | |||||||||
| Property and equipment, net of accumulated depreciation of $1,034.4 and $928.2 | 536.3 | 581.5 | |||||||||
| Right of use assets | 415.9 | 425.8 | |||||||||
| Goodwill | 1,221.7 | 1,226.2 | |||||||||
| Indefinite-lived intangibles | 480.7 | 501.0 | |||||||||
| Other amortizable intangibles, net of accumulated amortization of $185.2 and $134.7 | 313.1 | 362.4 | |||||||||
| Other noncurrent assets | 130.9 | 99.2 | |||||||||
| Total Assets | $ | 4,274.8 | $ | 4,514.0 | |||||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS & STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 269.5 | $ | 355.1 | |||||||
| Short-term borrowings and current portion of long-term debt | 33.4 | 29.3 | |||||||||
| Accrued compensation and benefits | 61.7 | 128.6 | |||||||||
| Short-term lease liability | 77.1 | 79.9 | |||||||||
| Accrued warranty | 20.8 | 18.8 | |||||||||
| Customer deposits | 93.8 | 125.3 | |||||||||
| Other accrued liabilities | 146.5 | 140.4 | |||||||||
| Total current liabilities | 702.8 | 877.4 | |||||||||
| Long-term debt | 1,365.1 | 1,379.2 | |||||||||
| Pension and post-retirement benefits | 7.5 | 25.0 | |||||||||
| Lease liabilities | 393.7 | 398.2 | |||||||||
| Other liabilities | 265.5 | 300.2 | |||||||||
| Total Liabilities | 2,734.6 | 2,980.0 | |||||||||
| Redeemable noncontrolling interests | 107.6 | 106.9 | |||||||||
| 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, 75,698,670 and 75,824,241 shares issued and outstanding in 2023 and 2022, respectively) | 15.1 | 15.2 | |||||||||
| Additional paid-in capital | 836.5 | 825.7 | |||||||||
| Retained earnings | 676.1 | 693.3 | |||||||||
| Accumulated other comprehensive loss | (95.1) | (107.1) | |||||||||
| Total Stockholders' Equity | 1,432.6 | 1,427.1 | |||||||||
| Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity | $ | 4,274.8 | $ | 4,514.0 | |||||||
49
MillerKnoll, Inc.
Consolidated Statements of Stockholders' Equity
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Deferred Compensation Plan | MillerKnoll, Inc. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||
| (In millions, except share and per share data) | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| May 30, 2020 | 58,793,275 | $ | 11.8 | $ | 81.6 | $ | 693.3 | $ | (134.0) | $ | (0.3) | $ | 652.4 | ||||||||||||||||||||||||||||
| Net earnings | — | — | — | 174.6 | — | — | 174.6 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 68.9 | — | 68.9 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 9.0 | — | — | — | 9.0 | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 86,238 | — | 2.6 | — | — | — | 2.6 | ||||||||||||||||||||||||||||||||||
| Restricted and performance stock units released | 114,103 | — | 0.2 | — | — | — | 0.2 | ||||||||||||||||||||||||||||||||||
| Employee stock purchase plan issuances | 71,468 | — | 2.1 | — | — | — | 2.1 | ||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (38,932) | — | (0.9) | — | — | — | (0.9) | ||||||||||||||||||||||||||||||||||
| Directors' fees | 3,013 | — | 0.1 | — | — | — | 0.1 | ||||||||||||||||||||||||||||||||||
| Deferred compensation plan | — | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||
| Dividends declared ($0.56 per share) | — | — | — | (33.4) | — | — | (33.4) | ||||||||||||||||||||||||||||||||||
| Redemption value adjustment | — | — | — | (15.0) | — | — | (15.0) | ||||||||||||||||||||||||||||||||||
| Other | — | — | — | (0.2) | — | — | (0.2) | ||||||||||||||||||||||||||||||||||
| May 29, 2021 | 59,029,165 | $ | 11.8 | $ | 94.7 | $ | 819.3 | $ | (65.1) | $ | (0.2) | $ | 860.5 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | (27.1) | — | — | (27.1) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (42.0) | — | (42.0) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 31.4 | — | — | — | 31.4 | ||||||||||||||||||||||||||||||||||
| Restricted stock issuance | 611,452 | 0.1 | (0.1) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 116,178 | 0.1 | 3.3 | — | — | — | 3.4 | ||||||||||||||||||||||||||||||||||
| Restricted and performance stock units released | 503,687 | 0.1 | (0.1) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Employee stock purchase plan issuances | 87,562 | — | 2.8 | — | — | — | 2.8 | ||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (390,979) | (0.1) | (16.1) | — | — | — | (16.2) | ||||||||||||||||||||||||||||||||||
| Directors' fees direct issuance | 23,255 | — | 0.9 | — | — | — | 0.9 | ||||||||||||||||||||||||||||||||||
| Director's fees deferred restricted stock units | — | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| Deferred compensation plan | — | — | — | — | — | 0.2 | 0.2 | ||||||||||||||||||||||||||||||||||
| Shares issued for the Acquisition of Knoll | 15,843,921 | 3.2 | 685.1 | — | — | — | 688.3 | ||||||||||||||||||||||||||||||||||
| Pre-combination expense from Knoll rollover | — | — | 22.4 | — | — | — | 22.4 | ||||||||||||||||||||||||||||||||||
| NCI Adjustment | — | — | 0.5 | — | — | — | 0.5 | ||||||||||||||||||||||||||||||||||
| NCI Valuation | — | — | — | (41.6) | — | — | (41.6) | ||||||||||||||||||||||||||||||||||
| Restricted stock units dividend reinvestment | — | — | 0.3 | (0.3) | — | — | — | ||||||||||||||||||||||||||||||||||
| Dividends declared ($0.75 per share) | — | — | — | (57.0) | — | — | (57.0) | ||||||||||||||||||||||||||||||||||
| May 28, 2022 | 75,824,241 | $ | 15.2 | $ | 825.7 | $ | 693.3 | $ | (107.1) | $ | — | $ | 1,427.1 | ||||||||||||||||||||||||||||
| Net earnings | — | — | — | 42.1 | — | — | 42.1 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 12.0 | — | 12.0 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | (39,839) | — | 20.2 | — | — | — | 20.2 | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 49,482 | — | 1.0 | — | — | — | 1.0 | ||||||||||||||||||||||||||||||||||
| Restricted and performance stock units released | 226,657 | — | 0.4 | — | — | — | 0.4 | ||||||||||||||||||||||||||||||||||
| Employee stock purchase plan issuances | 185,551 | — | 3.1 | — | — | — | 3.1 | ||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (575,207) | (0.1) | (15.9) | — | — | — | (16.0) | ||||||||||||||||||||||||||||||||||
| Deferred stock unit | — | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| Director's fees | 27,785 | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| NCI Valuation | — | — | — | (1.9) | — | — | (1.9) | ||||||||||||||||||||||||||||||||||
| Dividends declared ($0.75 per share) | — | — | — | (57.2) | — | — | (57.2) | ||||||||||||||||||||||||||||||||||
| Other | — | — | 0.8 | (0.2) | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| June 3, 2023 | 75,698,670 | $ | 15.1 | $ | 836.5 | $ | 676.1 | $ | (95.1) | $ | — | $ | 1,432.6 | ||||||||||||||||||||||||||||
50
MillerKnoll, Inc.
Consolidated Statements of Cash Flows
| Year Ended | |||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Cash Flows from Operating Activities: | |||||||||||||||||
| Net earnings (loss) | $ | 46.1 | $ | (19.7) | $ | 180.3 | |||||||||||
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | |||||||||||||||||
| Depreciation expense | 115.3 | 112.0 | 72.0 | ||||||||||||||
| Amortization expense | 39.8 | 78.6 | 15.2 | ||||||||||||||
| Loss (gain) on sales of property and dealers | — | (1.0) | — | ||||||||||||||
| Deferred taxes | (45.3) | (21.7) | 7.1 | ||||||||||||||
| Pension contributions | (11.7) | (5.0) | (5.4) | ||||||||||||||
| Impairment charges | 57.9 | 15.5 | — | ||||||||||||||
| Loss on extinguishment of debt | — | 13.4 | — | ||||||||||||||
| Restructuring expenses | 34.0 | — | 2.7 | ||||||||||||||
| Stock-based compensation | 20.2 | 31.4 | 9.0 | ||||||||||||||
| Amortization of deferred financing costs | 4.6 | 4.2 | 0.4 | ||||||||||||||
| (Increase) decrease in long-term assets | (4.7) | (1.6) | 1.2 | ||||||||||||||
| (Decrease) increase in long-term liabilities | (1.8) | (2.1) | 16.0 | ||||||||||||||
| Changes in current assets and liabilities: | |||||||||||||||||
| Decrease (increase) in accounts receivable & unbilled accounts receivable | 15.6 | (92.4) | (14.8) | ||||||||||||||
| Decrease (increase) in inventories | 81.5 | (166.4) | (10.4) | ||||||||||||||
| Decrease (increase) in prepaid expenses and other | 19.6 | (39.6) | (3.9) | ||||||||||||||
| (Decrease) increase in accounts payable | (82.5) | 51.5 | 43.2 | ||||||||||||||
| (Decrease) increase in accrued liabilities | (124.8) | 47.2 | 15.1 | ||||||||||||||
| Other, net | (0.9) | (16.2) | 4.6 | ||||||||||||||
| Net Cash Provided by (Used in) Operating Activities | 162.9 | (11.9) | 332.3 | ||||||||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||
| Notes receivable issued | (5.1) | (1.2) | (2.0) | ||||||||||||||
| Marketable securities purchases | — | — | (5.9) | ||||||||||||||
| Marketable securities sales | — | 7.7 | 5.3 | ||||||||||||||
| Capital expenditures | (83.3) | (94.7) | (59.8) | ||||||||||||||
| Proceeds from sales of property and dealers | 0.3 | 2.8 | 14.0 | ||||||||||||||
| Proceeds from life insurance policy | 13.5 | — | — | ||||||||||||||
| Acquisitions, net of cash received | — | (1,088.5) | — | ||||||||||||||
| Other, net | (1.9) | 1.5 | (11.5) | ||||||||||||||
| Net Cash (Used in) Investing Activities | (76.5) | (1,172.4) | (59.9) | ||||||||||||||
| Cash Flows from Financing Activities: | |||||||||||||||||
| Proceeds from issuance of debt, net of discounts | — | 1,007.0 | — | ||||||||||||||
| Payments of deferred financing costs | — | (9.3) | — | ||||||||||||||
| Repayments of long-term debt | (26.3) | (63.1) | (50.0) | ||||||||||||||
| Proceeds from credit facility | 929.9 | 1,026.5 | — | ||||||||||||||
| Repayments of credit facility | (916.2) | (838.5) | (265.0) | ||||||||||||||
| Payment of make whole premium on debt | — | (13.4) | — | ||||||||||||||
| Dividends paid | (57.1) | (54.5) | (34.5) | ||||||||||||||
| Common stock issued | 5.5 | 7.5 | 5.0 | ||||||||||||||
| Common stock repurchased and retired | (16.0) | (16.2) | (0.9) | ||||||||||||||
| Distribution to noncontrolling interest | (4.9) | (6.8) | — | ||||||||||||||
| Other, net | (1.7) | 0.7 | (2.3) | ||||||||||||||
| Net Cash (Used in) Provided by Financing Activities | (86.8) | 1,039.9 | (347.7) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (6.4) | (21.7) | 17.7 | ||||||||||||||
| Net (Decrease) In Cash and Cash Equivalents | (6.8) | (166.1) | (57.6) | ||||||||||||||
| Cash and cash equivalents, Beginning of Year | 230.3 | 396.4 | 454.0 | ||||||||||||||
| Cash and Cash Equivalents, End of Year | $ | 223.5 | $ | 230.3 | $ | 396.4 | |||||||||||
| Other Cash Flow Information | |||||||||||||||||
| Interest paid | $ | 70.6 | $ | 28.8 | $ | 12.5 | |||||||||||
| Income taxes paid, net of cash received | $ | 34.8 | $ | 36.9 | $ | 15.8 | |||||||||||
51
Notes to contingencies.
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52
1. Significant Accounting and Reporting Policies
The following is a summary of significant accounting standards.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of MillerKnoll, Inc. and in our International markets, the increase in white-collar employment, the willingness of customersits controlled domestic and foreign subsidiaries. The consolidated entities are collectively referred to undertake capital expenditures, the types of products purchased by customers, competitive-pricing pressures, the availabilityas “the Company.” All intercompany accounts and pricing of raw materials, our reliance on a limited number of suppliers, our ability to expand globally given the risks associated with regulatory and legal compliance challenges and accompanying currency fluctuations, the ability to increase prices to absorb the additional costs of raw materials, the financial strength of our dealers and the financial strength of our customers, our ability to locate new DWR studios, negotiate favorable lease terms for new and existing locations and the implementation of our studio portfolio transformation, our ability to attract and retain key executives and other qualified employees, our ability to continue to make product innovations, the success of newly-introduced products, our ability to serve all of our markets, possible acquisitions, divestitures or alliances, the pace and level of government procurement, the outcome of pending litigation or governmental audits or investigations, political risktransactions have been eliminated in the marketsConsolidated Financial Statements.
Description of Business
The companyCompany researches, designs, manufactures, markets,sells and sells its products throughoutdistributes interior furnishings for use in various environments including office, healthcare, educational and residential settings and provides related services that support companies all over the world and, as a result, is subject to changing economic conditions, which could reduce the demand for its products.
world. The company is exposed to risks arising from price changes for certain direct materials and assembly components used in its operations. The largest of such costs incurred by the company are for steel, plastics, textiles, wood particleboard, and aluminum components. The impact from changes in all commodity prices increased the company's costs by approximately $9 million during fiscal 2017 compared to the prior year. The impact from changes in commodity prices decreased the company's costs by approximately $20 million during fiscal 2016 as compared to fiscal 2015.
MillerKnoll is a collective of dynamic brands that comes together to those sales are transacteddesign the world we live in. A global leader in currencies other than the company's reporting currency, the U.S. dollar. Accordingly, production costsdesign, MillerKnoll includes Herman Miller® and profit margins relatedKnoll®, as well as Colebrook Bosson Saunders®, DatesWeiser®, Design Within Reach®, Edelman® Leather, Geiger®, HAY®, Holly Hunt®, KnollTextiles®, Maars® Living Walls, Maharam®, Muuto®, NaughtOne®, and Spinneybeck®|FilzFelt®. Combined, MillerKnoll represents over 100 years of design research and exploration in service of humanity. The Company is united by a belief in design as a tool to these sales are effected by the currency exchange relationship between the countries where the sales take placecreate positive impact and shape a more sustainable, caring, and beautiful future for all people and the countries whereplanet.
Fiscal Year
The Company's fiscal year ends on the products are sourced or manufactured. These currency exchange relationships can also impact the company's competitive positions within these markets.
Foreign Currency Translation
The functional currency for most of the Consolidated Statements of Comprehensive Income. Additionally, theforeign subsidiaries is their local currency. The cumulative effecteffects of translating the balance sheet and income statement accounts from the functional currency into the United States dollar increasedusing fiscal year-end exchange rates and translating revenue and expense accounts using average exchange rates for the accumulatedperiod are reflected as a component of Accumulated other comprehensive loss componentin the Consolidated Balance Sheets.
The financial statement impact of total stockholders' equity by $7.2gains and losses resulting from remeasuring foreign currency transactions into the appropriate functional currency resulted in a net loss of $4.8 million, $8.8$3.3 million, and $9.7$0.8 million for the fiscal years ended June 3, 2023, May 28, 2022, and May 29, 2021, respectively. These amounts are included in Other (income) expense, net in the Consolidated Statements of Comprehensive Income.
Cash Equivalents
The Company holds cash equivalents as part of its cash management function. Cash equivalents include money market funds and time deposit investments with original maturities of less than three months. The carrying value of cash equivalents, which approximates fair value, totaled $40.8 million and $43.1 million as of June 3, 2023 and May 28, 2022, respectively. All cash equivalents are high-credit quality financial instruments and the endamount of credit exposure to any one financial institution or instrument is limited.
Marketable Securities
The Company previously maintained a portfolio of marketable securities primarily comprised of mutual funds. These investments were liquidated during fiscal year 2022 resulting in a cash in-flow in that year of approximately $7.7 million.
Allowances for Credit Losses
Allowances for credit losses related to accounts are managed at a level considered by management to be adequate to absorb an estimate of probable future losses existing at the balance sheet date.
In estimating probable losses, we review accounts based on known customer exposures, historical credit experience, and specific identification of other potentially uncollectible accounts. An accounts receivable balance is considered past due when payment is not received within the stated terms. Accounts that are considered to have higher credit risk are reviewed using
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information available about the debtor, such as financial statements, news reports and published credit ratings. General information regarding industry trends, the economic environment is also used.
We arrive at an estimated loss for specific concerns and estimate an additional amount for the remainder of trade balances based on historical trends and other factors previously referenced. Balances are written off against the reserve once the Company determines the probability of collection to be remote. The Company generally does not require collateral or other security on trade accounts receivable. Subsequent recoveries, if any, are credited to bad debt expense when received.
Concentrations of Credit Risk
The Company's trade receivables are primarily due from independent dealers who, in turn, carry receivables from their customers. The Company monitors and manages the credit risk associated with individual dealers and direct customers where applicable. Dealers are responsible for assessing and assuming credit risk of their customers and may require their customers to provide deposits, letters of credit or other credit enhancement measures. Some sales contracts are structured such that the customer payment or obligation is direct to the Company. In those cases, the Company may assume the credit risk. Whether from dealers or customers, the Company's trade credit exposures are not concentrated with any particular entity.
Inventories
Inventories are valued at the lower of cost or net realizable value and include material, labor and overhead. The Company establishes reserves for excess and obsolete inventory based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or net realizable value may be adjusted in response to changing conditions, however inventory cannot be subsequently written back up, since the reserve establishes a new (lower) cost basis. Inventory cost is determined using the first in, first out (FIFO) method. Further information on the Company's recorded inventory balances can be found in Note 4 of the Consolidated Financial Statements.
Goodwill and Indefinite-lived Intangible Assets
The changes in the carrying amount of goodwill, by reporting segment, are as follows:
| (In millions) | Americas Contract | International Contract & Specialty | Global Retail | Total | |||||||||||||||||||||||||
| Balance at May 29, 2021 | |||||||||||||||||||||||||||||
| Goodwill | $ | 194.1 | $ | 103.0 | $ | 174.3 | $ | 471.4 | |||||||||||||||||||||
| Foreign currency translation adjustments | 3.3 | 8.2 | 6.8 | 18.3 | |||||||||||||||||||||||||
| Accumulated impairment losses | (36.7) | — | (88.8) | (125.5) | |||||||||||||||||||||||||
| Net goodwill as of May 29, 2021 | $ | 160.7 | $ | 111.2 | $ | 92.3 | $ | 364.2 | |||||||||||||||||||||
| Balance at May 28, 2022 | |||||||||||||||||||||||||||||
| Goodwill | $ | 197.4 | $ | 111.2 | $ | 181.1 | $ | 489.7 | |||||||||||||||||||||
| Sale of owned dealer | (0.3) | — | — | (0.3) | |||||||||||||||||||||||||
| Acquisition of Knoll | 346.0 | 226.8 | 330.7 | 903.5 | |||||||||||||||||||||||||
| Foreign currency translation adjustments | 23.7 | (33.7) | (31.2) | (41.2) | |||||||||||||||||||||||||
| Accumulated impairment losses | (36.7) | — | (88.8) | (125.5) | |||||||||||||||||||||||||
| Net goodwill as of May 28, 2022 | $ | 530.1 | $ | 304.3 | $ | 391.8 | $ | 1,226.2 | |||||||||||||||||||||
| Balance at June 3, 2023 | |||||||||||||||||||||||||||||
| Goodwill | $ | 566.8 | $ | 304.3 | $ | 480.6 | $ | 1,351.7 | |||||||||||||||||||||
| Foreign currency translation adjustments | (1.7) | (1.3) | (1.5) | (4.5) | |||||||||||||||||||||||||
| Accumulated impairment losses | (36.7) | — | (88.8) | (125.5) | |||||||||||||||||||||||||
| Net goodwill balance as of June 3, 2023 | $ | 528.4 | $ | 303.0 | $ | 390.3 | $ | 1,221.7 | |||||||||||||||||||||
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Other indefinite-lived assets included in the Consolidated Balance Sheets consist of the following:
| (In millions) | Indefinite-lived Intangible Assets | ||||||||||||||||
| Balance at May 29, 2021 | $ | 97.6 | |||||||||||||||
| Foreign currency translation adjustments | (14.6) | ||||||||||||||||
| Acquisition of Knoll | $ | 418.0 | |||||||||||||||
| Balance at May 28, 2022 | $ | 501.0 | |||||||||||||||
| Foreign currency translation adjustments | (0.6) | ||||||||||||||||
| Impairment charges | (19.7) | ||||||||||||||||
| Balance at June 3, 2023 | $ | 480.7 | |||||||||||||||
Goodwill is tested for impairment at the reporting unit level annually, or more frequently, when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. The Company may also elect to bypass the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value.
Each of the reporting units was reviewed for impairment using a qualitative assessment as of March 31, 2023. The Company elected to test each reporting unit qualitatively, as is permitted under ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The Company concluded it to be more likely than not that their estimated fair values are greater than their respective carrying values.
In connection with the segment reorganization, the Company’s reporting units have changed in composition, and goodwill was reallocated between such reporting units using a relative fair value approach. Accordingly, the Company performed interim goodwill impairment tests in the first quarter of 2023 for each reporting unit. Based on the results of the tests performed, the Company determined that the fair value of each reporting unit, both before and after the reorganization, exceeded its respective carrying amount.
During the third quarter of fiscal year 2023, the Company assessed changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units were below their carrying amounts. Although our annual impairment test is performed during the fourth quarter, we perform this qualitative assessment each interim reporting period.
While there was no single determinate event, the consideration in totality of several factors that developed during the third quarter of fiscal year 2023 led us to conclude that it was more likely than not that the fair value of the Global Retail reporting unit was below its carrying amount. These factors included: (i) the decision to discontinue stand-alone operations of the Fully brand and (ii) the assessment of our third quarter results, for which the performance of the Global Retail reporting unit was below management's expectations.
Accordingly, the Company performed an interim quantitative impairment analysis as of March 4, 2023 to determine the fair value of the Global Retail reporting unit as compared to the carrying value. The Company utilized a weighting of the income approach and the market approach to estimate the fair value of the Global Retail reporting unit. In performing the quantitative impairment test, the Company determined that the fair value of the Global Retail reporting unit exceeded the carrying amount and, as such, the reporting unit was not impaired. The Company determined that the Global Retail reporting unit exceeded its carrying value by 1% and therefore has a heightened risk of future impairments if any assumptions, estimates or market factors change in the future.
The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. We estimated the fair value of the Global Retail reporting unit using a discounted cash flow analysis. The discounted cash flow analysis used the present value of projected cash flows and a residual value.
The Company employed a market-based approach in selecting the discount rate used in our analysis. The discount rate selected represents the market rates of return equal to what the Company believes a reasonable investor would expect to achieve on investments of similar size to the Company's reporting units. The Company believes the discount rate selected in the quantitative assessment is appropriate in that exceeds the estimated weighted average cost of capital for our business as a
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whole. The results of the impairment test are sensitive to changes in the discount rates and changes in the discount rate may result in future impairment.
The Company evaluated the sensitivity of changes in forecasted sales, operating margin and the discount rate for the Global Retail reporting unit. Reducing the Global Retail reporting unit's forecasted sales by 5% in all years, and leaving all other assumptions static, would result in an impairment of $26.0 million. A decrease in the operating margin of 100 basis points would result in an impairment of $60.0 million. An increase in the discount rate of 100 basis points would result in an impairment of $46.0 million.
The Company evaluates indefinite-lived trade name intangible assets for impairment using a qualitative assessment annually. The Company also tests for impairment using a quantitative assessment if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date.
During fiscal 2023, the Company determined through a qualitative assessment that the Knoll trade name carrying value was more then likely above its fair value. As a result, the Company performed a quantitative assessment to determine the fair value and as a result recognized a $19.7 million non-cash impairment charge to the indefinite-lived trade name. The carrying value of the Knoll trade name as of the measurement date was $173.0 million. The fair value of the Knoll trade name as of the measurement date is $153.3 million.
In performing this quantitative assessment, we estimated the fair value using the relief-from-royalty method which requires assumptions related to:
•forecasted revenue growth rate,
•assumed royalty rates that could be payable if we did not own the trademark, and
•a market participant discount rate based on a weighted-average cost of capital.
The assumptions used reflect management’s best estimate; however, actual results could differ from our estimates. In completing our annual indefinite-lived trade name impairment test, fair value of the Knoll trade name was estimated using a discount rate of 12.0%, royalty rate of 2.00% and long-term growth rate of 2.5%. The Company’s estimates of the fair value of its Knoll indefinite-lived intangible asset is sensitive to changes in the key assumptions above as well as projected financial performance. Therefore, a sensitivity analysis was performed on certain key assumptions.
Keeping all other assumptions constant, a 10% decrease in forecasted sales at June 3, 2023 would have resulted in $15.3 million of additional pre-tax impairment charges. A decrease in the royalty rate of 25 basis points would result in an additional $20.0 million of impairment charges. Keeping all other assumptions constant, a 100 basis point increase in the discount rate would have resulted in an additional $15.0 million of impairment charges.
If the estimated cash flows related to the Company's indefinite-lived intangibles were to decline in future periods, the Company may need to record an impairment charge.
Property, Equipment and Depreciation
Property and equipment are stated at cost. The cost is depreciated over the estimated useful lives of the assets using the straight-line method. Estimated useful lives range from 3 to 10 years for machinery and equipment and do not exceed 40 years for buildings. Leasehold improvements are depreciated over the lesser of the lease term or the useful life of the asset. The Company capitalizes certain costs incurred in connection with the development, testing and installation of software for internal use and cloud computing arrangements. Software for internal use is included in property and equipment and is depreciated over an estimated useful life not exceeding 10 years. Depreciation and amortization expense is included in the Consolidated Statements of Comprehensive Income in the Cost of sales, Selling, general and administrative and Design and research line items.
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The following table summarizes our property as of the dates indicated:
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Land and improvements | $ | 55.1 | $ | 54.4 | |||||||
| Buildings and improvements | 393.5 | 377.2 | |||||||||
| Machinery and equipment | 1,066.6 | 1,027.0 | |||||||||
| Construction in progress | 55.5 | 51.1 | |||||||||
| Accumulated depreciation | (1,034.4) | (928.2) | |||||||||
| Property and equipment, net | $ | 536.3 | $ | 581.5 | |||||||
As of the end of fiscal 2017, 20162023, outstanding commitments for future capital purchases approximated $44.8 million.
Other Long-Lived Assets
The Company reviews the carrying value of long–lived assets for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. If such indicators are present, the future undiscounted cash flows attributable to the asset or asset group are compared to the carrying value of the asset or asset group. If such assets are considered to be impaired, the impairment amount to be recognized is the amount by which the carrying value of the assets exceeds their fair value.
Amortizable intangible assets within Other amortizable intangibles, net in the Consolidated Balance Sheets consist primarily of patents, trademarks and 2015,customer relationships. The customer relationships intangible asset is comprised of relationships with customers, specifiers, networks, dealers and distributors. Refer to the following table for the combined gross carrying value and accumulated amortization for these amortizable intangibles.
| June 3, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | Patent and Trademarks | Customer Relationships | Designs and Patterns | Backlog | Other | Total | |||||||||||||||||||||||||||||||||||
| Gross carrying value | $ | 60.1 | $ | 355.1 | $ | 42.0 | $ | 28.4 | $ | 12.7 | $ | 498.3 | |||||||||||||||||||||||||||||
| Accumulated amortization | 30.8 | 95.8 | 9.2 | 28.4 | 9.4 | 173.6 | |||||||||||||||||||||||||||||||||||
| Impairment | 11.6 | — | — | — | — | 11.6 | |||||||||||||||||||||||||||||||||||
| Net | $ | 17.7 | $ | 259.3 | $ | 32.8 | $ | — | $ | 3.3 | $ | 313.1 | |||||||||||||||||||||||||||||
| May 28, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Patent and Trademarks | Customer Relationships | Designs and Patterns | Backlog | Other | Total | ||||||||||||||||||||||||||||||||||||
| Gross carrying value | $ | 57.9 | $ | 355.8 | $ | 42.0 | $ | 29.8 | $ | 11.6 | $ | 497.1 | |||||||||||||||||||||||||||||
| Accumulated amortization | 24.7 | 66.0 | 5.9 | 29.8 | 8.3 | 134.7 | |||||||||||||||||||||||||||||||||||
| Net | $ | 33.2 | $ | 289.8 | $ | 36.1 | $ | — | $ | 3.3 | $ | 362.4 | |||||||||||||||||||||||||||||
The Company amortizes these assets over their remaining useful lives using the straight-line method over periods ranging from 1 year to 20 years, or on an accelerated basis, to reflect the expected realization of the economic benefits. It is estimated that the weighted-average remaining useful life of the patents and trademarks is approximately 3.6 and the weighted-average remaining useful life of the customer relationships is 9.6.
Estimated amortization expense on existing amortizable intangible assets as of June 3, 2023, for each of the succeeding five fiscal years, is as follows:
| (In millions) | |||||
| 2024 | $ | 36.6 | |||
| 2025 | 36.4 | ||||
| 2026 | 35.8 | ||||
| 2027 | 33.2 | ||||
| 2028 | 29.0 | ||||
In the third quarter of fiscal 2023 the decision was made to cease operating Fully as a stand-alone brand and sales channel and instead sell certain Fully products through other channels of the Global Retail business. As a result of this decision, the
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Company recorded asset Impairment charges related to Other Long-Lived Assets of $21.5 million in the third quarter of fiscal 2023. Of this amount, $11.6 million of the impairment related to the Fully trade name.
The table below provides information related to the impairments recognized during the third quarter of fiscal 2023. These charges are included in "Impairment charges" and "Cost of sales" within the Consolidated Statements of Comprehensive Income.
| (In millions) | Impairment Charge | ||||
| Property and equipment | 3.8 | ||||
| Right of use asset | 6.1 | ||||
| Trade name | 11.6 | ||||
| Total | $ | 21.5 | |||
Self-Insurance
The Company is partially self-insured for general liability, workers' compensation and certain employee health and dental benefits under insurance arrangements that provide for third-party coverage of claims exceeding the Company's loss retention levels. The Company's health benefit and auto liability retention levels do not include an aggregate stop loss policy. The Company's retention levels designated within significant insurance arrangements as ofJune 3, 2023, are as follows:
| (In millions) | Retention Level (per occurrence) | ||||
| General liability | $ | 1.00 | |||
| Auto liability | $ | 1.00 | |||
| Workers' compensation | $ | 0.75 | |||
| Health benefit | $ | 0.50 | |||
The Company accrues for its self-insurance arrangements, as well as reserves for health, prescription drugs, and dental benefit exposures based on actuarial estimates, which are recorded in Other liabilities in the Consolidated Balance Sheets. The value of the liability as of June 3, 2023 and May 28, 2022 was $13.2 million and $14.7 million, respectively. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, payment lag times and changes in actual experience could cause these estimates to change. The general, auto, and workers' compensation liabilities are managed through the Company's wholly-owned insurance captive.
Research, Development and Other Related Costs
Research, development, pre-production and start-up costs are expensed as incurred. Research and development ("R&D") costs consist of expenditures incurred during the course of planned research and investigation aimed at discovery of new knowledge useful in developing new products or processes. R&D costs also include the enhancement of existing products or production processes and the implementation of such through design, testing of product alternatives or construction of prototypes. R&D costs included in Design and research expense in the accompanying Consolidated Statements of Comprehensive Income are $67.6 million, $71.1 million and $50.8 million, in fiscal 2023, 2022, and 2021, respectively.
Royalty payments made to designers of the Company's products as the products are sold are variable costs based on product sales. These expenses totaled $38.1 million, $37.6 million and $21.3 million in fiscal years 2023, 2022 and 2021 respectively. They are included in Design and research expense in the accompanying Consolidated Statements of Comprehensive Income.
Customer Payments and Incentives
We offer various sales incentive programs to our customers, such as rebates and discounts. Programs such as rebates and discounts are adjustments to the selling price and are therefore characterized as a reduction to net sales.
Revenue Recognition
The Company recognizes revenue when performance obligations, based on the terms of customer contracts, are satisfied. This happens when control of goods and services based on the contract have been conveyed to the customer. Revenue for the sale of products is recognized at the point in time when control transfers, generally upon transfer of title and risk of loss to the customer. Revenue for services is recognized over time as the services are provided. The method of revenue recognition may vary, depending on the type of contract with the customer, as noted in the section "Disaggregated Revenue" in Note 2 of the Consolidated Financial Statements.
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The Company's contracts with customers include master agreements and certain other forms of contracts, which do not reach the level of a performance obligation until a purchase order is received from a customer. At the point in time that a purchase order under a contract is received by the Company, the collective group of documents represent an enforceable contract between the Company and the customer. While certain customer contracts may have a duration of greater than a year, all purchase orders are less than a year in duration. As of June 3, 2023, all unfulfilled performance obligations are expected to be fulfilled in the next twelve months.
Variable consideration exists within certain contracts that the Company has with customers. When variable consideration is present in a contract with a customer, the Company estimates the amount that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. These estimates are primarily related to rebate programs which involve estimating future sales amounts and rebate percentages to use in the determination of transaction price. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Adjustments to net sales from changes in variable consideration related to performance obligations completed in previous periods are not material to the Company's financial statements. Also, the Company has no contracts with significant financing components.
The Company accounts for shipping and handling activities as fulfillment activities and these costs are accrued within Cost of sales at the same time revenue is recognized. The Company does not record revenue for sales tax, value added tax or other taxes that are collected on behalf of government entities. The Company’s revenue is recorded net of these taxes as they are passed through to the relevant government entities. The Company has recognized incremental costs to obtain a contract as an expense when incurred as the amortization period is less than one year. The Company has not adjusted the amount of consideration to be received for any significant financing components as the Company’s contracts have a duration of one year or less.
Leases
The Company accounts for leases in accordance with ASC Topic 842, Leases, (“ASC 842”). For any new or modified lease, the Company, at the inception of the contract, determines whether a contract is or contains a lease. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company records right-of use ("ROU") assets and lease obligations for its finance and operating leases, which are initially recognized based on the discounted future lease payments over the term of the lease. As the rate implicit in the Company's leases is not easily determinable, the Company’s applicable incremental borrowing rate is used in calculating the present value of the sum of the lease payments.
As none of the Company’s leases provide an implicit discount rate, the Company uses an estimated incremental borrowing rate at the lease commencement date in determining the present value of the lease payments. Relevant information used in determining the Company’s incremental borrowing rate includes the duration of the lease, location of the lease, and the Company’s credit risk relative to risk-free market rates.
Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. Leases, and any leasehold improvements, are depreciated over the expected lease term. Additionally, certain leases include renewal or termination options, which can be exercised at the Company’s discretion. Lease terms include the non-cancelable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods. The Company’s leases do not contain any residual value guarantees or material restrictive covenants.
Variable lease costs associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease costs are presented as Operating expenses in the Company’s Consolidated Statements of Comprehensive Income in the same line item as the expense arising from fixed lease payments for operating leases.
The Company determines if an arrangement is a lease at contract inception. Arrangements that are leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. If leased assets have leasehold improvements, the depreciable life of those leasehold improvements are limited by the expected lease term.
ROU assets for operating leases are subject to the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment. The Company monitors for events or changes in circumstances that require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying
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amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.
Cost of Sales
The Company includes material, labor and overhead in cost of sales. Included within these categories are items such as freight charges, warehousing costs, internal transfer costs and other costs of its distribution network.
Selling, General and Administrative
The Company includes costs not directly related to the manufacturing of its products in the Selling, general and administrative line item within the Consolidated Statements of Comprehensive Income. Included in these expenses are items such as compensation expense, rental expense, warranty expense and travel and entertainment expense.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
The Company's annual effective tax rate is based on income, statutory tax rates and tax planning strategies available in the various jurisdictions the Company operates. Complex tax laws can be subject to different interpretations by the Company and the respective government authorities. Judgment is required in evaluating tax positions and determining our tax expense. Tax positions are reviewed quarterly and tax assets and liabilities are adjusted as new information becomes available.
In evaluating the Company's ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all positive and negative evidence. These assumptions require judgment about forecasts of future taxable income.
Interest Rate Risk
The companyCompany enters into interest rate swap agreements to manage its exposure to interest rate changes and its overall cost of borrowing. The company'sCompany's interest rate swap agreement wasagreements 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 agreementagreements 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 agreementagreements is recognized as an adjustment to interest expense.
These interest rate swap derivative instruments are held and used by the companyCompany as a tool for managing interest rate risk. They are not used for trading or speculative purposes. The counterparties to the swap instruments are large financial institutions that the companyCompany believes are of high-quality creditworthiness. While the companyCompany may be exposed to potential losses due to the credit risk of non-performance by these counterparties, such losses are not anticipated.
In September 2016, the Company entered into an interest rate swap agreement. The combinedinterest 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 the interest rate on indebtedness anticipated to be borrowed on its revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 1.949% fixed interest rate plus applicable margin as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on February 3, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 1.910% modified fixed interest rate.
In June 2017, the Company entered into a second 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 the interest rate on indebtedness anticipated to be borrowed on its revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 2.387% fixed interest rate plus applicable margin under the agreement as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on February 3, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 2.348% modified fixed interest rate.
In January 2022, the Company entered into a third interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $575.0 million with a forward start date of January 31, 2022 and a maturity date of January 29, 2027. The interest rate swap locked in the Company’s interest rate on forecasted outstanding borrowings of $575 million at 1.689% exclusive of the credit spread on the variable rate debt. The Company effectively will convert LIBOR-based floating interest rate plus applicable margin indebtedness to a 1.689% fixed interest rate plus applicable margin under the agreement as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on January 31, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 1.650% modified fixed interest rate.
In February 2023, the Company entered into a fourth interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $150.0 million with a forward start date of March 3, 2023 and a termination date of January 3, 2029. As a result of the transaction, under the terms of the agreement the Company effectively will convert one month Spread Adjusted Term SOFR floating interest rate plus applicable margin to 3.950% fixed interest rate and adjustment % plus applicable margin as of the forward start date. "Spread Adjusted Term SOFR" means Term SOFR plus an adjustment % that varies with tenor. The Company typically selects a one month tenor and that is calculated as the one month Term SOFR rate plus 0.11448%.
The fair market value and net asset amount of the effective interest rate swap instruments was $2.1a net asset of $56.9 million at June 3, 2017. The swap instrument has2023 compared to a forward start datenet asset of January 3, 2018 hence had no impact on total interest expense in fiscal 2017.$31.9 million at May 28, 2022. All cash flows related to the company'sCompany's interest rate swap instruments are denominated in U.S. dollars.Dollars. For further information, refer to Notes 5Note 6 and 11Note 12 of the Consolidated Financial Statements.
Expected cash outflows (notional amounts) over the next five years and thereafter related to debt instruments are as follows.
46
| (In millions) | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total(1) | ||||||||||||||||||||
| Long-Term Debt - Fixed rate: | |||||||||||||||||||||||||||
Interest rate = 6.42%(2) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 149.9 | $ | 149.9 | |||||||||||||
Interest rate = 6.00% | $ | — | $ | — | $ | — | $ | 50.0 | $ | — | $ | — | $ | 50.0 | |||||||||||||
| (In millions) | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total(1) | ||||||||||||||||||||||||||||||||||
| Long-Term Debt Instruments: | |||||||||||||||||||||||||||||||||||||||||
Interest rate 1.650%(2) | $ | — | $ | — | $ | — | $ | 575.0 | $ | — | $ | — | $ | 575.0 | |||||||||||||||||||||||||||
Interest rate 1.910%(2) | $ | — | $ | — | $ | — | $ | — | $ | 150.0 | $ | — | $ | 150.0 | |||||||||||||||||||||||||||
Interest rate 2.348%(2) | $ | — | $ | — | $ | — | $ | — | $ | 75.0 | $ | — | $ | 75.0 | |||||||||||||||||||||||||||
Interest rate 3.950%(2) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 150.0 | $ | 150.0 | |||||||||||||||||||||||||||
(1) Amount does not include the recorded fair value of the swap instrument, which totaled $2.1 million at the end of fiscal 2017.instruments.
(2) The company will have debt outstanding related to its Series B Senior Notes at a fixed interest rate of 6.42 percent until January 3, 2018. At that point in time, the company will borrow on its variable rateCompany's revolving credit facility in order to pay off notes. The company's revolving credit facility hasand Term Loans have a variable interest rate, but due to the interest rate swap,swaps, the rate on $150.0 million, $75.0 million, $575.0 million and $150.0 million will be fixed at 1.949% as demonstrated in the table above.1.65%, 1.91%, 2.348% and 3.95%, respectively.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial Statements and Supplementary Data
Consolidated Statements of Comprehensive Income
| Year Ended | |||||||||||||||||
| (In millions, except per share data) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Net sales | $ | 4,087.1 | $ | 3,946.0 | $ | 2,465.1 | |||||||||||
| Cost of sales | 2,657.1 | 2,593.3 | 1,514.0 | ||||||||||||||
| Gross margin | 1,430.0 | 1,352.7 | 951.1 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Selling, general and administrative | 1,126.4 | 1,204.2 | 643.8 | ||||||||||||||
| Impairment charges | 41.2 | — | — | ||||||||||||||
| Restructuring expenses | 34.4 | — | 2.7 | ||||||||||||||
| Design and research | 105.7 | 108.7 | 72.1 | ||||||||||||||
| Total operating expenses | 1,307.7 | 1,312.9 | 718.6 | ||||||||||||||
| Operating earnings | 122.3 | 39.8 | 232.5 | ||||||||||||||
| Interest expense | 74.0 | 37.8 | 13.9 | ||||||||||||||
| Interest and other investment income | 2.8 | 1.6 | 2.1 | ||||||||||||||
| Other (income) expense, net | (0.3) | 12.2 | (7.6) | ||||||||||||||
| Earnings (loss) before income taxes and equity income | 51.4 | (8.6) | 228.3 | ||||||||||||||
| Income tax expense | 4.5 | 11.1 | 48.3 | ||||||||||||||
| Equity (loss) earnings from nonconsolidated affiliates, net of tax | (0.8) | — | 0.3 | ||||||||||||||
| Net earnings (loss) | 46.1 | (19.7) | 180.3 | ||||||||||||||
| Net earnings attributable to redeemable noncontrolling interests | 4.0 | 7.4 | 5.7 | ||||||||||||||
| Net earnings (loss) attributable to MillerKnoll, Inc. | $ | 42.1 | $ | (27.1) | $ | 174.6 | |||||||||||
| Earnings (loss) per share - basic | $ | 0.56 | $ | (0.37) | $ | 2.96 | |||||||||||
| Earnings (loss) per share - diluted | 0.55 | (0.37) | 2.94 | ||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||
| Foreign currency translation adjustments | (20.1) | (90.0) | 52.1 | ||||||||||||||
| Pension and post-retirement liability adjustments | 13.1 | 13.5 | 8.8 | ||||||||||||||
| Unrealized gains on interest rate swap agreement | 19.0 | 34.5 | 8.1 | ||||||||||||||
| Unrealized holding (losses) gains on securities | — | — | (0.1) | ||||||||||||||
| Other comprehensive income (loss), net of tax | 12.0 | (42.0) | 68.9 | ||||||||||||||
| Comprehensive income (loss) | 58.1 | (61.7) | 249.2 | ||||||||||||||
| Comprehensive income attributable to redeemable noncontrolling interests | 4.0 | 4.4 | 5.7 | ||||||||||||||
| Comprehensive income (loss) attributable to MillerKnoll, Inc. | $ | 54.1 | $ | (66.1) | $ | 243.5 | |||||||||||
48
| Fiscal Years Ended | |||||||||||
| (In millions, except per share data) | June 3, 2017 | May 28, 2016 | May 30, 2015 | ||||||||
| Net sales | $ | 2,278.2 | $ | 2,264.9 | $ | 2,142.2 | |||||
| Cost of sales | 1,414.0 | 1,390.7 | 1,350.8 | ||||||||
| Gross margin | 864.2 | 874.2 | 791.4 | ||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | 587.8 | 585.6 | 543.9 | ||||||||
| Restructuring and impairment expenses | 12.5 | — | 12.7 | ||||||||
| Design and research | 73.1 | 77.1 | 71.4 | ||||||||
| Total operating expenses | 673.4 | 662.7 | 628.0 | ||||||||
| Operating earnings | 190.8 | 211.5 | 163.4 | ||||||||
| Other expenses (income): | |||||||||||
| Interest expense | 15.2 | 15.4 | 17.5 | ||||||||
| Interest and other investment income | (2.2 | ) | (0.8 | ) | (0.6 | ) | |||||
| Other, net | 0.2 | 0.3 | 1.3 | ||||||||
| Net other expenses | 13.2 | 14.9 | 18.2 | ||||||||
| Earnings before income taxes | 177.6 | 196.6 | 145.2 | ||||||||
| Income tax expense | 55.1 | 59.5 | 47.2 | ||||||||
| Equity earnings from nonconsolidated affiliates, net of tax | 1.6 | 0.4 | 0.1 | ||||||||
| Net earnings | 124.1 | 137.5 | 98.1 | ||||||||
| Net earnings attributable to noncontrolling interests | 0.2 | 0.8 | 0.6 | ||||||||
| Net earnings attributable to Herman Miller, Inc. | $ | 123.9 | $ | 136.7 | $ | 97.5 | |||||
| Earnings per share — basic | $ | 2.07 | $ | 2.28 | $ | 1.64 | |||||
| Earnings per share — diluted | $ | 2.05 | $ | 2.26 | $ | 1.62 | |||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | $ | (7.2 | ) | $ | (8.8 | ) | $ | (9.7 | ) | ||
| Pension and post-retirement liability adjustments | (12.7 | ) | 0.5 | (8.6 | ) | ||||||
| Unrealized gains on interest rate swap agreement | 2.1 | — | — | ||||||||
| Unrealized holding gain on available for sale securities | 0.1 | — | — | ||||||||
| Total other comprehensive loss | (17.7 | ) | (8.3 | ) | (18.3 | ) | |||||
| Comprehensive income | 106.4 | 129.2 | 79.8 | ||||||||
| Comprehensive income attributable to noncontrolling interests | 0.2 | 0.8 | 0.6 | ||||||||
| Comprehensive income attributable to Herman Miller, Inc. | $ | 106.2 | $ | 128.4 | $ | 79.2 | |||||
Consolidated Balance Sheets
| (In millions, except share and per share data) | June 3, 2023 | May 28, 2022 | |||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 223.5 | $ | 230.3 | |||||||
| Accounts receivable, net of allowances of $6.4 and $9.7 | 334.1 | 348.9 | |||||||||
| Unbilled accounts receivable | 29.4 | 32.0 | |||||||||
| Inventories, net | 487.4 | 587.3 | |||||||||
| Prepaid expenses | 92.7 | 112.1 | |||||||||
| Other current assets | 9.1 | 7.3 | |||||||||
| Total current assets | 1,176.2 | 1,317.9 | |||||||||
| Property and equipment, net of accumulated depreciation of $1,034.4 and $928.2 | 536.3 | 581.5 | |||||||||
| Right of use assets | 415.9 | 425.8 | |||||||||
| Goodwill | 1,221.7 | 1,226.2 | |||||||||
| Indefinite-lived intangibles | 480.7 | 501.0 | |||||||||
| Other amortizable intangibles, net of accumulated amortization of $185.2 and $134.7 | 313.1 | 362.4 | |||||||||
| Other noncurrent assets | 130.9 | 99.2 | |||||||||
| Total Assets | $ | 4,274.8 | $ | 4,514.0 | |||||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS & STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 269.5 | $ | 355.1 | |||||||
| Short-term borrowings and current portion of long-term debt | 33.4 | 29.3 | |||||||||
| Accrued compensation and benefits | 61.7 | 128.6 | |||||||||
| Short-term lease liability | 77.1 | 79.9 | |||||||||
| Accrued warranty | 20.8 | 18.8 | |||||||||
| Customer deposits | 93.8 | 125.3 | |||||||||
| Other accrued liabilities | 146.5 | 140.4 | |||||||||
| Total current liabilities | 702.8 | 877.4 | |||||||||
| Long-term debt | 1,365.1 | 1,379.2 | |||||||||
| Pension and post-retirement benefits | 7.5 | 25.0 | |||||||||
| Lease liabilities | 393.7 | 398.2 | |||||||||
| Other liabilities | 265.5 | 300.2 | |||||||||
| Total Liabilities | 2,734.6 | 2,980.0 | |||||||||
| Redeemable noncontrolling interests | 107.6 | 106.9 | |||||||||
| 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, 75,698,670 and 75,824,241 shares issued and outstanding in 2023 and 2022, respectively) | 15.1 | 15.2 | |||||||||
| Additional paid-in capital | 836.5 | 825.7 | |||||||||
| Retained earnings | 676.1 | 693.3 | |||||||||
| Accumulated other comprehensive loss | (95.1) | (107.1) | |||||||||
| Total Stockholders' Equity | 1,432.6 | 1,427.1 | |||||||||
| Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity | $ | 4,274.8 | $ | 4,514.0 | |||||||
49
| (In millions, except share and per share data) | June 3, 2017 | May 28, 2016 | |||||
| Assets | |||||||
| Current Assets: | |||||||
| Cash and cash equivalents | $ | 96.2 | $ | 84.9 | |||
| Marketable securities | 8.6 | 7.5 | |||||
| Accounts and notes receivable, less allowances of $3.3 in 2017 and $4.3 in 2016 | 186.6 | 211.0 | |||||
| Inventories, net | 152.4 | 128.2 | |||||
| Prepaid taxes | 17.7 | 20.4 | |||||
| Other | 30.4 | 28.5 | |||||
| Total Current Assets | 491.9 | 480.5 | |||||
| Property and Equipment: | |||||||
| Land and improvements | 24.0 | 24.1 | |||||
| Buildings and improvements | 229.0 | 205.7 | |||||
| Machinery and equipment | 662.4 | 645.3 | |||||
| Construction in progress | 53.3 | 53.9 | |||||
| Gross Property and Equipment | 968.7 | 929.0 | |||||
| Less: Accumulated depreciation | (654.1 | ) | (648.9 | ) | |||
| Net Property and Equipment | 314.6 | 280.1 | |||||
| Goodwill | 304.5 | 305.3 | |||||
| Indefinite-lived intangibles | 78.1 | 85.2 | |||||
| Other amortizable intangibles, net | 45.4 | 50.8 | |||||
| Other assets | 71.8 | 33.3 | |||||
| Total Assets | $ | 1,306.3 | $ | 1,235.2 | |||
| Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity | |||||||
| Current Liabilities: | |||||||
| Accounts payable | $ | 148.4 | $ | 165.6 | |||
| Accrued compensation and benefits | 79.7 | 85.2 | |||||
| Accrued warranty | 47.7 | 43.9 | |||||
| Unearned revenue | 33.2 | 35.4 | |||||
| Other accrued liabilities | 76.7 | 59.9 | |||||
| Total Current Liabilities | 385.7 | 390.0 | |||||
| Long-term debt | 199.9 | 221.9 | |||||
| Pension and post-retirement benefits | 38.5 | 25.8 | |||||
| Other liabilities | 69.9 | 45.8 | |||||
| Total Liabilities | 694.0 | 683.5 | |||||
| Redeemable noncontrolling interests | 24.6 | 27.0 | |||||
| Stockholders' Equity: | |||||||
| Preferred stock, no par value (10,000,000 shares authorized, none issued) | — | — | |||||
Common stock, $0.20 par value (240,000,000 shares authorized, 59,715,824 and 59,868,276 shares issued and outstanding in 2017 and 2016, respectively) | 11.9 | 12.0 | |||||
| Additional paid-in capital | 139.3 | 142.7 | |||||
| Retained earnings | 519.5 | 435.3 | |||||
| Accumulated other comprehensive loss | (82.2 | ) | (64.5 | ) | |||
| Key executive deferred compensation | (1.0 | ) | (1.1 | ) | |||
| Herman Miller, Inc. Stockholders' Equity | 587.5 | 524.4 | |||||
| Noncontrolling interests | 0.2 | 0.3 | |||||
| Total Stockholders' Equity | 587.7 | 524.7 | |||||
| Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity | $ | 1,306.3 | $ | 1,235.2 | |||
Consolidated Statements of Stockholders' Equity
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Deferred Compensation Plan | MillerKnoll, Inc. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||
| (In millions, except share and per share data) | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| May 30, 2020 | 58,793,275 | $ | 11.8 | $ | 81.6 | $ | 693.3 | $ | (134.0) | $ | (0.3) | $ | 652.4 | ||||||||||||||||||||||||||||
| Net earnings | — | — | — | 174.6 | — | — | 174.6 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 68.9 | — | 68.9 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 9.0 | — | — | — | 9.0 | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 86,238 | — | 2.6 | — | — | — | 2.6 | ||||||||||||||||||||||||||||||||||
| Restricted and performance stock units released | 114,103 | — | 0.2 | — | — | — | 0.2 | ||||||||||||||||||||||||||||||||||
| Employee stock purchase plan issuances | 71,468 | — | 2.1 | — | — | — | 2.1 | ||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (38,932) | — | (0.9) | — | — | — | (0.9) | ||||||||||||||||||||||||||||||||||
| Directors' fees | 3,013 | — | 0.1 | — | — | — | 0.1 | ||||||||||||||||||||||||||||||||||
| Deferred compensation plan | — | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||
| Dividends declared ($0.56 per share) | — | — | — | (33.4) | — | — | (33.4) | ||||||||||||||||||||||||||||||||||
| Redemption value adjustment | — | — | — | (15.0) | — | — | (15.0) | ||||||||||||||||||||||||||||||||||
| Other | — | — | — | (0.2) | — | — | (0.2) | ||||||||||||||||||||||||||||||||||
| May 29, 2021 | 59,029,165 | $ | 11.8 | $ | 94.7 | $ | 819.3 | $ | (65.1) | $ | (0.2) | $ | 860.5 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | (27.1) | — | — | (27.1) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (42.0) | — | (42.0) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 31.4 | — | — | — | 31.4 | ||||||||||||||||||||||||||||||||||
| Restricted stock issuance | 611,452 | 0.1 | (0.1) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 116,178 | 0.1 | 3.3 | — | — | — | 3.4 | ||||||||||||||||||||||||||||||||||
| Restricted and performance stock units released | 503,687 | 0.1 | (0.1) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Employee stock purchase plan issuances | 87,562 | — | 2.8 | — | — | — | 2.8 | ||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (390,979) | (0.1) | (16.1) | — | — | — | (16.2) | ||||||||||||||||||||||||||||||||||
| Directors' fees direct issuance | 23,255 | — | 0.9 | — | — | — | 0.9 | ||||||||||||||||||||||||||||||||||
| Director's fees deferred restricted stock units | — | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| Deferred compensation plan | — | — | — | — | — | 0.2 | 0.2 | ||||||||||||||||||||||||||||||||||
| Shares issued for the Acquisition of Knoll | 15,843,921 | 3.2 | 685.1 | — | — | — | 688.3 | ||||||||||||||||||||||||||||||||||
| Pre-combination expense from Knoll rollover | — | — | 22.4 | — | — | — | 22.4 | ||||||||||||||||||||||||||||||||||
| NCI Adjustment | — | — | 0.5 | — | — | — | 0.5 | ||||||||||||||||||||||||||||||||||
| NCI Valuation | — | — | — | (41.6) | — | — | (41.6) | ||||||||||||||||||||||||||||||||||
| Restricted stock units dividend reinvestment | — | — | 0.3 | (0.3) | — | — | — | ||||||||||||||||||||||||||||||||||
| Dividends declared ($0.75 per share) | — | — | — | (57.0) | — | — | (57.0) | ||||||||||||||||||||||||||||||||||
| May 28, 2022 | 75,824,241 | $ | 15.2 | $ | 825.7 | $ | 693.3 | $ | (107.1) | $ | — | $ | 1,427.1 | ||||||||||||||||||||||||||||
| Net earnings | — | — | — | 42.1 | — | — | 42.1 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 12.0 | — | 12.0 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | (39,839) | — | 20.2 | — | — | — | 20.2 | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 49,482 | — | 1.0 | — | — | — | 1.0 | ||||||||||||||||||||||||||||||||||
| Restricted and performance stock units released | 226,657 | — | 0.4 | — | — | — | 0.4 | ||||||||||||||||||||||||||||||||||
| Employee stock purchase plan issuances | 185,551 | — | 3.1 | — | — | — | 3.1 | ||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (575,207) | (0.1) | (15.9) | — | — | — | (16.0) | ||||||||||||||||||||||||||||||||||
| Deferred stock unit | — | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| Director's fees | 27,785 | — | 0.6 | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| NCI Valuation | — | — | — | (1.9) | — | — | (1.9) | ||||||||||||||||||||||||||||||||||
| Dividends declared ($0.75 per share) | — | — | — | (57.2) | — | — | (57.2) | ||||||||||||||||||||||||||||||||||
| Other | — | — | 0.8 | (0.2) | — | — | 0.6 | ||||||||||||||||||||||||||||||||||
| June 3, 2023 | 75,698,670 | $ | 15.1 | $ | 836.5 | $ | 676.1 | $ | (95.1) | $ | — | $ | 1,432.6 | ||||||||||||||||||||||||||||
50
| Fiscal Years Ended | |||||||||||
| June 3, 2017 | May 28, 2016 | May 30, 2015 | |||||||||
| Preferred Stock | |||||||||||
| Balance at beginning of year and end of year | $ | — | $ | — | $ | — | |||||
| Common Stock | |||||||||||
| Balance at beginning of year | $ | 12.0 | $ | 11.9 | $ | 11.9 | |||||
| Repurchase and retirement of common stock | (0.1 | ) | — | — | |||||||
| Restricted stock units released | — | 0.1 | — | ||||||||
| Balance at end of year | $ | 11.9 | $ | 12.0 | $ | 11.9 | |||||
| Additional Paid-in Capital | |||||||||||
| Balance at beginning of year | $ | 142.7 | $ | 135.1 | $ | 122.4 | |||||
| Exercise of stock options | 9.4 | 6.6 | 5.7 | ||||||||
| Repurchase and retirement of common stock | (23.7 | ) | (14.1 | ) | (3.7 | ) | |||||
| Employee stock purchase plan issuances | 1.9 | 1.7 | 1.6 | ||||||||
| Stock-based compensation expense | 9.1 | 11.9 | 8.6 | ||||||||
| Excess tax benefit for stock-based compensation | (0.6 | ) | 0.8 | 0.4 | |||||||
| Restricted stock units released | 0.3 | 0.2 | 0.2 | ||||||||
| Deferred compensation plan | (0.1 | ) | (0.1 | ) | (0.5 | ) | |||||
| Directors' fees | 0.3 | 0.6 | 0.4 | ||||||||
| Balance at end of year | $ | 139.3 | $ | 142.7 | $ | 135.1 | |||||
| Retained Earnings | |||||||||||
| Balance at beginning of year | $ | 435.3 | $ | 330.2 | $ | 269.6 | |||||
| Net income attributable to Herman Miller, Inc. | 123.9 | 136.7 | 97.5 | ||||||||
| Dividends declared on common stock (per share - 2017: $0.68; 2016: $0.59; 2015: $0.56) | (40.9 | ) | (35.6 | ) | (33.6 | ) | |||||
| Noncontrolling interests redemption value adjustment | 1.2 | 4.0 | (3.3 | ) | |||||||
| Balance at end year | $ | 519.5 | $ | 435.3 | $ | 330.2 | |||||
| Accumulated Other Comprehensive Loss | |||||||||||
| Balance at beginning of year | $ | (64.5 | ) | $ | (56.2 | ) | $ | (37.9 | ) | ||
| Other comprehensive loss | (17.7 | ) | (8.3 | ) | (18.3 | ) | |||||
| Balance at end of year | $ | (82.2 | ) | $ | (64.5 | ) | $ | (56.2 | ) | ||
| Key Executive Deferred Compensation | |||||||||||
| Balance at beginning of year | $ | (1.1 | ) | $ | (1.2 | ) | $ | (1.7 | ) | ||
| Deferred compensation plan | 0.1 | 0.1 | 0.5 | ||||||||
| Balance at end of year | $ | (1.0 | ) | $ | (1.1 | ) | $ | (1.2 | ) | ||
| Herman Miller, Inc. Stockholders' Equity | $ | 587.5 | $ | 524.4 | $ | 419.8 | |||||
| Noncontrolling Interests | |||||||||||
| Balance at beginning of year | $ | 0.3 | $ | 0.5 | $ | — | |||||
| Initial origination of noncontrolling interests | — | — | 6.0 | ||||||||
| Net income attributable to noncontrolling interests | — | 0.3 | 0.1 | ||||||||
| Deconsolidation of entity with noncontrolling interests | — | (0.5 | ) | — | |||||||
| Stock-based compensation expense | (0.1 | ) | — | 0.2 | |||||||
| Purchase of noncontrolling interests | — | — | (5.8 | ) | |||||||
| Balance at end of year | $ | 0.2 | $ | 0.3 | $ | 0.5 | |||||
| Total Stockholders' Equity | $ | 587.7 | $ | 524.7 | $ | 420.3 | |||||
Consolidated Statements of Cash Flows
| Year Ended | |||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Cash Flows from Operating Activities: | |||||||||||||||||
| Net earnings (loss) | $ | 46.1 | $ | (19.7) | $ | 180.3 | |||||||||||
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | |||||||||||||||||
| Depreciation expense | 115.3 | 112.0 | 72.0 | ||||||||||||||
| Amortization expense | 39.8 | 78.6 | 15.2 | ||||||||||||||
| Loss (gain) on sales of property and dealers | — | (1.0) | — | ||||||||||||||
| Deferred taxes | (45.3) | (21.7) | 7.1 | ||||||||||||||
| Pension contributions | (11.7) | (5.0) | (5.4) | ||||||||||||||
| Impairment charges | 57.9 | 15.5 | — | ||||||||||||||
| Loss on extinguishment of debt | — | 13.4 | — | ||||||||||||||
| Restructuring expenses | 34.0 | — | 2.7 | ||||||||||||||
| Stock-based compensation | 20.2 | 31.4 | 9.0 | ||||||||||||||
| Amortization of deferred financing costs | 4.6 | 4.2 | 0.4 | ||||||||||||||
| (Increase) decrease in long-term assets | (4.7) | (1.6) | 1.2 | ||||||||||||||
| (Decrease) increase in long-term liabilities | (1.8) | (2.1) | 16.0 | ||||||||||||||
| Changes in current assets and liabilities: | |||||||||||||||||
| Decrease (increase) in accounts receivable & unbilled accounts receivable | 15.6 | (92.4) | (14.8) | ||||||||||||||
| Decrease (increase) in inventories | 81.5 | (166.4) | (10.4) | ||||||||||||||
| Decrease (increase) in prepaid expenses and other | 19.6 | (39.6) | (3.9) | ||||||||||||||
| (Decrease) increase in accounts payable | (82.5) | 51.5 | 43.2 | ||||||||||||||
| (Decrease) increase in accrued liabilities | (124.8) | 47.2 | 15.1 | ||||||||||||||
| Other, net | (0.9) | (16.2) | 4.6 | ||||||||||||||
| Net Cash Provided by (Used in) Operating Activities | 162.9 | (11.9) | 332.3 | ||||||||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||
| Notes receivable issued | (5.1) | (1.2) | (2.0) | ||||||||||||||
| Marketable securities purchases | — | — | (5.9) | ||||||||||||||
| Marketable securities sales | — | 7.7 | 5.3 | ||||||||||||||
| Capital expenditures | (83.3) | (94.7) | (59.8) | ||||||||||||||
| Proceeds from sales of property and dealers | 0.3 | 2.8 | 14.0 | ||||||||||||||
| Proceeds from life insurance policy | 13.5 | — | — | ||||||||||||||
| Acquisitions, net of cash received | — | (1,088.5) | — | ||||||||||||||
| Other, net | (1.9) | 1.5 | (11.5) | ||||||||||||||
| Net Cash (Used in) Investing Activities | (76.5) | (1,172.4) | (59.9) | ||||||||||||||
| Cash Flows from Financing Activities: | |||||||||||||||||
| Proceeds from issuance of debt, net of discounts | — | 1,007.0 | — | ||||||||||||||
| Payments of deferred financing costs | — | (9.3) | — | ||||||||||||||
| Repayments of long-term debt | (26.3) | (63.1) | (50.0) | ||||||||||||||
| Proceeds from credit facility | 929.9 | 1,026.5 | — | ||||||||||||||
| Repayments of credit facility | (916.2) | (838.5) | (265.0) | ||||||||||||||
| Payment of make whole premium on debt | — | (13.4) | — | ||||||||||||||
| Dividends paid | (57.1) | (54.5) | (34.5) | ||||||||||||||
| Common stock issued | 5.5 | 7.5 | 5.0 | ||||||||||||||
| Common stock repurchased and retired | (16.0) | (16.2) | (0.9) | ||||||||||||||
| Distribution to noncontrolling interest | (4.9) | (6.8) | — | ||||||||||||||
| Other, net | (1.7) | 0.7 | (2.3) | ||||||||||||||
| Net Cash (Used in) Provided by Financing Activities | (86.8) | 1,039.9 | (347.7) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (6.4) | (21.7) | 17.7 | ||||||||||||||
| Net (Decrease) In Cash and Cash Equivalents | (6.8) | (166.1) | (57.6) | ||||||||||||||
| Cash and cash equivalents, Beginning of Year | 230.3 | 396.4 | 454.0 | ||||||||||||||
| Cash and Cash Equivalents, End of Year | $ | 223.5 | $ | 230.3 | $ | 396.4 | |||||||||||
| Other Cash Flow Information | |||||||||||||||||
| Interest paid | $ | 70.6 | $ | 28.8 | $ | 12.5 | |||||||||||
| Income taxes paid, net of cash received | $ | 34.8 | $ | 36.9 | $ | 15.8 | |||||||||||
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| Fiscal Years Ended | |||||||||||
| (In millions) | June 3, 2017 | May 28, 2016 | May 30, 2015 | ||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net earnings | $ | 124.1 | $ | 137.5 | $ | 98.1 | |||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation expense | 52.9 | 47.0 | 44.2 | ||||||||
| Amortization expense | 6.0 | 6.0 | 5.6 | ||||||||
| Provision for losses on accounts receivable and notes receivable | — | 2.2 | 1.8 | ||||||||
| Earnings from nonconsolidated affiliates net of dividends received | (1.5 | ) | — | 0.3 | |||||||
| Gain on sales of property and dealers | — | (5.8 | ) | — | |||||||
| Deferred taxes | 14.8 | 10.4 | (8.8 | ) | |||||||
| Pension and post-retirement expenses | 0.5 | 1.4 | 0.8 | ||||||||
| Restructuring and impairment expenses | 12.5 | — | 12.7 | ||||||||
| Stock-based compensation | 8.7 | 11.9 | 10.0 | ||||||||
| Excess tax benefits from stock-based compensation | (0.5 | ) | (1.4 | ) | (0.7 | ) | |||||
| Increase (decrease) in long-term liabilities | 6.2 | 6.7 | (1.2 | ) | |||||||
| Changes in current assets and liabilities: | |||||||||||
Decrease (Increase) in accounts receivable | 17.3 | (30.5 | ) | 7.8 | |||||||
| Increase in inventories | (29.9 | ) | (6.0 | ) | (9.0 | ) | |||||
| Increase in prepaid expenses and other | (0.5 | ) | (11.7 | ) | (2.5 | ) | |||||
(Decrease) increase in accounts payable | (11.2 | ) | 8.7 | 1.1 | |||||||
| Increase in accrued liabilities | 0.8 | 33.5 | 6.1 | ||||||||
| Other | 1.9 | 0.5 | 1.4 | ||||||||
| Net Cash Provided by Operating Activities | 202.1 | 210.4 | 167.7 | ||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Net receipts from notes receivable | 2.4 | 0.2 | 0.9 | ||||||||
| Marketable securities purchases | (2.0 | ) | (7.8 | ) | — | ||||||
| Marketable securities sales | 0.9 | 6.1 | 5.3 | ||||||||
| Capital expenditures | (87.3 | ) | (85.1 | ) | (63.6 | ) | |||||
| Proceeds from sales of property and dealers | — | 10.7 | 0.6 | ||||||||
| Payments of loans on cash surrender value of life insurance | (15.3 | ) | — | — | |||||||
| Acquisitions, net of cash received | — | (3.6 | ) | (154.0 | ) | ||||||
| Equity investment in non-controlled entities | (13.1 | ) | — | — | |||||||
| Other, net | (1.9 | ) | (1.3 | ) | (2.8 | ) | |||||
| Net Cash Used for Investing Activities | (116.3 | ) | (80.8 | ) | (213.6 | ) | |||||
| Cash Flows from Financing Activities: | |||||||||||
| Repayments of long-term debt | — | — | (50.0 | ) | |||||||
| Proceeds from credit facility | 794.4 | 800.8 | 796.7 | ||||||||
| Repayments of credit facility | (816.4 | ) | (868.8 | ) | (706.7 | ) | |||||
| Dividends paid | (39.4 | ) | (34.9 | ) | (33.3 | ) | |||||
| Common stock issued | 11.7 | 9.2 | 7.8 | ||||||||
| Common stock repurchased and retired | (23.7 | ) | (14.1 | ) | (3.7 | ) | |||||
| Excess tax benefits from stock-based compensation | 0.5 | 1.4 | 0.7 | ||||||||
| Payment of contingent consideration obligation | (2.0 | ) | — | — | |||||||
| Purchase of noncontrolling interests | (1.5 | ) | — | (5.8 | ) | ||||||
| Other, net | 1.8 | (0.1 | ) | 1.1 | |||||||
| Net Cash Provided by (Used for) Financing Activities | (74.6 | ) | (106.5 | ) | 6.8 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 0.1 | (1.9 | ) | 1.3 | |||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 11.3 | 21.2 | (37.8 | ) | |||||||
| Cash and cash equivalents, Beginning of Year | 84.9 | 63.7 | 101.5 | ||||||||
| Cash and Cash Equivalents, End of Year | $ | 96.2 | $ | 84.9 | $ | 63.7 | |||||
| Other Cash Flow Information | |||||||||||
| Interest paid | $ | 13.4 | $ | 13.4 | $ | 16.9 | |||||
| Income taxes paid, net of cash received | $ | 35.6 | $ | 57.6 | $ | 48.5 | |||||
Notes to the Consolidated Financial Statements
| Note 1 | ||||||||
| Note 2 | ||||||||
| Note | ||||||||
| Note 4 | ||||||||
| Note 5 | ||||||||
| Note 6 | ||||||||
| Note 7 | ||||||||
| Note 8 | ||||||||
| Note 9 | ||||||||
| Note 10 | ||||||||
| Note 11 | ||||||||
| Note 12 | ||||||||
| Note 13 | ||||||||
| Note 14 | ||||||||
| Note 15 | ||||||||
| Note 16 | ||||||||
| Note 17 | ||||||||
1. Significant Accounting and Reporting Policies
The following is a summary of significant accounting and reporting policies not reflected elsewhere in the accompanying financial statements.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Herman Miller,MillerKnoll, Inc. and its majority-ownedcontrolled domestic and foreign subsidiaries. The consolidated entities are collectively referred to as “the company.Company.” All intercompany accounts and transactions have been eliminated in the Consolidated Financial Statements. Nonconsolidated affiliates (20-50 percent owned companies) are accounted for using the equity method.
Description of Business
The companyCompany researches, designs, manufactures, sells and distributes interior furnishings for use in various environments including office, healthcare, educational and residential settings and provides related services that support companies all over the world. The company'sCompany's products are sold primarily through independent contract office furniture dealers, retail studios, the Company's eCommerce platforms, direct-mail catalogs, as well as the following channels: owned contract office furniture dealers, direct customer sales and independent retailers, owned retail studios, direct-mail catalogsretailers.
MillerKnoll is a collective of dynamic brands that comes together to design the world we live in. A global leader in design, MillerKnoll includes Herman Miller® and Knoll®, as well as Colebrook Bosson Saunders®, DatesWeiser®, Design Within Reach®, Edelman® Leather, Geiger®, HAY®, Holly Hunt®, KnollTextiles®, Maars® Living Walls, Maharam®, Muuto®, NaughtOne®, and Spinneybeck®|FilzFelt®. Combined, MillerKnoll represents over 100 years of design research and exploration in service of humanity. The Company is united by a belief in design as a tool to create positive impact and shape a more sustainable, caring, and beautiful future for all people and the company's e-commerce platforms.planet.
Fiscal Year
The company'sCompany's fiscal year ends on the Saturday closest to May 31. The fiscal year ended June 3, 20172023, contained 53 weeks whileand the fiscal years ended May 28, 2016,2022 and May 30, 2015 each29, 2021 contained 52 weeks.
Foreign Currency Translation
The functional currency for most of the foreign subsidiaries is their local currency. The cumulative effects of translating the balance sheet accounts from the functional currency into the United States dollar using fiscal year-end exchange rates and translating revenue and expense accounts using average exchange rates for the period isare reflected as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets.
The financial statement impact of gains and losses resulting from remeasuring foreign currency transactions into the appropriate functional currency resulted in a net loss of $0.7$4.8 million, $0.7$3.3 million, and $2.1$0.8 million for the fiscal years ended June 3, 2017,2023, May 28, 2016,2022, and May 30, 2015,29, 2021, respectively. These amounts are included in “Other, net”Other (income) expense, net in the Consolidated Statements of Comprehensive Income.
Cash Equivalents
The companyCompany holds cash equivalents as part of its cash management function. Cash equivalents include money market funds and time deposit investments with original maturities of less than three months. The carrying value of cash equivalents, which approximates fair value, totaled $33.6$40.8 million and $7.5$43.1 million as of June 3, 20172023 and May 28, 20162022, respectively. All cash equivalentsare high-credit quality financial instruments and the amount of credit exposure to any one financial institution or instrument is limited.
Marketable Securities
The company maintainsCompany previously maintained a portfolio of marketable securities primarily comprised of mutual funds. These investments were liquidated during fiscal year 2022 resulting in a cash in-flow in that year of approximately $7.7 million.
Allowances for Credit Losses
Allowances for credit losses related to accounts are heldmanaged at a level considered by management to be adequate to absorb an estimate of probable future losses existing at the company's wholly owned insurance captive and are considered “available-for-sale” securities. Accordingly, they have been recorded at fair value based on quoted market prices, with the resulting net unrealized holding gains orbalance sheet date.
In estimating probable losses, reflected net of tax as a component of “Accumulated other comprehensive loss” in the Consolidated Balance Sheets.
53
information available about the debtor, such as financial statements, news reports and published credit ratings. General information regarding industry trends, the economic environment is also used.
We arrive at an estimated loss for specific concerns and estimate an additional amount for the remainder of trade balances based on historical trends and other factors previously referenced. Balances are written off against the reserve once the companyCompany determines the probability of collection to be remote. The companyCompany generally does not require collateral or other security on trade accounts receivable.
Subsequent recoveries, if any, are credited to bad debt expense when received.
Concentrations of Credit Risk
sales contracts are structured such that the customer payment or obligation is direct to us.the Company. In those cases, wethe Company may assume the credit risk. Whether from dealers or customers, ourthe Company's trade credit exposures are not concentrated with any particular entity.
Inventories
Inventories are valued at the lower of cost or marketnet realizable value and include material, labor and overhead. Inventory cost is determined using the last-in, first-out (LIFO) method at manufacturing facilities in Michigan, whereas inventories of the company's other locations are valued using the first-in, first-out (FIFO) method. The companyCompany establishes reserves for excess and obsolete inventory based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or marketnet realizable value may be adjusted in response to changing conditions.conditions, however inventory cannot be subsequently written back up, since the reserve establishes a new (lower) cost basis. Inventory cost is determined using the first in, first out (FIFO) method. Further information on the company'sCompany's recorded inventory balances can be found in Note 34 of the Consolidated Financial Statements.
Goodwill and Indefinite-lived Intangible Assets
The changes in the carrying amount of goodwill, by reporting segment, are as follows:
| (In millions) | Americas Contract | International Contract & Specialty | Global Retail | Total | |||||||||||||||||||||||||
| Balance at May 29, 2021 | |||||||||||||||||||||||||||||
| Goodwill | $ | 194.1 | $ | 103.0 | $ | 174.3 | $ | 471.4 | |||||||||||||||||||||
| Foreign currency translation adjustments | 3.3 | 8.2 | 6.8 | 18.3 | |||||||||||||||||||||||||
| Accumulated impairment losses | (36.7) | — | (88.8) | (125.5) | |||||||||||||||||||||||||
| Net goodwill as of May 29, 2021 | $ | 160.7 | $ | 111.2 | $ | 92.3 | $ | 364.2 | |||||||||||||||||||||
| Balance at May 28, 2022 | |||||||||||||||||||||||||||||
| Goodwill | $ | 197.4 | $ | 111.2 | $ | 181.1 | $ | 489.7 | |||||||||||||||||||||
| Sale of owned dealer | (0.3) | — | — | (0.3) | |||||||||||||||||||||||||
| Acquisition of Knoll | 346.0 | 226.8 | 330.7 | 903.5 | |||||||||||||||||||||||||
| Foreign currency translation adjustments | 23.7 | (33.7) | (31.2) | (41.2) | |||||||||||||||||||||||||
| Accumulated impairment losses | (36.7) | — | (88.8) | (125.5) | |||||||||||||||||||||||||
| Net goodwill as of May 28, 2022 | $ | 530.1 | $ | 304.3 | $ | 391.8 | $ | 1,226.2 | |||||||||||||||||||||
| Balance at June 3, 2023 | |||||||||||||||||||||||||||||
| Goodwill | $ | 566.8 | $ | 304.3 | $ | 480.6 | $ | 1,351.7 | |||||||||||||||||||||
| Foreign currency translation adjustments | (1.7) | (1.3) | (1.5) | (4.5) | |||||||||||||||||||||||||
| Accumulated impairment losses | (36.7) | — | (88.8) | (125.5) | |||||||||||||||||||||||||
| Net goodwill balance as of June 3, 2023 | $ | 528.4 | $ | 303.0 | $ | 390.3 | $ | 1,221.7 | |||||||||||||||||||||
54
Other indefinite-lived assets included in the Consolidated Balance Sheets consist of the following:
| (In millions) | Indefinite-lived Intangible Assets | ||||||||||||||||
| Balance at May 29, 2021 | $ | 97.6 | |||||||||||||||
| Foreign currency translation adjustments | (14.6) | ||||||||||||||||
| Acquisition of Knoll | $ | 418.0 | |||||||||||||||
| Balance at May 28, 2022 | $ | 501.0 | |||||||||||||||
| Foreign currency translation adjustments | (0.6) | ||||||||||||||||
| Impairment charges | (19.7) | ||||||||||||||||
| Balance at June 3, 2023 | $ | 480.7 | |||||||||||||||
Goodwill is tested for impairment at the reporting unit level annually, or more frequently, when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. A reporting unit is defined as an operating segment or one level below an operating segment. When testing goodwill for impairment, the companyCompany may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. The companyCompany may also elect to skipbypass the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value.
Each of the reporting units was reviewed for impairment using a qualitative assessment as of March 31, 2023. The Company elected to test each reporting unit qualitatively, as is permitted under ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The Company concluded it to be more likely than not that their estimated fair values are greater than their respective carrying values.
During the third quarter of fiscal year 2023, the Company assessed changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units were below their carrying amounts. Although our annual impairment test is performed during the fourth quarter, we perform this qualitative assessment each interim reporting period.
While there was no single determinate event, the consideration in totality of several factors that developed during the third quarter of fiscal year 2023 led us to conclude that it was more likely than not that the fair value of the Global Retail reporting unit was below its carrying amount. These factors included: (i) the decision to discontinue stand-alone operations of the Fully brand and (ii) the assessment of our third quarter results, for which the performance of the Global Retail reporting unit was below management's expectations.
Accordingly, the Company performed an interim quantitative impairment analysis as of March 4, 2023 to determine the fair value of the Global Retail reporting unit as compared to the carrying value. The Company utilized a weighting of the income methodapproach and the market method.approach to estimate the fair value of the Global Retail reporting unit. In performing the quantitative impairment test, the Company determined that the fair value of the Global Retail reporting unit exceeded the carrying amount and, as such, the reporting unit was not impaired. The income method isCompany determined that the Global Retail reporting unit exceeded its carrying value by 1% and therefore has a heightened risk of future impairments if any assumptions, estimates or market factors change in the future.
The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. We estimated the fair value of the Global Retail reporting unit using a discounted future cash flow analysis. The discounted cash flow analysis used the present value of projected cash flows and a residual value.
The Company employed a market-based approach in selecting the discount rate used in our analysis. The discount rate selected represents the market rates of return equal to what the Company believes a reasonable investor would expect to achieve on investments of similar size to the Company's reporting units. The Company believes the discount rate selected in the quantitative assessment is appropriate in that uses a number of estimates, including revenue based on assumed growth rates,exceeds the estimated costs and discount rates based on the reporting unit's weighted average cost of capital. Growth rates for each reporting unit are determined based on internal estimates, historical data and external sources. The growth estimates are also used in planningcapital for our long-term and short-term business planning and forecasting. We test the reasonablenessas a
55
whole. The results of the inputsimpairment test are sensitive to changes in the discount rates and outcomeschanges in the discount rate may result in future impairment.
The Company evaluated the sensitivity of our discounted cash flow analysis against comparable market data. changes in forecasted sales, operating margin and the discount rate for the Global Retail reporting unit. Reducing the Global Retail reporting unit's forecasted sales by 5% in all years, and leaving all other assumptions static, would result in an impairment of $26.0 million. A decrease in the operating margin of 100 basis points would result in an impairment of $60.0 million. An increase in the discount rate of 100 basis points would result in an impairment of $46.0 million.
The market method is based on financial multiples of companies comparable to each reporting unit and applies a control premium. The carrying value of each reporting unit represents the assignment of variousCompany evaluates indefinite-lived trade name intangible assets and liabilities, excluding corporate assets and liabilities, such as cash, investments and debt.
During fiscal 2023, the Company determined through a qualitative assessment that the Knoll trade name carrying value was more then likely above its fair value. As a result, the Company performed a quantitative assessment to determine the fair value and as a result recognized a $19.7 million non-cash impairment charge to the indefinite-lived trade name. The company utilizes the relief from royalty methodology to test for impairment. The primary assumptions for the relief from royalty method include revenue forecasts, earnings forecasts, royalty rates and discount rates. The company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value. The company's indefinite-lived intangible assets consist of certainKnoll trade names valued at approximately $78.1 million and $85.2 millionname as of the end of fiscal 2017 and fiscal 2016, respectively. These assets have indefinite useful lives.
measurement date was $173.0 million. The company recognized asset impairment expense totaling $7.1 million associated with the Nemschoff trade name for the fiscal year 2017, which was recorded within the North American Furniture Solutions operating segment. As of the end of fiscal 2017, the carryingfair value of the NemschoffKnoll trade name as of the measurement date is $153.3 million.
In performing this quantitative assessment, we estimated the fair value using the relief-from-royalty method which requires assumptions related to:
•forecasted revenue growth rate,
•assumed royalty rates that could be payable if we did not own the trademark, and
•a market participant discount rate based on a weighted-average cost of capital.
The assumptions used reflect management’s best estimate; however, actual results could differ from our estimates. In completing our annual indefinite-lived trade name impairment test, fair value of the Knoll trade name was zero.estimated using a discount rate of 12.0%, royalty rate of 2.00% and long-term growth rate of 2.5%. The company recognized asset impairment expense totaling $10.8 million associated withCompany’s estimates of the POSH trade name for the fiscal year 2015, which was recorded within the Corporate category within segment reporting. The POSH trade namefair value of its Knoll indefinite-lived intangible asset is included within the ELA Furniture Solutions segment and as of the end of fiscal 2015, the carrying value was zero. These impairment expenses are recordedsensitive to changes in the Restructuring andkey assumptions above as well as projected financial performance. Therefore, a sensitivity analysis was performed on certain key assumptions.
Keeping all other assumptions constant, a 10% decrease in forecasted sales at June 3, 2023 would have resulted in $15.3 million of additional pre-tax impairment expenses line item withincharges. A decrease in the Consolidated Statementsroyalty rate of Comprehensive Income. The trade name assets represent level 3 fair value measurements and these assets are recorded at fair value only when25 basis points would result in an additional $20.0 million of impairment charges. Keeping all other assumptions constant, a 100 basis point increase in the discount rate would have resulted in an additional $15.0 million of impairment charges.
If the estimated cash flows related to the Company's indefinite-lived intangibles were to decline in future periods, the Company may need to record an impairment charge is recognized.charge.
| (In millions) | Goodwill | Indefinite-lived Intangible Assets | Total Goodwill and Indefinite-lived Intangible Assets | |||||||||
| Balance, May 30, 2015 | $ | 303.1 | $ | 85.2 | $ | 388.3 | ||||||
| Foreign currency translation adjustments | (0.4 | ) | — | (0.4 | ) | |||||||
| Acquisition of George Nelson Bubble Lamp product line | 3.2 | — | 3.2 | |||||||||
| Sale of owned dealer | (0.6 | ) | — | (0.6 | ) | |||||||
| Balance, May 28, 2016 | $ | 305.3 | $ | 85.2 | $ | 390.5 | ||||||
| Foreign currency translation adjustments | (0.7 | ) | — | (0.7 | ) | |||||||
| Sale of owned dealer | (0.1 | ) | — | (0.1 | ) | |||||||
| Impairment charges | — | (7.1 | ) | (7.1 | ) | |||||||
| Balance, June 03, 2017 | $ | 304.5 | $ | 78.1 | $ | 382.6 | ||||||
Property, Equipment and Depreciation
Property and equipment are stated at cost. The cost is depreciated over the estimated useful lives of the assets using the straight-line method. Estimated useful lives range from 3 to 10 years for machinery and equipment and do not exceed 40 years for buildings. Leasehold improvements are depreciated over the lesser of the lease term or the useful life of the asset. We capitalizeThe Company capitalizes certain costs incurred in connection with the development, testing and installation of software for internal use.use and cloud computing arrangements. Software for internal use is included in property and equipment and is depreciated over an estimated useful life not exceeding 510 years. Depreciation and amortization expense is included in the Consolidated Statements of Comprehensive Income in the Cost of sales, Selling, general and administrative and Design and research line items.
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The following table summarizes our property as of the dates indicated:
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Land and improvements | $ | 55.1 | $ | 54.4 | |||||||
| Buildings and improvements | 393.5 | 377.2 | |||||||||
| Machinery and equipment | 1,066.6 | 1,027.0 | |||||||||
| Construction in progress | 55.5 | 51.1 | |||||||||
| Accumulated depreciation | (1,034.4) | (928.2) | |||||||||
| Property and equipment, net | $ | 536.3 | $ | 581.5 | |||||||
As of the end of fiscal 2017,2023, outstanding commitments for future capital purchases approximated $16.3$44.8 million.
Other Long-Lived Assets
The companyCompany reviews other long-livedthe carrying value of long–lived assets for impairment wheneverwhen events or changes in circumstances indicate that the carrying amount of an asset or an asset groupassets may not be recoverable. Each impairment test is based on a comparison ofIf such indicators are present, the future undiscounted cash flows attributable to the asset or asset group are compared to the carrying amountvalue of the asset or asset group to the future undiscounted net cash flows expected to be generated by the asset or asset group, or in some cases, by prices for similar assets.group. If such assets are considered to be impaired, the impairment amount to be recognized is the amount by which the carrying value of the assets exceeds their fair value.
Amortizable intangible assets within Other amortizable intangibles, net in the Consolidated Balance Sheets consist primarily of patents, trademarks and customer relationships. The customer relationships intangible asset is comprised of relationships with customers, specifiers, networks, dealers and distributors. Refer to the following table for the combined gross carrying value and accumulated amortization for these amortizable intangibles.
| June 3, 2017 | June 3, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Patent and Trademarks | Customer Relationships | Other | Total | (In millions) | Patent and Trademarks | Customer Relationships | Designs and Patterns | Backlog | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Gross carrying value | $ | 20.5 | $ | 55.3 | $ | 7.5 | $ | 83.3 | Gross carrying value | $ | 60.1 | $ | 355.1 | $ | 42.0 | $ | 28.4 | $ | 12.7 | $ | 498.3 | |||||||||||||||||||||||||||||||||||
| Accumulated amortization | 13.3 | 19.7 | 4.9 | 37.9 | Accumulated amortization | 30.8 | 95.8 | 9.2 | 28.4 | 9.4 | 173.6 | |||||||||||||||||||||||||||||||||||||||||||||
| Impairment | Impairment | 11.6 | — | — | — | — | 11.6 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net | $ | 7.2 | $ | 35.6 | $ | 2.6 | $ | 45.4 | Net | $ | 17.7 | $ | 259.3 | $ | 32.8 | $ | — | $ | 3.3 | $ | 313.1 | |||||||||||||||||||||||||||||||||||
| May 28, 2016 | May 28, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Patent and Trademarks | Customer Relationships | Other | Total | Patent and Trademarks | Customer Relationships | Designs and Patterns | Backlog | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross carrying value | $ | 19.8 | $ | 55.7 | $ | 7.5 | $ | 83.0 | Gross carrying value | $ | 57.9 | $ | 355.8 | $ | 42.0 | $ | 29.8 | $ | 11.6 | $ | 497.1 | |||||||||||||||||||||||||||||||||||
| Accumulated amortization | 12.3 | 15.9 | 4.0 | 32.2 | Accumulated amortization | 24.7 | 66.0 | 5.9 | 29.8 | 8.3 | 134.7 | |||||||||||||||||||||||||||||||||||||||||||||
| Net | $ | 7.5 | $ | 39.8 | $ | 3.5 | $ | 50.8 | Net | $ | 33.2 | $ | 289.8 | $ | 36.1 | $ | — | $ | 3.3 | $ | 362.4 | |||||||||||||||||||||||||||||||||||
The companyCompany amortizes these assets over their remaining useful lives using the straight-line method over periods ranging from 5 years1 year to 20 years, or on an accelerated basis, to reflect the expected realization of the economic benefits. It is estimated that the weighted-average remaining useful life of the patents and trademarks is approximately 6 years3.6 and the weighted-average remaining useful life of the customer relationships is 9 years.9.6.
Estimated amortization expense on existing amortizable intangible assets as of June 3, 2017,2023, for each of the succeeding five fiscal years, is as follows:
| (In millions) | |||||
| 2024 | $ | 36.6 | |||
| 2025 | 36.4 | ||||
| 2026 | 35.8 | ||||
| 2027 | 33.2 | ||||
| 2028 | 29.0 | ||||
In the third quarter of fiscal 2023 the decision was made to cease operating Fully as a stand-alone brand and sales channel and instead sell certain Fully products through other channels of the Global Retail business. As a result of this decision, the
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| (In millions) | |||
| 2018 | $ | 6.3 | |
| 2019 | $ | 5.8 | |
| 2020 | $ | 5.7 | |
| 2021 | $ | 5.7 | |
| 2022 | $ | 5.6 | |
The table below provides information related to the impairments recognized during the third quarter of fiscal 2023. These charges are included in "Impairment charges" and "Cost of sales" within the Consolidated Statements of Comprehensive Income.
| (In millions) | Impairment Charge | ||||
| Property and equipment | 3.8 | ||||
| Right of use asset | 6.1 | ||||
| Trade name | 11.6 | ||||
| Total | $ | 21.5 | |||
Self-Insurance
The companyCompany is partially self-insured for general liability, workers' compensation and certain employee health and dental benefits under insurance arrangements that provide for third-party coverage of claims exceeding the company'sCompany's loss retention levels. The company'sCompany's health benefit and auto liability retention levels do not include an aggregate stop loss policy. The company'sCompany's retention levels designated within significant insurance arrangements as ofJune 3, 20172023, are as follows:
| (In millions) | Retention Level (per occurrence) | |||
| General liability and auto liability/physical damage | $ | 1.00 | ||
| Workers' compensation and property | $ | 0.75 | ||
| (In millions) | Retention Level (per occurrence) | ||||
| General liability | $ | 1.00 | |||
| Auto liability | $ | 1.00 | |||
| Workers' compensation | $ | 0.75 | |||
| Health benefit | $ | 0.50 | |||
The companyCompany accrues for its self-insurance arrangements, as well as reserves for health, prescription drugs, and dental benefit exposures based on actuarially-determined liabilities,actuarial estimates, which are recorded in “Other liabilities”Other liabilities in the Consolidated Balance Sheets. The value of the liability as of June 3, 20172023 and May 28, 20162022 was $10.5$13.2 million and $10.6$14.7 million, respectively. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, payment lag times and changes in actual experience could cause these estimates to change. The general, auto, and workers' compensation liabilities are managed through the company'sCompany's wholly-owned insurance captive.
Research, Development and Other Related Costs
Research, development, pre-production and start-up costs are expensed as incurred. Research and development ("R&D") costs consist of expenditures incurred during the course of planned research and investigation aimed at discovery of new knowledge useful in developing new products or processes. R&D costs also include the significant enhancement of existing products or production processes and the implementation of such through design, testing of product alternatives or construction of prototypes. R&D costs included in “DesignDesign and research”research expense in the accompanying Consolidated Statements of Comprehensive Income are $58.6$67.6 million,, $62.4 $71.1 million and $56.7$50.8 million,, in fiscal 2017, 2016,2023, 2022, and 2015,2021, respectively.
Royalty payments made to designers of the company'sCompany's products as the products are sold are a variable costcosts based on product sales. These expenses totaled $14.538.1 million, $14.737.6 million and $14.7$21.3 million in fiscal years 2017, 20162023, 2022 and 20152021 respectively. They are included in Design and research expense in the accompanying Consolidated Statements of Comprehensive Income.
Customer Payments and Incentives
We offer various sales incentive programs to our customers, such as rebates and discounts. Programs such as rebates and discounts are adjustments to the selling price and are therefore characterized as a reduction to net sales.
Revenue Recognition
The companyCompany recognizes revenue when performance obligations, based on sales through its networkthe terms of independentcustomer contracts, are satisfied. This happens when control of goods and services based on the contract furniture dealers and independent retailers once the related product is shipped and title passes. In situations where products are sold through subsidiary dealers or directlyhave been conveyed to the end customer, revenuecustomer. Revenue for the sale of products is recognized onceat the related product is shipped to the end customer and installation, if applicable, is substantially complete. Offers such as rebates and discounts are recorded as reductions to net sales. Unearned revenue occurs during the normal coursepoint in time when control transfers, generally upon transfer of business due to advance payments from customers for future delivery of products and services.
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The Company's contracts with customers include master agreements and certain other forms of contracts, which do not reach the level of a performance obligation until a purchase order is received from a customer. At the point in time that a purchase order under a contract is received by the Company, the collective group of documents represent an enforceable contract between the Company and the customer. While certain customer contracts may have a duration of greater than a year, all purchase orders are less than a year in duration. As of June 3, 2023, all unfulfilled performance obligations are expected to be fulfilled in the next twelve months.
Variable consideration exists within certain contracts that the Company has with customers. When variable consideration is present in a contract with a customer, the Company estimates the amount that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. These estimates are primarily related to rebate programs which involve estimating future sales may include provisions involvingamounts and rebate percentages to use in the determination of transaction price. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a rightsignificant future reversal of return. cumulative revenue under the contract will not occur. Adjustments to net sales from changes in variable consideration related to performance obligations completed in previous periods are not material to the Company's financial statements. Also, the Company has no contracts with significant financing components.
The company reducesCompany accounts for shipping and handling activities as fulfillment activities and these costs are accrued within Cost of sales at the same time revenue is recognized. The Company does not record revenue for an estimatesales tax, value added tax or other taxes that are collected on behalf of potential future product returns related to current period product revenue. When developing the allowance for sales returns, the company considers historical returns and current economic trends. Revenuegovernment entities. The Company’s revenue is recorded net of salesthese taxes as they are passed through to the companyrelevant government entities. The Company has recognized incremental costs to obtain a contract as an expense when incurred as the amortization period is less than one year. The Company has not adjusted the amount of consideration to be received for any significant financing components as the Company’s contracts have a pass-through entityduration of one year or less.
Leases
The Company accounts for collectingleases in accordance with ASC Topic 842, Leases, (“ASC 842”). For any new or modified lease, the Company, at the inception of the contract, determines whether a contract is or contains a lease. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company records right-of use ("ROU") assets and remitting sales tax.
As none of the Company’s leases provide an implicit discount rate, the Company uses an estimated incremental borrowing rate at the lease commencement date in determining the present value of the lease payments. Relevant information used in determining the Company’s incremental borrowing rate includes the duration of the lease, location of the lease, and the Company’s credit risk relative to risk-free market rates.
Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. Leases, and any leasehold improvements, are depreciated over the expected lease term. Additionally, certain leases include renewal or termination options, which can be exercised at the Company’s discretion. Lease terms include the non-cancelable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods. The Company’s leases do not contain any residual value guarantees or material restrictive covenants.
Variable lease costs associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease costs are presented as Operating expenses in the Company’s Consolidated Statements of Comprehensive Income.Income in the same line item as the expense arising from fixed lease payments for operating leases.
The Company determines if an arrangement is a lease at contract inception. Arrangements that are leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. If leased assets have leasehold improvements, the depreciable life of those leasehold improvements are limited by the expected lease term.
ROU assets for operating leases are subject to the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment. The Company monitors for events or changes in circumstances that require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying
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amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.
Cost of Sales
Selling, General and Administrative
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
The company'sCompany's annual effective tax rate is based on income, statutory tax rates and tax planning strategies available in the various jurisdictions the companyCompany operates. Complex tax laws can be subject to different interpretations by the companyCompany and the respective government authorities. Significant judgmentJudgment is required in evaluating tax positions and determining our tax expense. Tax positions are reviewed quarterly and tax assets and liabilities are adjusted as new information becomes available.
In evaluating the company'sCompany's ability to recover deferred tax assets within the jurisdiction from which they arise, the companyCompany considers all positive and negative evidence. These assumptions require significant judgment about forecasts of future taxable income.
Stock-Based Compensation
The companyCompany has several stock-based compensation plans, which are described in Note 9Note 10 of the Consolidated Financial Statements. Our policy is to expense stock-based compensation using the fair-value based method of accounting for all awards granted.
Earnings per Share
Basic earnings per share (EPS) excludes the dilutive effect of common shares that could potentially be issued, due to the exercise of stock options or the vesting of restricted shares and is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted-average number of shares outstanding, plus all dilutive sharesthat could potentially be issued. The company also evaluatesWhen in a loss position, basic and diluted EPS use the impact on EPSsame weighted-average number of all participating securities under the two-class method. Refershares outstanding. Refer to Note 89 of the Consolidated Financial Statements forfor further information regarding the computation of EPS.
Comprehensive Income
Comprehensive income consists of net earnings, foreign currency translation adjustments, unrealized holding gain (loss)gains on available-for-sale securities, unrealized gains on interest rate swap agreement and pension and post-retirement liability adjustments. ReferRefer to Note 1415 of the Consolidatedthe Consolidated Financial Statements for further information regarding comprehensive income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value
The companyCompany classifies and discloses its fair value measurements in one of the following three categories:
•Level 1 — Financial instruments with unadjusted, quoted prices listed on active market exchanges.
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•Level 2 — Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded financial instruments. Financial instrument values are determined using prices for recently traded financial instruments with similar underlying terms and direct or indirect observational inputs, such as interest rates and yield curves at commonly quoted intervals.
•Level 3 — Financial instruments not actively traded on a market exchange and there is little, if any, market activity. Values are determined using significant unobservable inputs or valuation techniques.
See Note 1112 of the Consolidated Financial Statements for the required fair value disclosures.
Derivatives and Hedging
The companyCompany calculates the fair value of financial instruments using quoted market prices whenever available. The companyCompany utilizes derivatives to manage exposures to foreign currency exchange rates and interest rate risk. The fair values of all derivatives are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these instruments are reported within Other expenses (income): Other, expense, net in the Consolidated Statements of Comprehensive Income, or Accumulated Other Comprehensive Lossother comprehensive loss within the Consolidated Balance Sheets, depending on the use of the derivative and whether it qualifies for hedge accounting treatment.
Gains and losses on derivatives that are designated and qualify as cash flow hedging instruments are recorded in Accumulated Other Comprehensive Loss, to the extent the hedges are effective, until the underlying transactions are recognized in the Consolidated Statements of Comprehensive Income. Derivatives not designated as hedging instruments are marked-to-market at the end of each period with the results included in Consolidated Statements of Comprehensive Income.
See Note 12 of the Consolidated Financial Statements for further information regarding derivatives.
The Company evaluates all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board ("FASB") for consideration of their applicability to our consolidated financial statements. We have assessed all ASUs issued but not yet adopted and concluded that those not disclosed are not relevant to the Company or are not expected to have a material impact.
2. Revenue from Contracts with Customers
Disaggregated Revenue
The Company’s revenue is comprised primarily of sales of products and installation services. Depending on the type of contract, the method of accounting and timing of revenue recognition may differ. Below, descriptions have been provided that summarize the Company’s different types of contracts and how revenue is recognized for each.
•Single Performance Obligations - these contracts are transacted with customers and include only the product performance obligation. Most commonly, these contracts represent master agreements with independent third party dealers in which a purchase order represents the customer contract, point of sale transactions through the Retail segment, as well as customer purchase orders within the Americas Contract and International Contract & Specialty segments. For contracts that include a single performance obligation, the Company records revenue at the point in time when control has transferred to the customer.
•Multiple Performance Obligations - these contracts are transacted with customers and include more than one performance obligation; products, which are shipped to the customer by the Company, and installation and other services, which are primarily fulfilled by independent third-party dealers. For contracts that include multiple performance obligations, the Company records revenue for the product performance obligation at the point in time when control transfers, generally upon transfer of title and risk of loss to the customer. In most cases, the Company has concluded that it is the agent for the installation services performance obligation and as such, the revenue and costs of these services are recorded net within Net sales in the Company’s Consolidated Statements of Comprehensive Income.
In certain instances, entities owned by the Company, rather than independent third-party dealers, perform installation and other services. In these cases, Service revenue is generated by the Company’s entities that provide installation services, and is recognized by the Company over time as the services are provided. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on relative standalone selling prices.
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•Other - these contracts are comprised mainly of alliance fee arrangements, whereby the Company earns revenue for allowing other furniture sellers access to its dealer distribution channel, as well as other miscellaneous selling arrangements. Revenue from alliance contracts are recorded at the point in time in which the sale is made by other furniture sellers through the Company’s sales channel.
Revenue disaggregated by contract type has been provided in the table below:
| Year Ended | |||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Net sales: | |||||||||||
| Single performance obligation | |||||||||||
| Product revenue | $ | 3,816.5 | $ | 3,660.1 | |||||||
| Multiple performance obligations | |||||||||||
| Product revenue | 254.1 | 265.3 | |||||||||
| Service revenue | 3.4 | 8.6 | |||||||||
| Other | 13.1 | 12.0 | |||||||||
| Total | $ | 4,087.1 | $ | 3,946.0 | |||||||
The Company internally reports and evaluates products based on the categories Workplace, Performance Seating, Lifestyle, and Other. A description of these categories is included below.
The Workplace category includes products centered on creating highly functional and productive settings for both groups and individuals. This category focuses on the development of products, beyond seating, that define boundaries, support work, and enable productivity.
The Performance Seating category includes products centered on seating ergonomics, productivity, and function across an evolving and diverse range of settings. This category focuses on the development of ergonomic seating solutions for specific use cases requiring more than basic utility.
The Lifestyle category includes products focused on bringing spaces to life through beautiful yet functional products. This category focuses on the development of products that support a way of living, in thoughtful yet elevated ways. The products in this category help create emotive and visually appealing spaces via a portfolio that offers diversity in aesthetics, price, and performance.
Revenue disaggregated by product type and segment has been provided in the table below:
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| Year Ended | |||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Americas Contract: | |||||||||||
| Workplace | $ | 1,305.8 | $ | 1,229.2 | |||||||
| Performance Seating | 437.8 | 442.6 | |||||||||
| Lifestyle | 257.9 | 221.2 | |||||||||
Other(1) | 24.6 | 36.1 | |||||||||
| Total Americas Contract | $ | 2,026.1 | $ | 1,929.1 | |||||||
| International Contract & Specialty: | |||||||||||
| Workplace | $ | 170.1 | $ | 143.7 | |||||||
| Performance Seating | 252.2 | 242.0 | |||||||||
| Lifestyle | 394.5 | 348.6 | |||||||||
Other(1) | 200.5 | 194.2 | |||||||||
| Total International Contract & Specialty | $ | 1,017.3 | $ | 928.5 | |||||||
| Global Retail: | |||||||||||
| Workplace | $ | 83.8 | $ | 111.5 | |||||||
| Performance Seating | 210.7 | 258.2 | |||||||||
| Lifestyle | 747.6 | 716.8 | |||||||||
Other(1) | 1.6 | 1.9 | |||||||||
| Total Global Retail | $ | 1,043.7 | $ | 1,088.4 | |||||||
| Total | $ | 4,087.1 | $ | 3,946.0 | |||||||
| (1) "Other" primarily consists of uncategorized product sales and service sales. | |||||||||||
Refer to Note 14 of the Consolidated Financial Statements for further information related to our segments.
Sales by geographic area are based on the location of the customer. Long-lived assets consist of long-term assets of the Company, excluding financial instruments, deferred tax assets and long-term intangibles. The following is a summary of geographic information for the years indicated. Individual foreign country information is not provided as none of the individual foreign countries in which the Company operates are considered material for separate disclosure based on quantitative and qualitative considerations.
| Year Ended | |||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Net sales: | |||||||||||||||||
| United States | $ | 2,918.0 | $ | 2,818.4 | $ | 1,728.9 | |||||||||||
| International | 1,169.1 | 1,127.6 | 736.2 | ||||||||||||||
| Total | $ | 4,087.1 | $ | 3,946.0 | $ | 2,465.1 | |||||||||||
| Long-lived assets: | |||||||||||||||||
| United States | $ | 518.7 | $ | 531.2 | $ | 311.1 | |||||||||||
| International | 135.6 | 144.9 | 70.6 | ||||||||||||||
| Total | $ | 654.3 | $ | 676.1 | $ | 381.7 | |||||||||||
The Company approximates that no single dealer accounted for more than 4% of the Company's net sales in the fiscal year ended June 3, 2023. The Company estimates that the largest single end-user customer accounted for $174.9 million, $114.4 million and $113.0 million of the Company's net sales in fiscal 2023, 2022 and 2021, respectively. This represents approximately 4% of the Company's net sales in fiscal 2023, 3% in 2022, and 5% in 2021. The Company's ten largest customers in the aggregate accounted for approximately 14% of net sales in fiscal 2023, 11% of net sales in fiscal 2022, and 17% of net sales in fiscal 2021.
Contract Assets and Contract Liabilities
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The Company records contract assets and contract liabilities related to its revenue generating activities. Contract assets include certain receivables from customers that are unconditional as all performance obligations with respect to the contract with the customer have been completed. These amounts represent trade receivables and they are recorded within Accounts receivable, net in the Consolidated Balance Sheets.
Contract assets also include amounts that are conditional because certain performance obligations in contracts with customers are incomplete as of the balance sheet date. These contract assets generally arise due to contracts with customers that include multiple performance obligations, e.g., both the product that is shipped to the customer by the Company, as well as installation services provided by independent third-party dealers. For these contracts, the Company recognizes revenue upon satisfaction of the product performance obligation. These contract assets are included in Unbilled accounts receivable in the Consolidated Balance Sheets until all performance obligations in the contract with the customer have been satisfied.
Contract liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer deposit is relieved and revenue is recognized. These customer deposits are included within Customer deposits in the Consolidated Balance Sheets. During the twelve months ended June 3, 2023, the Company recognized net sales of $117.7 million related to customer deposits that were included in the balance sheet as of May 28, 2022.
3. Acquisitions and Divestitures
Knoll, Inc.
On July 19, 2021, the Company completed its acquisition of Knoll, a leader in the design, manufacture, marketing, and sale of high-end furniture products and accessories for workplace and residential markets. The Company has included the financial results of Knoll in the consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition, which included financial advisory, legal, proxy filing, regulatory and financing fees, were approximately $30.0 million for the twelve months ended May 28, 2022 and were recorded in general and administrative expenses.
Under the terms of the Agreement and Plan of Merger, each issued and outstanding share of Knoll common stock (excluding shares exercising dissenters rights, shares owned by Knoll as treasury stock, shares owned by the deal parties or their subsidiaries, or shares subject to Knoll restricted stock awards) was converted into a right to receive 0.32 shares of Herman Miller, Inc. (now MillerKnoll, Inc.) common stock and $11.00 in cash, without interest. The acquisition date fair value of the consideration transferred for Knoll was approximately $1,887.3 million, which consisted of the following (in millions, except share amounts):
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| Knoll Shares | Herman Miller, Inc (now MillerKnoll, Inc.) Shares Exchanged | Fair Value | |||||||||||||||
| Cash Consideration: | |||||||||||||||||
| Shares of Knoll Common Stock issued and outstanding at July 19, 2021 | 49,444,825 | $ | 543.9 | ||||||||||||||
| Knoll equivalent shares for outstanding option awards, outstanding awards of restricted common stock held by non-employee directors and outstanding awards of performance units held by individuals who are former employees of Knoll and remain eligible to vest at July 19, 2021 | 184,857 | 1.4 | |||||||||||||||
| Total number of Knoll shares for cash consideration | 49,629,682 | ||||||||||||||||
| Shares of Knoll Preferred Stock issued and outstanding at July 19, 2021 | 169,165 | 254.4 | |||||||||||||||
| Consideration for payment to settle Knoll's outstanding debt | 376.9 | ||||||||||||||||
| Share Consideration: | |||||||||||||||||
| Shares of Knoll Common Stock issued and outstanding at July 19, 2021 | 49,444,825 | ||||||||||||||||
| Knoll equivalent shares for outstanding awards of restricted common stock held by non-employee directors and outstanding awards of performance units held by individuals who are former employees of Knoll and remain eligible to vest at July 19, 2021 | 74,857 | ||||||||||||||||
| Total number of Knoll shares for share consideration | 49,519,682 | 15,843,921 | 688.3 | ||||||||||||||
| Replacement Share-Based Awards: | |||||||||||||||||
| Outstanding awards of Knoll Restricted Stock and Performance units relating to Knoll Common Stock at July 19, 2021 | 22.4 | ||||||||||||||||
| Total acquisition date fair value of consideration transferred | $ | 1,887.3 | |||||||||||||||
The aggregate cash paid in connection with the Knoll acquisition was $1,176.6 million. MillerKnoll funded the acquisition through cash on-hand and debt proceeds, as described in Note 6. Short-Term Borrowings and Long-Term Debt.
Outstanding unvested restricted stock awards, performance stock awards, performance stock units, and restricted stock units with a preliminary estimated fair value of $53.4 million automatically converted into Company awards. Of the total fair value, $22.4 million was allocated to purchase consideration and $31.0 million was allocated to future services and will be expensed over the remaining service periods on a straight-line basis. Per the terms of the converted awards any qualifying termination within the twelve months subsequent to the acquisition will result in accelerated vesting and related recognition of expense.
The transaction was accounted for as a business combination which requires that assets and liabilities assumed be recognized at their fair value as of the acquisition date. The following table summarizes the fair value of assets acquired and liabilities assumed as of the date of acquisition:
65
| (In millions) | Fair Value | ||||
| Cash | $ | 88.0 | |||
| Accounts receivable | 82.3 | ||||
| Inventories | 219.9 | ||||
| Other current assets | 29.2 | ||||
| Property and equipment | 296.5 | ||||
| Right-of-use assets | 202.7 | ||||
| Intangible assets | 756.6 | ||||
| Goodwill | 903.5 | ||||
| Other noncurrent assets | 25.1 | ||||
| Total assets acquired | $ | 2,603.8 | |||
| Accounts payable | 144.0 | ||||
| Other current liabilities | 153.1 | ||||
| Lease liabilities | 177.8 | ||||
| Other liabilities | 241.6 | ||||
| Total liabilities assumed | 716.5 | ||||
| Net Assets Acquired | $ | 1,887.3 | |||
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. Goodwill is attributed to the assembled workforce of Knoll and anticipated operational synergies. Goodwill related to the acquisition was allocated to each of the reporting segments with a total value as of the opening balance sheet date of $903.5 million. Goodwill arising from the acquisition is not expected to be deductible for tax reporting purposes.
Certain measurement period adjustments were made during the twelve months ended May 28, 2022 to the preliminary fair values resulting in a net decrease to goodwill of $22.4 million primarily related to adjustments to the value of certain liabilities acquired and the fair value of intangible assets acquired. The allocation of purchase price was completed in the fourth quarter of fiscal year 2022.
The following table summarizes the acquired identified intangible assets, valuation method employed, useful lives and fair value, as determined by the Company as of the acquisition date:
| Valuation Method | Useful Life (years) | Fair Value | |||||||||||||||
| Multi-Period Excess Earnings | Less than 1 Year | $ | |||||||||||||||
| Trade name - indefinite lived | Relief from Royalty | Indefinite | 418.0 | ||||||||||||||
| Trade name - amortizing | Relief from Royalty | 5-10 Years | 14.0 | ||||||||||||||
| Designs | Relief from Royalty | 9-15 years | 40.0 | ||||||||||||||
| Customer Relationships | Multi-Period Excess Earnings | 2-15 years | 257.0 | ||||||||||||||
| Total | $ | ||||||||||||||||
Contract Furniture Dealership Divestiture
On January 1, 2017,31, 2022, the companyCompany completed the sale of a wholly-owned contract furniture dealership in Pennsylvania in exchangeToronto, Canada for a $3.0 million note receivable.cash consideration of $2.8 million. A pre-tax gain of $0.7$2.0 million was recognized as a result of the sale within the caption Selling, general and administrative within the 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 $1.4 million as of June 3, 2017 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
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Finished goods and work in process | $ | 357.2 | $ | 441.6 | |||||||
| Raw materials | 130.2 | 145.7 | |||||||||
| Total | $ | 487.4 | $ | 587.3 | |||||||
| Assets Acquired and Liabilities Assumed on July 28, 2014 | |||
| (In millions) | Fair Value | ||
| Purchase price | $ | 155.2 | |
| Fair value of the assets acquired: | |||
| Cash | 1.2 | ||
| Accounts receivable | 2.2 | ||
| Inventory | 47.4 | ||
| Current deferred tax asset | 1.5 | ||
| Other current assets | 5.5 | ||
| Goodwill | 75.6 | ||
| Other intangible assets | 68.5 | ||
| Property | 32.0 | ||
| Other long term assets | 2.4 | ||
| Total assets acquired | 236.3 | ||
| Fair value of liabilities assumed: | |||
| Accounts payable | 20.8 | ||
| Accrued compensation and benefits | 1.6 | ||
| Other accrued liabilities | 12.3 | ||
| Long term deferred tax liability | 14.5 | ||
| Other long term liabilities | 0.4 | ||
| Total liabilities assumed | 49.6 | ||
| Redeemable noncontrolling interests | 25.7 | ||
| Noncontrolling interests | 5.8 | ||
| Net assets acquired | $ | 155.2 | |
| Intangible Assets Acquired from the DWR Acquisition | ||||
| (In millions) | Fair Value | Useful Life | ||
| Trade Names and Trademarks | $ | 55.1 | Indefinite | |
| Exclusive Distribution Agreements | 0.2 | 1.5 years | ||
| Customer Relationships | 12.0 | 10 - 16 years | ||
| Product Development Designs | 1.2 | 7 years | ||
| Total Intangible Assets Acquired | $ | 68.5 | ||
| (In millions) | June 3, 2017 | May 28, 2016 | ||||||
| Finished goods and work in process | $ | 119.0 | $ | 102.1 | ||||
| Raw materials | 33.4 | 26.1 | ||||||
| Total | $ | 152.4 | $ | 128.2 | ||||
66
The companyCompany has certain investments in entities that are accounted for using the equity method (“nonconsolidated affiliates”). The investments are included in Other noncurrent assets in the Consolidated Balance Sheets and the equity earnings are included in Equity (loss) earnings from nonconsolidated affiliates, net of tax in the Consolidated Statements of Comprehensive Income. Refer to the tables below for the investment balances that are included in the Consolidated Balance Sheets and for the equity earnings that are included in the Consolidated Statements of Comprehensive Income.
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Investments in nonconsolidated affiliates | $ | 8.5 | $ | 9.9 | |||||||
| (in millions) | June 3, 2017 | May 28, 2016 | ||||
| Investments in nonconsolidated affiliates | $ | 16.2 | $ | 4.2 | ||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Equity (loss) earnings from nonconsolidated affiliates, net of tax | $ | (0.8) | $ | — | $ | 0.3 | |||||||||||
| (in millions) | June 3, 2017 | May 28, 2016 | May 30, 2015 | ||||||
| Equity earnings from nonconsolidated affiliates | $ | 1.6 | $ | 0.4 | $ | 0.1 | |||
The companyCompany had an ownership interest in fivetwo nonconsolidated affiliates at June 3, 2017.2023. Refer to the company'sCompany's ownership percentages shown below:
| Ownership Interest | June 3, 2017 | May 28, 2016 |
| Kvadrat Maharam Arabia DMCC | 50.0% | 50.0% |
| Kvadrat Maharam Pty Limited | 50.0% | 50.0% |
| Kvadrat Maharam Turkey JSC | 50.0% | 50.0% |
| Danskina B.V. | 50.0% | 50.0% |
| Naughtone Holdings Limited | 50.0% | —% |
| Ownership Interest | June 3, 2023 | May 28, 2022 | |||||||||
| Kvadrat Maharam Pty Limited | 50.0% | 50.0% | |||||||||
| Global Holdings Netherlands B.V. (Maars) | 48.2% | 48.2% | |||||||||
Kvadrat Maharam
The Kvadrat Maharam Pty Limited nonconsolidated affiliates areaffiliate is a distribution entities that areentity engaged in selling decorative upholstery, drapery and wall covering products. At June 3, 2017 and May 28, 2016, the company's investment value in Kvadrat Maharam Pty was $1.8 million more than the company's proportionate share of the underlying net assets. This difference was driven by a step-up in fair value of the investment in Kvadrat Maharam Pty, stemming from the Maharam business combination. This amount is considered to be a permanent basis difference.
On June 3, 2016,August 31, 2018, the companyCompany acquired 50 percent48.2% of the outstanding equity of NaughtoneGlobal Holdings LimitedNetherlands B.V., which owns 100% of Maars Holding B.V. ("Naughtone"Maars”), a Harderwijk, Netherlands-based worldwide leader in soft seating products, stools, occasionalthe design and meeting tables,manufacturing of interior wall solutions. The Company acquired its 48.2% ownership interest in Maars for $12.4approximately $6.1 million in consideration. Consequently, the company acquired a noncontrolling equity interest in Naughtone thatcash. The entity is accounted for underusing the equity method. Inmethod of accounting as the second quarter of fiscal 2017,Company has significant influence, but not control, over the company paid additional purchase consideration of approximately $0.6 million as part of the final net equity adjustment.
entity.
As of the June 3, 2016August 31, 2018 acquisition date, the company'sCompany's investment value in NaughtoneMaars was $11.3$3.1 million more than the company'sCompany's proportionate share of the underlying net assets. This amount represented the difference between the price that the companyCompany paid to acquire 50 percent48.2% of the outstanding equity and the carrying value of the net assets of Naughtone.Maars. Of this difference, $2.9$2.7 million wasis being amortized over the remaining useful lives of the assets, while $8.4$0.4 million wasis considered a permanent difference.
In the fourth quarter of fiscal 2023, the Company determined the fair value was less than the carrying value and concluded the impairment was other-than-temporary and recorded an impairment charge of approximately $1.0 million within Other income and expense in the Consolidated Statements of Comprehensive Income. At June 3, 2017,2023, the company'sCompany's investment value in Naughtone was $9.8Maars is $1.0 million more than the company'sCompany's proportionate share of the underlying net assets, the total of which $2.3 million wasis being amortized over the remaining useful lives of the assets, while $7.5 million was considered a permanent basis difference. The change in the permanent basis difference from the prior year was due to changes in foreign currency exchange rates.assets.
Transactions with Nonconsolidated Affiliates
Sales to and purchases from nonconsolidated affiliates were as follows for the periods presented below:
| (in millions) | June 3, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||||||
| (In millions) | (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||||||||||
| Sales to nonconsolidated affiliates | $ | 4.0 | $ | 2.5 | $ | 2.5 | Sales to nonconsolidated affiliates | $ | 2.8 | $ | 0.7 | $ | 1.0 | |||||||||||||
| Purchases from nonconsolidated affiliates | $ | 4.2 | $ | 0.9 | $ | 0.5 | Purchases from nonconsolidated affiliates | $ | — | $ | 0.6 | $ | 0.3 | |||||||||||||
Balances due to or due from nonconsolidated affiliates were as follows for the periods presented below:
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Receivables from nonconsolidated affiliates | $ | 0.5 | $ | 0.3 | |||||||
| Payables to nonconsolidated affiliates | $ | — | $ | — | |||||||
67
| (in millions) | June 3, 2017 | May 28, 2016 | ||||
| Receivables from nonconsolidated affiliates | $ | 0.8 | $ | 0.4 | ||
| Payables to nonconsolidated affiliates | $ | 0.5 | $ | 0.1 | ||
Long-term debt consisted of the following obligations:
| (In millions) | June 3, 2023 | May 28, 2022 | ||||||||||||
| Syndicated revolving line of credit, due July 2026 | $ | 426.7 | $ | 413.0 | ||||||||||
| Term Loan A, 7.0179%, due July 2026 | 370.0 | 390.0 | ||||||||||||
| Term Loan B, 7.2679% due July 2028 | 615.6 | 621.8 | ||||||||||||
| Supplier financing program | 2.1 | 3.1 | ||||||||||||
| Total debt | $ | 1,414.4 | $ | 1,427.9 | ||||||||||
| Less: Unamortized discount and issuance costs | (15.9) | (19.4) | ||||||||||||
| Less: Current debt | (33.4) | (29.3) | ||||||||||||
| Long-term debt | $ | 1,365.1 | $ | 1,379.2 | ||||||||||
| (In millions) | June 3, 2017 | May 28, 2016 | |||||
| Series B Senior Notes, 6.42%, due January 3, 2018 | $ | 149.9 | $ | 149.9 | |||
| Debt securities, 6.0%, due March 1, 2021 | 50.0 | 50.0 | |||||
| Syndicated Revolving Line of Credit, due September 2021 | — | 22.0 | |||||
| Total | $ | 199.9 | $ | 221.9 | |||
During 2022, the Company repaid $64 million of private placement notes due May 20, 2030, and recognized a loss of approximately $13.4 million on extinguishment of the debt ,which represented the premium on early redemption. The Company made principal payments on term loans "A" and "B" during the year ended June 3, 2023 in the amount of $20.0 million and $6.3 million, respectively and during the year ended May 28, 2022 in the amount of $10.0 million and $3.1 million, respectively.
Prior to July 2021, the Company's syndicated revolving line of credit provided the Company with up to $500 million in revolving variable interest borrowing capacity and includesincluded an "accordion feature" allowing the companyCompany to increase, at its option and subject to the approval of the participating banks, the aggregate borrowing capacity of the facility by $200up to $250 million. The facility expires in September 2021 and outstandingOutstanding borrowings would bear interest at rates based on the prime rate, federal funds rate, LIBOR or negotiated rates as outlined in the agreement. Interest iswas payable periodically throughout the period if borrowings arewere outstanding. AsThe Company paid off the outstanding balance due on the syndicated revolving line of June 3, 2017, therecredit during the first quarter of 2022.
Available borrowings under the syndicated revolving line of credit were zero outstanding borrowings against this facility and available borrowings were $391.7 million due to $8.3 million outstanding letters of credit. As of May 28, 2016, total usage against this facility was $30.7 million, of which $8.7 million related to outstanding letters of credit.as follows for the periods indicated:
| (In millions) | June 3, 2023 | May 28, 2022 | ||||||||||||
| Syndicated revolving line of credit borrowing capacity | $ | 725.0 | $ | 725.0 | ||||||||||
| Less: Borrowings under the syndicated revolving line of credit | 426.7 | 413.0 | ||||||||||||
| Less: Outstanding letters of credit | 14.1 | 15.4 | ||||||||||||
| Available borrowings under the syndicated revolving line of credit | $ | 284.2 | $ | 296.6 | ||||||||||
68
step-up in the maximum Leverage Ratio to 4:1covenant level of 0.50 for the four consecutive fiscal quarter end dates. The covenants also require a minimum interest coverage ratio, which is measured by the ratio ofsubsequent trailing four quarter EBITDA to trailing four quarter interest expense (as defined in the credit agreement) and is required to be greater than 4:1.periods. Adjusted EBITDA is generally defined in the credit agreement as EBITDA adjusted by certain items which include non-cash share-based compensation, non-recurring restructuring costs and extraordinary items. At June 3, 2017 and May 28, 2016,2023 the companyCompany was in compliance with all of these restrictions and performance ratios.
July 2021.
Annual maturities of long-term debt for the five fiscal years subsequent to June 3, 20172023 are as shown in the table below. Although
| (In millions) | |||||
| 2024 | $ | 33.4 | |||
| 2025 | 41.3 | ||||
| 2026 | 46.2 | ||||
| 2027 | 703.0 | ||||
| 2028 | 6.2 | ||||
| Thereafter | 584.3 | ||||
| Total | $ | 1,414.4 | |||
Supplier Financing Program
The Company has an agreement with a third-party financial institution that allows certain participating suppliers the Series B Senior Notes mature within 12 months,ability to finance payment obligations from the companyCompany. 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 classifiedlengthened 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 borrowings within Long-term debtamounts have been excluded from "Accounts payable" in the Consolidated Balance Sheets as the company has bothamounts have been accounted for by the intentCompany as a current debt, within "Short-term borrowings and abilitycurrent portion of long-term debt". As of June 3, 2023, the liability related to refinance this short-term obligation on a long-term basis, through the use of its syndicated revolving line of credit.supplier financing program is $2.1 million.
| (In millions) | |||
| 2018 | $ | — | |
| 2019 | $ | — | |
| 2020 | $ | — | |
| 2021 | $ | 50.0 | |
| 2022 | $ | — | |
| Thereafter | $ | 149.9 | |
The companyCompany has leases real propertyfor retail stores, showrooms, manufacturing facilities, warehouses and equipmentvehicles, which expire at various dates through 2042. Certain lease agreements include contingent rental payments based on per unit usage over a contractual amount and others include rental payments adjusted periodically for inflationary indexes.
The Company's lease costs recognized in the Consolidated Statement of Income consist of the following:
| Year Ended | Year Ended | ||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Operating lease costs | $ | 99.3 | $ | 89.4 | |||||||
| Short-term lease costs | 11.2 | 10.4 | |||||||||
| Variable lease costs | 12.0 | 10.3 | |||||||||
| Total | $ | 122.5 | $ | 110.1 | |||||||
Included in the Company's Right-of-use assets and Lease liabilities are variable lease costs, not included in the table above, for raw material purchases under agreementscertain supply arrangements that expire on various dates. Certainthe Company has determined to meet the definition of a lease:
| Year Ended | Year Ended | ||||||||||
| June 3, 2023 | May 28, 2022 | ||||||||||
| Variable lease costs | $ | 96.2 | $ | 95.6 | |||||||
During fiscal 2023, the Company determined it was more likely than not that the fair value of certain right of use assets within the Global Retail reporting unit, specifically Fully, were below their carrying value and assessed these assets for impairment. As
69
a result of this assessment, the Company recorded an impairment of $6.1 million in the Consolidated Statements of Comprehensive income.
At June 3, 2023, the Company has no financing leases. The undiscounted annual future minimum lease payments related to the Company's right-of-use assets are summarized by fiscal year in the following table:
| (In millions) | |||||
| 2024 | $ | 81.5 | |||
| 2025 | 92.3 | ||||
| 2026 | 79.1 | ||||
| 2027 | 65.4 | ||||
| 2028 | 58.5 | ||||
| Thereafter | 185.0 | ||||
| Total lease payments* | $ | 561.8 | |||
| Less interest | 91.0 | ||||
| Present value of lease liabilities | $ | 470.8 | |||
*Lease payments exclude $2.2 million of legally binding minimum lease payments for leases contain renewal provisions and generally require the company to pay utilities, insurance, taxes,signed but not yet commenced.
Supplemental cash flow and other operating expenses.
| Year Ended | Year Ended | |||||||||||||
| June 3, 2023 | May 28, 2022 | |||||||||||||
| Weighted-average remaining lease term (in years) | ||||||||||||||
| Operating leases | 6.9 | 7.1 | ||||||||||||
| Weighted-average discount rate | ||||||||||||||
| Operating leases | 2.4 | % | 1.9 | % | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Operating cash flow from operating leases | $ | 100.0 | $ | 85.7 | ||||||||||
| ROU assets obtained in exchange for new operating lease liabilities | ||||||||||||||
| Operating leases | $ | 63.0 | $ | 89.1 | ||||||||||
| (In millions) | |||
| 2018 | $ | 47.0 | |
| 2019 | $ | 42.2 | |
| 2020 | $ | 35.3 | |
| 2021 | $ | 32.5 | |
| 2022 | $ | 30.7 | |
| Thereafter | $ | 141.5 | |
Pension Plans and Post-Retirement Medical InsurancePlan
The Knoll subsidiary has one domestic defined-benefit pension plan covering eligible U.S. nonunion employees. The measurement date for this plan is the last day of the fiscal year and the plan is frozen to new participants.
Benefit Obligations and Funded Status
The following table presents, for the fiscal years noted, a summary of the changes in the projected benefit obligation, plan assets and funded status of the company's domesticCompany's pension plans:
70
| Pension Benefits | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||
| Domestic | International | Domestic | International | ||||||||||||||||||||||||||||||||||||||
| Change in benefit obligation: | |||||||||||||||||||||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 152.6 | $ | 104.5 | $ | — | $ | 140.9 | |||||||||||||||||||||||||||||||||
| Acquisition of Knoll | — | — | 189.8 | — | |||||||||||||||||||||||||||||||||||||
| Interest cost | 6.1 | 3.1 | 3.9 | 2.4 | |||||||||||||||||||||||||||||||||||||
| Expected Administrative Expenses | 0.6 | — | 0.5 | — | |||||||||||||||||||||||||||||||||||||
| Loss related to settlement | 4.7 | — | 1.0 | — | |||||||||||||||||||||||||||||||||||||
| Foreign exchange impact | — | (2.5) | — | (14.1) | |||||||||||||||||||||||||||||||||||||
Actuarial (gain) loss (1) | (18.2) | (26.2) | (28.0) | (21.9) | |||||||||||||||||||||||||||||||||||||
| Administrative expenses paid | (0.7) | — | (0.5) | — | |||||||||||||||||||||||||||||||||||||
| Benefits paid | (7.2) | (2.9) | (4.2) | (2.8) | |||||||||||||||||||||||||||||||||||||
| Benefits paid related to settlement | (14.1) | — | (9.9) | — | |||||||||||||||||||||||||||||||||||||
| Benefit obligation at end of year | $ | 123.8 | $ | 76.0 | $ | 152.6 | $ | 104.5 | |||||||||||||||||||||||||||||||||
| Change in plan assets: | |||||||||||||||||||||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 144.0 | $ | 93.5 | $ | — | $ | 109.9 | |||||||||||||||||||||||||||||||||
| Acquisition of Knoll | — | — | 175.4 | — | |||||||||||||||||||||||||||||||||||||
| Actual return on plan assets | (2.9) | (9.1) | (16.8) | (6.9) | |||||||||||||||||||||||||||||||||||||
| Foreign exchange impact | (1.6) | — | (11.8) | ||||||||||||||||||||||||||||||||||||||
| Employer contributions | 7.2 | 4.5 | — | 5.0 | |||||||||||||||||||||||||||||||||||||
| Actual expenses paid | (0.7) | — | (0.5) | — | |||||||||||||||||||||||||||||||||||||
| Benefits paid | (21.3) | (2.9) | (14.1) | (2.7) | |||||||||||||||||||||||||||||||||||||
| Fair value of plan assets at end of year | $ | 126.3 | $ | 84.4 | $ | 144.0 | $ | 93.5 | |||||||||||||||||||||||||||||||||
| Funded status: | |||||||||||||||||||||||||||||||||||||||||
| Over (under) funded status at end of year | $ | 2.5 | $ | 8.4 | $ | (8.6) | $ | (11.0) | |||||||||||||||||||||||||||||||||
| Components of the amounts recognized in the Consolidated Balance Sheets: | |||||||||||||||||||||||||||||||||||||||||
| Current assets | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| Non-current assets | $ | 2.5 | $ | 8.4 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| Current liabilities | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| Non-current liabilities | $ | — | $ | — | $ | 8.6 | $ | 10.9 | |||||||||||||||||||||||||||||||||
| Components of the amounts recognized in Accumulated other comprehensive loss before the effect of income taxes: | |||||||||||||||||||||||||||||||||||||||||
| Prior service cost | $ | — | $ | 0.4 | $ | — | $ | 0.5 | |||||||||||||||||||||||||||||||||
| Unrecognized net actuarial (gain) loss | (4.4) | 25.7 | (2.8) | 41.4 | |||||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive (gain) loss | $ | (4.4) | $ | 26.1 | $ | (2.8) | $ | 41.9 | |||||||||||||||||||||||||||||||||
(1) In fiscal 2023 and international pension plans and post-retirement plan:2022, the net actuarial (gain) loss includes amounts resulting from changes in actuarial assumptions utilized to calculate our benefit plan obligations such as the weighted-average discount rate.
| Pension Benefits | Post-Retirement Benefits | ||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||
| (In millions) | Domestic | International | Domestic | International | |||||||||||||||||||
| Change in benefit obligation: | |||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 1.0 | $ | 104.4 | $ | 1.1 | $ | 112.0 | $ | 5.9 | $ | 7.7 | |||||||||||
| Interest cost | 0.1 | 2.7 | — | 3.8 | 0.2 | 0.2 | |||||||||||||||||
| Foreign exchange impact | — | (12.5 | ) | — | (4.6 | ) | — | — | |||||||||||||||
| Actuarial (gain) loss | — | 23.4 | — | (4.4 | ) | (0.4 | ) | (1.3 | ) | ||||||||||||||
| Benefits paid | (0.1 | ) | (4.2 | ) | (0.1 | ) | (2.4 | ) | (0.7 | ) | (0.7 | ) | |||||||||||
| Benefit obligation at end of year | $ | 1.0 | $ | 113.8 | $ | 1.0 | $ | 104.4 | $ | 5.0 | $ | 5.9 | |||||||||||
| Change in plan assets: | |||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | — | $ | 85.0 | $ | — | $ | 92.0 | $ | — | $ | — | |||||||||||
| Actual return on plan assets | — | 9.6 | — | (1.3 | ) | — | — | ||||||||||||||||
| Foreign exchange impact | — | (10.3 | ) | — | (3.7 | ) | — | — | |||||||||||||||
| Employer contributions | 0.1 | 0.4 | 0.1 | 0.4 | 0.7 | 0.7 | |||||||||||||||||
| Benefits paid | (0.1 | ) | (4.2 | ) | (0.1 | ) | (2.4 | ) | (0.7 | ) | (0.7 | ) | |||||||||||
| Fair value of plan assets at end of year | $ | — | $ | 80.5 | $ | — | $ | 85.0 | $ | — | $ | — | |||||||||||
| Funded status: | |||||||||||||||||||||||
| Under funded status at end of year | $ | (1.0 | ) | $ | (33.3 | ) | $ | (1.0 | ) | $ | (19.4 | ) | $ | (5.0 | ) | $ | (5.9 | ) | |||||
| Components of the amounts recognized in the Consolidated Balance Sheets: | |||||||||||||||||||||||
| Current liabilities | $ | (0.1 | ) | $ | — | $ | (0.1 | ) | $ | — | $ | (0.7 | ) | $ | (0.7 | ) | |||||||
| Non-current liabilities | $ | (0.9 | ) | $ | (33.3 | ) | $ | (0.9 | ) | $ | (19.4 | ) | $ | (4.3 | ) | $ | (5.2 | ) | |||||
| Components of the amounts recognized in Accumulated other comprehensive loss before the effect of income taxes: | |||||||||||||||||||||||
| Unrecognized net actuarial loss (gain) | $ | 0.3 | $ | 50.9 | $ | 0.3 | $ | 39.3 | $ | (0.6 | ) | $ | (0.2 | ) | |||||||||
| Accumulated other comprehensive loss | $ | 0.3 | $ | 50.9 | $ | 0.3 | $ | 39.3 | $ | (0.6 | ) | $ | (0.2 | ) | |||||||||
The accumulated benefit obligation for the company's domesticCompany's pension benefit plans totaled$1.0 $196.5 million as of the end of both fiscal 2017 and fiscal 2016. For its international plans, the accumulated benefit obligation totaled$110.0 million and $100.8$250.1 million as of fiscal 20172023 and fiscal 2016,2022, respectively. The following table summarizes the totals for pension plans with accumulated benefit obligations in excess of plan assets:
| Pension Plans with Accumulated Benefit Obligation in Excess of Plan Assets | |||||||
| (In millions) | 2017 | 2016 | |||||
| Projected benefit obligation | $ | 114.8 | $ | 105.4 | |||
| Accumulated benefit obligation | $ | 111.0 | $ | 101.8 | |||
| Fair value of plan assets | $ | 80.5 | $ | 85.0 | |||
The following table is a summary of the annual cost of the company'sCompany's pension and post-retirement plans:
| Components of Net Periodic Benefit Costs and Other Changes Recognized in Other Comprehensive Income (Loss): | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||
| Domestic | International | Domestic | International | Domestic | International | |||||||||||||||||||||||||||||||||||||||
| Interest cost | $ | 6.1 | $ | 3.1 | $ | 3.9 | $ | 2.4 | $ | — | $ | 2.2 | ||||||||||||||||||||||||||||||||
| Expected return on plan assets | (8.3) | (4.7) | (7.3) | (5.1) | — | (4.6) | ||||||||||||||||||||||||||||||||||||||
| Amortization of prior service costs | (0.1) | 0.1 | — | 0.1 | — | 0.1 | ||||||||||||||||||||||||||||||||||||||
| Expected administrative expenses | 0.6 | — | 0.5 | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Settlement related expenses | (0.6) | — | (0.1) | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Amortization of net loss/(gain) | — | 2.2 | — | 4.5 | — | 5.3 | ||||||||||||||||||||||||||||||||||||||
| Net periodic benefit (income) cost | $ | (2.3) | $ | 0.7 | $ | (3.0) | $ | 1.9 | $ | — | $ | 3.0 | ||||||||||||||||||||||||||||||||
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| Components of Net Periodic Benefit Costs and Other Changes Recognized in Other Comprehensive Income: | |||||||||||||||||||||||
| Pension Benefits | Post-Retirement Benefits | ||||||||||||||||||||||
| (In millions) | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||
| Domestic: | |||||||||||||||||||||||
| Interest cost | $ | 0.1 | $ | — | $ | — | $ | 0.2 | $ | 0.2 | $ | 0.2 | |||||||||||
| Net periodic benefit cost | $ | 0.1 | $ | — | $ | — | $ | 0.2 | $ | 0.2 | $ | 0.2 | |||||||||||
| International: | |||||||||||||||||||||||
| Interest cost | $ | 2.7 | $ | 3.8 | $ | 4.3 | |||||||||||||||||
| Expected return on plan assets | (4.7 | ) | (5.4 | ) | (5.5 | ) | |||||||||||||||||
| Net amortization | 2.2 | 2.8 | 1.8 | ||||||||||||||||||||
| Net periodic benefit cost | $ | 0.2 | $ | 1.2 | $ | 0.6 | |||||||||||||||||
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income): | |||||||||||||||
| Pension Benefits | Post-Retirement Benefits | ||||||||||||||
| (In millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
| Domestic: | |||||||||||||||
| Net actuarial gain | $ | — | $ | — | $ | (0.4 | ) | $ | (1.3 | ) | |||||
| Total recognized in other comprehensive loss | $ | — | $ | — | $ | (0.4 | ) | $ | (1.3 | ) | |||||
| International: | |||||||||||||||
| Net actuarial loss | $ | 18.6 | $ | 2.2 | |||||||||||
| Net amortization | (2.2 | ) | (2.8 | ) | |||||||||||
| Total recognized in other comprehensive loss | $ | 16.4 | $ | (0.6 | ) | ||||||||||
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss): | |||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | |||||||||||||||||||||||||||
| Domestic | International | Domestic | International | ||||||||||||||||||||||||||
| Net actuarial (gain) loss | $ | (2.2) | $ | (12.4) | $ | (2.9) | $ | (10.0) | |||||||||||||||||||||
| Net amortization | 0.1 | (3.4) | 0.1 | (10.6) | |||||||||||||||||||||||||
| Settlement charge | 0.6 | — | — | — | |||||||||||||||||||||||||
| Total recognized in other comprehensive loss | $ | (1.5) | $ | (15.8) | $ | (2.8) | $ | (20.6) | |||||||||||||||||||||
Actuarial Assumptions
The weighted-average actuarial assumptions used to determine the benefit obligation amounts and the net periodic benefit cost for the company'sCompany's pension and post-retirement plans are as follows:
| Weighted-average assumptions used in the determination of net periodic benefit cost: | ||||||||||||||||||||||||||||||||||||||||||||
| (Percentages) | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||
| Domestic | International | Domestic | International | Domestic | International | |||||||||||||||||||||||||||||||||||||||
Discount rate(1) | varies | 3.33 | varies | 1.99 | — | 1.66 | ||||||||||||||||||||||||||||||||||||||
| Compensation increase rate | N/A | 4.45 | N/A | 3.20 | — | 2.75 | ||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | 6.80 | 4.80 | 5.10 | 4.80 | — | 4.80 | ||||||||||||||||||||||||||||||||||||||
| (1) Due to settlement activity during FYE 2023 in the domestic plan, there were two remeasurements as of 3/4/2023 and 6/3/2023. The discount rate for beginning of period is 4.40% and 5.18%, respectively. Due to settlement activity during fiscal year 2022, there were four remeasurements as of 8/28/2021, 11/27/2021, 2/26/2022, and 5/28/2022. The discount rate for beginning of period in fiscal 2022 is 2.90%, 2.89%, 3.00%, and 3.52% respectively. | ||||||||||||||||||||||||||||||||||||||||||||
| Weighted-average assumptions used in the determination of the projected benefit obligations: | ||||||||||||||||||||||||||||||||||||||||||||
| Discount rate | 5.17 | 5.34 | 4.40 | 3.33 | — | 1.99 | ||||||||||||||||||||||||||||||||||||||
| Compensation increase rate | N/A | 3.00 | N/A | 4.45 | — | 3.20 | ||||||||||||||||||||||||||||||||||||||
| The weighted-average used in the determination of net periodic benefit cost: | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (Percentages) | Domestic | International | Domestic | International | Domestic | International | |||||
| Discount rate | 3.51 | 3.43 | 3.41 | 3.50 | 3.44 | 4.40 | |||||
| Compensation increase rate | n/a | 2.95 | n/a | 3.20 | n/a | 3.35 | |||||
| Expected return on plan assets | n/a | 6.10 | n/a | 6.10 | n/a | 6.10 | |||||
| The weighted-average used in the determination of the projected benefit obligations: | |||||||||||
| Discount rate | 3.53 | 2.49 | 3.51 | 3.43 | 3.41 | 3.50 | |||||
| Compensation increase rate | n/a | 3.25 | n/a | 2.95 | n/a | 3.20 | |||||
| (In millions) | 1 Percent Increase | 1 Percent Decrease | |||||
| Effect on total fiscal 2017 service and interest cost components | $ | — | $ | — | |||
| Effect on post-retirement benefit obligation at June 3, 2017 | $ | 0.2 | $ | (0.2 | ) | ||
Plan Assets and Investment Strategies
The company's internationalassets of the Company's employee benefit plan assetsplans consist mainly of listed fixed income obligations and common/collective trusts. The company'sCompany's primary objective for invested pension plan assets is to provide for sufficient long-term growth and liquidity to satisfy all of its benefit obligations over time. Accordingly, the companyCompany has developed an investment strategy that it believes maximizes the probability of meeting this overall objective. This strategy includes the development of a target investment allocation by asset category in order to provide guidelines for making investment decisions. This target allocation emphasizes the long-term characteristics of individual asset classes as well as the diversification among multiple asset classes. In developing its strategy, the companyCompany considered the need to balance the varying risks associated with each asset class with the long-term nature of its benefit obligations. The company'sCompany's strategy moving forward will be to increase the level of fixed income investments as the funding status improves, thereby more closely matching the return on assets with the liabilities of the plans.
The companyCompany utilizes independent investment managers to assist with investment decisions within the overall guidelines of the investment strategy. The target asset allocation at the end of fiscal 20172023 and asset categories for the company's primary internationalCompany's pension planplans for fiscal 20172023 and 20162022 are as follows:
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| Targeted Asset Allocation Percentage | |||||||||||||||||||||||||||||||||||
| Asset Category | Targeted Asset Allocation Percentage | Percentage of Plan Assets at Year End | Asset Category | 2023 | 2022 | ||||||||||||||||||||||||||||||
| 2017 | 2016 | Domestic | International | Domestic | International | ||||||||||||||||||||||||||||||
| Fixed income | 20 | 27 | 24 | Fixed income | 70% | 33% | 46% | 33% | |||||||||||||||||||||||||||
| Common collective trusts | Common collective trusts | 30% | 67% | 54% | 67% | ||||||||||||||||||||||||||||||
| Total | Total | 100% | 100% | 100% | 100% | ||||||||||||||||||||||||||||||
| Percentage of Plan Assets at Year End | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| Domestic | International | Domestic | International | ||||||||||||||||||||||||||||||||
| Fixed income | Fixed income | 70% | 38% | 45% | 36% | ||||||||||||||||||||||||||||||
| Common collective trusts | 80 | 73 | 76 | Common collective trusts | 30% | 62% | 55% | 64% | |||||||||||||||||||||||||||
| Total | 100 | 100 | Total | 100% | 100% | 100% | 100% | ||||||||||||||||||||||||||||
| Domestic | |||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | June 3, 2023 | |||||||||||||||||||||||||||||||||
| Asset Category | Asset Category | Level 1 | Level 2 | Total | |||||||||||||||||||||||||||||||
| Cash and cash equivalents | Cash and cash equivalents | $ | 2.1 | $ | — | $ | 2.1 | ||||||||||||||||||||||||||||
| U.S. government securities | U.S. government securities | — | 17.5 | 17.5 | |||||||||||||||||||||||||||||||
| Corporate bonds | Corporate bonds | — | 68.8 | 68.8 | |||||||||||||||||||||||||||||||
| Common collective trusts-balanced | Common collective trusts-balanced | — | 37.9 | 37.9 | |||||||||||||||||||||||||||||||
| Total | Total | $ | 2.1 | $ | 124.2 | $ | 126.3 | ||||||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||||||||
| (In millions) | International Plan as of June 3, 2017 | (In millions) | June 3, 2023 | ||||||||||||||||||||||||||||||||
| Asset Category | Level 1 | Level 2 | Total | Asset Category | Level 1 | Level 2 | Total | ||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 0.2 | $ | — | $ | 0.2 | Cash and cash equivalents | $ | 5.6 | $ | — | $ | 5.6 | ||||||||||||||||||||||
| Foreign government obligations | — | 21.4 | 21.4 | Foreign government obligations | — | 26.1 | 26.1 | ||||||||||||||||||||||||||||
| Common collective trusts-balanced | — | 58.9 | 58.9 | Common collective trusts-balanced | — | 52.7 | 52.7 | ||||||||||||||||||||||||||||
| Total | $ | 0.2 | $ | 80.3 | $ | 80.5 | Total | $ | 5.6 | $ | 78.8 | $ | 84.4 | ||||||||||||||||||||||
| May 28, 2022 | |||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | Domestic | |||||||||||||||||||||||||||||||||
| Asset Category | Asset Category | Level 1 | Level 2 | Total | |||||||||||||||||||||||||||||||
| Cash and cash equivalents | Cash and cash equivalents | $ | 2.4 | $ | — | $ | 2.4 | ||||||||||||||||||||||||||||
| U.S. government securities | U.S. government securities | — | 10.3 | 10.3 | |||||||||||||||||||||||||||||||
| Foreign government obligations | Foreign government obligations | — | 51.8 | 51.8 | |||||||||||||||||||||||||||||||
| Common collective trusts-balanced | Common collective trusts-balanced | — | 79.5 | 79.5 | |||||||||||||||||||||||||||||||
| Total | Total | $ | 2.4 | $ | 141.6 | $ | 144.0 | ||||||||||||||||||||||||||||
| May 28, 2022 | |||||||||||||||||||||||||||||||||||
| (In millions) | International Plan as of May 28, 2016 | (In millions) | International | ||||||||||||||||||||||||||||||||
| Asset Category | Level 1 | Level 2 | Total | Asset Category | Level 1 | Level 2 | Total | ||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 0.2 | $ | — | $ | 0.2 | Cash and cash equivalents | $ | 4.5 | $ | — | $ | 4.5 | ||||||||||||||||||||||
| Foreign government obligations | — | 20.5 | 20.5 | Foreign government obligations | — | 29.3 | 29.3 | ||||||||||||||||||||||||||||
| Common collective trusts-balanced | — | 64.3 | 64.3 | Common collective trusts-balanced | — | 59.7 | 59.7 | ||||||||||||||||||||||||||||
| Total | $ | 0.2 | $ | 84.8 | $ | 85.0 | Total | $ | 4.5 | $ | 89.0 | $ | 93.5 | ||||||||||||||||||||||
Cash Flows
The companyCompany reviews pension funding requirements to determine the contribution to be made in the next year. Actual contributions will be dependent upon investment returns, changes in pension obligations and other economic and regulatory factors. During fiscal 2017,2023 and fiscal 2022, the companyCompany made total cash contributions of $1.1$11.7 million and $5.0 million, respectively, to its pension plans.
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The Company expects to contribute approximately $4.6 million to its benefit plans. Inpension plans in fiscal 2016, the company made total cash contributions of $1.2 million to its benefit plans.
2024. The following represents a summary of the benefits expected to be paid by the plans in future fiscal years. These expected benefits were estimated based on the same actuarial valuation assumptions used to determine benefit obligations at June 3, 2017.2023.
| (In millions) | Pension Benefits | |||||||||||||||||||
| Domestic | International | |||||||||||||||||||
| 2024 | $ | 8.4 | $ | 2.8 | ||||||||||||||||
| 2025 | $ | 9.5 | $ | 3.2 | ||||||||||||||||
| 2026 | $ | 9.8 | $ | 3.1 | ||||||||||||||||
| 2027 | $ | 9.8 | $ | 5.1 | ||||||||||||||||
| 2028 | $ | 9.6 | $ | 3.9 | ||||||||||||||||
| 2029-2033 | $ | 45.1 | $ | 24.8 | ||||||||||||||||
| (In millions) | Pension Benefits Domestic | Pension Benefits International | Post-Retirement Benefits | ||||||||
| 2018 | $ | 0.1 | $ | 1.7 | $ | 0.7 | |||||
| 2019 | $ | 0.1 | $ | 2.1 | $ | 0.6 | |||||
| 2020 | $ | 0.1 | $ | 2.1 | $ | 0.6 | |||||
| 2021 | $ | 0.1 | $ | 2.1 | $ | 0.5 | |||||
| 2022 | $ | 0.1 | $ | 2.6 | $ | 0.5 | |||||
| 2023-2027 | $ | 0.3 | $ | 15.5 | $ | 1.7 | |||||
Substantially all of the company’sCompany’s domestic employees are eligible to participate in a defined contribution retirement plan, primarily the Herman Miller, Inc. profit sharingMillerKnoll Retirement Plan and 401(k) plan.the Knoll Retirement Savings Plan. Employees under the Herman Miller, Inc. profit sharing plan are eligible to begin participating on their date of hire. The Profit Sharing plan provides for discretionaryCompany contributes to the plans as matching contributions for eligible participants, payablea certain percentage of the participant’s salary deferral, subject to certain limitations defined in the company's common stock, of not more than 6 percent of employees' wages based on the company's financial performance. Under the Herman Miller, Inc. 401(k) plan the company matches 100 percent of employee contributions to their 401(k) accounts up to 3 percent of their pay. A core contribution of 4 percent is also included for most participants of the plan.documents. The company’sCompany’s other defined contribution retirement plans may provide for matching contributions, non-elective contributions and discretionary contributions as declared by management. Effective January 1, 2023, the Knoll Retirement Savings Plan was merged into the MillerKnoll Retirement Plan.
The following table reconciles the numerators and denominators used in the calculations of basic and diluted EPS for each of the last three fiscal years:
| (In millions, except shares) | 2023 | 2022 | 2021 | ||||||||||||||
| Numerator: | |||||||||||||||||
| Numerator for both basic and diluted EPS, Net (loss) earnings attributable to MillerKnoll, Inc. | $ | 42.1 | $ | (27.1) | $ | 174.6 | |||||||||||
| Denominator: | |||||||||||||||||
| Denominator for basic EPS, weighted-average common shares outstanding | 75,478,000 | 73,160,212 | 58,931,268 | ||||||||||||||
| Potentially dilutive shares resulting from stock plans | 546,368 | — | 458,330 | ||||||||||||||
| Denominator for diluted EPS | 76,024,368 | 73,160,212 | 59,389,598 | ||||||||||||||
| (In millions, except shares) | 2017 | 2016 | 2015 | ||||||||
| Numerator: | |||||||||||
| Numerator for both basic and diluted EPS, Net earnings attributable to Herman Miller, Inc. | $ | 123.9 | $ | 136.7 | $ | 97.5 | |||||
| Denominator: | |||||||||||
| Denominator for basic EPS, weighted-average common shares outstanding | 59,871,805 | 59,844,540 | 59,475,297 | ||||||||
| Potentially dilutive shares resulting from stock plans | 682,784 | 684,729 | 649,069 | ||||||||
| Denominator for diluted EPS | 60,554,589 | 60,529,269 | 60,124,366 | ||||||||
Equity awards of 764,1542,119,223 shares, 528,6761,245,988 shares and 715,685207,365 sharesof common stock were excluded from the denominator for the computation of diluted earnings per share for the fiscal years ended June 3, 2017, 2023, May 28, 20162022 and May 30, 2015,29, 2021, respectively, because they were anti-dilutive. The company has certain share-based payment awards that meet the definition of participating securities. The company has evaluated the impact of all participating securities under the two-class method, noting there was no impact on EPS.
Common Stock
The companyCompany has a share repurchase plan authorized by the Board of Directors on September 28, 2007,January 16, 2019, which providedprovides a share repurchase authorization of $300.0$250.0 million with no specified expiration date. The approximate dollar value of shares available for purchase under the plan at June 3, 2023 was $204.5 million. During fiscal year 2017, 20162023, 2022, and 2015,2021, shares repurchased under the repurchase plan totaled 575,207, 390,010, and retired totaled 765,556, 482,040 and 121,48838,931 shares respectively.
The companyCompany utilizes equity-basedstock-based compensation incentives as a component of its employee and non-employee director and officer compensation philosophy. A committee of the Board of Directors determines the terms of the awards granted and may grant various forms of equity-based incentive compensation. Currently, these incentives consist principally of stock options, restricted stock restrictedunits, performance stock units, deferred stock units, and performance share units. The company also offers arestricted shares. For all stock-based compensation plans, the Company issues authorized but unissued shares to fulfill plan terms.
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Since the inception of the employee stock purchase plan, 3,666,018 shares of common stock have been authorized for its domesticissuance and certain international employees. The company issues246,338 shares in connection with its share-based compensation plans from authorized, but unissued, shares.remain available for future purchases as of June 3, 2023. At June 3, 20172023, there were 3,991,3078,164,945 shares authorized for issuance under active long-term incentive compensation plans: 7,182,670 shares authorized under the various stock-based compensation plans.MillerKnoll, Inc. 2020 Long Term Incentive Plan (the "LTIP") and 982,275 shares authorized under the Knoll, Inc. 2021 Stock Incentive Plan, (the "SIP"), as amended. There were 3,327,940 shares available for issuance under the LTIP and 530,684 under the SIP as of June 3, 2023.
Valuation and Expense Information
The companyCompany measures the cost of employee services received in exchange for an award of equity instruments based on their grant-datethe fair market value.value of the award on the date of grant. This costcompensation expense is recognized over the requisite service period, which includes any applicable performance period.
Certain of the company's equity-basedCompany stock-based compensation awards contain provisions that allow for continued vesting into retirement. Stock-based awards are considered fully vested for expense attribution purposes when the employee's retention of the award is no longer contingent on providing subsequent service.
The companyCompany classifies pre-tax stock-based compensation expense primarily within Operating expenses in the Consolidated Statements of Comprehensive Income. Pre-taxExcluding fully vested and non-forfeitable deferred stock units described under "Deferred Compensation Plan" below, pre-tax compensation expense and the related income tax benefit for all types of stock-based programs waswere as follows for the periods indicated:
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Employee stock purchase program | $ | 0.5 | $ | 0.5 | $ | 0.4 | |||||||||||
| Stock options | 5.7 | 3.6 | 3.7 | ||||||||||||||
| Restricted stock units | 9.4 | 15.3 | 4.1 | ||||||||||||||
| Performance share units | 3.5 | 2.8 | 0.8 | ||||||||||||||
| Restricted stock awards | 1.1 | 9.2 | — | ||||||||||||||
| Total | $ | 20.2 | $ | 31.4 | $ | 9.0 | |||||||||||
| Tax benefit | $ | 4.9 | $ | 7.7 | $ | 2.0 | |||||||||||
| (In millions) | June 3, 2017 | May 28, 2016 | May 30, 2015 | |||||||||
| Employee stock purchase program | $ | 0.3 | $ | 0.3 | $ | 0.3 | ||||||
| Stock option plans | 2.0 | 1.9 | 2.6 | |||||||||
| Restricted stock grants | — | — | 0.1 | |||||||||
| Restricted stock units | 3.6 | 3.2 | 3.7 | |||||||||
| Performance share units | 2.8 | 6.5 | 3.3 | |||||||||
| Total | $ | 8.7 | $ | 11.9 | $ | 10.0 | ||||||
| Tax benefit | $ | 3.1 | $ | 4.3 | $ | 3.6 | ||||||
As of June 3, 2017,2023, total pre-tax stock-based compensation cost not yet recognized related to non-vested awards was approximately $4.8 million.$11.5 million. The weighted-average period over which this amount is expected to be recognized is 1.06 years.0.9 year.
follows:
Employee Stock Purchase Program
Stock Option PlansOptions
The company has stock option plans under whichCompany grants options to purchase the company'sCompany's stock may be granted to certain key employees and non-employee directors at a price not less than the market price of the company's common stock on the date of grant.under its LTIP. Under the current award program, all options become exercisable between one year and three years from the date of grant and expire ten years from the date of grant. Most options are subject to graded vesting, withand the related compensation expense is based on the fair value of the stock options on the date of grant using the Black-Scholes model and is recognized on a straight-line basis over the requisite service period.
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In fiscal 2023, there was one stock option valuation date, but two valuations. In fiscal 2022, there were two stock option valuation dates. In fiscal 2021, there was one stock option valuation date, but two valuations. Therefore, the table below has been presented with the assumptions relevant to each valuation date. The companyCompany generally estimated the fair value of employee stock options on the date of grant using the Black-Scholes model.model; however, the Hull-White I lattice model was used where historical expected term data for the option conditions was not prevalent. In determining these values, the following weighted-average assumptions were used for the options granted during the fiscal years indicated.indicated:
| 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||
| Valuation Method | Valuation Method | Hull-White I(1) | Black-Scholes | Black-Scholes | Black-Scholes | ||||||||||||||||||||||||||
Risk-free interest rates | 1.01 | % | 1.51 | % | 1.46 | % | 2.91% | 3.01% | 0.47% | 0.23-0.25% | |||||||||||||||||||||
Expected term of options (2) | 4.0 years | 4.0 years | 4.0 years | ||||||||||||||||||||||||||||
Expected volatility (3) | 26 | % | 33 | % | 36 | % | |||||||||||||||||||||||||
Dividend yield (4) | 2.13 | % | 2.03 | % | 1.85 | % | |||||||||||||||||||||||||
Hull-White I barrier(3) | Hull-White I barrier(3) | 1.36 | N/A | N/A | N/A | ||||||||||||||||||||||||||
Expected term of options (4) | Expected term of options (4) | N/A | 3.4 years | 3.3 years | 3.8-4.1 years | ||||||||||||||||||||||||||
Expected volatility (5) | Expected volatility (5) | 37.09% | 51.58% | 49.03% | 43-44% | ||||||||||||||||||||||||||
Dividend yield (6) | Dividend yield (6) | 2.52 | % | 2.50 | % | 1.64 | % | 1.99 | % | ||||||||||||||||||||||
| Weighted-average grant-date fair value of stock options: | Weighted-average grant-date fair value of stock options: | ||||||||||||||||||||||||||||||
| Granted with exercise prices equal to the fair market value of the stock on the date of grant | $ | 5.50 | $ | 6.73 | $ | 7.74 | Granted with exercise prices equal to the fair market value of the stock on the date of grant | N/A | $ | 9.43 | $13.87-$14.36 | $ | 6.10 | ||||||||||||||||||
| Granted with exercise prices greater than the fair market value of the stock on the date of grant | Granted with exercise prices greater than the fair market value of the stock on the date of grant | $ | 5.74 | N/A | N/A | $ | 5.62 | ||||||||||||||||||||||||
(1) RepresentsA conservative post-vest cancel rate of 0.00% was applied under the U.S. Treasury yield overassumption that the same period as the expected option term.options will be exercised.
(2) Represents term-matched, zero-coupon risk-free rate from the period of time that options granted are expected to be outstanding. Based on analysis of historical option exercise activity, the company has determined that all employee groups exhibit similar exercise and post-vesting termination behavior.Treasury Constant Maturity yield curve, continuously compounded.
(3) Amount is determined based on analysisRepresents historical average of Section 16 Officers in-the-money exercise ratio from Company’s historical price volatility of the company's common stock over a period equal to the expected term of the options.data through May 27, 2022.
(4) Represents the company's estimated cash dividend yield over the expected term ofhistorical settlement data, using midpoint scenario with 1-year grant date filter assumption for outstanding options.
(5) The blended volatility approach was used. 90% term-matched historical volatility from daily stock prices and 10% weighted average implied volatility from the 90 days preceding the grant date.
(6) Represents the quarterly dividend divided by the three-month average stock price as of July 7 and 12, 2022, July 9, 2021, and February 28, 2023, for 2022 and 2021, respectively.
The following is a summary of the transactions under the company's stock option plans:activity during fiscal 2023:
| Shares Under Option | Weighted-Average Exercise Prices | Aggregate Intrinsic Value (in millions) | Weighted-Average Remaining Contractual Term (Years) | ||||||||||||||||||||
| Outstanding at May 28, 2022 | 1,716,593 | $ | 26.83 | $ | 10.4 | 7.7 | |||||||||||||||||
| Granted | 544,299 | 32.25 | |||||||||||||||||||||
| Exercised | (49,482) | 20.44 | |||||||||||||||||||||
| Forfeited or expired | (7,210) | 22.86 | |||||||||||||||||||||
| Outstanding at June 3, 2023 | 2,204,200 | 28.33 | — | 7.3 | |||||||||||||||||||
| Exercisable at end of period | 1,088,713 | $ | 26.57 | $ | — | 6.5 | |||||||||||||||||
| Shares Under Option | Weighted-Average Exercise Prices | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (In millions) | ||||||||||
| Outstanding at May 28, 2016 | 921,380 | $ | 25.80 | 4.20 | $ | 5.5 | |||||||
| Granted at market | 745,141 | $ | 31.86 | ||||||||||
| Exercised | (327,299 | ) | $ | 28.84 | |||||||||
| Forfeited or expired | (9,520 | ) | $ | 38.11 | |||||||||
| Outstanding at June 3, 2017 | 1,329,702 | $ | 28.36 | 7.26 | $ | 5.8 | |||||||
| Ending vested + expected to vest | 1,325,647 | $ | 28.35 | 7.25 | $ | 5.8 | |||||||
| Exercisable at end of period | 498,522 | $ | 22.95 | 4.37 | $ | 4.9 | |||||||
The weighted-average remaining recognition period of the outstanding stock options at June 3, 20172023 was 0.900.54 years. The total pre-tax intrinsic value of options exercised during fiscal 2017, 20162023, 2022 and 20152021 was $1.3$0.4 million, $2.3$1.8 million and $2.4$0.5 million, respectively. The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the company'sCompany's closing stock price as of the end of the period presented, which would have been received by the option holders had all option holders exercisedoptions were not in-the-money options as of that date. Total cash received during fiscal 20172023 from the exercise of stock options was $6.6approximately $1.0 million.
Restricted Stock GrantsUnits
The company periodicallyCompany grants time-based restricted stock units to certain key employees under its LTIP. Currently outstanding awards generally cliff-vest or vest ratably over a three-year service period. Prorated vesting occurs under certain circumstances and full or partial accelerated vesting occurs upon retirement. Awards granted in fiscal 2023 had a graded vesting schedule of 25%, 25%, and 50% after the first, second, and third year, respectively. Each restricted stock unit represents one equivalent share of the Company's common stock to certain key employees. Sharesbe issued, free of restrictions, after the vesting period. Compensation expense is based on the grant-date fair value and recognized on a straight-line basis over the requisite service period. Dividend reinvestment units are granted incredited on the name ofdividend payable date and vest with the employee, who has allunderlying shares. The units do not entitle participants to the rights of holders of common stock, such as voting rights, until shares are issued after vesting.
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In conjunction with the acquisition of Knoll, Inc. on July 19, 2021, outstanding restricted stock unit awards previously granted under a shareholder,Knoll stock compensation plan were automatically converted into MillerKnoll awards at the identified equity award exchange ratio, with each converted unit representing one equivalent share of the Company's common stock to be issued, free of restrictions, after the vesting period. The awards generally cliff-vest after a three-year service period from the original date of grant. The converted units do not entitle participants to the rights of holders of common stock, such as voting rights, until shares are issued after vesting. Restricted stock units awarded under a Knoll stock compensation plan are entitled to dividend rights, and dividend equivalents are accrued on the dividend record date. Upon vesting of the underlying shares, accrued dividend equivalents are paid in cash.
The following is a summary of restricted stock unit activity during fiscal 2023:
Share Units | Weighted Average Grant-Date Fair Value | Aggregate Intrinsic Value (in millions) | Weighted-Average Remaining Contractual Term (Years) | ||||||||||||||||||||
| Outstanding at May 28, 2022 | 576,382 | $ | 37.33 | $ | 17.8 | 1.1 | |||||||||||||||||
| Granted | 406,720 | 27.76 | |||||||||||||||||||||
| Forfeited | (79,027) | 33.54 | |||||||||||||||||||||
| Released | (219,734) | 38.46 | |||||||||||||||||||||
| Outstanding at June 3, 2023 | 684,341 | $ | 31.83 | $ | 9.9 | 1.0 | |||||||||||||||||
The weighted-average remaining recognition period of the outstanding restricted stock units at June 3, 2023, was 1.1 years. The total market value of the units that vested during the twelve months ended June 3, 2023, was $6.0 million. In addition, $74 thousand in accrued cash dividends were paid upon vesting of the underlying shares of converted Knoll awards. The weighted-average grant-date fair value of restricted stock units granted during 2023, 2022, and 2021 was $27.76, $44.25, and $26.71, respectively. The intrinsic value presented above includes $60 thousand in accrued cash dividends on the underlying shares of outstanding converted Knoll restricted stock unit awards.
Performance Stock Units
The Company grants performance-based restricted stock units, commonly referred to as performance stock units, to certain key employees under its LTIP that vest subject to certain restrictionsthe satisfaction of pre-established financial and non-financial metrics. Each performance stock unit represents one equivalent share of the Company's common stock. The number of shares of Company common stock ultimately issued in connection with these performance stock units will be determined based on transferability and riskattainment of forfeiture. The grants are subject to either cliff-based or graded vestingthe pre-established metrics over a defined three-year service period. For members of the executive leadership team, this calculation is adjusted by a relative total shareholder return modifier. Compensation expense is recognized over the requisite service period on a straight-line basis and based on the grant-date fair value. For certain awards incorporating a market condition, grant-date fair value is determined using a Monte Carlo simulation. For each tranche, fair value is determined on the date performance metrics are approved. Performance stock units awarded under the LTIP do not exceeding five years,have dividend rights.
In conjunction with the acquisition of Knoll, Inc. on July 19, 2021, outstanding performance stock unit awards previously granted under a Knoll stock compensation plan were automatically converted into MillerKnoll awards with each converted unit representing one equivalent share of the Company's common stock. The number of common shares ultimately issued in connection with these performance stock units will be determined based on the attainment of a pre-established financial metric over a five-year service period ending December 31, 2023. The converted units do not entitle participants to the rights of holders of common stock, such as voting rights, until shares are issued after vesting. Performance stock units awarded under Knoll stock compensation plans are entitled to dividend rights, and dividend equivalents are subjectaccrued on the dividend record date. Upon vesting of the underlying shares, accrued dividend equivalents are paid in cash.
The following is a summary of performance stock unit activity during fiscal 2023:
Share Units | Weighted Average Grant-Date Fair Value | Aggregate Intrinsic Value (in millions) | Weighted-Average Remaining Contractual Term (Years) | ||||||||||||||||||||
| Outstanding at May 28, 2022 | 364,087 | $ | 42.75 | $ | 11.3 | 0.9 | |||||||||||||||||
| Granted | 172,645 | 27.30 | |||||||||||||||||||||
| Forfeited | (179,631) | 44.70 | |||||||||||||||||||||
| Released | (6,130) | 31.23 | |||||||||||||||||||||
| Outstanding at June 3, 2023 | 350,971 | $ | 34.41 | $ | 5.2 | 1.2 | |||||||||||||||||
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The weighted-average remaining recognition period of the outstanding performance stock units at June 3, 2023, was 0.68 years. The total market value for shares vested in a prior fiscal year but deferred that were released during the twelve months ended June 3, 2023, was $167 thousand; no additional shares were vested in fiscal 2023. The weighted-average grant-date fair value of performance stock units granted during fiscal 2023, 2022, and 2021 was $27.30, $43.06, and $37.21, respectively. The intrinsic value presented above includes $0.2 million in accrued cash dividends on the underlying shares of outstanding converted Knoll performance stock unit awards.
Restricted Stock Awards
In conjunction with the acquisition of Knoll, Inc. on July 19, 2021, outstanding restricted stock awards previously granted under a Knoll stock compensation plan were automatically converted into MillerKnoll awards at the identified equity award exchange ratio with each converted unit then representing one equivalent share of the Company's common stock to forfeiture ifbe issued, free of restrictions, after the vesting period. The awards generally cliff-vest after a three-year service period from the original date of grant. The restricted stock awards do not entitle the employee ceases to be employed by the company for certain reasons. After the vesting period, the riskrights of forfeiture andholders of common stock, such as voting rights, until restrictions on transferability lapse.are released after vesting. The companyCompany recognizes the related compensation expense on a straight-line basis over the requisite service period. A summary of shares subjectRestricted stock awards granted under Knoll's stock compensation plans are entitled to restrictionsdividend rights, and dividend equivalents are as follows:
| 2017 | |||||||
| Shares | Weighted Average Grant-Date Fair Value | ||||||
| Outstanding at May 28, 2016 | 20,823 | $ | 21.35 | ||||
| Vested | (20,323 | ) | $ | 21.38 | |||
| Forfeited | (500 | ) | $ | 20.17 | |||
| Outstanding at June 3, 2017 | — | $ | — | ||||
cash.
The following is a summary of restricted stock unit transactions for theactivity during fiscal years indicated:2023:
| Share Units | Weighted-Average Grant-Date Fair Value | ||||||||||
| Outstanding at May 28, 2022 | 219,989 | $ | 44.36 | ||||||||
| Granted | — | — | |||||||||
| Forfeited | (39,839) | 44.18 | |||||||||
| Released | (145,407) | 44.35 | |||||||||
| Outstanding at June 3, 2023 | 34,743 | $ | 44.36 | ||||||||
Share Units | Weighted Average Grant-Date Fair Value | Aggregate Intrinsic Value in Millions | Weighted-Average Remaining Contractual Term (Years) | |||||||||
| Outstanding at May 28, 2016 | 377,861 | $ | 27.83 | $ | 12.0 | 1.40 | ||||||
| Granted | 114,778 | $ | 31.83 | |||||||||
| Forfeited | (12,951 | ) | $ | 29.25 | ||||||||
| Released | (94,736 | ) | $ | 28.70 | ||||||||
| Outstanding at June 3, 2017 | 384,952 | $ | 28.73 | $ | 12.6 | 1.14 | ||||||
| Ending vested + expected to vest | 379,037 | 29.30 | $ | 12.4 | 1.13 | |||||||
The weighted-average remaining recognition period of the outstanding restricted stock unitsaward shares at June 3, 2017,2023 was 0.900.7 years. The fair value of the share units that vested during the twelve months ended June 3, 2017, was $3.0 million. The weighted average grant-date fair value of restricted stock units granted during 2017, 2016, and 2015 was $31.83, $29.03 and $30.38 respectively.
Share Units | Weighted Average Grant-Date Fair Value | Aggregate Intrinsic Value in Millions | Weighted-Average Remaining Contractual Term (Years) | |||||||||
| Outstanding at May 28, 2016 | 433,714 | $ | 31.74 | $ | 13.7 | 1.20 | ||||||
| Granted | 141,218 | $ | 29.40 | |||||||||
| Forfeited | (43,945 | ) | $ | 35.75 | ||||||||
| Released | (113,040 | ) | $ | 29.34 | ||||||||
| Outstanding at June 3, 2017 | 417,947 | $ | 31.18 | $ | 13.7 | 1.03 | ||||||
| Ending vested + expected to vest | 413,358 | $ | 31.23 | $ | 13.5 | 1.03 | ||||||
| 2017 | 2016 | ||||||
Risk-free interest rates (1) | 1.29 | % | 1.07 | % | |||
Expected term of options (2) | 2.1 years | 3.1 years | |||||
Expected volatility (3) | 35 | % | 35 | % | |||
| Dividend yield | not applicable | not applicable | |||||
| Strike price | $ | 24.39 | 24.39 | ||||
Per share value (4) | $ | 3.24 | 6.52 | ||||
| Shares Under Option | Weighted-Average Exercise Prices | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (In millions) | ||||||||||
| Outstanding at May 28, 2016 | 500,376 | $ | 24.07 | 3.20 | $ | 0.4 | |||||||
| Granted | 40,425 | $ | 24.63 | ||||||||||
| Exercised | (2,957 | ) | $ | 6.40 | |||||||||
| Forfeited | (11,600 | ) | $ | 24.39 | |||||||||
| Outstanding at June 3, 2017 | 526,244 | $ | 24.20 | 2.20 | $ | 0.1 | |||||||
| Exercisable at end of period | 46,758 | $ | 22.30 | 2.20 | $ | 0.1 | |||||||
Executive Deferred Compensation Plan
The Herman Miller,MillerKnoll, Inc. Executive Equalization Retirement Plan, as amended (the "Executive Equalization Plan"), is a supplemental deferred compensation plan andthat was made available for salary deferrals and companyCompany contributions beginning in January 2008. The plan is available to a select group of management or highly compensated employees who are selected for participation by the Executive Compensation Committee of the Board of Directors. The plan allows participants to defer up to 50 percent50% of their base salary and up to 100 percent100% of their incentive cash bonus. Company contributions to the plan “mirror” the amounts the companyCompany would have contributed to the various qualified retirement plans had the employee's compensation not been above the IRS statutory ceiling ($270,000330,000 in 2017)2023). The companyCompany does not guarantee a rate of return for these funds.amounts deferred pursuant to this plan. Instead, participants make investment elections for their deferrals and company contributions.Company contributions which are subject to market conditions. Investment options are the same asclosely aligned to those available under the Herman Miller Profit Sharing and 401(k)MillerKnoll Retirement Plan, except for companythe Company stock which is not an investment option under this plan.
fund.
In accordance with the terms of the Executive Equalization Plan and Nonemployee Officerthe Director Plan described below, participant deferrals and Director Deferred Compensation Plan, the salary and bonus deferrals, companyCompany contributions and director fee deferrals have been placed in a Rabbi trust. The assets in the Rabbi trust remain subject to the claims of creditors of the companyCompany and are not the property of the participant. Investments in securities other than the company'sCompany's common stock are included within the Other assets line item, while the remaining investments in the company'sCompany's stock are included in the line item Key executive deferredDeferred compensation plan in the company'sCompany's Consolidated Balance Sheets. A liability of the same amount is recorded on the Consolidated Balance Sheets within the Other liabilities line item. Investment assets are classified as trading, and accordingly, realizedRealized and unrealized gains and losses for investment assets other than Company common stock are recognized within the company'sCompany's Consolidated Statements of Comprehensive Income in the Interest and other investment income line item. The associated changes to the liability are
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recorded as compensation expense within the Selling, general and administrative line item within the company'sCompany's Consolidated Statements of Comprehensive Income. The net effect of any change to the asset and corresponding liability is offset and has no impact on Netnet earnings in the Consolidated Statements of Comprehensive Income.
Director Fees and Director Deferred Compensation Plan
The Amended and Restated MillerKnoll, Inc, Director Deferred Compensation Plan (the "Director Plan") allows non-employee directors of the Board members receivedCompany to defer all or a portion of their annual director fees in either a deferred cash account or, beginning in January 2022, a deferred stock account.
In the deferred cash account, investment options are the same as those available under the MillerKnoll Retirement Plan, except for the Company stock fund. At the time(s) specified by the director for receipt of this deferred compensation, these deferred amounts will be paid to the director in cash.
In the deferred stock account, deferred stock units are credited to the director with each unit representing one equivalent share of the Company's common stock to be issued after the deferral period. The deferred stock units are valued at the market price of the Company's common stock on the date of grant, and the value of the units credited are expensed on the date of grant. Each time a dividend is paid on the Company's common stock, the director is credited with dividend equivalent units. At the time(s) specified by the director for receipt of this deferred compensation, these deferred amounts will be paid to the director in shares of the Company's common stock. The units do not entitle the directors to the rights of holders of common stock, such as voting rights, until shares are issued.
During fiscal year 2023, 25,230 deferred stock units were credited to directors pursuant to the Director Plan. The total fair value of deferred stock units issued during fiscal year 2023 was $0.6 million. At June 3, 2023, there were 41,824 deferred stock units outstanding. All of which are vested, with an aggregate intrinsic value of $0.6 million. The weighted-average grant date fair value of deferred stock units granted during 2023 and 2022 was $22.73 and $37.34 per share, respectively.
All amounts deferred by directors pursuant to the Director Plan are fully vested and nonforfeitable.
The following shares or options inamounts and types of Company equity were issued to non-employee directors during the fiscal years indicated:
| 2023 | 2022 | 2021 | |||||||||||||||
| Shares of common stock | 27,785 | 23,255 | 3,013 | ||||||||||||||
| Deferred stock units pursuant to the Director Plan | 25,230 | 15,664 | |||||||||||||||
| Stock options | — | — | — | ||||||||||||||
| 2017 | 2016 | 2015 | |||||||
| Shares of common stock | 9,982 | 21,988 | 13,752 | ||||||
| Shares through the deferred compensation program | 2,582 | 3,118 | — | ||||||
The components of (loss) earnings before income taxes are as follows:
| (In millions) | 2023 | 2022 | 2021 | ||||||||||||||
| Domestic | $ | (90.3) | $ | (142.4) | $ | 135.1 | |||||||||||
| Foreign | 141.7 | 133.8 | 93.2 | ||||||||||||||
| Total | $ | 51.4 | $ | (8.6) | $ | 228.3 | |||||||||||
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| (In millions) | 2017 | 2016 | 2015 | ||||||||
| Domestic | $ | 131.4 | $ | 154.9 | $ | 142.5 | |||||
| Foreign | 46.2 | 41.7 | 2.7 | ||||||||
| Total | $ | 177.6 | $ | 196.6 | $ | 145.2 | |||||
The provision (benefit) for income taxes consists of the following:
| (In millions) | 2017 | 2016 | 2015 | ||||||||
| Current: Domestic - Federal | $ | 28.7 | $ | 36.4 | $ | 43.6 | |||||
| Domestic - State | 2.3 | 6.4 | 6.3 | ||||||||
| Foreign | 11.1 | 6.3 | 6.1 | ||||||||
| 42.1 | 49.1 | 56.0 | |||||||||
| Deferred: Domestic - Federal | 9.2 | 7.5 | (5.9 | ) | |||||||
| Domestic - State | 2.8 | 0.2 | (0.6 | ) | |||||||
| Foreign | 1.0 | 2.7 | (2.3 | ) | |||||||
| 13.0 | 10.4 | (8.8 | ) | ||||||||
| Total income tax provision | $ | 55.1 | $ | 59.5 | $ | 47.2 | |||||
| (In millions) | 2023 | 2022 | 2021 | |||||||||||||||||
| Current: | Domestic - Federal | $ | 4.2 | $ | (3.8) | $ | 13.2 | |||||||||||||
| Domestic - State | 2.2 | 0.2 | 5.2 | |||||||||||||||||
| Foreign | 42.3 | 38.1 | 22.8 | |||||||||||||||||
| 48.7 | 34.5 | 41.2 | ||||||||||||||||||
| Deferred: | Domestic - Federal | (32.5) | (12.2) | 10.4 | ||||||||||||||||
| Domestic - State | (4.4) | (5.0) | 1.4 | |||||||||||||||||
| Foreign | (7.3) | (6.2) | (4.7) | |||||||||||||||||
| (44.2) | (23.4) | 7.1 | ||||||||||||||||||
| Total income tax provision | $ | 4.5 | $ | 11.1 | $ | 48.3 | ||||||||||||||
The following table represents a reconciliation of income taxes at the United States statutory rate of 21% with the effective tax rate as follows:
| (In millions) | 2023 | 2022 | 2021 | ||||||||||||||
| Income taxes computed at the United States Statutory rate | $ | 10.8 | $ | (1.8) | $ | 47.9 | |||||||||||
| Increase (decrease) in taxes resulting from: | |||||||||||||||||
| State and local income taxes, net of federal income tax benefit | (1.0) | (4.0) | 5.6 | ||||||||||||||
| Non-deductible officers' compensation | 0.9 | 5.3 | 0.5 | ||||||||||||||
| Foreign-derived intangible income | (1.7) | — | (2.1) | ||||||||||||||
| Foreign-based company income | 5.1 | 3.1 | 2.1 | ||||||||||||||
| Global intangible low-taxed income | 9.4 | 15.2 | 7.9 | ||||||||||||||
| Foreign statutory rate differences | 2.3 | 4.1 | 2.6 | ||||||||||||||
| Research and development incentives | (4.0) | (4.8) | (3.2) | ||||||||||||||
| Federal return to provision adjustments | (4.1) | (0.6) | (0.4) | ||||||||||||||
| Foreign tax credit | (15.6) | (8.8) | (10.3) | ||||||||||||||
| Foreign withholding taxes and other miscellaneous foreign taxes | 1.2 | 2.4 | 1.0 | ||||||||||||||
| Change in valuation allowance against deferred tax assets | 1.3 | 0.4 | (2.1) | ||||||||||||||
| Other, net | (0.1) | 0.6 | (1.2) | ||||||||||||||
| Income tax expense | $ | 4.5 | $ | 11.1 | $ | 48.3 | |||||||||||
| Effective tax rate | 8.8 | % | (130.1) | % | 21.2 | % | |||||||||||
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| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Income taxes computed at the United States Statutory rate of 35% | $ | 62.2 | $ | 68.8 | $ | 50.8 | ||||||
| Increase (decrease) in taxes resulting from: | ||||||||||||
| Foreign statutory rate differences | (5.7 | ) | (4.3 | ) | (1.0 | ) | ||||||
| Manufacturing deduction under the American Jobs Creation Act of 2004 | (3.4 | ) | (4.8 | ) | (4.8 | ) | ||||||
| State taxes | 3.8 | 5.2 | 4.2 | |||||||||
| Tax on undistributed foreign earnings | — | — | (3.9 | ) | ||||||||
| United Kingdom patent box deduction for research and development | (2.6 | ) | (1.7 | ) | (0.3 | ) | ||||||
| Sale of manufacturing facility in the United Kingdom | — | (1.6 | ) | — | ||||||||
| Other, net | 0.8 | (2.1 | ) | 2.2 | ||||||||
| Income tax expense | $ | 55.1 | $ | 59.5 | $ | 47.2 | ||||||
| Effective tax rate | 31.1 | % | 30.3 | % | 32.6 | % | ||||||
The tax effects and types of temporary differences that give rise to significant components of the deferred tax assets and liabilities at June 3, 20172023 and May 28, 2016,2022, are as follows:
| (In millions) | 2017 | 2016 | (In millions) | 2023 | 2022 | ||||||||||||||
| Deferred tax assets: | Deferred tax assets: | ||||||||||||||||||
| Compensation-related accruals | $ | 22.7 | $ | 23.2 | Compensation-related accruals | $ | 15.2 | $ | 15.3 | ||||||||||
| Capitalized research and experimental costs | Capitalized research and experimental costs | 17.6 | — | ||||||||||||||||
| Accrued pension and post-retirement benefit obligations | 10.9 | 9.2 | Accrued pension and post-retirement benefit obligations | 0.4 | 7.1 | ||||||||||||||
| Deferred revenue | 5.3 | 5.6 | Deferred revenue | 5.6 | 6.9 | ||||||||||||||
| Inventory related | 4.1 | 3.8 | Inventory related | 16.1 | 10.0 | ||||||||||||||
| Reserves for uncollectible accounts and notes receivable | 1.0 | 1.2 | |||||||||||||||||
| Other reserves and accruals | 6.1 | 3.0 | Other reserves and accruals | 10.9 | 12.3 | ||||||||||||||
| Warranty | 17.0 | 15.7 | Warranty | 18.0 | 17.8 | ||||||||||||||
| State and local tax net operating loss carryforwards and credits | 2.7 | 5.7 | State and local tax net operating loss carryforwards and credits | 4.7 | 7.2 | ||||||||||||||
| Federal net operating loss carryforward | 5.0 | 7.1 | Federal net operating loss carryforward | 5.2 | 3.6 | ||||||||||||||
| Federal and state nondeductible interest expense carryforward | Federal and state nondeductible interest expense carryforward | 7.9 | 1.0 | ||||||||||||||||
| Foreign tax net operating loss carryforwards and credits | 10.0 | 14.6 | Foreign tax net operating loss carryforwards and credits | 14.2 | 15.9 | ||||||||||||||
| Accrued step rent and tenant reimbursements | 4.7 | 1.9 | Accrued step rent and tenant reimbursements | 0.7 | 1.0 | ||||||||||||||
| Lease liability | Lease liability | 109.6 | 109.0 | ||||||||||||||||
| Other | 4.2 | 2.8 | Other | 5.1 | 6.0 | ||||||||||||||
| Subtotal | 93.7 | 93.8 | Subtotal | 231.2 | 213.1 | ||||||||||||||
| Valuation allowance | (10.0 | ) | (10.6 | ) | Valuation allowance | (12.7) | (11.7) | ||||||||||||
| Total | $ | 83.7 | $ | 83.2 | Total | $ | 218.5 | $ | 201.4 | ||||||||||
| Deferred tax liabilities: | Deferred tax liabilities: | ||||||||||||||||||
| Book basis in property in excess of tax basis | $ | (37.4 | ) | $ | (24.8 | ) | Book basis in property in excess of tax basis | $ | 64.0 | $ | 72.3 | ||||||||
| Intangible assets | (47.3 | ) | (47.4 | ) | Intangible assets | 196.3 | 206.8 | ||||||||||||
| Interest rate swap | Interest rate swap | 14.1 | 8.0 | ||||||||||||||||
| Right of use lease assets | Right of use lease assets | 99.1 | 100.5 | ||||||||||||||||
| Withholding taxes on planned repatriation of foreign earnings | Withholding taxes on planned repatriation of foreign earnings | 5.8 | 8.3 | ||||||||||||||||
| Other | (3.2 | ) | (2.2 | ) | Other | 2.3 | 2.8 | ||||||||||||
| Total | $ | (87.9 | ) | $ | (74.4 | ) | Total | $ | 381.6 | $ | 398.7 | ||||||||
The future tax benefits of net operating loss (NOL) carry-forwards and foreign tax credits are recognized to the extent that realization of these benefits is considered more likely than not. The companyCompany bases this determination on the expectation that related operations will be sufficiently profitable or various tax planning strategies will enable the companyCompany to utilize the NOL carry-forwards and/or foreign tax credits. To the extent that available evidence about the future raises doubt about the realization of these tax benefits, a valuation allowance is established.
At June 3, 2017,2023, the companyCompany had state and local tax NOL carry-forwards of $36.0$67.7 million, the state tax benefit of which was $2.2is $4.1 million, which have various expiration periods from 21 year to 21 years.an unlimited term. The companyCompany also had state credits with a state tax benefit of $0.5$0.6 million,, which expire in 32 to 65 years. For financial statement purposes, the NOL carry-forwards and state tax credits have been recognized as deferred tax assets, subject to a valuation allowance of $1.5$0.7 million.
At June 3, 2017,2023, the companyCompany had federal NOL carry-forwards of $14.2$24.6 million, the tax benefit of which was $5.0is $5.2 million, which expire in 12years.have expiration periods from 6 years to an unlimited term. For financial statement purposes, the NOL carry-forwards have been recognized as deferred tax assets.
At June 3, 2017,2023, the companyCompany had federal deferred assets of $2.0$1.3 million, the tax benefit of which is $0.7$0.3 million, which is related to investmentsan investment in variousa foreign joint ventures.venture. For financial statement purposes, the assets have been recognized as deferred tax assets, subject to a valuation allowance of $0.7$0.3 million.
At June 3, 2017,2023, the companyCompany had foreign net operating loss carry-forwards of $43.6$52.6 million, the tax benefit of which is $9.9$13.5 million, which have expiration periods from 115 years to an unlimited term. The companyCompany also had foreign tax credits with a tax benefit of $0.1$0.7 million which expire in 3have expiration periods from 8 to 10 years. For financial statement purposes, the NOL carry-forwards and foreign tax credits have been recognized as deferred tax assets, subject to a valuation allowance of $7.4$11.0 million.
At June 3, 2017,2023, the companyCompany had foreign deferred assets of $2.3$2.6 million, the tax benefit of which is $0.4$0.7 million, which is related to various deferred taxes in Hong KongCanada, Belgium and Ireland as well as buildings in the United Kingdom. For financial statement purposes, the assets have been recognized as deferred tax assets, subject to a valuation allowance of $0.4$0.7 million.
81
The companyCompany intends to repatriate $169.4 million in cash held in certain foreign jurisdictions and as such has not provided for United Statesrecorded a deferred tax liability related to foreign withholding taxes on these future dividends received in the U.S. from foreign subsidiaries of $5.8 million. A significant portion of this cash was previously taxed under the U.S. Tax Cut and Jobs Act either as one-time U.S. tax liability on undistributed foreign earnings or GILTI. The Company intends to remain indefinitely reinvested in the remaining undistributed earnings outside the U.S, which was $282.2 million on June 3, 2023. Determination of the total amount of unrecognized deferred income taxestax on the remaining undistributed earnings of foreign subsidiaries totaling approximately $135.0 million. Recording deferred income taxes on these undistributed earnings is not required, because these earnings have been deemed to be indefinitely reinvested. These amounts would be subject to possible U.S. taxation only if remitted as dividends. The determination of the hypothetical amount of unrecognized deferred U.S. taxes on undistributed earnings of foreign entities is not practicable.
The components of the company'sCompany's unrecognized tax benefits are as follows:
| (In millions) | ||||
| Balance at May 30, 2015 | $ | 1.8 | ||
| Increases related to current year income tax positions | 0.4 | |||
| Increases related to prior year income tax positions | 0.1 | |||
| Decreases related to prior year income tax positions | (0.1 | ) | ||
| Decreases related to lapse of applicable statute of limitations | (0.1 | ) | ||
| Decreases related to settlements | (0.4 | ) | ||
| Balance at May 28, 2016 | 1.7 | |||
| Increases related to current year income tax positions | 0.3 | |||
| Increases related to prior year income tax positions | 1.1 | |||
| Decreases related to prior year income tax positions | (0.1 | ) | ||
| Decreases related to lapse of applicable statute of limitations | (0.1 | ) | ||
| Decreases related to settlements | (0.1 | ) | ||
| Balance at June 3, 2017 | $ | 2.8 | ||
| (In millions) | |||||
| Balance at May 29, 2021 | $ | 2.1 | |||
| Increases related to prior year income tax positions | 0.5 | ||||
| Decreases related to lapse of applicable statute of limitations | (0.3) | ||||
| Balance at May 28, 2022 | $ | 2.3 | |||
| Increases related to current year income tax positions | 0.1 | ||||
| Decreases related to lapse of applicable statute of limitations | (0.6) | ||||
| Decreases related to settlements | (0.2) | ||||
| Balance at June 3, 2023 | $ | 1.6 | |||
The company'sCompany's effective tax rate would have been affected by the total amount of unrecognized tax benefits had this amount been recognized as a reduction to income tax expense.
The companyCompany recognizes interest and penalties related to unrecognized tax benefits through Income tax expense in its Consolidated Statements of Comprehensive Income. Interest and penalties and the related liability, which are excluded from the table above, were as follows for the periods indicated:
| (In millions) | June 3, 2017 | May 28, 2016 | May 30, 2015 | (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | |||||||||||||||||||||||||||
| Interest and penalty expense (income) | $ | 0.2 | $ | (0.1 | ) | $ | 0.4 | |||||||||||||||||||||||||||
| Interest and penalty (income) expense | Interest and penalty (income) expense | $ | (0.2) | $ | — | $ | 0.1 | |||||||||||||||||||||||||||
| Liability for interest and penalties | $ | 0.8 | $ | 0.7 | Liability for interest and penalties | $ | 0.7 | $ | 0.9 | $ | 0.9 | |||||||||||||||||||||||
The companyCompany is subject to periodic audits by domestic and foreign tax authorities. Currently, the companyCompany is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 months as a result of new positions that may be taken on income tax returns, settlement of tax positions and the closing of statutes of limitation. It is not expected that any of the changes will be material to the company'sCompany's Consolidated Statements of Comprehensive Income.
During the year, the company has closed the audit ofreturn for fiscal year 2016 with2022 has been fully accepted by the Internal Revenue Service under the Compliance Assurance Process (CAP). and the Company is awaiting final closing documentation. Knoll’s federal consolidated returns related to calendar years 2019 and 2020 have also been selected for examination by the Internal Revenue Service. For the majority of the remaining tax jurisdictions, the companyCompany is no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for fiscal years before 2014.2020.
82
The company'sCompany's financial instruments consist of cash equivalents, marketable securities, accounts and notes receivable, deferred compensation plan, accounts payable, debt, interest rate swaps, foreign currency exchange contracts, redeemable noncontrolling interests, indefinite-lived intangible assets, and foreign currency exchange contracts.right of use assets. The company'sCompany's financial instruments, other than long-term debt, are recorded at fair value. The fair value of fixed rate debt was based on third-party quotes (Level 2).
The carrying value and fair value of the company'sCompany's long-term debt, including current maturities, is as follows for the periods indicated:
| (In millions) | June 3, 2017 | May 28, 2016 | (In millions) | June 3, 2023 | May 28, 2022 | |||||||||||||||||
| Carrying value | $ | 199.9 | $ | 221.9 | Carrying value | $ | 1,414.4 | $ | 1,427.9 | |||||||||||||
| Fair value | $ | 213.0 | $ | 241.7 | Fair value | $ | 1,378.2 | $ | 1,364.7 | |||||||||||||
The following describes the methods the companyCompany uses to estimate the fair value of financial assets and liabilities ofrecorded in net earnings, which there have been no significant changesnot significantly changed in the current period:
Mutual Funds-equity — The Company's equity securities primarily include exchange equity and fixed income mutual funds and government obligations. Thesefunds. The equity mutual fund investments are recorded at fair value using quoted prices for similar securities.
Deferred compensation plan — The Company's deferred compensation plan primarily includes various domestic and international mutual funds that are recorded at fair value using quoted prices for similar securities.
Foreign currency exchange contracts — The company'sCompany'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 market-based activity.
The following tables settable sets forth financial assets and liabilities measured at fair value in the Consolidated Balance Sheetsthrough net income and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of June 3, 20172023 and May 28, 2016:2022:
| (In millions) | Fair Value Measurements | (In millions) | June 3, 2023 | May 28, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Financial Assets | Financial Assets | NAV | Quoted Prices With Other Observable Inputs (Level 2) | NAV | Quoted Prices With Other Observable Inputs (Level 2) | |||||||||||||||||||||||||||||||||||||||||||
| Cash equivalents: | Cash equivalents: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | Money market funds | $ | 17.3 | $ | — | $ | 31.8 | $ | — | |||||||||||||||||||||||||||||||||||||||
| June 3, 2017 | May 28, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||
| Financial Assets | Quoted Prices With Other Observable Inputs (Level 2) | Management Estimates (Level 3) | Quoted Prices With Other Observable Inputs (Level 2) | Management Estimates (Level 3) | ||||||||||||||||||||||||||||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Mutual funds - fixed income | $ | 7.7 | $ | — | $ | 6.4 | $ | — | ||||||||||||||||||||||||||||||||||||||||
| Mutual funds - equity | 0.9 | — | 0.7 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Government obligations | — | — | 0.4 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | 0.5 | — | 0.5 | — | Foreign currency forward contracts | — | 1.3 | — | 0.4 | |||||||||||||||||||||||||||||||||||||||
Interest rate swap agreement | 3.3 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation plan | 12.8 | — | 7.9 | — | Deferred compensation plan | — | 16.3 | — | 15.0 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 25.2 | $ | — | $ | 15.9 | $ | — | Total | $ | 17.3 | $ | 17.6 | $ | 31.8 | $ | 15.4 | |||||||||||||||||||||||||||||||
| Financial Liabilities | Financial Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | 0.6 | $ | — | $ | 0.8 | $ | — | Foreign currency forward contracts | $ | — | $ | 1.8 | $ | — | $ | 1.0 | |||||||||||||||||||||||||||||||
| Contingent consideration | — | 0.5 | — | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 0.6 | $ | 0.5 | $ | 0.8 | $ | 2.7 | Total | $ | — | $ | 1.8 | $ | — | $ | 1.0 | |||||||||||||||||||||||||||||||
The following describes the methods the Company uses to estimate the fair value of financial assets and liabilities recorded in other comprehensive income, which have not significantly changed in the current period:
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.
83
The following table below presents a reconciliation forsets forth financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3) (in millions):
| (In millions) | ||||||||
| Contingent Consideration | June 3, 2017 | May 28, 2016 | ||||||
| Beginning balance | $ | 2.7 | $ | 2.6 | ||||
| Net realized gains | (0.2 | ) | — | |||||
| Foreign currency translation adjustments | — | (0.1 | ) | |||||
| Settlements | (2.0 | ) | (2.5 | ) | ||||
| Purchases or additions | — | 2.7 | ||||||
| Ending balance | $ | 0.5 | $ | 2.7 | ||||
| June 3, 2017 | May 28, 2016 | ||||||||||||||||||||||||||||||
| (In millions) | Cost | Unrealized Gain | Unrealized Loss | Market Value | Cost | Unrealized Gain | Unrealized Loss | Market Value | |||||||||||||||||||||||
| Mutual funds - fixed income | $ | 7.6 | $ | 0.1 | $ | — | $ | 7.7 | $ | 6.4 | $ | — | $ | — | $ | 6.4 | |||||||||||||||
| Mutual funds - equity | 0.9 | — | — | 0.9 | 0.7 | — | — | 0.7 | |||||||||||||||||||||||
| Government obligations | — | — | — | — | 0.4 | — | — | 0.4 | |||||||||||||||||||||||
| Total | $ | 8.5 | $ | 0.1 | $ | — | $ | 8.6 | $ | 7.5 | $ | — | $ | — | $ | 7.5 | |||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | ||||||||||||
| Financial Assets | Balance Sheet Location | Quoted Prices with Other Observable Inputs (Level 2) | Quoted Prices with Other Observable Inputs (Level 2) | |||||||||||
| Interest rate swap agreement | Other noncurrent assets | $ | 59.9 | $ | 31.9 | |||||||||
| Total | $ | 59.9 | $ | 31.9 | ||||||||||
| Financial Liabilities | ||||||||||||||
| Interest rate swap agreement | Other liabilities | $ | 3.0 | $ | — | |||||||||
| Total | $ | 3.0 | $ | — | ||||||||||
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".
Other (income) expense, net. The Company views its equity and fixed income mutual funds as available for use in its current operations. Accordingly, the investments are recorded within Current Assets within the Consolidated Balance Sheets.
The companyCompany reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requirerequires the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the companyCompany evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the company'sCompany's intent to hold the investment, and whether it is more likely than not that the companyCompany will be required to sell the investment before recovery of the cost basis. The companyCompany 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 companyCompany could incur future impairments.
Derivative Instruments and Hedging Activities
Foreign Currency Forward Contracts
The companyCompany transacts business in various foreign currencies and has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Under this program, the company'sCompany'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. These foreign currency exposures typically arise from net liability or asset exposures in non-functional currencies on the balance sheets of our foreign subsidiaries. These 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, expense, net, for both realized and unrealized gains and losses.
The notional amounts of the forward contracts held to purchase and sell U.S. dollars in exchange for other major international currencies were $36.1$99.5 million and $64.3$54.1 million as of June 3, 20172023 and May 28, 2016,2022, respectively. The notional amounts of the foreign currency forward contracts held to purchase and sell British pound sterling in exchange for other major international currencies were £19.4£7.5 millionand £31.2£43.1 million as of June 3, 20172023 and May 28, 2016,2022, respectively. The companyCompany also has other forward contracts related to other currency pairs at varying notional amounts.
Interest Rate Swaps
84
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 the interest rate on 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% fixed interest rate plus applicable margin as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on February 3, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 1.910% modified fixed interest rate.
In June 2017, the Company entered into a second 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 the interest rate on 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% fixed interest rate plus applicable margin as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on February 3, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 2.348% modified fixed interest rate.
In January 2022, the Company entered into a third interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $575.0 million with a forward start date of January 31, 2022 and a maturity date of January 29, 2027. The interest rate swap locked in the Company’s interest rate on the forecasted outstanding borrowings of $575.0 million at 1.689% exclusive of the credit spread on the variable rate debt. As a result of the transaction, under the terms of the agreement the Company effectively will convert one month Spread Adjusted Term SOFR floating interest rate plus applicable margin to 1.689% fixed interest rate and adjustment % plus applicable margin as of the forward start date.The swap agreement was amended in February 2023 for each calculation period beginning on January 31, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 1.650% modified fixed interest rate.
In February 2023, the Company entered into a fourth interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $150.0 million with a forward start date of March 3, 2023 and a termination date of January 3, 2029. As a result of the transaction, under the terms of the agreement the Company effectively will convert one month Spread Adjusted Term SOFR floating interest rate plus applicable margin to 3.950% fixed interest rate and adjustment % plus applicable margin as of the forward start date. "Spread adjusted Term SOFR" means Term SOFR plus an adjustment % that varies with tenor. The Company typically selects a one month tenor and that is calculated as the one month Term SOFR rate plus 0.11448%.
The interest rate swap was aswaps were designated cash flow hedgehedges at inception and the facts and circumstances of the hedged relationship remains consistent with the initial quantitative effectiveness assessment in that the hedged instruments remain an effective accounting hedge as of June 3, 2017.2023. Since a designated derivative meets hedge accounting criteria, the fair value of the hedge is recorded in the Consolidated StatementStatements 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 derivativederivatives is immediately recognized in earnings. The interest rate swap agreement isagreements are assessed for hedge effectiveness on a quarterly basis.
| (In millions) | Notional Amount | Forward Start Date | Amendment Effective Date | Termination Date | Effective Fixed Interest Rate | ||||||||||||||||||||||||
| September 2016 Interest Rate Swap | $ | 150.0 | January 3, 2018 | February 3, 2023 | January 3, 2028 | 1.910 | % | ||||||||||||||||||||||
| June 2017 Interest Rate Swap | $ | 75.0 | January 3, 2018 | February 3, 2023 | January 3, 2028 | 2.348 | % | ||||||||||||||||||||||
| January 2022 Interest Rate Swap | $ | 575.0 | January 31, 2022 | January 31, 2023 | January 29, 2027 | 1.650 | % | ||||||||||||||||||||||
| March 2023 Interest Rate Swap | $ | 150.0 | March 3, 2023 | none | January 3, 2029 | 3.950 | % | ||||||||||||||||||||||
As of June 3, 2023, the swaps above effectively converted indebtedness up to the notional amounts from a SOFR-based floating interest rate plus 0.11448% plus applicable margin to an effective fixed interest rate plus 0.11448% plus applicable margin under the terms of our Credit Agreement. Effective Fixed Interest Rates include the rates amended effective January 31, 2023, or February 3, 2023, for the first three swaps included in the chart above.
For fiscal 2023, 2022 and 2021, there were no gains or losses recognized against earnings for hedge ineffectiveness.
85
Effects of Derivatives on the Financial Statements
The effects of non-designated derivatives on the consolidated financial statements were as follows for the fiscal years ended 20172023 and 20162022 (amounts presented exclude any income tax effects):effects ):
| (In millions) | Balance Sheet Location | June 3, 2023 | May 28, 2022 | ||||||||||||||
Non-designated derivatives: (1) | |||||||||||||||||
| Foreign currency forward contracts | Current assets: Other current assets | $ | 1.3 | $ | 0.4 | ||||||||||||
| Foreign currency forward contracts | Current liabilities: Other accrued liabilities | $ | 1.8 | $ | 1.0 | ||||||||||||
| (1) Designated derivative and their balance sheet locations are located in above table within financial assets and liabilities measured at fair value. | |||||||||||||||||
| (In millions) | Balance Sheet Location | June 3, 2017 | May 28, 2016 | ||||||
| Designated derivatives: | |||||||||
| Interest rate swap | Long-term assets: Other assets | $ | 3.3 | $ | — | ||||
| Non-designated derivatives: | |||||||||
| Foreign currency forward contracts | Current assets: Other | $ | 0.5 | $ | 0.5 | ||||
| Foreign currency forward contracts | Current liabilities: Other accrued liabilities | $ | 0.6 | $ | 0.8 | ||||
| Fiscal Year | ||||||||||||||||||||||||||||||||||||
| (In millions) | Fiscal Year | (In millions) | Statement of Comprehensive Income Location | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||||||||||||||||||
| Statement of Comprehensive Income Location | June 3, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||||||||||||||||
| Gain recognized on foreign currency forward contracts | Other expenses (income): Other, net | $ | (1.2 | ) | $ | (0.7 | ) | $ | (2.1 | ) | ||||||||||||||||||||||||||
| Loss recognized on foreign currency forward contracts | Loss recognized on foreign currency forward contracts | Other expense (income), net | $ | 4.8 | $ | 3.3 | $ | 0.8 | ||||||||||||||||||||||||||||
The gaingain/(loss) recorded, net of income taxes, in Other comprehensive loss for the effective portion of designated derivatives was as follows for the periods presented below:
| Fiscal Year | |||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Interest rate swap | $ | 4.7 | $ | 41.4 | $ | 12.6 | |||||||||||
| (In millions) | Fiscal Year | |||||||||||
| June 3, 2017 | May 28, 2016 | May 30, 2015 | ||||||||||
| Interest rate swap | $ | 2.1 | $ | — | $ | — | ||||||
Redeemable Noncontrolling Interests
Redeemable noncontrolling interests are reported on the Consolidated Balance Sheets in mezzanine equity in Redeemable noncontrolling interests. These financial instruments represent a level 3 fair value measurement.
On December 2, 2019, the Company purchased an additional 34% equity voting interest in HAY. Upon increasing its ownership to 67%, the Company obtained a controlling financial interest and consolidated the financial results of HAY. Additionally, the Company is a party to options, that if exercised, would require it to purchase the remaining 33% of the equity in HAY, at fair market value. This remaining redeemable noncontrolling interest in HAY is classified outside permanent equity in the next fiscal year, relatedConsolidated Balance Sheets and is carried at the current estimated redemption amount. 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 using discounted cash flow methods. This represents a level 3 fair value measurement.
Changes in the Company's redeemable noncontrolling interest rate swap.in HAY for the year ended June 3, 2023 are as follows:
| (In millions) | June 3, 2023 | ||||||||||
| Beginning Balance | $ | 106.9 | |||||||||
| Dividend attributable to redeemable noncontrolling interests | (4.9) | ||||||||||
| Redemption value adjustment | 1.9 | ||||||||||
| Net income attributable to redeemable noncontrolling interests | 4.0 | ||||||||||
| Foreign currency translation adjustments | (0.3) | ||||||||||
| Ending Balance | $ | 107.6 | |||||||||
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13. Commitments and Contingencies
Product Warranties
The companyCompany provides coverage to the end-user for parts and labor on products sold under its warranty policy and for other product-related matters. The standardspecific terms, conditions, and length of warranty is 12 years. However, this variesthose warranties vary depending onupon the product classification.sold. The companyCompany does not sell or otherwise issue warranties or warranty extensions as stand-alone products. Reserves have been established for various costs associated with the company'sCompany's warranty program. General warranty reserves are based on historical claims experience and other currently available information and are periodically adjusted for business levels and other factors. Specific reserves are established once an issue is identified with the amounts for such reserves based on the estimated cost of correction. The Company provides an assurance-type warranty that ensures that products will function as intended. As such, the Company's estimated warranty obligation is accounted for as a liability and is recorded within current and long-term liabilities within the Consolidated Balance Sheets.
Changes in the warranty reserve for the stated periods were as follows:
| Year Ended | |||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Accrual Balance — beginning | $ | 73.2 | $ | 60.1 | $ | 59.2 | |||||||||||
| Accrual for warranty matters | 24.6 | 16.6 | 12.8 | ||||||||||||||
| Settlements and adjustments | (23.9) | (18.6) | (11.9) | ||||||||||||||
| Acquired through business acquisition | — | 15.1 | — | ||||||||||||||
| Accrual Balance — ending | $ | 73.9 | $ | 73.2 | $ | 60.1 | |||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Accrual balance, beginning | $ | 43.9 | $ | 39.3 | $ | 37.7 | ||||||
| Accrual for warranty matters | 22.8 | 25.5 | 25.0 | |||||||||
| Settlements | (19.0 | ) | (20.9 | ) | (23.4 | ) | ||||||
| Accrual balance, ending | $ | 47.7 | $ | 43.9 | $ | 39.3 | ||||||
The companyCompany is periodically required to provide performance bonds in order to conductdo business with certain customers. These arrangements are common in the industry and generally have terms ranging between one year and three years. The bonds are required to provide assurancesassurance to customers that the products and services they have purchased will be installed and/or provided properly and without damage to their facilities. The performance bonds are provided by various bonding agencies andagencies. However, the companyCompany is ultimately liable for claims that may occur against them. As of June 3, 2017,2023, the companyCompany had a maximum financial exposure related to performance bonds of approximately $9.7$8.9 million. The companyCompany has no history of claims, nor is it aware of circumstances that would require it to performpay, under anyof these arrangements andarrangements. The Company also believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not significantlymaterially affect the company's financial statements.Company's Consolidated Financial Statements. Accordingly,no liability has been recorded in respect to these bonds as of either June 3, 2017 and 2023 or May 28, 2016.2022.
The company periodically enters into agreements in the normal course of business that may include indemnification clauses regarding patent or trademark infringement and service losses. Service losses represent all direct or consequential loss, liability, damages, costs and expenses incurred by the customer or others resulting from services rendered by the company, the dealer, or certain sub-contractors, due to a proven negligent act. The company has no history of claims, nor is it aware of circumstances that would require it to perform under these arrangements and believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not significantly affect the company's financial statements. Accordingly, no liability has been recorded as of June 3, 2017 and May 28, 2016.
2022.
Contingencies
The companyCompany 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 affecthave a material adverse effect, if any, on the company'sCompany's Consolidated Financial Statements.
As of the end of fiscal 2017,2023, outstanding commitments for future purchase obligations approximated $45.4$91.4 million.
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Effective as of May 29, 2022, the beginning of fiscal year 2023, the Company implemented an organizational change that resulted in a change in the reportable segments. The Company has restated historical results to reflect this change. Below is a summary of the change in reportable segments.
•The reportable segments now consist of three segments: Americas Contract ("Americas"), International Contract & Specialty ("International & Specialty"), and Global Retail ("Retail").
•The activities related to the manufacture and sale of furniture products direct to consumers and third-party retailers for the Knoll and Muuto brands that were previously reported within the Knoll segment have been moved to the Global Retail segment.
•The activities related to the manufacture and sale of furniture products in the Americas for the Knoll, Muuto and Datesweiser brands that were previously reported within the Knoll segment have been moved to the Americas Contract segment.
•The activities related to the manufacture and sale of furniture products in geographies other than the Americas for the Knoll and Muuto brands have been moved to the International Contract & Specialty segment.
•The activities related to manufacture and sale of products for the Maharam brand have been moved from the Americas Contract segment to the International Contract & Specialty segment, along with the activities of Holly Hunt, Spinneybeck, Knoll Textiles, and Edelman, which were previously reported within the Knoll segment.
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 reportableAmericas Contract segment includes the operations associated with the design, manufacture and sale of furniture products directly or indirectly through an independent dealership network for work-related settings, including office, education,healthcare, and healthcareeducational environments throughout the United StatesNorth and Canada. ELA Furniture SolutionsSouth America.
The International Contract & Specialty segment includes the operations associated with the design, manufacture and sale of furniture products, primarily for work-related settings,indirectly or directly through an independent dealership network in Europe, the EMEA, Latin AmericaMiddle East, Africa and Asia-Pacific geographic regions.as well as the global operations of the Specialty includes the operations associated with the design, manufacture,brands, which include Holly Hunt, Spinneybeck, Maharam, Edelman, and sale of high-craft furniture products and textiles including Geiger wood products, Maharam textiles, and Herman Miller Collection products. Knoll Textiles.
The ConsumerGlobal Retail segment includes theglobal operations associated with the sale of modern design furnishings and accessories to third party retail distributors,retailers, as well as direct to consumer sales through eCommerce, direct-mail catalogs, and DWR studios. physical retail stores.
The companyCompany also reports a Corporate“Corporate” category consisting primarily of unallocated expenses related to general corporate expensesfunctions, including, but not limited to, certain legal, executive, corporate finance, information technology, administrative and acquisition-related costs. Management regularly reviews corporate costs and other unallocated corporate costs.
The performance of the operating segments is evaluated by the company'sCompany's management using various financial measures. The following is a summary of certain key financial measures for the respective fiscal years indicated:
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| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Net Sales: | ||||||||||||
| North American Furniture Solutions | $ | 1,342.2 | $ | 1,331.8 | $ | 1,241.9 | ||||||
| ELA Furniture Solutions | 385.5 | 412.6 | 409.9 | |||||||||
| Specialty | 232.4 | 231.8 | 219.9 | |||||||||
| Consumer | 318.1 | 288.7 | 270.5 | |||||||||
| Corporate | — | — | — | |||||||||
| Total | $ | 2,278.2 | $ | 2,264.9 | $ | 2,142.2 | ||||||
| Depreciation and Amortization: | ||||||||||||
| North American Furniture Solutions | $ | 32.0 | $ | 27.9 | $ | 26.5 | ||||||
| ELA Furniture Solutions | 8.8 | 8.5 | 8.2 | |||||||||
| Specialty | 7.5 | 7.4 | 7.4 | |||||||||
| Consumer | 10.2 | 8.6 | 7.3 | |||||||||
| Corporate | 0.4 | 0.6 | 0.4 | |||||||||
| Total | $ | 58.9 | $ | 53.0 | $ | 49.8 | ||||||
| Operating Earnings (Losses): | ||||||||||||
| North American Furniture Solutions | $ | 137.7 | $ | 152.0 | $ | 125.2 | ||||||
| ELA Furniture Solutions | 30.8 | 35.3 | 25.9 | |||||||||
| Specialty | 17.7 | 16.4 | 13.5 | |||||||||
| Consumer | 5.3 | 8.1 | 14.7 | |||||||||
| Corporate | (0.7 | ) | (0.3 | ) | (15.9 | ) | ||||||
| Total | $ | 190.8 | $ | 211.5 | $ | 163.4 | ||||||
| Capital Expenditures: | ||||||||||||
| North American Furniture Solutions | $ | 47.1 | $ | 56.8 | $ | 31.7 | ||||||
| ELA Furniture Solutions | 8.5 | 15.0 | 20.3 | |||||||||
| Specialty | 9.7 | 3.1 | 3.7 | |||||||||
| Consumer | 22.0 | 10.2 | 7.9 | |||||||||
| Corporate | — | — | — | |||||||||
| Total | $ | 87.3 | $ | 85.1 | $ | 63.6 | ||||||
| Total Assets: | ||||||||||||
| North American Furniture Solutions | $ | 533.6 | $ | 531.7 | $ | 504.5 | ||||||
| ELA Furniture Solutions | 230.3 | 218.4 | 235.4 | |||||||||
| Specialty | 157.9 | 147.3 | 151.6 | |||||||||
| Consumer | 276.4 | 245.3 | 231.8 | |||||||||
| Corporate | 108.1 | 92.5 | 69.4 | |||||||||
| Total | $ | 1,306.3 | $ | 1,235.2 | $ | 1,192.7 | ||||||
| Goodwill: | ||||||||||||
| North American Furniture Solutions | $ | 135.8 | $ | 135.8 | $ | 135.8 | ||||||
| ELA Furniture Solutions | 40.1 | 40.9 | 41.9 | |||||||||
| Specialty | 49.8 | 49.8 | 49.8 | |||||||||
| Consumer | 78.8 | 78.8 | 75.6 | |||||||||
| Corporate | — | — | — | |||||||||
| Total | $ | 304.5 | $ | 305.3 | $ | 303.1 | ||||||
| Year Ended | |||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Net sales: | |||||||||||||||||
| Americas Contract | $ | 2,026.1 | $ | 1,929.1 | $ | 1,234.6 | |||||||||||
| International Contract and Specialty | 1,017.3 | 928.5 | 479.6 | ||||||||||||||
| Global Retail | 1,043.7 | 1,088.4 | 750.9 | ||||||||||||||
| Total | $ | 4,087.1 | $ | 3,946.0 | $ | 2,465.1 | |||||||||||
| Depreciation and amortization: | |||||||||||||||||
| Americas Contract | $ | 87.7 | $ | 104.5 | $ | 48.4 | |||||||||||
| International Contract and Specialty | 33.4 | 52.3 | 20.2 | ||||||||||||||
| Global Retail | 34.0 | 33.8 | 18.6 | ||||||||||||||
| Corporate | — | — | — | ||||||||||||||
| Total | $ | 155.1 | $ | 190.6 | $ | 87.2 | |||||||||||
| Operating earnings (loss): | |||||||||||||||||
| Americas Contract | $ | 99.6 | $ | (24.0) | $ | 97.2 | |||||||||||
| International Contract and Specialty | 98.6 | 69.9 | 49.4 | ||||||||||||||
| Global Retail | (15.5) | 134.5 | 138.2 | ||||||||||||||
| Corporate | (60.4) | (140.6) | (52.3) | ||||||||||||||
| Total | $ | 122.3 | $ | 39.8 | $ | 232.5 | |||||||||||
| Capital expenditures: | |||||||||||||||||
| Americas Contract | $ | 52.4 | $ | 52.5 | $ | 40.8 | |||||||||||
| International Contract and Specialty | 15.6 | 17.8 | 11.3 | ||||||||||||||
| Global Retail | 15.3 | 24.4 | 7.7 | ||||||||||||||
| Total | $ | 83.3 | $ | 94.7 | $ | 59.8 | |||||||||||
| Goodwill: | |||||||||||||||||
| Americas Contract | $ | 528.4 | $ | 530.1 | $ | 160.7 | |||||||||||
| International Contract and Specialty | 303.0 | 304.3 | 111.2 | ||||||||||||||
| Global Retail | 390.3 | $ | 391.8 | 92.3 | |||||||||||||
| Total | $ | 1,221.7 | $ | 1,226.2 | $ | 364.2 | |||||||||||
Many of the Company's assets, including manufacturing, office and showroom facilities, support multiple segments. For that reason, it is impractical to disclose asset information on a segment basis.
The accounting policies of the reportable operating segments are the same as those of the company.Company. Additionally, the companyCompany employs a methodology for allocating corporate costs and assets with the underlying objective of this methodology being to allocate corporate costs according to the relative usage of the underlying resources and to allocate corporate assets according to the relative expected benefit. The majority of the allocations for corporate expenses are based on relative net sales. However, certain corporate costs, generally considered the result of isolated business decisions, are not subject to allocation and are evaluated separately from the rest of the regular ongoing business operations.
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The company'sCompany's product offerings consist primarily of office furniture systems, seating, freestanding furniture, storage, casegoods, textiles, architectural and casegoods.acoustical products. These product offerings are marketed, distributed and managed primarily as a group of similar products on an overall portfolio basis. The following is a summary of net sales estimated by product category for the respective fiscal years indicated.indicated:
| Year Ended | |||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Net sales: | |||||||||||||||||
| Workplace | $ | 1,559.7 | $ | 1,484.4 | $ | 855.1 | |||||||||||
| Performance Seating | 900.7 | 942.8 | 778.3 | ||||||||||||||
| Lifestyle | 1,400.0 | 1,286.6 | 696.2 | ||||||||||||||
Other (1) | 226.7 | 232.2 | 135.5 | ||||||||||||||
| Total | $ | 4,087.1 | $ | 3,946.0 | $ | 2,465.1 | |||||||||||
| (1) “Other” primarily consists of uncategorized product sales and service sales. | |||||||||||||||||
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| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Net Sales: | ||||||||||||
| Systems | $ | 639.0 | $ | 656.8 | $ | 563.4 | ||||||
| Seating | 894.8 | 855.5 | 805.5 | |||||||||
| Freestanding and storage | 428.8 | 456.9 | 484.1 | |||||||||
Other (1) | 315.6 | 295.7 | 289.2 | |||||||||
| Total | $ | 2,278.2 | $ | 2,264.9 | $ | 2,142.2 | ||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Net Sales: | ||||||||||||
| United States | $ | 1,690.1 | $ | 1,757.0 | $ | 1,640.6 | ||||||
| International | 588.1 | 507.9 | 501.6 | |||||||||
| Total | $ | 2,278.2 | $ | 2,264.9 | $ | 2,142.2 | ||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Long-lived assets: | ||||||||||||
| United States | $ | 328.6 | $ | 254.8 | $ | 224.2 | ||||||
| International | 45.3 | 48.1 | 53.8 | |||||||||
| Total | $ | 373.9 | $ | 302.9 | $ | 278.0 | ||||||
The following table provides an analysis of the changes in accumulated other comprehensive loss for the years ended June 3, 2017, May 28, 2016 and May 30, 2015:indicated:
| Year Ended | |||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | May 29, 2021 | ||||||||||||||
| Cumulative translation adjustments at beginning of period | $ | (93.9) | $ | (3.9) | $ | (56.0) | |||||||||||
| Other comprehensive (loss) income | (20.1) | (90.0) | 52.1 | ||||||||||||||
| Balance at end of period | (114.0) | (93.9) | (3.9) | ||||||||||||||
| Pension and other post-retirement benefit plans at beginning of period | (36.9) | (50.4) | (59.2) | ||||||||||||||
| Other comprehensive income before reclassifications (net of tax of ($3.50), ($.02), and ($0.03)) | 14.8 | 13.5 | 5.3 | ||||||||||||||
| Reclassification from accumulated other comprehensive income - Other, net | 2.7 | 4.4 | 5.5 | ||||||||||||||
| Tax expense | (4.4) | (4.4) | (2.0) | ||||||||||||||
| Net reclassifications | (1.7) | — | 3.5 | ||||||||||||||
| Net current period other comprehensive income | 13.1 | 13.5 | 8.8 | ||||||||||||||
| Balance at end of period | (23.8) | (36.9) | (50.4) | ||||||||||||||
| Interest rate swap agreement at beginning of period | 23.7 | (10.8) | (18.9) | ||||||||||||||
| Other comprehensive income before reclassifications (net of tax of ($6.2), ($11.6), and ($2.6)) | 4.7 | 41.4 | 12.6 | ||||||||||||||
| Reclassification from accumulated other comprehensive income - Other, net | 14.3 | (6.9) | (4.5) | ||||||||||||||
| Net reclassifications | 14.3 | (6.9) | (4.5) | ||||||||||||||
| Net current period other comprehensive income | 19.0 | 34.5 | 8.1 | ||||||||||||||
| Balance at end of period | 42.7 | 23.7 | (10.8) | ||||||||||||||
| Unrealized holding gains on securities at beginning of period | — | — | 0.1 | ||||||||||||||
| Other comprehensive (loss) income before reclassifications | — | — | (0.1) | ||||||||||||||
| Balance at end of period | — | — | — | ||||||||||||||
| Total Accumulated other comprehensive loss | $ | (95.1) | $ | (107.1) | $ | (65.1) | |||||||||||
| Year Ended | |||||||||||
| (In millions) | June 3, 2017 | May 28, 2016 | May 30, 2015 | ||||||||
| Cumulative translation adjustments at beginning of period | $ | (29.6 | ) | $ | (20.8 | ) | $ | (11.1 | ) | ||
| Translation adjustments (net of tax of $ - , ($0.3) and $0.3) | (7.2 | ) | (8.8 | ) | (9.7 | ) | |||||
| Balance at end of period | (36.8 | ) | (29.6 | ) | (20.8 | ) | |||||
| Pension and other post-retirement benefit plans at beginning of period | (34.9 | ) | (35.4 | ) | (26.8 | ) | |||||
| Adjustments to pension and other post-retirement benefit plans (net of tax of $3.7, ($0.7) and $2.6) | (14.5 | ) | (2.0 | ) | (10.0 | ) | |||||
| Reclassification to earnings - operating expenses (net of tax of ($0.4), ($0.7) and ($0.4)) | 1.8 | 2.5 | 1.4 | ||||||||
| Balance at end of period | (47.6 | ) | (34.9 | ) | (35.4 | ) | |||||
| Interest rate swap agreement at beginning of period | — | — | — | ||||||||
| Valuation adjustments (net of tax of ($1.2), $ - and $ -) | 2.1 | — | — | ||||||||
| Balance at end of period | 2.1 | — | — | ||||||||
| Available-for-sale Securities at beginning of period | — | — | — | ||||||||
| Unrealized holding gain (net of tax of $ - , $ - and $ -) | 0.1 | — | — | ||||||||
| Balance at end of period | 0.1 | — | — | ||||||||
| Total accumulated other comprehensive loss | $ | (82.2 | ) | $ | (64.5 | ) | $ | (56.2 | ) | ||
| Year Ended | ||||||||
| (In millions) | June 3, 2017 | May 28, 2016 | ||||||
| Balance at beginning of period | $ | 27.0 | $ | 30.4 | ||||
| Purchase of redeemable noncontrolling interests | (1.5 | ) | — | |||||
| Net income attributable to redeemable noncontrolling interests | 0.2 | 0.5 | ||||||
| Redemption value adjustment | (1.2 | ) | (4.0 | ) | ||||
| Other adjustments | 0.1 | 0.1 | ||||||
| Balance at end of period | $ | 24.6 | $ | 27.0 | ||||
16. Restructuring and Impairment Activities
Integration Expense
Integration Expense
The company recognized asset impairment expense totaling $7.1 million associated with integration initiatives are included in Selling, General, and Administrative and the Nemschoff trade name for the fiscal year 2017. Forecasts developed during the fourth quarter of fiscal 2017 indicated future revenue and profitability no longer supported the value of the trade name intangible asset. The company also recognizedexpense associated with restructuring expenses of $5.4 million related to targeted workforce reductions within the North America, ELA, Specialty and Consumer segments. The restructuring actions were deemed to be complete at June 3, 2017 and final paymentsactivities are expected to be made over the course of the next fiscal year. These charges have been reflected separately as "Restructuring and impairment expenses"included in Restructuring expense in the Consolidated Statements of Comprehensive IncomeIncome. Non-cash costs related to debt extinguishment in the financing of the transaction is recorded in Other expense (income), net in the Consolidated Statements of Comprehensive Income.
Knoll Integration:
Following the acquisition of Knoll, the Company announced a multi-year program (the "Knoll Integration") designed to reduce costs and are included within Operating earnings forintegrate and optimize the North America, ELA, Specialtycombined organization. The Company currently expects that the Knoll Integration will result in pre-tax costs of approximately $140 million, comprised of the following categories:
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•Severance and Consumer segments within segment reportingemployee benefit costs associated with plans to integrate the Company's operating structure, resulting in Note 13.workforce reductions. These costs will primarily include: severance and employee benefits (cash severance, non-cash severance, including accelerated stock-compensation award expense and other termination benefits).
•Exit and disposal activities include those incurred as a direct result of integration activities, primarily including the reorganization and consolidation of facilities and asset impairment charges.
•Other integration costs include professional fees and other incremental third-party expenses, including a loss on extinguishment of debt associated with financing of the acquisition.
For the year ended June 3, 2023, the Company incurred $18.0 million of costs related to the Knoll Integration including: $3.6 million of severance and employee benefit costs, $5.9 million of exit and disposal costs related to the consolidation of facilities, and $8.5 million of other integration costs.
For the year ended May 28, 2022, the Company incurred $107.9 million of costs related to the Knoll Integration including: $51.1 million of severance and employee benefit costs, $15.5 million of non-cash asset impairments, $13.4 million of non-cash costs related to debt-extinguishment in the financing of the transaction, and $27.9 million of other integration costs.
The following table provides an analysis of the changes in restructuringliability balance for Knoll Integration costs reservethat qualify as exit and disposal costs under U.S. GAAP (i.e., severance and employee benefit costs and exit and disposal activities) for the fiscal year ended June 3, 2017:2023:
| Year Ended | ||||
| (In millions) | June 3, 2017 | |||
| Beginning Balance | $ | 0.4 | ||
| Restructuring expenses | 5.4 | |||
| Payments | (3.4 | ) | ||
| Ending Balance | $ | 2.4 | ||
| (In millions) | Severance and Employee Benefit | Exit and Disposal Activities | Total | ||||||||||||||
| May 28, 2022 | $ | 1.4 | $ | — | $ | 1.4 | |||||||||||
| Integration Costs | 3.6 | 5.9 | 9.5 | ||||||||||||||
| Amounts Paid | (2.3) | (5.9) | (8.2) | ||||||||||||||
| Non-cash costs | 0.2 | — | 0.2 | ||||||||||||||
| June 3, 2023 | $ | 2.9 | $ | — | $ | 2.9 | |||||||||||
The company recognized asset impairment expense totaling $10.8 million associatedCompany expects that a substantial portion of the liability for the Knoll Integration as of June 3, 2023, will be paid in the first quarter of fiscal year 2024.
The following is a summary of integration expenses by segment for the period indicated:
| Twelve Months Ended | |||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||
| Americas Contract | $ | 9.7 | $ | 21.9 | |||||||
| International Contract and Specialty | 2.5 | — | |||||||||
| Global Retail | 0.2 | — | |||||||||
| Corporate | 5.6 | 86.0 | |||||||||
| Total | $ | 18.0 | $ | 107.9 | |||||||
2023 Restructuring Plan
During fiscal year 2023, the Company announced a series of actions that relate to the 2023 restructuring plan ("2023 restructuring plan") to reduce expenses. These restructuring activities included voluntary and involuntary reductions in workforces and charges incurred in connection with the POSH trade nameFully decision. As the result of these actions, the Company projects an annualized expense reduction of approximately $30 million to $35 million. For the year ended June 3, 2023, the Company incurred $34.0 million of costs related to the 2023 restructuring plan comprised of $27.9 million of severance and employee benefit costs and $6.1 million of non-impairment charges related to the closure of the Fully business. The restructuring plan is complete and no future costs related to this plan are expected.
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The following table provides an analysis of the changes in liability balance for the 2023 restructuring plan that qualify as exit and disposal costs under U.S. GAAP (i.e., severance and employee benefit costs and exit and disposal activities) for the fiscal year 2015. Although profitability associated with the POSH trade name increased as compared to the prior year, forecasts developed during the fourth quarter of fiscal 2015 indicated that future revenue and profitability no longer supported the value of the trade name intangible asset.ended June 3, 2023:
| (In millions) | Severance and Employee-Related | Exit and Disposal Activities | Total | ||||||||||||||||||||
| May 28, 2022 | $ | — | $ | — | $ | — | |||||||||||||||||
| Restructuring Costs | 27.9 | 6.1 | 34.0 | ||||||||||||||||||||
| Amounts Paid | (20.6) | (6.1) | (26.7) | ||||||||||||||||||||
| June 3, 2023 | $ | 7.3 | $ | — | $ | 7.3 | |||||||||||||||||
The company also recognizedCompany expects that remaining liability for the 2023 restructuring expensesplan as of $1.9 million during the third quarter of fiscal 2015 related to targeted workforce reductions within the North American segment. These actions resulted in the recognition of restructuring expenses related to severance and outplacement costs.
The total gain related to the sale is not expected to be material to the company's financial statements. The operations associated with the dealership related to the North American Furniture Solutions segment.
| Year Ended | |||||||||||||||||||||||
| (In millions) | June 3, 2023 | May 28, 2022 | |||||||||||||||||||||
| Americas Contract | $ | 22.8 | $ | — | |||||||||||||||||||
| International Contract & Specialty | 1.3 | — | |||||||||||||||||||||
| Retail | 9.9 | — | |||||||||||||||||||||
| Corporate | — | — | |||||||||||||||||||||
| Total | $ | 34.0 | $ | — | |||||||||||||||||||
17. Variable Interest Entities
During the year ended May 28, 2022, the Company entered into long-term notes receivable with certain of its third-party owned dealers that are deemed to be variable interests in variable interest entities. The carrying value of these long-term notes receivable was $6.3 million and $1.2 million as of June 3, 2017, 2023 and May 28, 2016,2022 respectively and May 30, 2015.
represents the Company’s maximum exposure to loss. The Company is not deemed to be the primary beneficiary for any of these variable interest entities as each dealer controls the activities that most significantly impact the entity’s economic performance, including sales, marketing, and operations.
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| (In millions, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| 2017 | Net sales | $ | 598.6 | $ | 577.5 | $ | 524.9 | $ | 577.2 | |||||||
Gross margin (1) | 230.0 | 218.0 | 195.5 | 220.9 | ||||||||||||
| Net earnings attributable to Herman Miller, Inc. | 36.3 | 31.7 | 22.5 | 33.4 | ||||||||||||
Earnings per share-basic (1) | 0.61 | 0.53 | 0.38 | 0.56 | ||||||||||||
| Earnings per share-diluted | 0.60 | 0.53 | 0.37 | 0.55 | ||||||||||||
| 2016 | Net sales | $ | 565.4 | $ | 580.4 | $ | 536.5 | $ | 582.6 | |||||||
| Gross Margin | 216.8 | 224.4 | 207.8 | 225.2 | ||||||||||||
Net earnings attributable to Herman Miller, Inc. (1) | 33.5 | 34.7 | 27.9 | 40.7 | ||||||||||||
| Earnings per share-basic | 0.56 | 0.58 | 0.46 | 0.68 | ||||||||||||
| Earnings per share-diluted | 0.56 | 0.57 | 0.46 | 0.67 | ||||||||||||
| 2015 | Net sales | $ | 509.7 | $ | 565.4 | $ | 516.4 | $ | 550.7 | |||||||
| Gross margin | 185.6 | 205.7 | 190.5 | 209.6 | ||||||||||||
Net earnings attributable to Herman Miller, Inc. (1) | 25.2 | 27.8 | 21.0 | 23.4 | ||||||||||||
| Earnings per share-basic | 0.43 | 0.47 | 0.35 | 0.39 | ||||||||||||
| Earnings per share-diluted | 0.42 | 0.46 | 0.35 | 0.39 | ||||||||||||
Management's Report on Internal Control over Financial Reporting
To the Board of Directors and Stockholders of Herman Miller,MillerKnoll, Inc.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f). The internal control over financial reporting at Herman Miller,MillerKnoll, Inc., is designed to provide reasonable assurance to our stakeholders that the financial statements of the companyCompany fairly represent its financial condition and results of operations.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect all misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of June 3, 2017,2023, based on the original framework in Internal Control — Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management believes the company'sCompany's internal control over financial reporting was effective as of June 3, 2017.2023.
/s/ Brian C. WalkerAndrea R. Owen
Chief Executive Officer
/s/ Jeffrey M. Stutz
Jeffrey M. Stutz
Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
MillerKnoll, Inc.:
Opinions on the Consolidated Financial Statements and Shareholders of Herman Miller, Inc.Internal Control Over Financial Reporting
We have audited Herman Miller,the accompanying consolidated balance sheets of MillerKnoll, Inc.’s and subsidiaries (the Company) as of June 3, 2023 and May 28, 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended June 3, 2023, and the related notes and financial statement schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of June 3, 2017,2023, based on criteria established in Internal Control-IntegratedControl – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Herman Miller, Inc.’sCommission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 3, 2023 and May 28, 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended June 3, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 3, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinion.opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
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company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion Herman Miller, Inc. maintained,on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill impairment assessment
As discussed in all material respects, effective internal control overNote 1 to the consolidated financial reportingstatements, the Company’s consolidated goodwill balance was $1,221.7 million as of June 3, 2017, based2023, of which $390.3 million was related to the Global Retail reporting unit. Goodwill is tested for impairment annually in the fourth quarter of each fiscal year, or more frequently, when events or changes in circumstances indicate that the fair value of a reporting unit has declined below its carrying value. To estimate the fair value of the Global Retail reporting unit, the Company utilized a weighting of the income approach and the market approach that used observable comparable company information.
We identified the evaluation of goodwill for impairment for the Global Retail reporting unit as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate the selection of forecasted revenue growth rates, operating margins, and the discount rate used in the income approach. Additionally, the audit effort associated with the evaluation of the Company’s discount rate involved the use of valuation professionals with specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s determination of the fair value of the Global Retail reporting unit, including controls over the selection of forecasted revenue growth rates, operating margins, and the discount rate. We evaluated the reasonableness of management’s forecasted revenue growth rates and operating margins by comparing the forecasts to historical revenue growth rates and operating margins, considering industry conditions and growth plans. We performed sensitivity analyses to assess the impact of reasonably possible changes to the forecasted revenue growth rates, operating margins, and discount rate assumptions on the COSO criteria.reporting unit fair values. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the Company’s discount rate by comparing the Company’s inputs to the discount rate to publicly available data for comparable entities and assessing the resulting discount rate.
As discussed in accordance withNote 1 to the standards of the Public Company Accounting Oversight Board (United States), the fiscal 2017 consolidated financial statements, of Herman Miller, Inc., and our report dated August 1, 2017 expressed an unqualified opinion thereon.
We identified the evaluation of the Knoll tradename for impairment as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate the selection of forecasted revenue growth rates, discount rate, and royalty rate used to estimate the fair value of the Knoll tradename. Additionally, the audit effort associated with the evaluation of the Company’s discount rate and royalty rate required the use of valuation professionals with specialized skills and knowledge.
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The following are the responsibilityprimary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s determination of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
• evaluating the auditCompany’s discount rate by comparing the Company’s inputs to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amountsdiscount rate to publicly available data for comparable entities and disclosures in the financial statements. An audit also includes assessing the accounting principles usedoverall discount rate; and significant estimates made by management, as well as
• evaluating the Company’s royalty rate by comparing the selected royalty rate to the royalty rate selected at the acquisition date and publicly available data for comparable licensing agreements in assessing the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.royalty rate.
/s/ Ernst & YoungKPMG LLP
Chicago, Illinois
July 26, 2023
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Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None
Item 9A CONTROLS AND PROCEDURES
Controls and Procedures
| (a) | Disclosure Controls and Procedures. Under the supervision and with the participation of management, the | ||||
| (b) | Management's Annual Report on Internal Control Over Financial Reporting and Attestation Report of the Independent Registered Public Accounting Firm. Refer to Item 8 for “Management's Report on Internal Control Over Financial Reporting.” The effectiveness of the | ||||
| (c) | Changes in Internal Control Over Financial Reporting. There were no changes in the | ||||
Item 9B OTHER INFORMATIONOther Information
On July 21, 2023, the Company’s Board of Directors approved an amendment to the Company’s annual incentive cash bonus plan that removes adjusted operating income as the primary metric upon which awards made pursuant to that plan are based and instead gives the Board discretion to determine the applicable metric(s) for each plan year. The plan, as amended and restated, is filed as Exhibit 10.4 to this Annual Report.
Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable
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PART III
Item 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors, Executive Officers and Corporate Governance
Directors, Executive Officers, Promoters and Control Persons
Information relating to directors and director nominees of the registrantCompany is contained under the caption “Director and Executive Officer Information” in the company'sCompany's definitive Proxy Statement, relating to the company's 2017Company's 2023 Annual Meeting of Stockholders, and the information within that section is incorporated by reference. Information relating to Executive Officersexecutive officers of the companyCompany is included in Part I hereof entitled “Executive Officers of the Registrant.“Information About Our Executive Officers.”
Compliance with Section 16(a) of the Exchange Act
Information relating to compliance with Section 16(a) of the Exchange Act is contained under the caption “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” in the company'sCompany's definitive Proxy Statement, relating to the company's 2017Company's 2023 Annual Meeting of Stockholders, and the information within that section is incorporated by reference.
Code of Ethics
The companyCompany has adopted a Code of Business Conduct and Ethics that serves as the code of ethics for the executive officers and senior financial officers and as the code of business conduct for all Company directors and employees of the registrant.employees. This code is made available free of charge through the “Investors”“Legal” section of the company's internetCompany's website at www.hermanmiller.com.www.millerknoll.com/legal. Any amendments to, or waivers from, a provision of this code alsoapplicable to any such officers will be posted to the company's internet"Legal" section of the Company's website.
Corporate Governance
Information relating to the identification of the audit committee, audit committee financial experts, and director nomination procedures of the registrantCompany is contained under the captions “Board Committees” and “Corporate Governance and Board Matters — Director Nominations” in the company'sCompany's definitive Proxy Statement, relating to the company's 2017Company's 2023 Annual Meeting of Stockholders, and the information within these sections is incorporated by reference.
Item 11 EXECUTIVE COMPENSATION
Executive Compensation
Information relating to management remunerationexecutive compensation is contained under the captionssections “Compensation Discussion and Analysis,” “Summary Compensation Table,“Compensation Tables,” “Grants of Plan-Based Awards,“CEO Pay Ratio,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,” “Pension Benefits,” “Nonqualified Deferred Compensation,” “Potential Payments Upon Termination, Death, Disability, Retirement or Change in Control,” “Director Compensation,” “Director Compensation Table,“Pay Versus Performance,” and “Compensation"Compensation Committee Interlocks and Insider Participation”Participation" in the company'sCompany's definitive Proxy Statement, relating to the company's 2017Company's 2023 Annual Meeting of Stockholders, and the information within these sections is incorporated by reference. The information under the caption “Compensation Committee Report” is incorporated by reference, however, such information is not deemed filed with the Commission.SEC.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The sections entitled “Voting Securities and Principal Stockholders,“Share Ownership,” “Director and Executive Officer Information,” and “Equity Compensation Plan Information” in the Company's definitive Proxy Statement, relating to the company's 2017Company's 2023 Annual Meeting of Stockholders, and the information within these sections is incorporated by reference.
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Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related transactions contained under the captions “Related“Certain Relationships and Related Party Transactions,” and “Corporate Governance and Board Matters — Determination of Independence of Board Members”Director Independence” in the Company's definitive Proxy Statement, relating to the company's 2017Company's 2023 Annual Meeting of Stockholders and the information within these sections is incorporated by reference.
Item 14 PRINCIPAL ACCOUNTANT FEES AND SERVICESPrincipal Accountant Fees and Services
The Company's independent registered public accounting firm is KPMG LLP, Chicago, IL, Auditor Firm ID: 185.
Information relating to the ratification of the selection of the Company's independent public accountants and concerning the payments to our principal accountants and the services provided by our principal accounting firm set forth under the captioncaptions "Ratification of the Audit Committee's selection of Independent Registered Public Accounting Firm" including “Disclosure of Fees Paid to Independent Auditors” in the DefinitiveCompany's definitive Proxy Statement, relating to the company's 2017Company's 2023 Annual Meeting of Stockholders, and the information within that section is incorporated by reference.
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PART IV
Item 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
Exhibits and Financial Statement Schedule
| (a) | The following documents are filed as a part of this report: | |||||||||||||
| 1. | Financial Statements | |||||||||||||
| The following Consolidated Financial Statements of the | ||||||||||||||
Page Number in this Form 10-K | ||||||||||||||
| Consolidated Statements of Comprehensive Income | ||||||||||||||
| Consolidated Balance Sheets | ||||||||||||||
| Consolidated Statements of Stockholders' Equity | ||||||||||||||
| Consolidated Statements of Cash Flows | ||||||||||||||
| Notes to the Consolidated Financial Statements | ||||||||||||||
| Management's Report on Internal Control over Financial Reporting | ||||||||||||||
| Report of Independent Registered Public Accounting | ||||||||||||||
| 2. | ||||||||||||||
| Financial Statement Schedule | ||||||||||||||
| The following financial statement schedule | ||||||||||||||
Page Number in this Form 10-K | ||||||||||||||
| Schedule II- | Valuation and Qualifying Accounts | |||||||||||||
| All other schedules required by Form 10-K Annual Report have been omitted because they were not applicable, included in the Notes to the Consolidated Financial Statements, or otherwise not required under instructions contained in Regulation S-X. | ||||||||||||||
| 3. | Exhibits | |||||||||||||
| (2) | Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession | ||||||||||
| (2.1) | |||||||||||
| (3) | Articles of Incorporation and Bylaws | ||||||||||
| (3.1) | |||||||||||
| (3.2) | |||||||||||
| (4) | Instruments Defining the Rights of Security Holders | ||||||||||
| (4.1) | Other instruments which define the rights of holders of long-term debt individually represent debt of less than 10% of total assets. In accordance with item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant agrees to furnish to the SEC copies of such agreements upon request. | ||||||||||
| (4.2) | |||||||||||
| (10) | Material Contracts | ||||||||||
| (10.1) | |||||||||||
| (10.2) | |||||||||||
| (10.3) | |||||||||||
| (10.4) | |||||||||||
| (10.5) | |||||||||||
| (10.6) | |||||||||||
| (10.7) | |||||||||||
| (10.8) | |||||||||||
| (10.9) | |||||||||||
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| (10.10) | |||||||||||
| (10.11) | |||||||||||
| (10.12) | |||||||||||
| (10.13) | |||||||||||
| (10.14) | |||||||||||
| (10.15) | |||||||||||
| (10.16) | |||||||||||
| (10.17) | |||||||||||
| (10.18) | |||||||||||
| (10.19) | |||||||||||
| (10.20) | |||||||||||
| (10.21) | |||||||||||
| (10.22) | |||||||||||
| (10.23) | |||||||||||
| (10.24) | |||||||||||
| (10.25) | |||||||||||
| (10.26) | |||||||||||
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| (10.27) | |||||||||||
| (10.28) | |||||||||||
| (21) | ||||||||
| (31.1) | ||||||||
| (31.2) | ||||||||
| (32.1) | ||||||||
| (32.2) | ||||||||
| (97) | Policy Relating to Recovery of Erroneously Awarded Compensation | ||||||||||
| (97.1) | |||||||||||
| 101.INS | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101). | |||||||
(1) Denotes compensatory plan or arrangement.
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Schedule II - Valuation and Qualifying Accounts
(In millions)
| Column A | Column B | Column C | Column D | Column E | |||||||||||||||||||||||||
| Description | Balance at beginning of period | Charges to expenses or net sales | Charges to other accounts (4) | Deductions (3) | Balance at end of period | ||||||||||||||||||||||||
| Year ended June 3, 2023: | |||||||||||||||||||||||||||||
Accounts receivable allowances — uncollectible accounts(1) | $ | 8.6 | $ | 0.5 | $ | — | $ | (3.0) | $ | 6.1 | |||||||||||||||||||
Accounts receivable allowances — credit memo(2) | 1.1 | (0.8) | — | — | 0.3 | ||||||||||||||||||||||||
| Valuation allowance for deferred tax asset | 11.7 | 1.3 | — | (0.3) | 12.7 | ||||||||||||||||||||||||
| Year ended May 28, 2022: | |||||||||||||||||||||||||||||
Accounts receivable allowances — uncollectible accounts(1) | $ | 4.8 | $ | 1.3 | $ | 4.7 | $ | (2.2) | $ | 8.6 | |||||||||||||||||||
Accounts receivable allowances — credit memo(2) | 0.7 | 0.4 | — | — | 1.1 | ||||||||||||||||||||||||
| Valuation allowance for deferred tax asset | 8.9 | 0.4 | — | 2.4 | 11.7 | ||||||||||||||||||||||||
| Year ended May 29, 2021: | |||||||||||||||||||||||||||||
Accounts receivable allowances — uncollectible accounts(1) | $ | 4.3 | $ | 1.7 | $ | — | $ | (1.2) | $ | 4.8 | |||||||||||||||||||
Accounts receivable allowances — credit memo(2) | 0.1 | — | — | 0.6 | 0.7 | ||||||||||||||||||||||||
| Allowance for possible losses on notes receivable | 0.3 | (0.3) | — | — | — | ||||||||||||||||||||||||
| Valuation allowance for deferred tax asset | 10.6 | (2.3) | — | 0.6 | 8.9 | ||||||||||||||||||||||||
(1) Activity under the “Charges to expenses or net sales” column are recorded within Selling, general and administrative expenses.
(2) Activity under the “Charges to expenses or net sales” column are recorded within Net sales.
(3) Represents amounts written off, net of recoveries and other adjustments. Includes effects of foreign translation.
(4) Represents reserves recorded related to the Knoll entity.
Item 16 Form 10-K Summary
None
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| /s/ Jeffrey M. Stutz | ||||||||||||||||
| By | Jeffrey M. Stutz Chief Financial Officer (Principal Accounting Officer and Duly Authorized Signatory for Registrant) | |||||||||||||||
Date: August 1, 2017July 26, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on August 1, 2017July 26, 2023 by the following persons on behalf of the Registrant and in the capacities indicated.Each director whose signature appears below hereby appoints Andrea R. Owen and Jeffrey M. Stutz and each of them severally, as his or her attorney-in-fact, to sign in his or her name and on his or her behalf, as a director, and to file with the Securities and Exchange Commission any and all amendments to this Annual Report on Form 10-K.
| /s/ Michael A. Volkema | /s/ Lisa Kro | |||||||||||||||
| Michael A. Volkema (Chairman of the Board) | Lisa Kro (Director) | |||||||||||||||
| /s/ David | /s/ | |||||||||||||||
David A. Brandon (Director) | Douglas D. French (Director) | |||||||||||||||
| /s/ John R. Hoke III | /s/ Heidi Manheimer | |||||||||||||||
John R. Hoke III (Director) | Heidi Manheimer (Director) | |||||||||||||||
| /s/ | /s/ | |||||||||||||||
Candace Matthews (Director) | ||||||||||||||||
Andrea R. Owen (President, Chief Executive Officer, and Director) | ||||||||||||||||
| /s/ | /s/ Michael R. Smith | |||||||||||||||
| Michael C. Smith (Director) | Michael R. Smith (Director) | |||||||||||||||
| /s/ Jeffrey M. Stutz | ||||||||||||||||
Jeffrey M. Stutz (Chief Financial Officer and Principal Accounting Officer) | ||||||||||||||||
| Column A | Column B | Column C | Column D | Column E | |||||||||||
| Description | Balance at beginning of period | Charges to expenses or net sales | Deductions (3) | Balance at end of period | |||||||||||
| Year ended June 3, 2017: | |||||||||||||||
Accounts receivable allowances — uncollectible accounts(1) | $ | 3.4 | $ | — | $ | (1.1 | ) | $ | 2.3 | ||||||
Accounts receivable allowances — credit memo(2) | $ | 0.4 | $ | — | $ | — | $ | 0.4 | |||||||
| Allowance for possible losses on notes receivable | $ | 0.9 | $ | — | $ | — | $ | 0.9 | |||||||
| Valuation allowance for deferred tax asset | $ | 10.6 | $ | (0.6 | ) | $ | — | $ | 10.0 | ||||||
| Year ended May 28, 2016: | |||||||||||||||
Accounts receivable allowances — uncollectible accounts(1) | $ | 2.4 | $ | 2.3 | $ | (1.3 | ) | $ | 3.4 | ||||||
Accounts receivable allowances — credit memo(2) | $ | 0.4 | $ | — | $ | — | $ | 0.4 | |||||||
| Allowance for possible losses on notes receivable | $ | 1.0 | $ | (0.1 | ) | $ | — | $ | 0.9 | ||||||
| Valuation allowance for deferred tax asset | $ | 11.1 | $ | (1.5 | ) | $ | 1.0 | $ | 10.6 | ||||||
| Year ended May 30, 2015: | |||||||||||||||
Accounts receivable allowances — uncollectible accounts(1) | $ | 3.4 | $ | 0.9 | $ | (1.9 | ) | $ | 2.4 | ||||||
Accounts receivable allowances — credit memo (2) | $ | 0.6 | $ | — | $ | (0.2 | ) | $ | 0.4 | ||||||
| Allowance for possible losses on notes receivable | $ | 0.1 | $ | 0.9 | $ | — | $ | 1.0 | |||||||
| Valuation allowance for deferred tax asset | $ | 8.5 | $ | (0.6 | ) | $ | 3.2 | $ | 11.1 | ||||||
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