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, 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 office furniture dealers as well as the following channels: owned contract office furniture dealers, direct customer sales, independent retailers, owned retail studios, direct-mail catalogs and the Company's e-commerce platforms.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to May 31. The fiscal years ended May 30, 2020, June 1, 2019, and June 2, 2018 contained 52 weeks, while the fiscal year ended June 3, 2017 contained 53 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 $1.1 million, net gain of $0.3 million, and a net gain of $0.4 million for the fiscal years ended May 30, 2020, June 1, 2019, and June 2, 2018, respectively, and a net loss of $0.7 million for the fiscal year ended June 3, 2017.respectively. These amounts are included in “Other, net”“Other expense (income), 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 $364.0 million and$102.8 million and $148.8 millionas ofMay 30, 2020andJune 1, 2019 and June 2, 2018, respectively. All cash equivalents are high-credit quality financial instruments and the amount of credit exposure to any one financial institution or instrument is limited.
Marketable Securities
The Company maintains a portfolio of marketable securities primarily comprised of mutual funds. These mutual funds are comprised of both equity and fixed income funds. These investments are held by 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. Net unrealized holding gains or losses related to the equity mutual funds are recorded through net income while net unrealized holding gains or losses related to the fixed income mutual funds are recorded through other comprehensive income.
All marketable security transactions are recognized on the trade date. Realized gains and losses on disposal of available-for-sale investments are included in “Interest and other investment income” in the Consolidated Statements of Comprehensive Income. See Note 12 of the Consolidated Financial Statements for additional disclosures of marketable securities.
Accounts Receivable Allowances
Reserves for uncollectible accounts receivable balances are based on known customer exposures, historical credit experience and the specific identification of other potentially uncollectible accounts. Balances are written off against
Herman Miller, Inc. and Subsidiaries48
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.
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 market 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 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. 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
Goodwill and other indefinite-lived assets included in the Consolidated Balance Sheets consist of the following:
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| | | | | | | | | | | | |
(In millions) | | Goodwill | | Indefinite-lived Intangible Assets | | Total Goodwill and Indefinite-lived Intangible Assets |
Balance, June 2, 2018 | | $ | 304.1 |
| | $ | 78.1 |
| | $ | 382.2 |
|
Foreign currency translation adjustments | | (0.3 | ) | | — |
| | (0.3 | ) |
Balance, June 2, 2019 | | $ | 303.8 |
| | $ | 78.1 |
| | $ | 381.9 |
|
Foreign currency translation adjustments | | (0.9 | ) | | (0.5 | ) | | (1.4 | ) |
Acquisition of HAY | | 111.1 |
| | 60.0 |
| | 171.1 |
|
Acquisition of naughtone | | 57.5 |
| | 8.5 |
| | 66.0 |
|
Impairment charges | | (125.5 | ) | | (53.3 | ) | | (178.8 | ) |
Balance, May 30, 2020 | | $ | 346.0 |
| | $ | 92.8 |
| | $ | 438.8 |
|
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 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 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 were reviewed for impairment using a quantitative assessment as of March 31, 2020.
To estimate the fair value of each reporting unit when performing the quantitative testing, the Company utilizes a weighting of the income method and the market method. The income method is based on a discounted future cash flow approachanalysis that uses a number of estimates, includinginputs, including:
actual and forecasted revenue based on assumed growth rates estimated costs and operating margins, 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 planning for the Company's long-term and short-term business planning and forecasting. We testCompany corroborates the reasonableness of the inputs and outcomes of our discounted cash flow analysis against comparablethrough a market data. The market methodcapitalization reconciliation to determine whether the implied control premium 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 various assets and liabilities, excluding corporate assets and liabilities, such as cash, investments and debt.reasonable.
The Company completed the requiredits annual goodwill impairment test in the fourth quarter of fiscal 2019,each year, as of March 31 2019, performing ast. In fiscal 2020, the Company elected to perform quantitative and qualitative impairment testtests for all goodwill reporting units and other indefinite-lived intangible assets. For the reporting units that the Company elected to test 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 performing the quantitative impairment test, the Company determined that the fair value of the North America and International reporting units exceeded the carrying amount and, as such, thethese reporting units were not impaired and the second stepimpaired. Our assessment of the Retail and Maharam reporting units indicated that the carrying value of these reporting units exceeded their fair values, and goodwill impairment test was not necessary.charges of $88.8 million and $36.7 million, respectively, were recorded in fiscal 2020 resulting in no goodwill in either the Retail or Maharam reporting units.
The Company performed a sensitivity analysis over key valuation assumptions. The carryingfair value of the Company's RetailInternational reporting unit, was $249.9which includes $163.7 million of goodwill as of June 1, 2019. The calculated fairMay 30, 2020, exceeds its carrying value of the reporting unit was $282.6 million, which represents an excess fair value of $32.7 million or 13%by 17%. Due to the level that the reporting unit fair valuesvalue exceeded the carrying amountsamount and the results of the sensitivity analysis, the Company may need to record an impairment charge if the operating results of its RetailInternational reporting unit were to decline in future periods.
In completing our annual goodwill impairment test, the respective fair values were estimated using an income approach with market participant discount rates ranging from 10.25% to 14.0% developed using a weighted average cost of capital analysis and long-term growth rates ranging from 2.5% to 3.0%.
Intangible assets with indefinite useful lives are not subject to amortization and are evaluated annually for impairment, or more frequently, when events or changes in circumstances indicate that the fair value of an intangible asset may not be recoverable. The Company utilizes the relief from royalty methodology to test for impairment. The primary assumptions for the relief from royalty method include forecasted revenue forecasts, earnings forecasts,growth rates, 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 certain trade names valued at approximately $78.1 million as of the end of fiscal 2019 and fiscal 2018. These assets have indefinite useful lives.
In fiscal 2019,2020, the Company performed only quantitative assessments in testing indefinite-lived intangible assets for impairment. Theimpairment, which resulted in the carrying value of the Company's DWR trade name indefinite-lived intangible asset was $55.1 million as of June 1, 2019. The calculated fair valuevalues of the DWR, Maharam, HAY and naughtone trade name was $63.2names exceeding their fair values by $53.3 million, which represents an excess fair valueand impairment charges of $8.1 million or 14.6%.this amount were recognized. If the residual cash flows related to the Company's DWRthese trade namenames were to decline in future periods, the Company may need to record an additional impairment charge.
During fiscal 2017, the Company recognized asset impairment expense totaling $7.1 million associated with the NemschoffIn completing our annual indefinite-lived trade name which wasimpairment test, the respective fair values were estimated using a relief-from-royalty approach, applying market participant discount rates ranging from 12.75% to 17.25% developed using a weighted average cost of capital analysis, royalty rates ranging from 1.00% to 3.00% and long-term growth rates ranging from 2.5% to 3.0%.
The table below summarizes the carrying values and impairment charges recorded withinas of and for the North America Contract operating segment. Asfiscal year ended May 30, 2020, for each of the end of fiscal 2017, the carrying value of the NemschoffCompany’s indefinite-lived trade name was zero. These impairment expenses are recorded in the Restructuring and impairment expenses line item within the Consolidated Statements of Comprehensive Income.
Goodwill and other indefinite-lived assets included in the Consolidated Balance Sheets consist of the following:names:
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| | | | | | | | | | | | |
(In millions) | | Goodwill | | Indefinite-lived Intangible Assets | | Total Goodwill and Indefinite-lived Intangible Assets |
Balance, June 3, 2017 | | $ | 304.5 |
| | $ | 78.1 |
| | $ | 382.6 |
|
Foreign currency translation adjustments | | (0.1 | ) | | — |
| | (0.1 | ) |
Sale of owned dealer | | (0.3 | ) | | — |
| | (0.3 | ) |
Balance, June 2, 2018 | | $ | 304.1 |
| | $ | 78.1 |
| | $ | 382.2 |
|
Foreign currency translation adjustments | | (0.3 | ) | | — |
| | (0.3 | ) |
Balance, June 1, 2019 | | $ | 303.8 |
| | $ | 78.1 |
| | $ | 381.9 |
|
|
| | | | | | |
(In millions) | | |
Trade name | Carrying Value | Impairment Charge |
Maharam | $ | 16.5 |
| $ | (6.5 | ) |
DWR | 31.5 |
| (23.6 | ) |
HAY | 39.3 |
| (20.7 | ) |
naughtone | 6.0 |
| (2.5 | ) |
Total | $ | 93.3 |
| $ | (53.3 | ) |
The goodwill and indefinite-lived trade name impairment charges were primarily caused by reduced sales and profitability projections, largely attributable to the COVID-19 pandemic and related economic disruption that the Company began to experience in the fourth quarter of fiscal 2020.
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
Herman Miller, Inc. and Subsidiaries50
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 5 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.
The following table summarizes our property as of the dates indicated:
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| | | | | | | |
(In millions) | May 30, 2020 | | June 1, 2019 |
Land and improvements | $ | 23.7 |
| | $ | 24.2 |
|
Buildings and improvements | 266.5 |
| | 267.6 |
|
Machinery and equipment | 791.9 |
| | 733.0 |
|
Construction in progress | 29.2 |
| | 59.9 |
|
Accumulated depreciation | (780.5 | ) | | (736.1 | ) |
Property and equipment, net | $ | 330.8 |
| | $ | 348.6 |
|
As of the end of fiscal 2019,2020, outstanding commitments for future capital purchases approximated $34.7$39.8 million.
Other Long-Lived Assets
The Company 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 groupgroup. Given the substantial reduction in forecasted revenue growth rates and cash flows due to the future undiscounted net cash flows expected to be generated byCOVID-19 pandemic, the Company determined that a triggering event occurred in the fourth quarter of 2020 and an impairment assessment was warranted for certain asset groups. Accordingly, the Company compared the fair value of the asset or asset group, or in some cases, by prices for similar assets. If such assets are consideredgroups to be impaired, the impairment amount to be recognized is the amount by which the carrying value of the asset groups. Based on this assessment, the Company recorded long-lived asset impairment charges of $26.6 million, primarily related to its right-of-use assets exceedsand definite-lived customer relationship intangible assets within the DWR asset group. The carrying value of the DWR asset group as of May 30, 2020 was $122.7 million.
The Company used available market-based rental comparatives and industry data trends, as well as considerations of the remaining lease term, to determine the fair value of DWR’s right of use assets. As a result, the Company determined that the carrying value for the right-of-use assets within the DWR asset group exceeded their fair value. value and an impairment charge of $19.3 million was recorded. The carrying value of the DWR right of use assets at May 30, 2020 is $110.9 million. If the residual cash flows related to these long-lived assets were to decline in future periods, the Company may need to record an additional impairment charge.
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.
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| | | | | | | | | | | | | | | |
| May 30, 2020 |
(In millions) | Patent and Trademarks | | Customer Relationships | | Other | | Total |
Gross carrying value | $ | 41.7 |
| | $ | 118.7 |
| | $ | 14.7 |
| | $ | 175.1 |
|
Accumulated amortization | 14.4 |
| | 38.3 |
| | 10.0 |
| | 62.7 |
|
Net | $ | 27.3 |
| | $ | 80.4 |
| | $ | 4.7 |
| | $ | 112.4 |
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| | | | | | | |
| June 1, 2019 |
| Patent and Trademarks | | Customer Relationships | | Other | | Total |
Gross carrying value | $ | 20.1 |
| | $ | 55.2 |
| | $ | 12.0 |
| | $ | 87.3 |
|
Accumulated amortization | 12.5 |
| | 27.6 |
| | 6.1 |
| | 46.2 |
|
Net | $ | 7.6 |
| | $ | 27.6 |
| | $ | 5.9 |
| | $ | 41.1 |
|
|
| | | | | | | | | | | | | | | |
| June 1, 2019 |
(In millions) | Patent and Trademarks | | Customer Relationships | | Other | | Total |
Gross carrying value | $ | 20.1 |
| | $ | 55.2 |
| | $ | 12.0 |
| | $ | 87.3 |
|
Accumulated amortization | 12.5 |
| | 27.6 |
| | 6.1 |
| | 46.2 |
|
Net | $ | 7.6 |
| | $ | 27.6 |
| | $ | 5.9 |
| | $ | 41.1 |
|
| | | | | | | |
| June 2, 2018 |
| Patent and Trademarks | | Customer Relationships | | Other | | Total |
Gross carrying value | $ | 22.4 |
| | $ | 55.3 |
| | $ | 7.5 |
| | $ | 85.2 |
|
Accumulated amortization | 14.7 |
| | 23.5 |
| | 5.7 |
| | 43.9 |
|
Net | $ | 7.7 |
| | $ | 31.8 |
| | $ | 1.8 |
| | $ | 41.3 |
|
The Company amortizes these assets over their remaining useful lives using the straight-line method over periods ranging from 5 years 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 67 years and the weighted-average remaining useful life of the customer relationships is 7 years.
Estimated amortization expense on existing amortizable intangible assets as of June 1, 2019,May 30, 2020, for each of the succeeding five fiscal years, is as follows:
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| | | |
(In millions) | |
2021 | $ | 14.9 |
|
2022 | $ | 14.9 |
|
2023 | $ | 14.4 |
|
2024 | $ | 14.2 |
|
2025 | $ | 13.3 |
|
|
| | | |
(In millions) | |
2020 | $ | 6.4 |
|
2021 | $ | 6.3 |
|
2022 | $ | 6.1 |
|
2023 | $ | 5.4 |
|
2024 | $ | 5.1 |
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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 of June 1, 2019May 30, 2020, are as follows:
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| | | |
(In millions) | Retention Level (per occurrence) |
General liability | $ | 1.00 |
|
Auto liability | $ | 1.00 |
|
Workers' compensation | $ | 0.75 |
|
Health benefit | $ | 0.50 |
|
|
| | | | |
(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 actuarially-determined estimates, which are recorded in “Other liabilities” in the Consolidated Balance Sheets. The value of the liability as of May 30, 2020 and June 1, 2019 and June 2, 2018 was $11.7$13.1 million and $11.2$11.7 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.
Redeemable Noncontrolling Interests
Certain minority shareholders in the Company's subsidiary Herman Miller Consumer Holdings, Inc. have the right, at specified times over a period of time, to require the Company to acquire portions of their ownership interest in those entities at fair value. Their interests in these subsidiaries are classified outside permanent equity in the Consolidated Balance Sheets and are carried at the current estimated redemption amounts.
The redemption amounts are estimated based on the fair value of the subsidiary, which is determined based on a weighting of the discounted cash flow and market methods. The discounted cash flow analysis uses the present value of projected cash flows and a residual value. A market-based approach is used to determine the discount rate for the discounted cash flow method. Market multiples for comparable companies are used for the market method of valuation. The fair value of the subsidiary is sensitive to changes in projected revenues and costs, the discount rate and the forward multiples of the comparable companies.
Changes in the estimated redemption amounts of the noncontrolling interests, subject to put options, are reflected at each reporting period with a corresponding adjustment to Retained earnings. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. See Note 16 of the Consolidated Financial Statements for additional information.
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 “Design“Design and research”research” expense in the accompanying Consolidated Statements of Comprehensive Income are $54.3 million, $58.8 million and $57.1 million, and $58.6 million, in fiscal 2020, 2019, and 2018, and 2017, respectively.
Royalty payments made to designers of the Company's products as the products are sold are a variable costcosts based on product sales. These expenses totaled$19.7 million,$18.1 million, and$16.0 million and $14.5 millionin fiscal years2020,2019and2018 and 2017 respectively. They are included in Design and researchexpense 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.
Herman Miller, Inc. and Subsidiaries52
Revenue Recognition
The Company adopted ASC 606 - Revenue from Contracts with Customers at the beginning of fiscal 2019 using the modified retrospective approach. The Company completed its review of the impact of the new standard and identified certain key accounting policy changes that resulted from adopting the new standard. All necessary changes required by the new standard, including those to the Corporation's accounting policies, controls, and disclosures, have been identified and implemented as of the beginning of fiscal 2019. See Note 2 of the Consolidated Financial Statements for further information regarding the Company's revenue recognition accounting policies.
Shipping and Handling Expenses
The Company records shipping and handling related expenses under the caption Cost of sales in the Consolidated Statements of Comprehensive Income.
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. Significant 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 significant judgment about forecasts of future taxable income.
Stock-Based Compensation
The Company has several stock-based compensation plans, which are described in Note 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 shares that could potentially be issued. Refer to Note 9 of the Consolidated Financial Statements for further information regarding the computation of EPS.
Comprehensive Income
Comprehensive income consists of Net earnings, Foreign currency translation adjustments, Unrealized holding gain on available-for-sale securities, Unrealized gains on interest rate swap agreement and Pension and post-retirement liability adjustments. Refer to Note 15 of the 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 Company 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.
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 12 of the Consolidated Financial Statements for the required fair value disclosures.
Derivatives and Hedging
The Company calculates the fair value of financial instruments using quoted market prices whenever available. The Company 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, net in the Consolidated Statements of Comprehensive Income, or Accumulated Other 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.
New Accounting Standards
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| | | | | | |
Recently Adopted Accounting Standards |
Standard | | Description | | Date of Adoption | | Effect on the Financial Statements or Other Significant Matters |
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Revenue from Contracts with Customers | | The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. The standard allows for two adoption methods, a full retrospective or modified retrospective approach. | | June 3, 2018 | | The Company adopted the standard effective June 3, 2018 using the modified retrospective method. Refer to Note 2 to the financial statements for further information regarding the adoption of the standard. |
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Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities | | The standard provides guidance for the measurement, presentation and disclosure of financial assets and liabilities. The standard requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any change in fair value in net income. The standard does not permit early adoption and at adoption a cumulative-effect adjustment to beginning retained earnings should be recorded. | | June 3, 2018 | | The Company adopted the standard effective June 3, 2018 using the modified retrospective method. As a result, the Company reclassified $0.1 million of net gains on mutual fund equity securities, that were formerly classified as available for sale securities before the adoption of the new standard, from Accumulated other comprehensive loss to Retained earnings. The impact of adoption also resulted in certain disclosure changes. Refer to Note 12 of the financial statements for further information. |
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Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | | This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Early adoption is permitted. | | September 2, 2018 | | The Company early adopted the standard prospectively effective September 2, 2018. The impacts resulting from adoption did not have an impact on the Company’s Financial Statements. |
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Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | | This update allows for the reclassification to retained earnings of the tax effects stranded in Accumulated Other Comprehensive Income resulting from The Tax Cuts and Jobs Act. Early adoption is permitted. | | September 2, 2018 | | The Company early adopted the standard effective September 2, 2018 and reclassified $1.5 million from Accumulated other comprehensive loss to Retained earnings related to the tax impact of the Company’s interest rate swap agreements. |
| | | | | | |
Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost | | This standard changes the income statement presentation of the components of net periodic benefit cost for defined benefit pension and other postretirement benefit plans. Under the new guidance, entities must present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs related to services rendered during the period. Other components of net periodic benefit cost will be presented separately from the line items that include the service cost. Early adoption is permitted. | | June 3, 2018 | | The Company retrospectively adopted the standard effective June 3, 2018. Prior to adoption, the Company recorded net periodic benefit costs related to its defined benefit pension and post-retirement medical plans within Selling, general and administrative expenses. As a result of adoption, these costs are recorded within Other, net. The Company retrospectively reclassified these costs in the Condensed Consolidated Statements of Comprehensive Income for the fiscal years ended June 2, 2018 and June 3, 2017 from Selling, general and administrative to Other, net. Refer to Note 8 of the financial statements for further information. |
|
| | | | | | |
Recently Issued Accounting Standards Not Yet Adopted |
Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
| | | | | | |
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities | | This update amends the hedge accounting recognition and presentation with the objectives of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities and simplifying the application of hedge accounting. The update expands the strategies eligible for hedge accounting, relaxes the timing requirements of hedge documentation and effectiveness assessments and permits the use of qualitative assessments on an ongoing basis to assess hedge effectiveness. The new guidance also requires new disclosures and presentation. | | June 2, 2019 | | The Company is currently evaluating the impact of adopting this guidance. |
| | | | | | |
Leases | | Under the updated standard a lessee's rights and obligations under most leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet. The standard must be adopted under a modified retrospective approach and early adoption is permitted. | | June 2, 2019 | | The Company has assembled a project team and has made significant process towards implementation of the lease accounting standard. The Company will adopt the standard in fiscal 2020 using the modified-retrospective transition approach. The Company has substantially completed its identification of the global lease population and the data migration to a lease integration tool that will support the accounting and disclosure requirements under the standard. Also, the Company will elect the package of practical expedients. The Company is in the process of finalizing its accounting policies and internal control processes related to the new standard. Upon adoption, the Company expects to record lease liabilities and right-of-use assets in the range of $250 million to $300 million. |
| | | | | | |
Measurement of Credit Losses on Financial Instruments | | This guidance replaces the existing incurred loss impairment model with an expected loss model and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. | | May 31, 2020 | | The Company is currently evaluating the impact of adopting this guidance. |
| | | | | | |
Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement | | This update eliminates, adds and modifies certain disclosure requirements for fair value measurements. Early adoption is permitted, and an entity is also permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date.
| | May 31, 2020 | | The Company is currently evaluating the impact of adopting this guidance. |
| | | | | | |
Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans | | This update eliminates, adds and clarifies certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Early adoption is permitted.
| | May 30, 2021 | | The Company is currently evaluating the impact of adopting this guidance. |
2. Revenue from Contracts with Customers
Impact of Adoption
The Company adopted ASC 606 - Revenue from Contracts with Customers at the beginning of fiscal year 2019. The Company completed its review of the impact of the new standard and identified certain key accounting policy changes that resulted from adopting the new standard. These included changes to the identification of performance obligations for commercial contracts in which the Company sells directly to end customers. Under previous accounting rules, which were codified under ASC 605, the Company generally delayed revenue recognition until the products were shipped and installed as the Company had concluded that contracts that contained both products and services represented a single, combined deliverable. However, under ASC 606, the Company has determined that products and services are distinct and as such, represent separate performance obligations. The Company also determined that under ASC 606, certain product pricing elements related to its direct customer sales should be recorded within Cost of sales rather than net within Net sales as had been historical practice under ASC 605.
The Company adopted ASC 606 using the modified retrospective approach and applied the guidance therein to all applicable contracts that were not complete as of the date of adoption. As a result of these changes in accounting, the Company recorded a cumulative adjustment to retained earnings of $1.9 million on the date of adoption. With the change in performance obligations under ASC 606, product revenue recognition is accelerated on certain direct commercial customer sales. As a result, the cumulative adjustment recorded upon the adoption of ASC 606 had the impact of reducing inventory for sales transactions that would have been recognized in a prior period under ASC 606 and recording unbilled receivables for the amounts owed prior to invoicing. Additionally, the cumulative adjustment reflects the change in accrued expenses, including income taxes payable, related to these sales transactions.
The cumulative impact to our Consolidated Balance Sheet as of June 3, 2018 was as follows:
|
| | | | | | | | | | | |
| Balance at | | Adjustments due | | Balance at |
(In millions) | June 2, 2018 | | to ASC 606 | | June 3, 2018 |
Balance Sheet | | | | | |
Assets: | | | | | |
Unbilled accounts receivable | $ | 1.9 |
| | $ | 11.1 |
| | $ | 13.0 |
|
Inventories, net | 162.4 |
| | (7.1 | ) | | 155.3 |
|
| | | | | |
Liabilities: | | | | | |
Accrued compensation and benefits | 86.3 |
| | 0.2 |
| | 86.5 |
|
Other accrued liabilities | 77.0 |
| | 1.9 |
| | 78.9 |
|
| | | | | |
Equity: | | | | | |
Retained earnings | 598.3 |
| | 1.9 |
| | 600.2 |
|
In accordance with the modified retrospective adoption rules per ASC 606, the Company has disclosed in the table below the differences in our financial statements due to the adoption of the standard. The “As reported” column represents the financial statement values recorded in accordance with ASC 606, while the “Legacy GAAP” column represents what the financial statement values would have been under ASC 605, had the new standard not been adopted.
|
| | | | | | | | | | | | | | | |
| Year Ended June 1, 2019 |
(In millions) | As reported | | Performance Obligation Change | | Gross vs. Net Change | | Legacy GAAP |
Statement of Comprehensive Income | | | | | | | |
Net sales | $ | 2,567.2 |
| | $ | (21.5 | ) | | $ | (38.0 | ) | | $ | 2,507.7 |
|
Cost of sales | 1,637.3 |
| | (12.8 | ) | | (38.0 | ) | | 1,586.5 |
|
Gross margin | 929.9 |
| | (8.7 | ) | |
| | 921.2 |
|
Total operating expenses | 726.4 |
| | (0.1 | ) | | | | 726.3 |
|
Operating earnings | 203.5 |
| | (8.6 | ) | | | | 194.9 |
|
Income tax expense | 39.6 |
| | (1.5 | ) | | | | 38.1 |
|
Net earnings | 160.5 |
| | (7.1 | ) | | | | 153.4 |
|
|
| | | | | | | | | | | | | |
| As of June 1, 2019 |
(In millions) | As reported | | Performance Obligation Change | | Gross vs. Net Change | | Legacy GAAP |
Balance Sheet | | | | | | | |
Assets: | | | | | | | |
Unbilled accounts receivable | $ | 34.3 |
| | $ | (32.6 | ) | | | | $ | 1.7 |
|
Inventories, net | 184.2 |
| | 17.6 |
| | | | 201.8 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Accrued compensation and benefits | 85.5 |
| | (0.4 | ) | | | | 85.1 |
|
Other accrued liabilities | 99.1 |
| | (5.6 | ) | | | | 93.5 |
|
| | | | | | | |
Equity: | | | | | | | |
Retained earnings | 712.7 |
| | (8.9 | ) | | | | 703.8 |
|
There was no impact on Net Cash Provided by Operating Activities within the Company's Consolidated Statement of Cash Flows as a result of adopting ASC 606.
Accounting Policies
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 typically recognized at the point in time when control transfers, generally upon transfer of title and risk of loss to the customer. Revenue for services, including the installation of products by the Company's owned dealers, 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 further below."Disaggregated Revenue" in Note 2 of the Consolidated Financial Statements.
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 1, 2019,May 30, 2020, 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 adopted ASC 842 - Leases at the beginning of fiscal year 2020. The new standard required the Company to recognize most leases on the balance sheet as right of use (ROU) assets with corresponding lease liabilities. All necessary changes required by the new standard, including those to the Company’s accounting policies, business processes, systems, controls and disclosures, were implemented as of the first quarter of fiscal year 2020. See Note 7 of the Consolidated Financial Statements for further information regarding the Company's lease accounting policies.
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. Significant 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 significant judgment about forecasts of future taxable income.
Stock-Based Compensation
The Company has several stock-based compensation plans, which are described in Note 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 shares that could potentially be issued. When in a loss position, basic and diluted EPS use the same weighted-average number of shares outstanding. Refer to Note 9 of the Consolidated Financial Statements for further information regarding the computation of EPS.
Comprehensive Income
Comprehensive income consists of Net earnings, Foreign currency translation adjustments, Unrealized holding gains on securities, Unrealized gains on interest rate swap agreement and Pension and post-retirement liability adjustments. Refer to Note 15 of the 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 Company 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.
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 12 of the Consolidated Financial Statements for the required fair value disclosures.
Herman Miller, Inc. and Subsidiaries54
Derivatives and Hedging
The Company calculates the fair value of financial instruments using quoted market prices whenever available. The Company 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 expense (income), net" in the Consolidated Statements of Comprehensive Income, or "Accumulated other comprehensive loss" within the Consolidated Balance Sheets, depending on the use of the derivative and whether it qualifies for hedge accounting policiestreatment.
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.
Recently Adopted Accounting Standards
On June 2, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)" using the modified retrospective method. Under the updated standard, a resultlessee's rights and obligations under most leases, including existing and new arrangements, are recognized as assets and liabilities, respectively, on the balance sheet. Refer to Note 7 to the Consolidated Financial Statements for further information regarding the adoption of the standard.
On June 2, 2019, the Company adopted ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" using the prospective method. This update amends the hedge accounting recognition and presentation with the objectives of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities and simplifying the application of hedge accounting. The update expands the strategies eligible for hedge accounting, relaxes the timing requirements of hedge documentation and effectiveness assessments and permits the use of qualitative assessments on an ongoing basis to assess hedge effectiveness. The new guidance also requires new disclosures and presentation. The adoption did not have a material impact on the Company's financial statements. Refer to Note 12 to the Consolidated Financial Statements for further information.
On March 1, 2020, the Company adopted ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" using the prospective method. This update simplifies how an entity assesses goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test consists of one step comparing the fair value of a reporting unit with its carrying amount. An entity then recognizes a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The adoption was utilized in the Company's current year goodwill impairment testing. Refer above to the "Goodwill and Indefinite-lived Intangible Assets" section for further information.
Recently Issued Accounting Standards Not Yet Adopted
The Company is currently evaluating the impact of adopting the new standard on revenue recognition:following relevant standards issued by the FASB:
|
| | | | | |
–Standard | Shipping and Handling Activities - 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.
|
| Description | | Effective Date |
– | Sales Taxes
| | | | |
2016-13 | Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | | This guidance replaces the Company does not record revenueexisting incurred loss impairment model with an expected loss model and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. | | May 31, 2020 |
2018-13 | Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for sales tax,Fair Value Measurement | | This update eliminates, adds and modifies certain disclosure requirements for fair value added taxmeasurements. Early adoption is permitted. | | May 31, 2020 |
2018-14 | Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans | | This update eliminates, adds and clarifies certain disclosure requirements for employers that sponsor defined benefit pension or other taxes that are collected on behalf of government entities. The Company’s revenuepost-retirement plans. Early adoption is recorded net of these taxes as they are passed through to the relevant government entities. |
permitted. | | May 30, 2021 |
–2019-12 | Incremental CostsIncome Taxes (Topic 740): Simplifying the Accounting for Income Taxes
| | This update removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The update also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of Obtaining a Contract - the Company has recognized incremental costs to obtain a contract as an expense when incurred as the amortization periodconsolidated group. Early adoption is less than one year.permitted. | | May 30, 2021 |
| |
– | Significant Financing Component - 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.
|
All other issued and not yet effective accounting standards are not relevant to the Company.
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 Obligation - 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 reportable segment, as well as customer purchase orders for the Maharam subsidiary within the North America Contract reportable segment. For contracts that include a single performance obligation, the Company records revenue at the point in time when title and risk of loss has transferred to the customer.
|
Single Performance Obligation - 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 for the Maharam subsidiary within the North America Contract segment. For contracts that include a single performance obligation, the Company records revenue at the point in time when title and risk of loss 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.
|
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, which include owned dealers, 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.
| |
– | 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.
|
Herman Miller, Inc. and Subsidiaries56
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 | Year Ended |
(In millions) | June 1, 2019 | May 30, 2020 | | June 1, 2019 |
Net Sales: | | | | |
Single performance obligation | | | | |
Product revenue | $ | 2,155.0 |
| $ | 2,116.6 |
| | $ | 2,155.0 |
|
Multiple performance obligations | | | | |
Product revenue | 390.0 |
| 347.8 |
| | 390.0 |
|
Service revenue | 12.6 |
| 9.7 |
| | 12.6 |
|
Other | 9.6 |
| 12.5 |
| | 9.6 |
|
Total | $ | 2,567.2 |
| $ | 2,486.6 |
| | $ | 2,567.2 |
|
Revenue disaggregated by product type and reportable segment has been provided in the table below:
|
| | | | | | | |
| Year Ended |
(In millions) | May 30, 2020 | | June 1, 2019 |
North America Contract: | | | |
Systems | $ | 512.7 |
| | $ | 564.4 |
|
Seating | 459.1 |
| | 501.8 |
|
Freestanding and storage | 379.8 |
| | 384.9 |
|
Textiles | 138.8 |
| | 113.8 |
|
Other | 107.8 |
| | 121.6 |
|
Total North America Contract | $ | 1,598.2 |
| | $ | 1,686.5 |
|
| | | |
International Contract: | | | |
Systems | $ | 76.6 |
| | $ | 103.6 |
|
Seating | 321.2 |
| | 276.1 |
|
Freestanding and storage | 51.1 |
| | 53.0 |
|
Other | 53.9 |
| | 59.5 |
|
Total International Contract | $ | 502.8 |
| | $ | 492.2 |
|
| | | |
Retail: | | | |
Seating | $ | 261.3 |
| | $ | 235.6 |
|
Freestanding and storage | 66.0 |
| | 67.5 |
|
Other | 58.3 |
| | 85.4 |
|
Total Retail | $ | 385.6 |
| | $ | 388.5 |
|
| | | |
Total | $ | 2,486.6 |
| | $ | 2,567.2 |
|
|
| | | |
| Year Ended |
(In millions) | June 1, 2019 |
North America Contract: | |
Systems | $ | 564.4 |
|
Seating | 501.8 |
|
Freestanding and storage | 384.9 |
|
Textiles | 113.8 |
|
Other | 121.6 |
|
Total North America Contract | $ | 1,686.5 |
|
| |
International Contract: | |
Systems | $ | 103.6 |
|
Seating | 276.1 |
|
Freestanding and storage | 53.0 |
|
Other | 59.5 |
|
Total International Contract | $ | 492.2 |
|
| |
Retail: | |
Seating | $ | 235.6 |
|
Freestanding and storage | 67.5 |
|
Other | 85.4 |
|
Total Retail | $ | 388.5 |
|
| |
Total | $ | 2,567.2 |
|
Refer to Note 14 of the Consolidated Financial Statements for further information related to our reportable segments.
Contract Assets and Contract Liabilities
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 the caption “Accounts and notes receivable”receivable, net” in the Consolidated Balance Sheets. The payment terms for the Company's customers differs depending on the type of customer. For third-party dealers and commercial contract customers, standard credit terms apply. Sales transacted through the Company's direct to consumer channels are generally paid for by the customer at point of sale.
Contract assets also include amounts that are conditional because certain performance obligations in the contractcontracts with the customercustomers are incomplete as of the balance sheet date. These contract assets generally arise due to contracts with the customercustomers that include multiple performance obligations, e.g., both the product that is shipped to the customer by the
Herman Miller, Inc. and Subsidiaries57
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. However, the asset is conditional and the customer is not invoiced by the Company until the installation performance obligation is completed. These contract assets are included in the caption "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(s) are completeobligation and revenue is recognized.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 the caption “Customer deposits” in the Consolidated Balance Sheets. During the year ended June 1, 2019,May 30, 2020, the Company recognized Net sales of $26.9$27.7 million related to customer deposits therethat were included in the balance sheet as of June 2, 2018.1, 2019.
3. Acquisitions and Divestitures
Contract Furniture Dealerships
On July 31, 2017, the Company completed the sale of a wholly-owned contract furniture dealership in Vancouver, Canada for initial cash consideration of $2.0 million. A pre-tax gain of $1.1 million was recognized as a result of the sale within the caption Selling, general and administrative within the Consolidated Statements of Comprehensive Income.
On January 1, 2017, the Company completed the sale of a wholly-owned contract furniture dealership in Pennsylvania in exchange for a $3.0 million note receivable. A pre-tax gain of $0.7 million was recognized as a result of the sale within the caption Selling, general and administrative within the Consolidated Statements of Comprehensive Income. The full balance of the note receivable was paid in the fourth quarter of fiscal 2019.
Maars Holding B.V.
On August 31, 2018, Herman Miller Holdings Limited, a wholly owned subsidiary of the Company acquired 48.2% of the outstanding equity of Global Holdings Netherlands B.V., which owns 100% of Maars Holding B.V. ("Maars”), a Harderwijk, Netherlands-based worldwide leader in the design and manufacturing of interior wall solutions. The Company acquired its 48.2% ownership interest in Maars for approximately $6.1 million in cash. The entity is accounted for using the equity method of accounting as the Company has significant influence, but not control, over the entity.
For the Maars equity method investment, the fair values assigned to the assets acquired were based on best estimates and assumptions as of the reporting dateAugust 31, 2018, and the valuation analysis was completed in the fourth quarter of fiscal 2019 with no differences noted from the preliminary valuation.2019.
Nine United Denmark A/S
On June 7, 2018, Herman Miller Holdings Limited, a wholly owned subsidiary of the Company acquired 33% of the outstanding equity of Nine United Denmark A/S, d/b/a HAY and subsequently renamed to HAY A/SApS ("HAY”), a Copenhagen, Denmark-based, design leader in furniture and ancillary furnishings for residential and contract markets in Europe and Asia. The Company acquired its 33% ownership interest in HAY for approximately $65.5 million in cash. The entity is accounted for using the equity method of accounting as the Company has significant influence, but not control, over the entity.
The Company also acquired the rights to the HAY brand in North America under a long-term license agreement for approximately $4.8 million million in cash. ThisIn the fiscal periods leading up to December 2, 2019 (“Acquisition Date”), the date when the Company purchased an additional 34% equity voting interest in HAY, this licensing agreement iswas recorded as an amortizinga definite life intangible asset and iswas being amortized over its 15-year useful life. This asset iswas also recorded within Other amortizable intangibles, net within the Condensed Consolidated Balance Sheets.Sheets as of June 1, 2019.
ForOn December 2, 2019, the HayCompany obtained a controlling financial interest in HAY through the purchase of an additional 34% equity voting interest. The completion of the acquisition will allow the Company to further promote growth and development of HAY's ancillary product lines and continue to support product innovation and sales growth. The Company previously accounted for its ownership interest in HAY as an equity method investment, but upon increasing its ownership to 67% on the fair values assignedAcquisition Date, the Company consolidated the operations of HAY. Total consideration paid for HAY on the Acquisition Date was $79.0 million, exclusive of HAY cash on hand. The Company funded the acquisition with cash and cash equivalents.
The previously mentioned HAY long-term licensing agreement was deemed to the assets acquired were based on best estimates and assumptions asbe a contractual preexisting relationship. As a result of the reporting datebusiness combination, the Company recorded this arrangement at its Acquisition Date fair value, which resulted in an increase in goodwill of $10.0 million and a net gain of $5.9 million, which was recorded within “Gain on consolidation of equity method investments" within the valuation analysisConsolidated Statements of Comprehensive Income. The goodwill was completed inrecorded within the third quarter of fiscal 2019 with no differences noted from the preliminary valuation.Company’s Retail segment.
Herman Miller, Inc. and Subsidiaries58
The Company is a party to options, that if exercised, would require the Companyit to purchase an additionalthe remaining 33% of the equity in HAY, at fair market value. These optionsThis remaining redeemable noncontrolling interest in HAY is classified outside permanent equity in the Consolidated Balance Sheets and is carried at the current estimated redemption amount.
The Company is in the process of finalizing assessments for the purpose of allocating the purchase price to the individual assets acquired and liabilities assumed in the HAY acquisition. This has the potential to result in adjustments to the carrying values of certain assets and liabilities as accounting policies are harmonized and purchase price allocation assumptions are updated. The refinement of these estimates may impact residual amounts allocated to goodwill. The preliminary allocation of the purchase prices included in the current period balance sheet is based on the best estimates of management and is subject to revision based on final determination of asset fair values and useful lives. As of May 30, 2020, the Company is in the process of finalizing the value associated with certain tax-related matters.
The following table presents the preliminary allocation of purchase price related to acquired tangible assets:
|
| | | |
(In millions) | |
Cash | $ | 12.1 |
|
Working capital, net of cash and inventory step-up | 12.3 |
|
Net property and equipment | 0.9 |
|
Other assets | 3.9 |
|
Other liabilities | (3.1 | ) |
Net assets acquired | $ | 26.1 |
|
The purchase of the additional equity interest in HAY was considered to be exercisedan acquisition achieved in stages, whereby the previously held equity interest was remeasured as of the acquisition date. The Company considered multiple factors in determining the fair value of the previously held equity method investment, including the price negotiated with the selling shareholder for the 34% equity interest in HAY, an income valuation model (discounted cash flow) and current trading multiples for comparable companies. Based on this analysis, the Company recognized a non-taxable gain of approximately $0.3 million on the remeasurement of the previously held equity method investment of $67.8 million. The net gain has been recognized in “Gain on consolidation of equity method investments" within the Consolidated Statements of Comprehensive Income.
The following table summarizes the acquired identified intangible assets, valuation method employed, useful lives and fair value, as determined by the Company at the acquisition date. Adjustments were made to the fair value of the identified intangible assets during the measurement period ended May 30, 2020 as shown in the table below. Goodwill related to the acquisition was recorded in the amount of $111.1 million and included deferred tax liabilities of $26.2 million, an increase of $6.3 million and $0.9 million, respectively, during the measurement period ended May 30, 2020. The changes in fair value of goodwill and the identified intangible assets were due to refinements in the projected cash flow estimates of the individual intangible assets acquired.
|
| | | | | | | | | | | | | | | |
| | | | | Acquisition Date Fair Value | | |
(In millions) | Valuation Method | | Useful Life (years) | | Initial Valuation at February 29, 2020 | | Adjusted Valuation at May 30, 2020 | | Measurement Period Adjustments |
Inventory Step-up | Comparative Sales Approach | | 0.8 | | $ | 3.4 |
| | $ | 3.4 |
| | $ | — |
|
Backlog | Multi-Period Excess Earnings | | 0.3 | | 3.4 |
| | 1.7 |
| | (1.7 | ) |
Deferred Revenue | Adjusted Fulfillment Cost Method | | 0.1 | | (2.0 | ) | | (2.2 | ) | | (0.2 | ) |
Tradename | Relief from Royalty | | Indefinite | | 56.0 |
| | 60.0 |
| | 4.0 |
|
Product Development | Relief from Royalty | | 8.0 | | 21.0 |
| | 22.0 |
| | 1.0 |
|
Customer Relationships | Multi-Period Excess Earnings | | 9.0 | | 33.0 |
| | 34.0 |
| | 1.0 |
|
Total | | | | | $ | 114.8 |
| | $ | 118.9 |
| | $ | 4.1 |
|
Goodwill related to the acquisition was recorded within the International Contract segment for $101.1 million and the Retail segment for $10.0 million.
naughtone
On October 25, 2019 (“Acquisition Date”), the Company purchased the remaining 47.5% equity voting interest in naughtone (Holdings) Limited and naughtone Manufacturing Ltd. (together “naughtone”). naughtone is an upscale, contemporary furniture manufacturer based in Harrogate, North Yorkshire, UK. The completion of the acquisition will allow the Company to further promote growth and development of naughtone's ancillary product lines, and continue to support product innovation and sales growth. The Company previously accounted for its ownership interest in naughtone as an equity method investment. Upon increasing its ownership to 100% on the acquisition date, the Company obtained a period commencing fromcontrolling financial interest and consolidated the thirdoperations of naughtone. Total consideration paid for naughtone on the Acquisition Date was $45.9 million, exclusive of naughtone cash on hand. The Company funded the acquisition with cash and cash equivalents. The allocation of the purchase price was finalized during the fourth quarter of fiscal 2020.
The following table presents the allocation of purchase price related to acquired tangible assets:
|
| | | |
(In millions) | |
Cash | $ | 5.1 |
|
Working capital, net of cash and inventory step-up | 1.3 |
|
Net property and equipment | 0.8 |
|
Net assets acquired | $ | 7.2 |
|
The purchase of the remaining equity interest in naughtone was considered to be an acquisition achieved in stages, whereby the previously held equity interest was remeasured as of the acquisition date. The Company considered multiple factors in determining the fair value of the previously held equity method investment, including the price negotiated with the selling shareholder for the 47.5% equity interest in naughtone, an income valuation model (discounted cash flow) and current trading multiples for comparable companies. Based on this analysis, the Company recognized a non-taxable gain of approximately $30.0 million on the remeasurement of the previously held equity method investment of $20.5 million. The net gain has been recognized in “Gain on consolidation of equity method investments" within the Consolidated Statements of Comprehensive Income.
The following table summarizes the acquired identified intangible assets, valuation method employed, useful lives and fair value, as determined by the Company at the acquisition date:
|
| | | | | | | |
(In millions) | Valuation Method | | Useful Life (years) | | Fair Value |
Inventory Step-up | Comparative Sales Approach | | 0.3 | | $ | 0.2 |
|
Backlog | Multi-Period Excess Earnings | | 0.3 | | 0.8 |
|
Tradename | Relief from Royalty | | Indefinite | | 8.5 |
|
Customer Relationships | Multi-Period Excess Earnings | | 9.0 | | 29.4 |
|
Total | | | | | $ | 38.9 |
|
Goodwill related to the acquisition was recorded within the North America Contract and International Contract segments for $35.0 million and $22.5 million, respectively.
The Company has finalized allocating the purchase price to the individual assets acquired and liabilities assumed in the naughtone acquisition as of May 30, 2020.
Pro Forma Results of Operations
The results of naughtone and HAY’s operations have been included in the Consolidated Financial Statements beginning on October 25, 2019 and December 2, 2019 respectively. The following table provides pro forma results of operations for the years ended May 30, 2020 and annually thereafter. June 1, 2019, as if naughtone and HAY had been acquired as of June 3, 2018. The pro forma results include certain purchase accounting adjustments such as the estimated change in depreciation and amortization expense on the acquired tangible and intangible assets acquired. Pro forma results do not include any anticipated cost savings from the planned integration of these acquisitions, or the gain on the consolidation of the HAY and naughtone equity method investments of approximately $36.2 million. Accordingly, such amounts are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the
Herman Miller, Inc. and Subsidiaries60
dates indicated or that may result in the future and are inclusive of pre-tax impairment charges of $205.4 million in the year-end May 30, 2020.
|
| | | | | | | |
| Year Ended |
(In millions) | May 30, 2020 | | June 1, 2019 |
Net sales | $ | 2,580.6 |
| | $ | 2,757.3 |
|
Net (loss) earnings attributable to Herman Miller, Inc. | $ | (46.3 | ) | | $ | 163.7 |
|
4. Inventories
|
| | | | | | | |
(In millions) | May 30, 2020 | | June 1, 2019 |
Finished goods and work in process | $ | 151.1 |
| | $ | 139.1 |
|
Raw materials | 46.2 |
|
| 45.1 |
|
Total | $ | 197.3 |
| | $ | 184.2 |
|
|
| | | | | | | | |
(In millions) | | June 1, 2019 | | June 2, 2018 |
Finished goods and work in process | | $ | 139.1 |
| | $ | 124.2 |
|
Raw materials | | 45.1 |
| | 38.2 |
|
Total | | $ | 184.2 |
| | $ | 162.4 |
|
Inventories valued using LIFO amounted to $26.5$24.9 million and $25.5$26.5 million as of May 30, 2020 and June 1, 2019, and June 2, 2018, respectively. If all inventories had been valued using the first-in first-out method, inventories would have been $210.8 million and $198.0 million at May 30, 2020 and $175.3 million at June 1, 2019, and June 2, 2018, respectively.
5. Investments in Nonconsolidated Affiliates
The Company 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 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) | May 30, 2020 | | June 1, 2019 |
Investments in nonconsolidated affiliates | $ | 12.2 |
| | $ | 89.0 |
|
|
| | | | | | |
(in millions) | June 1, 2019 | June 2, 2018 |
Investments in nonconsolidated affiliates | $ | 89.0 |
| $ | 16.8 |
|
|
| | | | | | | | | | | |
(In millions) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Equity earnings from nonconsolidated affiliates, net of tax | $ | 5.0 |
| | $ | 5.0 |
| | $ | 3.0 |
|
|
| | | | | | | | | |
(in millions) | June 1, 2019 | June 2, 2018 | June 3, 2017 |
Equity earnings from nonconsolidated affiliates | $ | 5.0 |
| $ | 3.0 |
| $ | 1.6 |
|
The Company had an ownership interest in seven5 nonconsolidated affiliates at June 1, 2019.May 30, 2020. Refer to the Company's ownership percentages shown below: |
| | | |
Ownership Interest | May 30, 2020 | | June 1, 2019 |
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% |
Global Holdings Netherlands B.V. | 48.2% | | 48.2% |
|
| | |
Ownership Interest | June 1, 2019 | June 2, 2018 |
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* | 52.5% | 50.0% |
Global Holdings Netherlands B.V. | 48.2% | —% |
HAY A/S | 33.0% | —% |
*The minority shareholders of Naughtone Holdings Limited have substantive participation rights, including participating in decisions related to hiring, firing, and compensation of executive management, as well as establishing the annual operating budget. As such, the entity is not consolidated.
Kvadrat Maharam
The Kvadrat Maharam nonconsolidated affiliates are distribution entities that are engaged in selling decorative upholstery, drapery and wall covering products. At May 30, 2020 and June 1, 2019, and June 2, 2018, the Company's investment value in Kvadrat Maharam Pty was $1.8$1.7 million and $1.9$1.8 million more than the Company's proportionate share of the underlying net assets, respectively. 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.
Naughtone
In fiscal 2020 the fourth quarterCompany agreed to fully divest its interest in Kvadrat Maharam Arabia DMCC, Kvadrat Maharam Turkey JSC and Danskina B.V for approximately $3 million. The divestitures are expected to be completed by the end of the first half of fiscal 2019 the Company increased its investment in Naughtone from 50% to 52.5% for approximately $2.0 million. At June 1, 2019, the Company's investment value in Naughtone was $9.8 million more than the Company's proportionate share of the underlying net assets, of which $2.0 million was being amortized over the remaining useful lives of the assets, while $7.8 million was considered a permanent basis difference.2021.
At June 2, 2018, the Company's investment value in Naughtone was $10.2 million more than the Company's proportionate share of the underlying net assets, of which $2.4 million was being amortized over the remaining useful lives of the assets, while $7.8 million was considered a permanent basis difference.
Maars
On August 31, 2018, Herman Miller Holdings Limited, a wholly owned subsidiary of the Company acquired 48.2% of the outstanding equity of Global Holdings Netherlands B.V., which owns 100% of Maars Holding B.V. ("Maars”), a Harderwijk, Netherlands-based worldwide leader in the design and manufacturing of interior wall solutions. The Company acquired its 48.2% ownership interest in Maars for approximately $6.1 million in cash. The entity is accounted for using the equity method of accounting as the Company has significant influence, but not control, over the entity.
For the Maars equity method investment, the fair values assigned to the assets acquired were based on best estimates and assumptions as of the reporting date and the valuation analysis was completed in the fourth quarter of fiscal 2019 with no differences noted from the preliminary valuation.
As of the August 31, 2018 acquisition date, the Company's investment value in Maars was $3.1 million more than the Company's proportionate share of the underlying net assets. This amount represented the difference between the price that the Company paid to acquire 48.2% of the outstanding equity and the carrying value of the net assets of Maars. Of this difference, $2.7 million was being amortized over the remaining useful lives of the assets, while $0.4 million was considered a permanent difference.
At June 1, 2019,May 30, 2020, the Company's investment value in Maars was $2.7$2.5 million more than the Company's proportionate share of the underlying net assets, of which $2.3$2.1 million was being amortized over the remaining useful lives of the assets, while $0.4 million was considered a permanent basis difference.
naughtone & HAY
On June 7, 2018, Herman Miller Holdings Limited, a wholly owned subsidiary ofAs described in Note 3 to the Consolidated Financial Statements, the Company acquired 33% ofincreased its investment in both naughtone & HAY during the outstanding equity of Nine United Denmark A/S, d/b/year ended May 30, 2020 and obtained a HAY and subsequently renamed to HAY A/S ("HAY”),controlling financial interest over each entity. As a Copenhagen, Denmark-based, design leader in furniture and ancillary furnishings for residential and contract markets in Europe and Asia. The Company acquired its 33% ownership interest in HAY for approximately $65.5 million in cash. The entity isresult, these two entities, which were previously accounted for using theas equity method of accounting as the Company has significant influence, but not control, over the entity.
For the HAY equity method investment, the fair values assigned to the assets acquired were based on best estimates and assumptions as of the reporting date and the valuation analysis was completed in the third quarter of fiscal 2019 with no differences noted from the preliminary valuation.
As of the June 7, 2018 acquisition date,investments, are now included within the Company's investment value in HAY was $62.9 million more than the Company's proportionate share of the underlying net assets. This amount represented the difference between the price that the company paid to acquire 33% of the outstanding equity and the carrying value of the net assets of HAY. Of this difference, $26.6 million was being amortized over the remaining useful lives of the assets while, $36.3 million was considered a permanent difference.consolidated operations.
At June 1, 2019, the Company's investment value in HAY was $56.8 million more than the Company's proportionate share of the underlying net assets, of which $22.6 million was being amortized over the remaining useful lives of the assets, while $34.2 million was considered a permanent basis difference. The change in the permanent basis difference from the acquisition date is due to changes in foreign currency exchange rates.
Transactions with Nonconsolidated Affiliates
Sales to and purchases from nonconsolidated affiliates were as follows for the periods presented below:
| | (in millions) | June 1, 2019 | | June 2, 2018 | | June 3, 2017 | |
(In millions) | | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Sales to nonconsolidated affiliates | $ | 3.9 |
| | $ | 4.3 |
| | $ | 4.0 |
| $ | 3.6 |
| | $ | 3.9 |
| | $ | 4.3 |
|
Purchases from nonconsolidated affiliates | $ | 23.0 |
| | $ | 6.8 |
| | $ | 4.2 |
| $ | 5.0 |
| | $ | 23.0 |
| | $ | 6.8 |
|
Balances due to or due from nonconsolidated affiliates were as follows for the periods presented below:
|
| | | | | | | |
(In millions) | May 30, 2020 | | June 1, 2019 |
Receivables from nonconsolidated affiliates | $ | 0.6 |
| | $ | 0.7 |
|
Payables to nonconsolidated affiliates | $ | — |
| | $ | 1.2 |
|
|
| | | | | | | |
(in millions) | June 1, 2019 | | June 2, 2018 |
Receivables from nonconsolidated affiliates | $ | 0.7 |
| | $ | 0.9 |
|
Payables to nonconsolidated affiliates | $ | 1.2 |
| | $ | 1.0 |
|
6. Short-Term Borrowings and Long-Term Debt
Long-term debt consisted of the following obligations:
|
| | | | | | | |
(In millions) | May 30, 2020 | | June 1, 2019 |
Debt securities, 6.0%, due March 1, 2021 | $ | 50.0 |
| | $ | 50.0 |
|
Debt securities, 4.95%, due May 20, 2030 | 49.9 |
| | — |
|
Syndicated Revolving Line of Credit, due August 2024 | 490.0 |
| | 225.0 |
|
Construction-Type Lease | — |
| | 6.9 |
|
Supplier financing program | 1.4 |
| | 3.1 |
|
Total debt | $ | 591.3 |
| | $ | 285.0 |
|
Less: Current debt | (51.4 | ) | | (3.1 | ) |
Long-term debt | $ | 539.9 |
| | $ | 281.9 |
|
|
| | | | | | | |
(In millions) | June 1, 2019 | | June 2, 2018 |
Debt securities, 6.0%, due March 1, 2021 | $ | 50.0 |
| | $ | 50.0 |
|
Syndicated Revolving Line of Credit, due September 2021 | 225.0 |
| | 225.0 |
|
Construction-Type Lease | 6.9 |
| | 7.0 |
|
Supplier financing program | 3.1 |
| | 3.8 |
|
Total debt | $ | 285.0 |
| | $ | 285.8 |
|
Less: Current debt | (3.1 | ) | | (10.8 | ) |
Long-term debt | $ | 281.9 |
| | $ | 275.0 |
|
TheAs of June 1, 2019, the Company's syndicated revolving line of credit provided the Company with up to $400 million in revolving variable interest borrowing capacity and included an "accordion feature" allowing the Company to increase, at its option and subject to the approval of the participating banks, the aggregate borrowing capacity of the facility by up to $200 million. On August 28, 2019, the Company entered into an amendment and restatement of its existing
Herman Miller, Inc. and Subsidiaries62
unsecured credit facility (the "Agreement"). The Agreement, which expires on August 28, 2024, provides the Company with up to $400$500 million in revolving variable interest borrowing capacity and includes an "accordion feature" allowing the Company to increase, at its option and subject to the approval of the participating banks, the aggregate borrowing capacity of the facility by $200up to $250 million. The facility expires in September 2021 and outstandingOutstanding borrowings bear interest at rates based on the prime rate, federal funds rate, LIBOR or negotiated rates as outlined in the agreement. Interest is payable periodically throughout the period if borrowings are outstanding.
On January 3, 2018,In March 2020, the Company borrowed $225.0an additional $265 million onfrom its existingsyndicated revolving line of credit. Of these proceeds, $150.0 millioncredit as a precautionary measure to provide additional near-term liquidity given the uncertainty related to COVID-19, which was used to repay its Series B senior notes upon maturity, while the rest of the proceeds was designated for general business purposes.subsequently repaid in June 2020.
As of June 1, 2019, the total debt outstanding related toAvailable borrowings under the syndicated revolving line of credit was $225.0 million. Available borrowings against this facility were $165.0 million due to $10.0 millionoutstanding letters of credit. As of June 2, 2018, available borrowings against this facility were $166.8 million due to $8.2 million related to outstanding letters of credit.as follows for the periods indicated:
|
| | | | | | | |
(In millions) | May 30, 2020 | | June 1, 2019 |
Syndicated revolving line of credit borrowing capacity | $ | 500.0 |
| | $ | 400.0 |
|
Less: Borrowings under the syndicated revolving line of credit | 490.0 |
| | 225.0 |
|
Less: Outstanding letters of credit | 9.4 |
| | 10.0 |
|
Available borrowings under the syndicated revolving line of credit | $ | 0.6 |
| | $ | 165.0 |
|
The unsecured senior revolving credit facility restrict, without prior consent, ourthe Company's borrowings, capital leases and the sale of certain assets. In addition, we havethe Company has agreed to maintain certain financial performance ratios, which include a maximum leverage ratio covenant, which is measured by the ratio of debt to trailing four quarter adjusted EBITDA (as defined in the credit agreement) and is required to be less than 3.5:1, except that wethe Company may elect, under certain conditions, to increase the maximum Leverage Ratio to 4:1 for four consecutive fiscal quarter end dates. The covenants also require a minimum interest coverage ratio, which is measured by the ratio of trailing four quarter EBITDA to trailing four quarter interest expense (as defined in the credit agreement) and is required to be greater than 4:3.5:1. 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 May 30, 2020 and June 1, 2019, and June 2, 2018, the Company was in compliance with all of these restrictions and performance ratios.
On May 20, 2020, the Company entered into a third amendment to its existing Private Shelf Agreement, dated December 14, 2010, as amended (together with the third amendment, the "Agreement"), between the Company and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.) and certain of its affiliates (collectively, “Prudential”). The Agreement provides for a $150.0 million revolving facility, which includes $50.0 million of outstanding existing unsecured senior notes that are due on March 1, 2021 (the "Existing Notes") and an additional $50.0 million aggregate principal amount of unsecured senior notes issued on May 20, 2020 (the "2020 Notes"). The 2020 Notes are due on May 20, 2030 and bear interest at a fixed annual coupon rate of 4.95%. The Company intends to use the proceeds of the 2020 Notes for general corporate purposes and/or to refinance existing indebtedness, including the Existing Notes. The Agreement also establishes an uncommitted shelf facility (the “Facility”), under which Prudential will consider one or more requests from the Company to purchase up to an additional $50.0 million in aggregate amount of the Company’s senior unsecured notes from time to time. The interest rate on any future notes issued under the Facility will be based on the benchmark Treasury rate corresponding to the weighted average life of the notes, plus a spread as determined by Prudential. The Facility will expire on May 20, 2023.
Annual maturities of debt for the five fiscal years subsequent to May 30, 2020 are as shown in the table below.
|
| | | |
(In millions) | |
2021 | $ | 51.4 |
|
2022 | $ | — |
|
2023 | $ | — |
|
2024 | $ | — |
|
2025 | $ | 490.0 |
|
Thereafter | $ | 50.0 |
|
Supplier Financing Program
The Company has an agreement with a third partythird-party financial institution to provide a platform that allows certain participating suppliers the ability to finance payment obligations from the Company. Under this program, participating suppliers may finance payment obligations of the Company, prior to their scheduled due dates, at a discounted price to the third partythird-party financial institution.
The Company has lengthened the payment terms for certain suppliers that have chosen to participate in the program. As a result, certain amounts due to suppliers have payment terms that are longer than standard industry practice and as such, these amounts have been excluded from the caption “Accounts payable” in the Condensed Consolidated Balance Sheets as the amounts have been accounted for by the Company as a current debt obligation. Accordingly, $3.1$1.4 million and $3.8$3.1 million have been recorded within the caption “Other accrued liabilities”“Short-term borrowings and current portion of long-term debt” for the periods ended May 30, 2020 and June 1, 2019, and June 2, 2018, respectively.
Construction-Type Lease
During fiscal 2015, the Company entered into a lease agreement for the occupancy of a new studio facility in Palo Alto, California which runs through fiscal 2026. In fiscal 2017, the Company became the deemed owner of the leased building for accounting purposes as a result of the Company's involvement during the construction phase of the project. The lease iswas therefore accounted for as a financing transactionlease and the building and related financing liability were initially recorded at fair value in the Consolidated Balance Sheets within both Construction in progress and Other accrued liabilities. The fair value of the building and financing liability was determined through a blend of an income approach, comparable property sales approach and a replacement cost approach.
During the first quarter of fiscal 2019, the construction was substantially completed, and the property was placed in service. As a result, the Company began depreciating the assets over their estimated useful lives. The Company also reclassified the related financing liability to Long-term debt. Additionally, the Company began allocating its monthly lease payments between land rent, which is recorded as an operating lease expense, interest expense and the reduction of the related lease obligation. The imputed interest rate on the financing liability is 2.9%, the Company's incremental borrowing rate. The carrying value of the building was $6.7 million and the related financing liability was $6.9 million at June 1, 2019. As a result of the adoption of ASC 842 in the first quarter of fiscal 2020, the Company derecognized its construction-type lease asset and financing liability and there was 0 related cumulative adjustment to retained earnings.
7. Leases
Impact of Adoption
The carryingCompany adopted ASC 842 - Leases at the beginning of fiscal year 2020. The new standard required the Company to recognize most leases on the balance sheet as right of use (ROU) assets with corresponding lease liabilities. All necessary changes required by the new standard, including those to the Company’s accounting policies, business processes, systems, controls and disclosures were implemented as of the first quarter of fiscal year 2020.
As part of the implementation process the Company made the following elections:
The Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs for all leases.
The Company elected to make the accounting policy election for short-term leases resulting in lease costs being recorded as an expense on a straight-line basis over the lease term.
The Company elected to not separate lease and non-lease components, for all leases.
The Company did not elect the hindsight practical expedient in determining the lease term and in assessing the likelihood that a lessee purchase option will be exercised, for all leases.
The Company did not elect the land easement practical expedient in determining whether land easements that were not previously accounted for as leases are or contain a lease.
Upon adoption, the cumulative effect of initially applying this new standard resulted in the addition of approximately $245 million of ROU assets, as well as corresponding short-term and long-term lease liabilities of approximately $275 million. Additionally, as a result of adoption, the Company derecognized its construction-type lease asset and financing liability and there was 0 related cumulative adjustment to retained earnings.
Herman Miller, Inc. and Subsidiaries64
Accounting Policies
The Company has leases for retail studios, showrooms, manufacturing facilities, warehouses and vehicles, which expire at various dates through 2036. 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.
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 Operations and Comprehensive Income in the same line item as the expense arising from fixed lease payments for operating leases.
Additionally, certain leases include renewal or termination options, which can be exercised at the Company’s discretion. Lease terms include the noncancelable 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.
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.
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 buildinglease payments. Relevant information used in determining the Company’s incremental borrowing rate includes the duration of the lease, location of the lease, and the related financing liabilityCompany’s credit risk relative to risk-free market rates.
Leases
During the year ended May 30, 2020, lease expense was $62.1 million. The components of lease expense were both $7.0 million at June 2, 2018.as follows:
Annual maturities of debt for the five fiscal years subsequent to June 1, 2019 are as shown |
| | | |
| Year Ended |
(In millions) | May 30, 2020 |
Operating lease costs | $ | 51.3 |
|
Short-term lease costs | 2.6 |
|
Variable lease costs* | 8.2 |
|
Total | $ | 62.1 |
|
*Not included in the table below.above for the year ended May 30, 2020 are variable lease costs of $81.3 million for raw material purchases under certain supply arrangements that the Company has determined to meet the definition of a lease.
During the fourth quarter of fiscal 2020, the Company determined it was more likely than not that the fair value of certain right of use assets were below their carrying values and assessed these assets for impairment. As result of this assessment the Company recorded an impairment of $19.3 million in the Consolidated Statements of Comprehensive income.
At May 30, 2020, 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) | |
2020 | $ | 3.1 |
|
2021 | $ | 50.0 |
|
2022 | $ | 225.0 |
|
2023 | $ | — |
|
2024 | $ | — |
|
Thereafter | $ | 6.9 |
|
|
| | | |
(In millions) | |
2021 | $ | 48.5 |
|
2022 | 44.8 |
|
2023 | 40.2 |
|
2024 | 34.5 |
|
2025 | 30.5 |
|
Thereafter | 71.9 |
|
Total lease payments* | 270.4 |
|
Less interest | 26.5 |
|
Present value of lease liabilities | $ | 243.9 |
|
*Lease payments exclude $30.6 million of legally binding minimum lease payments for leases signed but not yet commenced, primarily related to a new Chicago showroom expected to open in fiscal 2021.
7. Operating Leases
The Company leases real propertylong-term portion of the lease liabilities included in the amounts above is $178.8 million and equipment under agreements that expire on various dates. Certain leases contain renewal provisions and generally require the Company to pay utilities, insurance, taxes, and other operating expenses.remainder of the lease liabilities are included in Other accrued liabilities in the Condensed Consolidated Balance Sheets.
FutureThe following table summarizes future minimum rental payments required under operating leases that have non-cancelable lease terms as of June 1, 2019,, are as follows: prior to the adoption of ASC 842:
| | (In millions) | | |
2020 | $ | 51.7 |
| $ | 51.7 |
|
2021 | $ | 46.8 |
| 46.8 |
|
2022 | $ | 42.9 |
| 42.9 |
|
2023 | $ | 39.0 |
| 39.0 |
|
2024 | $ | 33.5 |
| 33.5 |
|
Thereafter | $ | 101.9 |
| 101.9 |
|
Total | | $ | 315.8 |
|
Total rental expense charged to operationsAt May 30, 2020, the weighted average remaining lease term and weighted average discount rate for operating leases were 7 years and 3.1%, respectively.
During the year ended May 30, 2020, the cash paid for leases included in the measurement of the liabilities and the operating cash flows was $55.9$49.2 million $49.3 millionand $45.3 million,the right of use assets obtained in fiscal 2019, 2018 and 2017, respectively. Substantially all such rental expense represented the minimum rental payments under operating leases.exchange for new liabilities was $13.4 million.
8. Employee Benefit Plans
The Company maintains retirement benefit plans for substantially all of its employees.
Pension Plans and Post-Retirement Medical InsurancePlan
The Company offers certain employees retirement benefits under domestic defined benefit plans. The Company provides healthcare benefits to employees who retired from service on or before a qualifying date in 1998. AsOne of the qualifying date, the Company discontinued offering post-retirement medical to future retirees. Benefits to qualifying retirees under this plan are based on the employee's years of service and age at the date of retirement. In addition to the domestic pension and retiree healthcare plan, one of the Company's wholly owned foreign subsidiaries has a defined-benefit pension plan based upon an average final pay benefit calculation. The measurement date for the Company's remaining domestic and international pension plans, as well as its post-retirement medicalthis plan is the last day of the fiscal year.year and the plan is frozen to new participants.
Herman Miller, Inc. and Subsidiaries66
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 domestic and international pension plans and post-retirement plan:
| | | Pension Benefits | | Post-Retirement Benefits | | | | | |
| 2019 | | 2018 | | 2019 | | 2018 | Pension Benefit |
(In millions) | Domestic | | International | | Domestic | | International | | | | | 2020 | | 2019 |
Change in benefit obligation: | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | $ | 1.0 |
| | $ | 105.9 |
| | $ | 1.0 |
| | $ | 113.8 |
| | $ | 4.0 |
| | $ | 5.0 |
| $ | 109.1 |
| | $ | 105.9 |
|
Interest cost | — |
| | 2.7 |
| | 0.1 |
| | 2.7 |
| | 0.1 |
| | 0.1 |
| 2.4 |
|
| 2.7 |
|
Plan Amendments | — |
| | 0.9 |
| | — |
| | — |
| | — |
| | — |
| — |
|
| 0.9 |
|
Foreign exchange impact | — |
| | (6.0 | ) | | — |
| | 4.2 |
| | — |
| | — |
| (2.9 | ) | | (6.0 | ) |
Actuarial loss (gain) | 0.1 |
| | 9.7 |
| | — |
| | (12.2 | ) | | (0.3 | ) | | (0.5 | ) | 21.0 |
| | 9.7 |
|
Benefits paid | (0.1 | ) | | (4.1 | ) | | (0.1 | ) | | (2.6 | ) | | (0.5 | ) | | (0.6 | ) | (3.1 | ) | | (4.1 | ) |
Benefit obligation at end of year | $ | 1.0 |
| | $ | 109.1 |
| | $ | 1.0 |
| | $ | 105.9 |
| | $ | 3.3 |
| | $ | 4.0 |
| $ | 126.5 |
| | $ | 109.1 |
|
| | | | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | $ | — |
| | $ | 94.6 |
| | $ | — |
| | $ | 80.5 |
| | $ | — |
| | $ | — |
| $ | 88.2 |
|
| $ | 94.6 |
|
Actual return on plan assets | — |
| | 2.5 |
| | — |
| | 1.2 |
| | — |
| | — |
| 4.7 |
| | 2.5 |
|
Foreign exchange impact | — |
| | (5.1 | ) | | — |
| | 2.8 |
| | — |
| | — |
| (2.0 | ) | | (5.1 | ) |
Employer contributions | 0.1 |
| | 0.3 |
| | 0.1 |
| | 12.7 |
| | 0.5 |
| | 0.6 |
| 0.3 |
| | 0.3 |
|
Benefits paid | (0.1 | ) | | (4.1 | ) | | (0.1 | ) | | (2.6 | ) | | (0.5 | ) | | (0.6 | ) | (3.1 | ) | | (4.1 | ) |
Fair value of plan assets at end of year | $ | — |
| | $ | 88.2 |
| | $ | — |
| | $ | 94.6 |
| | $ | — |
| | $ | — |
| $ | 88.1 |
| | $ | 88.2 |
|
| | | | | | | | | | | | | | |
Funded status: | | | | | | | | | | | | | | |
Under funded status at end of year | $ | (1.0 | ) | | $ | (20.9 | ) | | $ | (1.0 | ) | | $ | (11.3 | ) | | $ | (3.3 | ) | | $ | (4.0 | ) | $ | (38.4 | ) | | $ | (20.9 | ) |
| | | | | | | | | | | | | | |
Components of the amounts recognized in the Consolidated Balance Sheets: | Components of the amounts recognized in the Consolidated Balance Sheets: | | | | | Components of the amounts recognized in the Consolidated Balance Sheets: |
Current liabilities | $ | (0.1 | ) | | $ | — |
| | $ | (0.1 | ) | | $ | — |
| | $ | (0.6 | ) | | $ | (0.6 | ) | $ | — |
| | $ | — |
|
Non-current liabilities | $ | (0.9 | ) | | $ | (20.9 | ) | | $ | (0.9 | ) | | $ | (11.3 | ) | | $ | (2.7 | ) | | $ | (3.4 | ) | $ | (38.3 | ) | | $ | (20.9 | ) |
| | | | | | | | | | | | | | |
Components of the amounts recognized in Accumulated other comprehensive loss before the effect of income taxes: | Prior service cost | $ | — |
| | $ | 0.8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 0.7 |
| | $ | 0.8 |
|
Unrecognized net actuarial loss (gain) | $ | 0.3 |
| | $ | 47.3 |
| | $ | 0.3 |
| | $ | 40.8 |
| | $ | (1.3 | ) | | $ | (1.1 | ) | $ | 63.2 |
| | $ | 47.3 |
|
Accumulated other comprehensive loss | $ | 0.3 |
| | $ | 48.1 |
| | $ | 0.3 |
| | $ | 40.8 |
| | $ | (1.3 | ) | | $ | (1.1 | ) | $ | 63.9 |
| | $ | 48.1 |
|
The Company retrospectively adopted ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost on June 3, 2018. As the Company's pension and post retirement medical plans are frozen and not open to new plan participants, these plans no longer have a service component in net periodic benefit cost. Prior to adoption, the Company recorded net periodic benefit costs related to its defined benefit pension and post-retirement medical plans within Selling, general and administrative expenses. As a result of adoption, these costs are recorded within Other, net. The Company retrospectively reclassified $1.4 million and $0.3 million of net periodic benefit cost in the Consolidated Statements of Comprehensive Income for fiscal years 2018 and 2017, respectively, from Selling, general and administrative to Other, net.
The accumulated benefit obligation for the Company's domestic pension benefit plansplan totaled$1.0123.9 million as of the end of both fiscal 2019 and fiscal 2018. For its international plans, the accumulated benefit obligation totaled$105.4 million and $102.2$105.4 million as of fiscal 20192020 and fiscal 2018,2019, 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) | 2019 | | 2018 |
Projected benefit obligation | $ | 110.1 |
| | $ | 106.9 |
|
Accumulated benefit obligation | $ | 106.4 |
| | $ | 103.1 |
|
Fair value of plan assets | $ | 88.2 |
| | $ | 94.6 |
|
The following table is a summary of the annual cost of the Company's pension and post-retirement plans:plan:
|
| | | | | | | | | | | |
Components of Net Periodic Benefit Costs and Other Changes Recognized in Other Comprehensive Income (Loss): |
(In millions) | 2020 | | 2019 | | 2018 |
Interest cost | $ | 2.4 |
| | $ | 2.7 |
| | $ | 2.7 |
|
Expected return on plan assets | (4.4 | ) | | (4.5 | ) | | (5.6 | ) |
Amortization of prior service costs | 0.1 |
| | 0.1 |
| | — |
|
Amortization of net (gain)/loss | 3.2 |
| | 2.7 |
| | 4.2 |
|
Net periodic benefit cost | $ | 1.3 |
| | $ | 1.0 |
| | $ | 1.3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Components of Net Periodic Benefit Costs and Other Changes Recognized in Other Comprehensive Income (Loss): |
| Pension Benefits | | Post-Retirement Benefits |
(In millions) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Domestic: | | | | | | | | | | | |
Interest cost | $ | — |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.2 |
|
Net periodic benefit cost | $ | — |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.2 |
|
| | | | | | | | | | | |
International: | | | | | | | | | | | |
Interest cost | $ | 2.7 |
| | $ | 2.7 |
| | $ | 2.7 |
| | | | | | |
Expected return on plan assets | (4.5 | ) | | (5.6 | ) | | (4.7 | ) | | | | | | |
Net amortization | 2.8 |
| | 4.2 |
| | 2.2 |
| | | | | | |
Net periodic benefit cost | $ | 1.0 |
| | $ | 1.3 |
| | $ | 0.2 |
| | | | | | |
|
| | | | | | | |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss): |
(In millions) | 2020 | | 2019 |
Net actuarial (gain) loss | $ | 20.6 |
| | $ | 11.7 |
|
Net amortization | (4.8 | ) | | (2.7 | ) |
Total recognized in other comprehensive loss | $ | 15.8 |
| | $ | 9.0 |
|
|
| | | | | | | | | | | | | | | |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss): |
| Pension Benefits | | Post-Retirement Benefits |
(In millions) | 2019 | | 2018 | | 2019 | | 2018 |
Domestic: | | | | | | | |
Net actuarial gain | $ | 0.1 |
| | $ | — |
| | $ | (0.3 | ) | | $ | (0.5 | ) |
Total recognized in other comprehensive loss | $ | 0.1 |
| | $ | — |
| | $ | (0.3 | ) | | $ | (0.5 | ) |
| | | | | | | |
International: | | | | | | | |
Net actuarial (gain) loss | $ | 11.7 |
| | $ | (7.7 | ) | | | | |
Net amortization | (2.7 | ) | | (4.2 | ) | | | | |
Total recognized in other comprehensive loss | $ | 9.0 |
| | $ | (11.9 | ) | | | | |
The net actuarial loss, included in accumulated other comprehensive loss (pretax), expected to be recognized in net periodic benefit cost during fiscal 2021 is $4.9million.
672020 is$3.3 million.Annual Report
Actuarial Assumptions
The weighted-average actuarial assumptions used to determine the benefit obligation amounts and the net periodic benefit cost for the Company's pension and post-retirement plansplan are as follows:
|
| | | | | |
Weighted-average assumptions used in the determination of net periodic benefit cost: |
(Percentages) | 2020 | | 2019 | | 2018 |
Discount rate | 2.39 | | 2.87 | | 2.49 |
Compensation increase rate | 3.20 | | 3.10 | | 3.25 |
Expected return on plan assets | 4.80 | | 4.80 | | 6.10 |
| | | | | |
Weighted-average assumptions used in the determination of the projected benefit obligations: |
Discount rate | 1.66 | | 2.39 | | 2.87 |
Compensation increase rate | 2.75 | | 3.20 | | 3.10 |
|
| | | | | | | | | | | |
The weighted-average used in the determination of net periodic benefit cost: |
| 2019 | | 2018 | | 2017 |
(Percentages) | Domestic | | International | | Domestic | | International | | Domestic | | International |
Discount rate | 3.99 | | 2.87 | | 3.53 | | 2.49 | | 3.51 | | 3.43 |
Compensation increase rate | n/a | | 3.10 | | n/a | | 3.25 | | n/a | | 2.95 |
Expected return on plan assets | n/a | | 4.80 | | n/a | | 6.10 | | n/a | | 6.10 |
| | | | | | | | | | | |
The weighted-average used in the determination of the projected benefit obligations: |
Discount rate | 3.47 | | 2.39 | | 3.99 | | 2.87 | | 3.53 | | 2.49 |
Compensation increase rate | n/a | | 3.20 | | n/a | | 3.10 | | n/a | | 3.25 |
The Company uses a full yield curve approach to estimate the interest component of net periodic benefit cost for pension and other postretirement benefits. This method applies the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
In calculating post-retirement benefit obligations for fiscal 2020, a 6.7 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2019, decreasing gradually to 4.3 percent by 2038 and remaining at that level thereafter. For purposes of calculating post-retirement benefit costs, a 7.1 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2019, decreasing gradually to 4.3 percent by 2038 and remaining at that level thereafter.
Changes in assumed health care cost-trend rates is not expected to have a significant impact on the post-employment liability.
Plan Assets and Investment Strategies
The Company's international employee benefit plan assets consist mainly of listed fixed income obligations and common/collective trusts. The Company'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 Company 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 Company considered the need to balance the varying risks associated with each asset class with the long-term nature of its benefit obligations. The Company'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 Company 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 20192020 and asset categories for the Company's primary international pension plan for fiscal 20192020 and 20182019 are as follows:
|
| | | | | | | | | | | | | |
Asset Category | Targeted Asset Allocation Percentage | | Percentage of Plan Assets at Year End |
2020 | | 2019 | | 2020 | | 2019 |
Fixed income | 35% | | 35% | | 37% | | 33% |
Common collective trusts | 65% | | 65% | | 63% | | 67% |
Total | | | | | 100% | | 100% |
| | | | | | | |
(In millions) | | | May 30, 2020 |
Asset Category | | | Level 1 | | Level 2 | | Total |
Foreign government obligations | | | — |
| | 31.4 |
| | 31.4 |
|
Common collective trusts-balanced | | | — |
| | 56.7 |
| | 56.7 |
|
Total | | | $ | — |
| | $ | 88.1 |
| | $ | 88.1 |
|
| | | | | | | |
(In millions) | | | June 1, 2019 |
Asset Category | | | Level 1 | | Level 2 | | Total |
Foreign government obligations | | | — |
| | 29.3 |
| | 29.3 |
|
Common collective trusts-balanced | | | — |
| | 58.9 |
| | 58.9 |
|
Total | | | $ | — |
| | $ | 88.2 |
| | $ | 88.2 |
|
Herman Miller, Inc. and Subsidiaries68
|
| | | | | | | | | | | | | |
Asset Category | Targeted Asset Allocation Percentage | | Percentage of Plan Assets at Year End |
2019 | | 2018 | | 2019 | | 2018 |
Fixed income | 35 | | 35 | | 33 |
| | 36 |
|
Common collective trusts | 65 | | 65 | | 67 |
| | 64 |
|
Total | | | | | 100 |
| | 100 |
|
| | | | | | | |
(In millions) | | | International Plan as of June 1, 2019 |
Asset Category | | | Level 1 | | Level 2 | | Total |
Cash and cash equivalents | | | $ | — |
| | $ | — |
| | $ | — |
|
Foreign government obligations | | | — |
| | 29.3 |
| | 29.3 |
|
Common collective trusts-balanced | | | — |
| | 58.9 |
| | 58.9 |
|
Total | | | $ | — |
| | $ | 88.2 |
| | $ | 88.2 |
|
| | | | | | | |
(In millions) | | | International Plan as of June 2, 2018 |
Asset Category | | | Level 1 | | Level 2 | | Total |
Cash and cash equivalents | | | $ | 0.2 |
| | $ | — |
| | $ | 0.2 |
|
Foreign government obligations | | | — |
| | 33.4 |
| | 33.4 |
|
Common collective trusts-balanced | | | — |
| | 61.0 |
| | 61.0 |
|
Total | | | $ | 0.2 |
| | $ | 94.4 |
| | $ | 94.6 |
|
Cash Flows
The Company 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 2020 and fiscal 2019, the Company made total cash contributions of $0.9 million to its benefit plans. In fiscal 2018, the Company made total cash contributions of $13.4 million to its benefit plans.
The following represents a summary of the benefits expected to be paid by the plansplan in future fiscal years. These expected benefits were estimated based on the same actuarial valuation assumptions used to determine benefit obligations at June 1, 2019.May 30, 2020.
|
| | | |
(In millions) | Pension Benefits |
2021 | $ | 2.4 |
|
2022 | $ | 2.4 |
|
2023 | $ | 2.5 |
|
2024 | $ | 2.5 |
|
2025 | $ | 2.6 |
|
2026-2030 | $ | 13.9 |
|
|
| | | | | | | | | | | |
(In millions) | Pension Benefits Domestic | | Pension Benefits International | | Post-Retirement Benefits |
2020 | $ | 0.1 |
| | $ | 1.8 |
| | $ | 0.5 |
|
2021 | $ | 0.1 |
| | $ | 1.9 |
| | $ | 0.4 |
|
2022 | $ | 0.1 |
| | $ | 2.3 |
| | $ | 0.4 |
|
2023 | $ | 0.1 |
| | $ | 2.1 |
| | $ | 0.4 |
|
2024 | $ | 0.1 |
| | $ | 2.3 |
| | $ | 0.3 |
|
2025-2029 | $ | 0.3 |
| | $ | 16.7 |
| | $ | 1.1 |
|
Profit Sharing, 401(k) Plan, and Core Contribution
Substantially all of the Company’s domestic employees are eligible to participate in a defined contribution retirement plan, primarily the Herman Miller, Inc. profit sharing and 401(k) plan (the "plan"). Employees under the plan are eligible to begin participating on their date of hire. Until June 4, 2017, the plan provided for discretionary contributions for eligible participants, payable in the Company's common stock, of not more than 6 percent of employees' wages based on the Company's financial performance. Effective June 4, 2017, the Company discontinued the Employer Profit Sharing Contribution and instead, began allocating those funds to other components of pay and retirement. Under the plan the Company matches 100 percent of employee contributions to their 401(k) accounts up to 3 percent of their pay. Effective September 3, 2017, the Companypay which was subsequently increased the Employer Matching Contribution from 3 percent to 4 percent in September 2017 for all eligible employees. A core contribution of 4 percent is also included for most participants of the plan. There was an additional 1 percent contribution added to the quarterly Core Contribution for the quarter prior to the increased Employer Matching Contribution effective September 3, 2017. The Company’s other defined contribution retirement plans may provide for matching contributions, non-elective contributionsDuring the fourth quarter of fiscal 2020, the Company elected to temporarily suspend the Company's Core Contribution and discretionary contributions as declared by management.401(k) matches in order to reduce costs and preserve liquidity.
The cost of theThere were 0 Herman Miller, Inc. profit sharing contribution duringcontributions made in fiscal 2017 was $6.0 million. No profit sharing contribution was made in2020, fiscal 2019 or fiscal 2018. The expense recorded for the Company's 401(k) matching contributions and core contributions was approximately $25.4$22.2 million,, $24.9 $25.4 million and $22.8$24.9 million in fiscal years 2020, 2019 and 2018, and 2017, respectively.
9. Common Stock and Per Share Information
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) | 2020 | | 2019 | | 2018 |
Numerator: | | | | | |
Numerator for both basic and diluted EPS, Net (loss) earnings attributable to Herman Miller, Inc. | $ | (9.1 | ) | | $ | 160.5 |
| | $ | 128.1 |
|
| | | | | |
Denominator: | | | | | |
Denominator for basic EPS, weighted-average common shares outstanding | 58,920,653 |
| | 59,011,945 |
| | 59,681,268 |
|
Potentially dilutive shares resulting from stock plans | — |
| | 369,846 |
| | 630,037 |
|
Denominator for diluted EPS | 58,920,653 |
| | 59,381,791 |
| | 60,311,305 |
|
|
| | | | | | | | | | | |
(In millions, except shares) | 2019 | | 2018 | | 2017 |
Numerator: | | | | | |
Numerator for both basic and diluted EPS, Net earnings attributable to Herman Miller, Inc. | $ | 160.5 |
| | $ | 128.1 |
| | $ | 123.9 |
|
| | | | | |
Denominator: | | | | | |
Denominator for basic EPS, weighted-average common shares outstanding | 59,011,945 |
| | 59,681,268 |
| | 59,871,805 |
|
Potentially dilutive shares resulting from stock plans | 369,846 |
| | 630,037 |
| | 682,784 |
|
Denominator for diluted EPS | 59,381,791 |
| | 60,311,305 |
| | 60,554,589 |
|
Equity awards of 142,224 shares, 218,037 shares and 348,089 shares and 764,154 sharesof common stock were excluded from the denominator for the computation of diluted earnings per share for the fiscal years ended May 30, 2020, June 1, 2019, and June 2, 2018, and June 3, 2017, respectively, because they were anti-dilutive. The Company has certain share-based payment awards that meet the definition of participating securities.
Common Stock
The Company has twoa share repurchase plansplan authorized by the Board of Directors on September 25, 2007 and January 16, 2019, which provideprovides a share repurchase authorization of $550.0$250.0 million with no specified expiration date. The approximate dollar value of shares available for purchase under the plansplan at June 1, 2019May 30, 2020 was $264.2$237.6 million. During fiscal year 2020, 2019,, 2018, and 2017,2018, shares repurchased and retired under the current and past repurchase plans totaled 641,192, 1,326,023, 1,356,156, and 765,5561,356,156 shares respectively.
10. Stock-Based Compensation
The Company utilizes equity-based compensation incentives as a component of its employee and non-employee director and officer compensation philosophy. Currently, these incentives consist principally of stock options, restricted stock, restricted stock units and performance share units. The Company also offers a stock purchase plan for its domestic and certain international employees. The Company issues shares in connection with its share-based compensation plans from authorized, but unissued, shares. At June 1, 2019May 30, 2020 there were 5,991,307 shares authorized under the various stock-based compensation plans.
Valuation and Expense Information
The Company measures the cost of employee services received in exchange for an award of equity instruments based on their grant-date fair market value. This cost is recognized over the requisite service period.
Certain of the Company's equity-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 Company classifies pre-tax stock-based compensation expense primarily within Operating expenses in the Consolidated Statements of Comprehensive Income. 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) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Employee stock purchase program | $ | 0.3 |
| | $ | 0.3 |
| | $ | 0.3 |
|
Stock option plans | 0.6 |
| | (0.4 | ) | | 2.6 |
|
Restricted stock units | 3.9 |
| | 4.6 |
| | 3.9 |
|
Performance share units | (2.1 | ) | | 2.8 |
| | 0.9 |
|
Total | $ | 2.7 |
| | $ | 7.3 |
| | $ | 7.7 |
|
Tax benefit | $ | 0.5 |
| | $ | 1.6 |
| | $ | 2.3 |
|
|
| | | | | | | | | | | | |
(In millions) | | June 1, 2019 | | June 2, 2018 | | June 3, 2017 |
Employee stock purchase program | | $ | 0.3 |
| | $ | 0.3 |
| | $ | 0.3 |
|
Stock option plans | | (0.4 | ) | | 2.6 |
| | 2.0 |
|
Restricted stock units | | 4.6 |
| | 3.9 |
| | 3.6 |
|
Performance share units | | 2.8 |
| | 0.9 |
| | 2.8 |
|
Total | | $ | 7.3 |
| | $ | 7.7 |
| | $ | 8.7 |
|
| | | | | | |
Tax benefit | | $ | 1.6 |
| | $ | 2.3 |
| | $ | 3.1 |
|
As of June 1, 2019,May 30, 2020, total pre-tax stock-based compensation cost not yet recognized related to non-vested awards was approximately $7.1$3.2 million. The weighted-average period over which this amount is expected to be recognized is 0.961.2 years.
Employee Stock Purchase Program
Under the terms of the Company's Employee Stock Purchase Plan, 4 million shares of authorized common stock were reserved for purchase by plan participants at 85 percent of the market price. Shares of common stock purchased under the employee stock purchase plan were 70,145, 62,957, 67,335, and 68,54767,335 for the fiscal years ended 2020, 2019 2018 and 20172018 respectively.
Stock Option PlansOptions
The Company grants options to purchase the Company's stock to certain key employees and non-employee directors under its Long-Term Incentive Plan, as amended (the "LTIP") at a price not less than the market price of the Company's common stock on the date of grant. Under the current award program, all options become exercisable between one year and three years from date of grant and expire ten years from date of grant. Most options are subject to graded vesting with the related compensation expense recognized on a straight-line basis over the requisite service period.
Herman Miller, Inc. and Subsidiaries70
In fiscal 2020 there were no stock option grants awarded to employees or non-employee directors. In fiscal 2019 there were two separate stock option valuation dates. Therefore the table below has been presented with the assumptions relevant to each valuation date. The Company estimated the fair value of employee stock options on the date of grant using the Black-Scholes model. In determining these values, the following weighted-average assumptions were used for the options granted during the fiscal years indicated:
|
| | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Risk-free interest rates (1) | N/A | | 2.65-2.70% |
| | 1.79 | % |
Expected term of options (2) | N/A | | 4.4 years |
| | 4.6 years |
|
Expected volatility (3) | N/A | | 27 | % | | 26 | % |
Dividend yield (4) | N/A | | 2.18-2.33% |
| | 2.23 | % |
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 | N/A | | $ | 8.05 |
| | $ | 6.39 |
|
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Risk-free interest rates (1) | 2.65-2.70% |
| | 1.79 | % | | 1.01 | % |
Expected term of options (2) | 4.4 years |
| | 4.6 years |
| | 4.0 years |
|
Expected volatility (3) | 27 | % | | 26 | % | | 26 | % |
Dividend yield (4) | 2.18-2.33% |
| | 2.23 | % | | 2.13 | % |
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 | $ | 8.05 |
| | $ | 6.39 |
| | $ | 5.50 |
|
(1) Represents term-matched, zero-coupon risk-free rate from the Treasury Constant Maturity yield curve, continuously compounded.
(2) Represents historical settlement data, using midpoint scenario with 1-year grant date filter assumption for outstanding options.
(3) The blended volatility approach was used. 90% term-matched historical volatility from daily stock prices and 10% percent weighted average implied volatility from the 90 days preceding the grant date.
(4) Represents the quarterly dividend divided by the three-month average stock price as of the grant date, annualized and continuously compounded.
The following is a summary of the transactions under the Company's stock option plans:plan:
|
| | | | | | | | | | | | |
| Shares Under Option | | Weighted-Average Exercise Prices | | Aggregate Intrinsic Value (in millions) | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding at June 1, 2019 | 790,059 |
| | $ | 32.17 |
| | $ | 3.0 |
| | 5.8 |
Exercised | (423,815 | ) | | $ | 31.63 |
| | | | |
Forfeited or expired | (4,828 | ) | | $ | 33.38 |
| | | | |
Outstanding at May 30, 2020 | 361,416 |
| | $ | 32.80 |
| | $ | 0.2 |
| | 5.8 |
Ending vested + expected to vest | 361,416 |
| | $ | 32.80 |
| | $ | 0.2 |
| | 5.8 |
Exercisable at end of period | 186,952 |
| | $ | 29.80 |
| | $ | 0.2 |
| | 5.2 |
|
| | | | | | | | | | | | |
| Shares Under Option | | Weighted-Average Exercise Prices | | Aggregate Intrinsic Value (in millions) | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding at June 2, 2018 | 1,063,249 |
| | $ | 30.33 |
| | $ | 2.9 |
| | 7.45 |
Granted at market | 156,008 |
| | $ | 38.23 |
| | | | |
Exercised | (347,248 | ) | | $ | 28.84 |
| | | | |
Forfeited or expired | (81,950 | ) | | $ | 33.94 |
| | | | |
Outstanding at June 1, 2019 | 790,059 |
| | $ | 32.17 |
| | $ | 3.0 |
| | 5.81 |
Ending vested + expected to vest | 790,059 |
| | $ | 32.17 |
| | $ | 3.0 |
| | 5.81 |
Exercisable at end of period | 282,985 |
| | $ | 28.51 |
| | $ | 2.0 |
| | 4.42 |
The weighted-average remaining recognition period of the outstanding stock options at June 1, 2019May 30, 2020 was 1.121.0 years. The total pre-tax intrinsic value of options exercised during fiscal 2020, 2019 and 2018 and 2017 was $5.5 million, $3.3 million $5.0 million and $1.3$5.0 million, respectively. The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company'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 exercised in-the-money options as of that date. Total cash received during fiscal 20192020 from the exercise of stock options was approximately $10$12 million.
Restricted Stock Units
The Company grants restricted stock units to certain key employees.employees under its LTIP. This program provides that the actual number of restricted stock units awarded is based on the value of a portion of the participant's long-term incentive compensation divided by the fair value of the Company's stock on the date of grant. The awards generally cliff-vest after a three-year service period, with prorated vesting under certain circumstances and full or partial accelerated vesting upon retirement. Each restricted stock unit represents one1 equivalent share of the Company's common stock to be awarded, free of restrictions, after the vesting period. Compensation expense related to these awards is recognized over the requisite service period, which includes any applicable performance period. Dividend equivalent awards are credited quarterly. The units do not entitle participants to the rights of stockholders of common stock, such as voting rights, until shares are issued after vesting.
The following is a summary of restricted stock unit transactions for the fiscal years indicated:
|
| | | | | | | | | | | | |
| Share Units | | Weighted Average Grant-Date Fair Value | | Aggregate Intrinsic Value (in millions) | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding at June 1, 2019 | 311,281 |
| | $ | 33.93 |
| | $ | 11.0 |
| | 1.1 |
Granted | 90,551 |
| | $ | 44.70 |
| | | | |
Forfeited | (14,378 | ) | | $ | 40.07 |
| | | | |
Released | (143,680 | ) | | $ | 34.79 |
| |
| | |
Outstanding at May 30, 2020 | 243,774 |
| | $ | 37.02 |
| | $ | 5.6 |
| | 1.3 |
Ending vested + expected to vest | 240,824 |
| | $ | 37.00 |
| | $ | 5.5 |
| | 1.3 |
|
| | | | | | | | | | | | |
| Share Units | | Weighted Average Grant-Date Fair Value | | Aggregate Intrinsic Value (in millions) | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding at June 2, 2018 | 481,027 |
| | $ | 32.20 |
| | $ | 15.8 |
| | 1.28 |
Granted | 91,304 |
| | $ | 37.81 |
| | | | |
Forfeited | (31,922 | ) | | $ | 35.94 |
| | | | |
Released | (229,128 | ) | | $ | 31.40 |
| | | | |
Outstanding at June 1, 2019 | 311,281 |
| | $ | 33.93 |
| | $ | 11.0 |
| | 1.10 |
Ending vested + expected to vest | 311,281 |
| | $ | 33.93 |
| | $ | 11.0 |
| | 1.10 |
The weighted-average remaining recognition period of the outstanding restricted stock units at June 1, 2019,May 30, 2020, was 0.991.2 years. The fair value of the share units that vested during the twelve months ended June 1, 2019,May 30, 2020, was $8.4$5.9 million. The weighted average grant-date fair value of restricted stock units granted during 2020, 2019, and 2018 was $44.70, $37.81 and 2017 was $37.81, $35.28 and $31.83 respectively.
Performance Share Units
The Company grants performance share units to certain key employees.employees under its LTIP. The number of units initially awarded was based on the value of a portion of the participant's long-term incentive compensation, divided by the fair value of the Company's common stock on the date of grant. Each unit represents one1 equivalent share of the Company's common stock. The number of common shares ultimately issued in connection with these performance share units is determined based on the Company's financial performance over the related three-year service period or the Company's financial performance based on certain total shareholder return results as compared to a selected group of peer companies. Compensation expense is determined based on the grant-date fair value and the number of common shares projected to be issued and is recognized over the requisite service period.
The following is a summary of performance share unit transactions for the fiscal years indicated:
|
| | | | | | | | | | | | |
| Share Units | | Weighted Average Grant-Date Fair Value | | Aggregate Intrinsic Value (in millions) | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding at June 1, 2019 | 323,356 |
| | $ | 33.48 |
| | $ | 11.5 |
| | 1.1 |
Granted | 188,719 |
| | $ | 45.71 |
| | | | |
Forfeited | (127,538 | ) | | $ | 31.79 |
| | | | |
Outstanding at May 30, 2020 | 384,537 |
| | $ | 37.95 |
| | $ | 8.9 |
| | 1.3 |
Ending vested + expected to vest | 384,537 |
| | $ | 37.95 |
| | $ | 8.9 |
| | 1.3 |
|
| | | | | | | | | | | | |
| Share Units | | Weighted Average Grant-Date Fair Value | | Aggregate Intrinsic Value (in millions) | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding at June 2, 2018 | 374,560 |
| | $ | 30.76 |
| | $ | 12.3 |
| | 1.01 |
Granted | 207,568 |
| | $ | 36.37 |
| | | | |
Forfeited | (19,093 | ) | | $ | 35.90 |
| | | | |
Released | (239,679 | ) | | $ | 31.55 |
| | | | |
Outstanding at June 1, 2019 | 323,356 |
| | $ | 33.48 |
| | $ | 11.5 |
| | 1.13 |
Ending vested + expected to vest | 323,356 |
| | $ | 33.48 |
| | $ | 11.5 |
| | 1.13 |
The weighted-average remaining recognition period of the outstanding performance share units at June 1, 2019,May 30, 2020, was 1.061.3 years. The fair value for shares that vested during the twelve months ended June 1, 2019,May 30, 2020, was $9.3 million.0. The weighted average grant-date fair value of performance share units granted during 2019, 2018, and 2017 was $36.37, $31.28, and $29.40 respectively.
Herman Miller Consumer Holdings Stock (HMCH) Option Plan
Certain employees were granted options to purchase stock of HMCH at a price not less than the market price of HMCH common stock on the date of grant. For the grants of options under the award program, options are potentially exercisable between one year and five years from date of grant and expire at the end of the window period that follows the fifth anniversary of the grant date. Vesting is based on the performance of HMCH over a period of five years. Certain of these options have been classified as liability awards as the holders have the right to put the underlying shares to the Company immediately upon exercise. Given this, the awards are measured at fair value at the end of each reporting period and compensation expense is adjusted accordingly to reflect the fair value over the requisite service period. The Company estimates the issuance date fair value of HMCH stock options on the date of grant using the Black-Scholes model. In fiscal 2019 the options did not meet their performance targets resulting in cancellation of awards and reversal of the related expense and liability. The expense reversal for these awards was $1.1 million during fiscal2020, 2019, and the related liability for these awards2018 was zero as of the end of fiscal 2019.$45.71, $36.37, and $31.28 respectively.
The following weighted-average assumptions were used to value the liability associated with HMCH stock options as of June 2, 2018:
|
| | | |
| | 2018 |
Risk-free interest rates (1)
| | 2.29 | % |
Expected term of options (2)
| | 1.1 years |
|
Expected volatility (3)
| | 35 | % |
Dividend yield | | not applicable |
|
Strike price | | 30.64 |
|
Per share value (4)
| | 8.24 |
|
(1) Represents the U.S. Treasury yield over the same period as the expected option term.
(2) Represents the period of time that options granted are expected to be outstanding.
(3) Amount is determined based on analysis of historical price volatility of the common stock of peer companies over a period equal to the expected term of the options.
(4) Based on the Black-Scholes formula.
|
| | | | | | | | | | | | |
| Shares Under Option | | Weighted-Average Exercise Prices | | Aggregate Intrinsic Value (in millions) | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding at June 2, 2018 | 544,126 |
| | $ | 24.04 |
| | $ | 3.6 |
| | 1.20 |
Exercised | (4,861 | ) | | $ | 7.82 |
| | | | |
Forfeited | (468,558 | ) | | $ | 24.39 |
| | | | |
Outstanding at June 1, 2019 | 70,707 |
| | $ | 22.80 |
| | $ | 0.5 |
| | 0.20 |
Exercisable at end of period | 70,707 |
| | $ | 22.80 |
| | $ | 0.5 |
| | 0.20 |
The outstanding balance at June 1, 2019 in the preceding table represents fully vested options. The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the HMCH market price, less the strike price, as of the end of the period presented, which would have been received by the option holders had all option holders exercised in-the-money options as of that date.
Deferred Compensation Plan
The Herman Miller, Inc. Executive Equalization Retirement Plan is a supplemental deferred compensation plan and was made available for salary deferrals and Company 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 percent of their base salary and up to 100 percent of their incentive cash bonus. Company contributions to the plan “mirror” the amounts the Company would have contributed to the various qualified retirement plans had the employee's compensation not been above the IRS statutory ceiling ($280,000285,000 in 2019)2020). The Company does not guarantee a rate of return for these funds. Instead, participants make investment elections for their deferrals and Company contributions. Investment options are the same asclosely aligned to those available under the Herman Miller Profit Sharing and 401(k) Plan, except for Company stock, which is not an investment option under this plan.Plan.
Herman Miller, Inc. and Subsidiaries72
The Nonemployee Officer and Director Deferred Compensation Plan allows the Board of Directors of the Company to defer a portion of their annual director fee. Investment options are the same as those available under the Herman Miller Profit Sharing and 401(k) Plan, including Company stock.
In accordance with the terms of the Executive Equalization Plan and Nonemployee Officer and Director Deferred Compensation Plan, the salary and bonus deferrals, Company 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 Company and are not the property of the participant. Investments in securities other than the Company's common stock are included within the Other assets line item, while investments in the Company's stock are included in the line item Key executive deferredDeferred compensation plan in the Company'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,asset realized and unrealized gains and losses are recognized within the Company's Consolidated Statements of Comprehensive Income in the Interest and other investment income line item. The associated changes to the liability are recorded as compensation expense within the Selling, general and administrative line item within the Company'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 Net earnings in the Consolidated Statements of Comprehensive Income.
Director Fees
Company directors may elect to receive their director fees in one or more of the following forms: cash, deferred compensation in the form of shares or other selected investment funds, unrestricted Company stock at the market value at the date of election or stock options that vest in one year and expire in ten years. The exercise price of the stock options granted may not be less than the market price of the Company's common stock on the date of grant. Under the plan, the Board members received the following shares or options in the fiscal years indicated:
|
| | | | | | | | |
| 2020 | | 2019 | | 2018 |
Shares of common stock | 7,769 |
| | 10,185 |
| | 8,828 |
|
Shares through the deferred compensation program | 1,045 |
| | 7,619 |
| | 2,207 |
|
|
| | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
Shares of common stock | | 10,185 |
| | 8,828 |
| | 9,982 |
|
Shares through the deferred compensation program | | 7,619 |
| | 2,207 |
| | 2,582 |
|
11. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law in the United States. The effects of the Act included the reduction of the federal corporate income tax rate from 35 percent to 21 percent and a new participation exemption system of taxation on foreign earnings, among other provisions.
In accordance with Staff Accounting Bulletin 118, for the year ended June 2, 2018, the Company recorded a provisional tax benefit of $3.1 million from the impact of the Act, primarily related to the one-time U.S. tax liability on certain undistributed foreign earnings and the remeasurement of current and deferred tax liabilities. Subsequently, as the U.S. Treasury Department issued additional guidance, the Company recorded adjustments to the provisional tax benefit. During the year ended June 1, 2019, the Company completed its accounting for all the effects of the Act and recorded adjustments to the provisional amounts primarily for the one-time U.S. tax liability on certain undistributed foreign earnings and also an adjustment related to foreign tax credits to increase the income tax benefit from the Act by $1.0 million.
The U.S. Treasury Department and the Internal Revenue Service are expected to continue issuing additional guidance related to the Act, which could have a material impact to the provision for income taxes. If applicable, the Company would recognize any adjustments in the provision for income taxes in the period additional guidance is issued.
For tax years beginning after December 31, 2017, the Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy electionCompany elected to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company will account for tax expense related to GILTI in the year the tax is incurred.
The components of (loss) earnings before income taxes are as follows:
|
| | | | | | | | | | | |
(In millions) | 2020 | | 2019 | | 2018 |
Domestic | $ | (75.6 | ) | | $ | 136.2 |
| | $ | 121.6 |
|
Foreign | 62.2 |
| | 58.9 |
| | 46.5 |
|
Total | $ | (13.4 | ) | | $ | 195.1 |
| | $ | 168.1 |
|
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Domestic | $ | 136.2 |
| | $ | 121.6 |
| | $ | 131.4 |
|
Foreign | 58.9 |
| | 46.5 |
| | 46.2 |
|
Total | $ | 195.1 |
| | $ | 168.1 |
| | $ | 177.6 |
|
The provision (benefit) for income taxes consists of the following:
|
| | | | | | | | | | | |
(In millions) | 2020 | | 2019 | | 2018 |
Current: Domestic - Federal | $ | 12.0 |
| | $ | 19.0 |
| | $ | 30.2 |
|
Domestic - State | 5.7 |
| | 6.4 |
| | 4.3 |
|
Foreign | 13.3 |
| | 12.9 |
| | 10.7 |
|
| 31.0 |
| | 38.3 |
| | 45.2 |
|
Deferred: Domestic - Federal | (16.8 | ) | | 1.0 |
| | (4.1 | ) |
Domestic - State | (3.9 | ) | | (0.2 | ) | | 0.1 |
|
Foreign | (4.3 | ) | | 0.5 |
| | 1.2 |
|
| (25.0 | ) | | 1.3 |
| | (2.8 | ) |
Total income tax provision | $ | 6.0 |
| | $ | 39.6 |
| | $ | 42.4 |
|
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Current: Domestic - Federal | $ | 19.0 |
| | $ | 30.2 |
| | $ | 28.7 |
|
Domestic - State | 6.4 |
| | 4.3 |
| | 2.3 |
|
Foreign | 12.9 |
| | 10.7 |
| | 11.1 |
|
| 38.3 |
| | 45.2 |
| | 42.1 |
|
Deferred: Domestic - Federal | 1.0 |
| | (4.1 | ) | | 9.2 |
|
Domestic - State | (0.2 | ) | | 0.1 |
| | 2.8 |
|
Foreign | 0.5 |
| | 1.2 |
| | 1.0 |
|
| 1.3 |
| | (2.8 | ) | | 13.0 |
|
Total income tax provision | $ | 39.6 |
| | $ | 42.4 |
| | $ | 55.1 |
|
The following table represents a reconciliation of income taxes at the United States statutory rate of 21% for 2020 and 2019, and 29.1% for 2018 and 35% for 2017 with the effective tax rate as follows:
|
| | | | | | | | | | | |
(In millions) | 2020 | | 2019 | | 2018 |
Income taxes computed at the United States Statutory rate | $ | (2.8 | ) | | $ | 41.0 |
| | $ | 49.0 |
|
Increase (decrease) in taxes resulting from: | | | | | |
State and local income taxes, net of federal income tax benefit | 1.4 |
| | 4.9 |
| | 3.3 |
|
Non-deductible goodwill impairment | 17.1 |
| | — |
| | — |
|
Gain on consolidation of equity method investments | (5.5 | ) | | — |
| | — |
|
Remeasurement of U.S. deferred tax assets and liabilities due to the Tax Act | — |
| | (0.2 | ) | | (8.9 | ) |
U.S. tax liability on undistributed foreign earnings due to the Tax Act | — |
| | (2.6 | ) | | 9.0 |
|
Foreign-derived intangible income | (1.4 | ) | | (3.1 | ) | | — |
|
Global intangible low-taxed income | 5.9 |
| | 6.9 |
| | — |
|
Foreign statutory rate differences | 0.7 |
| | 1.9 |
| | (4.0 | ) |
Manufacturing deduction under the American Jobs Creation Act of 2004 | — |
| | — |
| | (2.7 | ) |
Research and development credit | (4.4 | ) | | (5.3 | ) | | (4.2 | ) |
Foreign offshore income claim | (1.7 | ) | | (0.7 | ) | | — |
|
Foreign tax credit | (5.8 | ) | | (5.7 | ) | | (2.4 | ) |
Foreign withholding taxes and other miscellaneous foreign taxes | 2.7 |
| | 0.8 |
| | 1.9 |
|
Other, net | (0.2 | ) | | 1.7 |
| | 1.4 |
|
Income tax expense | $ | 6.0 |
| | $ | 39.6 |
| | $ | 42.4 |
|
Effective tax rate | (44.9 | )% | | 20.3 | % | | 25.2 | % |
Herman Miller, Inc. and Subsidiaries74
|
| | | | | | | | | | | | |
(In millions) | | 2019 | | 2018 | | 2017 |
Income taxes computed at the United States Statutory rate | | $ | 41.0 |
| | $ | 49.0 |
| | $ | 62.2 |
|
Increase (decrease) in taxes resulting from: | | | | | | |
Remeasurement of U.S. deferred tax assets and liabilities due to the Tax Act | | (0.2 | ) | | (8.9 | ) | | — |
|
U.S. tax liability on undistributed foreign earnings due to the Tax Act | | (2.6 | ) | | 9.0 |
| | — |
|
Foreign-derived intangible income | | (3.1 | ) | | — |
| | — |
|
Global intangible low-taxed income | | 6.9 |
| | — |
| | — |
|
Foreign statutory rate differences | | 1.9 |
| | (4.0 | ) | | (5.7 | ) |
Manufacturing deduction under the American Jobs Creation Act of 2004 | | — |
| | (2.7 | ) | | (3.4 | ) |
State taxes | | 4.9 |
| | 3.3 |
| | 3.8 |
|
United Kingdom patent box deduction for research and development | | (1.9 | ) | | (1.8 | ) | | (2.6 | ) |
Research and development credit | | (3.4 | ) | | (2.4 | ) | | (1.4 | ) |
Foreign tax credit | | (5.7 | ) | | (2.4 | ) | | (0.6 | ) |
Other, net | | 1.8 |
| | 3.3 |
| | 2.8 |
|
Income tax expense | | $ | 39.6 |
| | $ | 42.4 |
| | $ | 55.1 |
|
Effective tax rate | | 20.3 | % | | 25.2 | % | | 31.1 | % |
The tax effects and types of temporary differences that give rise to significant components of the deferred tax assets and liabilities at May 30, 2020 and June 1, 2019, and June 2, 2018, are as follows:
|
| | | | | | | |
(In millions) | 2020 | | 2019 |
Deferred tax assets: | | | |
Compensation-related accruals | $ | 14.2 |
| | $ | 13.1 |
|
Accrued pension and post-retirement benefit obligations | 9.6 |
| | 7.2 |
|
Deferred revenue | 3.7 |
| | 6.1 |
|
Inventory related | 3.9 |
| | 1.2 |
|
Other reserves and accruals | 7.9 |
| | 8.1 |
|
Warranty | 14.0 |
| | 12.3 |
|
State and local tax net operating loss carryforwards and credits | 2.5 |
| | 2.5 |
|
Federal net operating loss carryforward | 1.2 |
| | 1.4 |
|
Foreign tax net operating loss carryforwards and credits | 8.4 |
| | 9.1 |
|
Accrued step rent and tenant reimbursements | 0.7 |
| | 4.2 |
|
Interest rate swap | 6.1 |
| | 0.3 |
|
Lease liability | 52.5 |
| | — |
|
Other | 6.9 |
| | 4.7 |
|
Subtotal | 131.6 |
| | 70.2 |
|
Valuation allowance | (10.6 | ) | | (10.4 | ) |
Total | $ | 121.0 |
| | $ | 59.8 |
|
| | | |
Deferred tax liabilities: | | | |
Book basis in property in excess of tax basis | $ | 32.0 |
| | $ | 26.6 |
|
Intangible assets | 43.6 |
| | 34.6 |
|
Right of use lease assets | 44.7 |
| | — |
|
Other | 3.4 |
| | 2.4 |
|
Total | $ | 123.7 |
| | $ | 63.6 |
|
|
| | | | | | | | |
(In millions) | | 2019 | | 2018 |
Deferred tax assets: | | | | |
Compensation-related accruals | | $ | 13.1 |
| | $ | 15.3 |
|
Accrued pension and post-retirement benefit obligations | | 7.2 |
| | 6.6 |
|
Deferred revenue | | 6.1 |
| | 5.6 |
|
Inventory related | | 1.2 |
| | 1.0 |
|
Reserves for uncollectible accounts and notes receivable | | 0.7 |
| | 0.6 |
|
Other reserves and accruals | | 8.1 |
| | 5.2 |
|
Warranty | | 12.3 |
| | 11.9 |
|
State and local tax net operating loss carryforwards and credits | | 2.5 |
| | 2.3 |
|
Federal net operating loss carryforward | | 1.4 |
| | 1.7 |
|
Foreign tax net operating loss carryforwards and credits | | 9.1 |
| | 10.0 |
|
Accrued step rent and tenant reimbursements | | 4.2 |
| | 3.8 |
|
Other | | 4.0 |
| | 3.9 |
|
Subtotal | | 69.9 |
| | 67.9 |
|
Valuation allowance | | (10.4 | ) | | (10.3 | ) |
Total | | $ | 59.5 |
| | $ | 57.6 |
|
| | | | |
Deferred tax liabilities: | | | | |
Book basis in property in excess of tax basis | | $ | (26.6 | ) | | $ | (25.5 | ) |
Intangible assets | | (34.6 | ) | | (32.3 | ) |
Other | | (2.1 | ) | | (6.9 | ) |
Total | | $ | (63.3 | ) | | $ | (64.7 | ) |
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 Company bases this determination on the expectation that related operations will be sufficiently profitable or various tax planning strategies will enable the Company 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 1, 2019,May 30, 2020, the Company had state and local tax NOL carry-forwards of $25.7$22.0 million, the state tax benefit of which is $1.4$1.2 million, which have various expiration periods from 1 to 21 years. The Company also had state credits with a state tax benefit of $1.1$1.3 million, which expire in 12 to 6 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 $1.3$1.6 million.
At June 1, 2019,May 30, 2020, the Company had federal NOL carry-forwards of $6.6$5.9 million, the tax benefit of which is $1.4$1.2 million, which expire in 109 years. For financial statement purposes, the NOL carry-forwards have been recognized as deferred tax assets.
At June 1, 2019,May 30, 2020, the Company had federal deferred assets of $2.2$2.3 million, the tax benefit of which is $0.5 million, which is related to investments in various foreign joint ventures. For financial statement purposes, the assets have been recognized as deferred tax assets, subject to a valuation allowance of $0.5 million.
At June 1, 2019,May 30, 2020, the Company had foreign net operating loss carry-forwards of $41.2$37.7 million, the tax benefit of which is $9.1$8.4 million, which have expiration periods from 98 years to an unlimited term. For financial statement purposes, the NOL carry-forwards have been recognized as deferred tax assets, subject to a valuation allowance of $7.6$7.7 million.
At June 1, 2019,May 30, 2020, the Company had foreign deferred assets of $5.5$4.2 million, the tax benefit of which is $1.0$0.8 million, which is related to various deferred taxes in Hong Kong and Brazil 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 $1.0$0.8 million.
The Company intends to repatriate $29.1 million in cash held in certain foreign jurisdictions and as such has recorded transitiona deferred tax liability related to foreign withholding taxes on these future dividends received in the U.S. from foreign subsidiaries of $1.8 million. A significant portion of this cash was previously taxed under the U.S. Tax Cut and Jobs Act (TCJA) one-time U.S. tax liability on undistributed foreign earnings as required byearnings. The Company intends to remain indefinitely reinvested in the Act. No other provision was made for income taxes that may result from future remittances of theremaining undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested,outside the U.S, which was $223.8$221.5 million on June 1, 2019.May 30, 2020. Determination of the total amount of unrecognized deferred income tax on the remaining undistributed earnings of foreign subsidiaries is not practicable.
The components of the Company's unrecognized tax benefits are as follows:
|
| | | |
(In millions) | |
Balance at June 2, 2018 | $ | 3.2 |
|
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 | (0.4 | ) |
Decreases related to lapse of applicable statute of limitations | (0.3 | ) |
Decreases related to settlements | (1.1 | ) |
Balance at June 1, 2019 | $ | 1.9 |
|
Increases related to current year income tax positions | 0.3 |
|
Decreases related to prior year income tax positions | (0.1 | ) |
Decreases related to lapse of applicable statute of limitations | (0.2 | ) |
Balance at May 30, 2020 | $ | 1.9 |
|
|
| | | | |
(In millions) | | |
Balance at June 3, 2017 | | $ | 2.8 |
|
Increases related to current year income tax positions | | 0.3 |
|
Increases related to prior year income tax positions | | 0.4 |
|
Decreases related to lapse of applicable statute of limitations | | (0.3 | ) |
Balance at June 2, 2018 | | $ | 3.2 |
|
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 | | (0.4 | ) |
Decreases related to lapse of applicable statute of limitations | | (0.3 | ) |
Decreases related to settlements | | (1.1 | ) |
Balance at June 1, 2019 | | $ | 1.9 |
|
The Company'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 Company 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) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Interest and penalty expense (income) | $ | 0.1 |
| | $ | (0.3 | ) | | $ | 0.1 |
|
Liability for interest and penalties | $ | 0.8 |
| | $ | 0.7 |
| | |
|
| | | | | | | | | | | |
(In millions) | June 1, 2019 | | June 2, 2018 | | June 3, 2017 |
Interest and penalty expense (income) | $ | (0.3 | ) | | $ | 0.1 |
| | $ | 0.2 |
|
Liability for interest and penalties | $ | 0.7 |
| | $ | 1.0 |
| | |
The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the Company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 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's Consolidated Statements of Comprehensive Income.
During the year, the Company has partially closed the audit of fiscal 20182019 with the Internal Revenue Service under the Compliance Assurance Process (CAP). The audit of fiscal 2018 also remains partially closed. For the majority of the remaining tax jurisdictions, the Company is no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for fiscal years before 2016.2017.
Herman Miller, Inc. and Subsidiaries76
12. Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, marketable securities, interest rate swaps, 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'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's long-term debt, including current maturities, is as follows for the periods indicated:
|
| | | | | | | | |
(In millions) | | May 30, 2020 | | June 1, 2019 |
Carrying value | | $ | 591.3 |
| | $ | 285.0 |
|
Fair value | | $ | 594.0 |
| | $ | 287.8 |
|
|
| | | | | | | | |
(In millions) | | June 1, 2019 | | June 2, 2018 |
Carrying value | | $ | 285.0 |
| | $ | 285.8 |
|
Fair value | | $ | 287.8 |
| | $ | 288.6 |
|
The following describes the methods the Company uses to estimate the fair value of financial assets and liabilities recorded in net earnings, which have not significantly changed in the current period:
Cash and cash equivalents — The Company invests excess cash in short term investments in the form of commercial paper and money market funds. Commercial paper is valued at amortized costs while money market funds are valued using net asset value.value ("NAV").
Equity securitiesMutual Funds-equity — The Company's equity securities primarily include equity mutual funds. The equity mutual fund investments are recorded at fair value using quoted prices for similar securities.
Available-for-sale securitiesDeferred compensation plan — The Company's available-for-sale marketable securitiesdeferred compensation plan primarily include fixed incomeincludes various domestic and international mutual funds and government obligations. These investmentsthat are recorded at fair value using quoted prices for similar securities.
Foreign currency exchange contracts — The Company's foreign currency exchange contracts are valued using an approach based on foreign currency exchange rates obtained from active markets. The estimated fair value of forward currency exchange contracts is based on month-end spot rates as adjusted by market-based current market-based activity. These forward contracts are not designated as hedging instruments.
Interest rate swap agreements — The Company's interest rate swap agreements value is determined using a market approach based on rates obtained from active markets. The interest rate swap agreements are designated as a cash flow hedging instrument.
Deferred compensation plan assets — The Company's deferred compensation plan primarily includes various domestic and international mutual funds that are recorded at fair value using quoted prices for similar securities.
Other — The Company's contingent consideration liabilities and redeemable noncontrolling interests are deemed to be level 3 fair value measurements. Refer to Note 16 for further information regarding redeemable noncontrolling interests.
The following table sets forth financial assets and liabilities measured at fair value through net income and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of May 30, 2020 and June 1, 20192019:
|
| | | | | | | | | | | | | | | |
(In millions) | May 30, 2020 | | June 1, 2019 |
Financial Assets | NAV | | Quoted Prices With Other Observable Inputs (Level 2) | | NAV | | Quoted Prices With Other Observable Inputs (Level 2) |
Cash equivalents: | | | | | | |
|
|
Money market funds | $ | 283.7 |
| | $ | — |
| | $ | 69.5 |
| | $ | — |
|
Mutual funds - equity | — |
| | 0.7 |
| | — |
| | 0.9 |
|
Foreign currency forward contracts | — |
| | 1.1 |
| | — |
| | — |
|
Deferred compensation plan | — |
| | 13.2 |
| | — |
| | 12.5 |
|
Total | $ | 283.7 |
| | $ | 15.0 |
| | $ | 69.5 |
| | $ | 13.4 |
|
| | | | | | | |
Financial Liabilities | | | | | | | |
Foreign currency forward contracts | $ | — |
| | $ | 0.8 |
| | $ | — |
| | $ | 1.4 |
|
Total | $ | — |
| | $ | 0.8 |
| | $ | — |
| | $ | 1.4 |
|
The following describes the methods the Company uses to estimate the fair value of financial assets and June 2, 2018:liabilities recorded in other comprehensive income, which have not significantly changed in the current period:
Mutual funds-fixed income — The Company's fixed-income securities primarily include fixed income mutual funds and government obligations. These investments are recorded at fair value using quoted prices for similar securities.
|
| | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements |
| June 1, 2019 | | June 2, 2018 |
(In millions) Financial Assets | NAV | Quoted Prices With Other Observable Inputs (Level 2) | Management Estimates (Level 3) | | NAV | Quoted Prices With Other Observable Inputs (Level 2) | Management Estimates (Level 3) |
Cash equivalents: | | |
| | |
|
|
Money market funds | $ | 69.5 |
| $ | — |
| $ | — |
| | $ | 121.0 |
| $ | — |
| $ | — |
|
Mutual funds - equity | — |
| 0.9 |
| — |
| | — |
| 0.9 |
| — |
|
Foreign currency forward contracts | — |
| — |
| — |
| | — |
| 0.4 |
| — |
|
Deferred compensation plan | — |
| 12.5 |
| — |
| | — |
| 15.1 |
| — |
|
Total | $ | 69.5 |
| $ | 13.4 |
| $ | — |
| | $ | 121.0 |
| $ | 16.4 |
| $ | — |
|
| | | | | | | |
Financial Liabilities | | | | | | | |
Foreign currency forward contracts | $ | — |
| $ | 1.4 |
| $ | — |
| | $ | — |
| $ | 0.3 |
| $ | — |
|
Contingent consideration | — |
| — |
| 0.2 |
| | — |
| — |
| 0.5 |
|
Total | $ | — |
| $ | 1.4 |
| $ | 0.2 |
| | $ | — |
| $ | 0.3 |
| $ | 0.5 |
|
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.
The following table sets forth financial assets and liabilities measured at fair value through other comprehensive income and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of May 30, 2020 and June 1, 2019 and June 2, 2018.2019.
|
| | | | | | | |
(In millions) | May 30, 2020 | | June 1, 2019 |
Financial Assets | Quoted Prices with Other Observable Inputs (Level 2) | | Quoted Prices with Other Observable Inputs (Level 2) |
Mutual funds - fixed income | $ | 6.3 |
| | $ | 7.9 |
|
Interest rate swap agreement | — |
| | 1.0 |
|
Total | $ | 6.3 |
| | $ | 8.9 |
|
| | | |
Financial Liabilities | | | |
Interest rate swap agreement | $ | 25.0 |
| | $ | 2.2 |
|
Total | $ | 25.0 |
| | $ | 2.2 |
|
|
| | | | | | | | | | | | | | | |
(In millions) | June 1, 2019 | | June 2, 2018 |
Financial Assets | Quoted Prices with Other Observable Inputs (Level 2) | | Management Estimate (Level 3) | | Quoted Prices with Other Observable Inputs (Level 2) | | Management Estimate (Level 3) |
Mutual funds - fixed income | $ | 7.9 |
| | $ | — |
| | $ | 7.7 |
| | $ | — |
|
Interest rate swap agreement | 1.0 |
| | — |
| | 15.0 |
| | — |
|
Total | $ | 8.9 |
| | $ | — |
| | $ | 22.7 |
| | $ | — |
|
| | | | | | | |
Financial Liabilities | | | | | | | |
Interest rate swap agreement | $ | 2.2 |
| | — |
| | — |
| | $ | — |
|
Total | $ | 2.2 |
| | $ | — |
| | $ | — |
| | $ | — |
|
The table below presents a reconciliation for liabilities measured at fair value using significant unobservable inputs (Level 3):
|
| | | | | | | |
(In millions) | | | |
Contingent Consideration | June 1, 2019 | | June 2, 2018 |
Beginning balance | $ | 0.5 |
| | $ | 0.5 |
|
Net realized (gains) losses | (0.2 | ) | | 0.1 |
|
Settlements | (0.1 | ) | | (0.1 | ) |
Ending balance | $ | 0.2 |
| | $ | 0.5 |
|
The contingent consideration liabilities represent future payment obligations that relate to business and product line acquisitions. These payments are based on the future performance of the acquired businesses. The contingent consideration liabilities are valued using estimates based on discount rates that reflect the risk involved and the projected sales and earnings of the acquired businesses. The estimates are updated and the liabilities are adjusted to fair value on a quarterly basis.
The following is a summary of the carrying and market values of the Company's fixed income mutual funds and equity mutual funds as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| May 30, 2020 | | June 1, 2019 |
(In millions) | Cost | | Unrealized Gain/(Loss) | | Market Value | | Cost | | Unrealized Gain/(Loss) | | Market Value |
Mutual funds - fixed income | $ | 6.2 |
| | $ | 0.1 |
| | $ | 6.3 |
| | $ | 7.9 |
| | $ | — |
| | $ | 7.9 |
|
Mutual funds - equity | 0.6 |
| | 0.1 |
| | 0.7 |
| | 0.8 |
| | 0.1 |
| | 0.9 |
|
Total | $ | 6.8 |
| | $ | 0.2 |
| | $ | 7.0 |
| | $ | 8.7 |
| | $ | 0.1 |
| | $ | 8.8 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 1, 2019 | | June 2, 2018 |
(In millions) | Cost | | Unrealized Gain/(Loss) | | Market Value | | Cost | | Unrealized Gain/(Loss) | | Market Value |
Mutual funds - fixed income | $ | 7.9 |
| | $ | — |
| | $ | 7.9 |
| | $ | 7.8 |
| | $ | (0.1 | ) | | $ | 7.7 |
|
Mutual funds - equity | 0.8 |
| | 0.1 |
| | 0.9 |
| | 0.7 |
| | 0.2 |
| | 0.9 |
|
Total | $ | 8.7 |
| | $ | 0.1 |
| | $ | 8.8 |
| | $ | 8.5 |
| | $ | 0.1 |
| | $ | 8.6 |
|
The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in the Consolidated Statements of Comprehensive Income within "Other expense (income), net".
The Company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requires the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the Company's intent to hold the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of the cost basis. The Company also considers the type of security, related industry and sector performance, and published investment ratings. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments, or macro-economic environments deteriorate, the Company could incur future impairments.
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.
On June 3, 2018, as a result of the adoption of ASU 2016-01 - Financial Instruments, the Company reclassified net gains on mutual fund equity securities, that were formerly classified as available for sale securities before the adoption of the new standard, from Accumulated other comprehensive loss to Retained earnings. The impact of adoption was $0.1 million which is not material to the Company's financial statements.
Derivative Instruments and Hedging Activities
Foreign Currency Forward Contracts
The Company transacts business in various foreign currencies and has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Under this program, the Company's strategy is to have increases or decreases in our foreign currency exposures offset by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility associated with foreign currency transaction gains or losses. 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
Herman Miller, Inc. and Subsidiaries78
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"Other expense (income): Other, net,, 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 $38.1$52.6 million and $37.3$38.1 million as of May 30, 2020 and June 1, 2019, and June 2, 2018, 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 £19.2£27.5 million and £19.9£19.2 million as of May 30, 2020 and June 1, 2019, and June 2, 2018, respectively. The Company also has other forward contracts related to other currency pairs at varying notional amounts.
Interest Rate Swaps
The Company enters into interest rate swap agreements to manage its exposure to interest rate changes and its overall cost of borrowing. The Company's interest rate swap agreements were entered into to exchange variable rate interest payments for fixed rate payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amount of the interest rate swap agreements is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss.received. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense.
The interest rate swaps were designated cash flow hedges at inception and 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 1, 2019.May 30, 2020. 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 derivatives is immediately recognized in earnings. The interest rate swap agreements are assessed for hedge effectiveness on a quarterly basis.
In September 2016, the Company entered into an interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $150.0 million with a forward start date of January 3, 2018 and a termination date of January 3, 2028. As a result of the transaction, the Company effectively converted indebtedness anticipated to be borrowed on the Company’s revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 1.949 percent fixed interest rate plus applicable margin under the agreement as of the forward start date.
In June 2017, the Company entered into an interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $75.0 million with a forward start date of January 3, 2018 and a termination date of January 3, 2028. As a result of the transaction, the Company effectively converted the Company’s revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 2.387 percent fixed interest rate plus applicable margin under the agreement as of the forward start date.
The fair value of the Company’s two outstanding interest rate swap agreements was a net liability of $1.2$25.0 million (comprised of a $1.0 million asset position and a $2.2 million liability position) and an asset of $15.0$1.2 million as of May 30, 2020 and June 1, 2019, and June 2, 2018, respectively. The liability and asset fair value were recorded within "Other Liabilitiesliabilities" and "Other Assetsnoncurrent assets" within the Consolidated Balance Sheets. Recorded within Other comprehensive loss, net of tax, for the effective portion of the Company's designated cash flow hedges was a net unrealized loss of $12.8$17.2 million and a net unrealized gain of $7.5$12.8 million for the fiscal years ended May 30, 2020 and June 1, 2019, and June 2, 2018, respectively.
For fiscal 2020, 2019 2018 and 2017,2018, there were no0 gains or losses recognized against earnings for hedge ineffectiveness.
Effects of Derivatives on the Financial Statements
The effects of derivatives on the consolidated financial statements were as follows for the fiscal years ended 20192020 and 20182019 (amounts presented exclude any income tax effects):
| | (In millions) | Balance Sheet Location | | June 1, 2019 | | June 2, 2018 | Balance Sheet Location | | May 30, 2020 | | June 1, 2019 |
Designated derivatives: | | | | | | | | |
Interest rate swap | Long-term assets: Other assets | | $ | 1.0 |
| | $ | 15.0 |
| Long-term assets: Other noncurrent assets | | $ | — |
| | $ | 1.0 |
|
Interest rate swap | Long-term liabilities: Other liabilities | | $ | 2.2 |
| | $ | — |
| Long-term liabilities: Other liabilities | | $ | 25.0 |
| | $ | 2.2 |
|
Non-designated derivatives: | | | | | | | | |
Foreign currency forward contracts | Current assets: Other | | $ | — |
| | $ | 0.4 |
| Current assets: Other current assets | | $ | 1.1 |
| | $ | — |
|
Foreign currency forward contracts | Current liabilities: Other accrued liabilities | | $ | 1.4 |
| | $ | 0.3 |
| Current liabilities: Other accrued liabilities | | $ | 0.8 |
| | $ | 1.4 |
|
|
| | | | | | | | | | | | | |
| | | Fiscal Year |
(In millions) | Statement of Comprehensive Income Location | | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
(Loss) gain recognized on foreign currency forward contracts | Other expense (income), net | | $ | (1.1 | ) | | $ | 0.3 |
| | $ | 0.4 |
|
|
| | | | | | | | | | | | | |
| | | Fiscal Year |
(In millions) | Statement of Comprehensive Income Location | | June 1, 2019 | | June 2, 2018 | | June 3, 2017 |
Gain (loss) recognized on foreign currency forward contracts | Other expenses (income): Other, net | | $ | 0.3 |
| | $ | 0.4 |
| | $ | (1.2 | ) |
The gain/(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) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Interest rate swap | $ | (17.2 | ) | | $ | (12.8 | ) | | $ | 7.5 |
|
|
| | | | | | | | | | | |
| Fiscal Year |
(In millions) | June 1, 2019 | | June 2, 2018 | | June 3, 2017 |
Interest rate swap | $ | (12.8 | ) | | $ | 7.5 |
| | $ | 2.1 |
|
LossesReclassified from Accumulated other comprehensive loss into earnings within "Interest expense" for the fiscal years ended 2020, 2019, and 2018 were gains of $0.8 million and losses of $0.5 million, and $0.3 million, respectively. Pre-tax gains expected to be reclassified from Accumulated other comprehensive loss into earnings were $0.5 million and $0.3 million forduring the fiscal years ended 2019 and 2018, respectively. There were no reclassifications required in fiscal 2017.next twelve months are $4.3 million. The amount of gain, net of tax, amount expected to be reclassified out of Accumulated other comprehensive loss into earnings during the next twelve months is a $0.3 million gain.$3.2 million.
Investments in Equity Securities Without a Readily Determinable Fair Value
In the fourth quarter of fiscal 2019, the Company recorded a gain from a $2.1 million fair value adjustment in an investment in a technology partner, which increased the total carrying value of the investment to $3.6 million as of June 1, 2019.2020. The gain was the result of an observable price change for a similar investment in the same entity. There were no similar gains in fiscal 2020.
Redeemable Noncontrolling Interests
Redeemable noncontrolling interests are reported on the Condensed Consolidated Balance Sheets in mezzanine equity in “Redeemable noncontrolling interests.” These financial instruments represent a level 3 fair value measurement.
As of June 1, 2019, the outstanding redeemable noncontrolling interests in the Company's subsidiary, Herman Miller Consumer Holdings, Inc. ("HMCH") were $20.6 million, and represented an approximate 5% minority ownership. During August 2019, the Company acquired all of the remaining redeemable noncontrolling equity interests. HMCH redeemed certain HMCH stock for cash and then, in August 2019, HMCH merged with and into the Company, with the remaining minority HMCH shareholders receiving a cash payment. Total cash paid of $20.4 million for the redemptions and for merger consideration was at fair market value based on an independent appraisal. This compares to purchases of $10.1 million during the twelve month period ended June 1, 2019.
Herman Miller, Inc. and Subsidiaries80
Changes in the Company's redeemable noncontrolling interest in HMCH for the years ended May 30, 2020 and June 1, 2019 are as follows:
|
| | | | | | | |
(In millions) | May 30, 2020 | | June 1, 2019 |
Beginning Balance | $ | 20.6 |
| | $ | 30.5 |
|
Purchase of HMCH redeemable noncontrolling interests | (20.4 | ) | | (10.1 | ) |
Redemption value adjustment | (0.2 | ) | | — |
|
Exercised options | — |
| | 0.2 |
|
Ending Balance | $ | — |
| | $ | 20.6 |
|
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 Consolidated 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 in HAY for the year ended May 30, 2020 are as follows:
|
| | | |
(In millions) | May 30, 2020 |
Beginning Balance | $ | — |
|
Increase due to HAY acquisition | 72.4 |
|
Redemption value adjustment | (17.6 | ) |
Net income attributable to redeemable noncontrolling interests | (5.1 | ) |
Foreign currency translation adjustments | $ | 0.7 |
|
Ending Balance | $ | 50.4 |
|
Other
The following table summarizes the valuation of our assets measured at fair value on a non-recurring basis as of May 30, 2020:
|
| | | |
(In millions) | May 30, 2020 |
Assets: | Level 3 |
Indefinite-lived intangible assets | $ | 92.8 |
|
DWR right of use assets | 110.9 |
|
Not included in the above is goodwill related to the Retail and Maharam reporting units, as these were fully written down with a resulting impairment charge of $125.5 million in the fourth quarter of fiscal 2020.
The relief-from-royalty method for the quantitative impairment assessment for indefinite-lived intangible assets utilized discount rates ranging from 12.75% to 17.25% and royalty rates ranging from 1.00% to 3.00%. Based on the quantitative impairment assessment performed, the carrying value these assets exceeded their fair value, resulting in an impairment charge of $53.3 million in fiscal 2020.
See Note 1 and Note 7 to the Consolidated Financial Statements for additional information.
13. Warranties, GuaranteesCommitments and Contingencies
Product Warranties
The Company provides coverage to the end-user for parts and labor on products sold under its warranty policy and for other product-related matters. The standard length of warranty is 12 years. However,years; however, this varies depending on the product classification. The Company does not sell or otherwise issue warranties or warranty extensions as stand-alone products. Reserves have been established for various costs associated with the Company'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. Changes in the warranty reserve for the stated periods were as follows:
|
| | | | | | | | | | | |
| Year Ended |
(In millions) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Accrual Balance — beginning | $ | 53.1 |
| | $ | 51.5 |
| | $ | 47.7 |
|
Accrual for warranty matters | 23.7 |
| | 20.7 |
| | 22.1 |
|
Settlements and adjustments | (17.6 | ) | | (19.1 | ) | | (18.3 | ) |
Accrual Balance — ending | $ | 59.2 |
| | $ | 53.1 |
| | $ | 51.5 |
|
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Accrual balance, beginning | $ | 51.5 |
| | $ | 47.7 |
| | $ | 43.9 |
|
Accrual for warranty matters | 20.7 |
| | 22.1 |
| | 22.8 |
|
Settlements | (19.1 | ) | | (18.3 | ) | | (19.0 | ) |
Accrual balance, ending | $ | 53.1 |
| | $ | 51.5 |
| | $ | 47.7 |
|
Other Guarantees
The Company 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 Company is ultimately liable for claims that may occur against them. As of June 1, 2019,May 30, 2020, the Company had a maximum financial exposure related to performance bonds of approximately $5.7$4.4 million. The Company has no history of claims, nor is it aware of circumstances that would require it to performpay, under any of 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 Consolidated Financial Statements. Accordingly,no 0liability has been recorded in respect to these bonds as of either May 30, 2020 or June 1, 2019 and June 2, 2018.2019.
The Company periodically enters into agreements in the normal course of business that may include indemnification clauses regarding 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 Consolidated Financial Statements. Accordingly, no liability has been recorded as of June 1, 2019 and June 2, 2018.
The Company has entered into standby letter of credit arrangements for the purposepurposes of protecting various insurance companies and lessors against default on insurance premium and lease payments. As of June 1, 2019,May 30, 2020, the Company had a $10 millionmaximum financial exposure from these standby letters of credit totaling approximately $9.4 million, all of which is considered usage against the Company's revolving line of credit. The Company has no history of claims, nor is it aware of circumstances that would require it to perform under any of these arrangements and believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not significantlymaterially affect the Company's Consolidated Financial Statements. Accordingly, no0 liability has been recorded as of May 30, 2020 and June 1, 2019 and June 2, 2018.2019.
Contingencies
The Company is also involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affecthave a material adverse effect, if any, on the Company's Consolidated Financial Statements.
The Company is a party to options, that if exercised, would require the Company to purchase an additional 33% of the equity in HAY at fair market value. These options may be exercised during a period commencing from the third quarter of fiscal 2020.
As of the end of fiscal 2019,2020, outstanding commitments for future purchase obligations approximated $73.5$79.8 million.
Herman Miller, Inc. and Subsidiaries82
14. Operating Segments
The Company's segments consist of North America Contract, International Contract and Retail.
In fiscal 2018, the Company's reportable segments consisted of North American Furniture Solutions, ELA ("EMEA, Latin America, and Asia Pacific") Furniture Solutions, Specialty and Consumer. Effective in the fourth quarter of fiscal 2019, the Company has revised its reportable segments to combine the Specialty reportable segment with the North American Furniture Solutions reportable segment. The newly combined segment is called "North America Contract". There were no changes to the Company's ELA Furniture Solutions ("ELA") and Consumer segments, but each has been renamed. Effective in the fourth quarter of fiscal 2019, ELA is now named "International Contract" and Consumer is named "Retail". The Specialty segment (Maharam, Geiger, Nemschoff and the Herman Miller Collection) has been combined with the North America Contract segment under a common segment manager as of the fourth quarter fiscal 2019. The change in operating segments reflect the basis of how the Company internally reports and evaluates financial information used to make operating decisions. Prior year results disclosed in the table below have been revised to reflect these changes.
The North America Contract segment includes the operations associated with the design, manufacture and sale of furniture and textile products for work-related settings, including office, education, and healthcare environments, throughout the United States and Canada. The business associated with the Company's owned contract furniture dealers is also included in the North America Contract segment. In addition to the Herman Miller brand, this segment includes the operations associated with the design, manufacture and sale of high-craft furniture products and textiles including Geiger wood products, Maharam textiles, Nemschoff, naughtone and Herman Miller Collection products.
The International Contract segment includes EMEA, Latin America, and Asia-Pacific. International Contract includes the operations associated with the design, manufacture, and sale of furniture products, primarily for work-related settings in these aforementioned geographic regions. EMEA, Latin America and Asia-Pacific.
The Retail segment includes 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,e-commerce, direct mailing catalogs and Design Within ReachDWR and HAY studios.
The Company also reports a “Corporate” category consisting primarily of unallocated expenses related to general corporate functions, including, but not limited to, certain legal, executive, corporate finance, information technology, administrative and acquisition-related costs. Management regularly reviews corporate costs and believes disclosing such information provides more visibility and transparency regarding how the chief operating decision maker reviews results of the Company. The accounting policies of the reportable operating segments are the same as those of the Company.
The performance of the operating segments is evaluated by the Company's management using various financial measures. The following is a summary of certain key financial measures for the respective fiscal years indicated:
|
| | | | | | | | | | | |
| Year Ended |
(In millions) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Net Sales: | | | | | |
North America Contract | $ | 1,598.2 |
| | $ | 1,686.5 |
| | $ | 1,589.8 |
|
International Contract | 502.8 |
| | 492.2 |
| | 434.5 |
|
Retail | 385.6 |
| | 388.5 |
| | 356.9 |
|
Total | $ | 2,486.6 |
| | $ | 2,567.2 |
| | $ | 2,381.2 |
|
Depreciation and Amortization: | | | | | |
North America Contract | $ | 46.7 |
| | $ | 46.8 |
| | $ | 43.9 |
|
International Contract | 17.4 |
| | 10.5 |
| | 10.2 |
|
Retail | 14.7 |
| | 14.1 |
| | 12.1 |
|
Corporate | 0.7 |
| | 0.7 |
| | 0.7 |
|
Total | $ | 79.5 |
| | $ | 72.1 |
| | $ | 66.9 |
|
Operating Earnings (Loss): | | | | | |
North America Contract | $ | 130.9 |
| | $ | 189.7 |
| | $ | 175.2 |
|
International Contract | 18.2 |
| | 57.8 |
| | 36.9 |
|
Retail | (148.3 | ) | | 5.3 |
| | 13.9 |
|
Corporate | (39.2 | ) | | (49.3 | ) | | (47.1 | ) |
Total | $ | (38.4 | ) | | $ | 203.5 |
| | $ | 178.9 |
|
Capital Expenditures: | | | | | |
North America Contract | $ | 53.7 |
| | $ | 52.7 |
| | $ | 46.0 |
|
International Contract | 10.4 |
| | 16.6 |
| | 11.4 |
|
Retail | 4.9 |
| | 16.5 |
| | 13.2 |
|
Corporate | — |
| | — |
| | — |
|
Total | $ | 69.0 |
| | $ | 85.8 |
| | $ | 70.6 |
|
Total Assets: | | | | | |
North America Contract | $ | 769.5 |
| | $ | 733.6 |
| | $ | 677.4 |
|
International Contract | 512.5 |
| | 356.8 |
| | 283.4 |
|
Retail | 310.9 |
| | 310.0 |
| | 291.2 |
|
Corporate | 461.0 |
| | 168.9 |
| | 227.5 |
|
Total | $ | 2,053.9 |
| | $ | 1,569.3 |
| | $ | 1,479.5 |
|
Goodwill: | | | | | |
North America Contract | $ | 182.3 |
| | $ | 185.3 |
| | $ | 185.3 |
|
International Contract | 163.7 |
| | 39.7 |
| | 40.0 |
|
Retail | — |
| | 78.8 |
| | 78.8 |
|
Corporate | — |
| | — |
| | — |
|
Total | $ | 346.0 |
| | $ | 303.8 |
| | $ | 304.1 |
|
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Net Sales: | | | | | |
North America Contract | $ | 1,686.5 |
| | $ | 1,589.8 |
| | $ | 1,574.6 |
|
International Contract | 492.2 |
| | 434.5 |
| | 385.5 |
|
Retail | 388.5 |
| | 356.9 |
| | 318.1 |
|
Corporate | — |
| | — |
| | — |
|
Total | $ | 2,567.2 |
| | $ | 2,381.2 |
| | $ | 2,278.2 |
|
| | | | | |
Depreciation and Amortization: | | | | | |
North America Contract | $ | 46.8 |
| | $ | 43.9 |
| | $ | 37.7 |
|
International Contract | 10.5 |
| | 10.2 |
| | 9.4 |
|
Retail | 14.1 |
| | 12.1 |
| | 10.2 |
|
Corporate | 0.7 |
| | 0.7 |
| | 1.6 |
|
Total | $ | 72.1 |
| | $ | 66.9 |
| | $ | 58.9 |
|
| | | | | |
Operating Earnings (Losses): | | | | | |
North America Contract | $ | 189.7 |
| | $ | 175.2 |
| | $ | 184.1 |
|
International Contract | 57.8 |
| | 36.9 |
| | 36.2 |
|
Retail | 5.3 |
| | 13.9 |
| | 4.8 |
|
Corporate | (49.3 | ) | | (47.1 | ) | | (34.0 | ) |
Total | $ | 203.5 |
| | $ | 178.9 |
| | $ | 191.1 |
|
| | | | | |
Capital Expenditures: | | | | | |
North America Contract | $ | 52.7 |
| | $ | 46.0 |
| | $ | 56.8 |
|
International Contract | 16.6 |
| | 11.4 |
| | 8.5 |
|
Retail | 16.5 |
| | 13.2 |
| | 22.0 |
|
Corporate | — |
| | — |
| | — |
|
Total | $ | 85.8 |
| | $ | 70.6 |
| | $ | 87.3 |
|
| | | | | |
Total Assets: | | | | | |
North America Contract | $ | 733.6 |
| | $ | 677.4 |
| | $ | 691.5 |
|
International Contract | 356.8 |
| | 283.4 |
| | 230.3 |
|
Retail | 310.0 |
| | 291.2 |
| | 276.4 |
|
Corporate | 168.9 |
| | 227.5 |
| | 108.1 |
|
Total | $ | 1,569.3 |
| | $ | 1,479.5 |
| | $ | 1,306.3 |
|
| | | | | |
Goodwill: | | | | | |
North America Contract | $ | 185.3 |
| | $ | 185.3 |
| | $ | 185.6 |
|
International Contract | 39.7 |
| | 40.0 |
| | 40.1 |
|
Retail | 78.8 |
| | 78.8 |
| | 78.8 |
|
Corporate | — |
| | — |
| | — |
|
Total | $ | 303.8 |
| | $ | 304.1 |
| | $ | 304.5 |
|
The accounting policies of the reportable operating segments are the same as those of the Company. Additionally, the Company employs a methodology for allocating corporate costs and assets with the underlying objective of this methodology being to allocate corporate costs according to the relative usage of the underlying resources and to allocate corporate assets according to the relative expected benefit. The 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.
Herman Miller, Inc. and Subsidiaries84
The Company's product offerings consist primarily of office furniture systems, seating, freestanding furniture, storage and casegoods. 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:
|
| | | | | | | | | | | |
| Year Ended |
(In millions) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Net Sales: | | | | | |
Systems | $ | 589.3 |
| | $ | 668.0 |
| | $ | 601.5 |
|
Seating | 1,041.6 |
| | 1,013.5 |
| | 965.9 |
|
Freestanding and storage | 496.9 |
| | 505.4 |
| | 465.1 |
|
Textiles | 138.8 |
| | 113.8 |
| | 94.3 |
|
Other (1) | 220.0 |
| | 266.5 |
| | 254.4 |
|
Total | $ | 2,486.6 |
| | $ | 2,567.2 |
| | $ | 2,381.2 |
|
(1) “Other” primarily consists of uncategorized product sales and service sales. | | | | | |
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Net Sales: | | | | | |
Systems | $ | 668.0 |
| | $ | 601.5 |
| | $ | 639.0 |
|
Seating | 1,013.5 |
| | 965.9 |
| | 894.8 |
|
Freestanding and storage | 505.4 |
| | 465.1 |
| | 428.8 |
|
Textiles | 113.8 |
| | 94.3 |
| | 96.9 |
|
Other (1) | 266.5 |
| | 254.4 |
| | 218.7 |
|
Total | $ | 2,567.2 |
| | $ | 2,381.2 |
| | $ | 2,278.2 |
|
(1) “Other” primarily consists of uncategorized product sales and service sales.
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 respective fiscal 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) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Net Sales: | | | | | |
United States | $ | 1,795.8 |
| | $ | 1,865.8 |
| | $ | 1,737.9 |
|
International | 690.8 |
| | 701.4 |
| | 643.3 |
|
Total | $ | 2,486.6 |
| | $ | 2,567.2 |
| | $ | 2,381.2 |
|
| | | | | |
Long-lived assets: | | | | | |
United States | $ | 306.7 |
| | $ | 422.1 |
| | $ | 349.3 |
|
International | 59.6 |
| | 52.2 |
| | 50.5 |
|
Total | $ | 366.3 |
| | $ | 474.3 |
| | $ | 399.8 |
|
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Net Sales: | | | | | |
United States | $ | 1,865.8 |
| | $ | 1,737.9 |
| | $ | 1,690.1 |
|
International | 701.4 |
| | 643.3 |
| | 588.1 |
|
Total | $ | 2,567.2 |
| | $ | 2,381.2 |
| | $ | 2,278.2 |
|
|
| | | | | | | | | | | |
| | | | | |
Long-lived assets: | | | | | |
United States | $ | 422.1 |
| | $ | 349.3 |
| | $ | 328.6 |
|
International | 52.2 |
| | 50.5 |
| | 45.3 |
|
Total | $ | 474.3 |
| | $ | 399.8 |
| | $ | 373.9 |
|
The Company estimates that no single dealer accounted for more than 54 percent of the Company's net sales in the fiscal year ended June 1, 2019.May 30, 2020. The Company estimates that its largest single end-user customer accounted for $122.9 million, $129.6 million $109.8 million and $102.3$109.8 million of the Company's net sales in fiscal 2020, 2019 2018 and 2017,2018, respectively. This represents approximately 5 percent, 5 percent and 5 percent of the Company's net sales in fiscal 2020, 2019 2018 and 2017,2018, respectively.
Approximately 53 percent of the Company's employees are covered by collective bargaining agreements, most of whom are employees of its Nemschoff and Herman Miller Holdings Limited subsidiaries.
15. Accumulated Other Comprehensive Loss
The following table provides an analysis of the changes in accumulated other comprehensive loss for the years ended June 1, 2019, June 2, 2018 and June 3, 2017:indicated: |
| | | | | | | | | | | |
| Year Ended |
(In millions) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
Cumulative translation adjustments at beginning of period | $ | (48.3 | ) | | $ | (34.1 | ) | | $ | (36.8 | ) |
Other comprehensive (loss) income | (7.7 | ) | | (14.2 | ) | | 2.7 |
|
Balance at end of period | (56.0 | ) | | (48.3 | ) | | (34.1 | ) |
| | | | | |
Pension and other post-retirement benefit plans at beginning of period | (45.0 | ) | | (37.2 | ) | | (47.6 | ) |
Other comprehensive (loss) income before reclassifications (net of tax of $3.5, $2.0, and($2.9)) | (16.9 | ) | | (10.0 | ) | | 5.3 |
|
Reclassification from accumulated other comprehensive income - Other, net | 3.3 |
| | 2.6 |
| | 4.2 |
|
Tax (expense) benefit | (0.6 | ) | | (0.4 | ) | | 0.9 |
|
Net reclassifications | 2.7 |
| | 2.2 |
| | 5.1 |
|
Net current period other comprehensive (loss) income | (14.2 | ) | | (7.8 | ) | | 10.4 |
|
Balance at end of period | (59.2 | ) | | (45.0 | ) | | (37.2 | ) |
| | | | | |
Interest rate swap agreement at beginning of period | (0.9 | ) | | 9.9 |
| | 2.1 |
|
Cumulative effect of accounting change | — |
| | 1.5 |
| | — |
|
Other comprehensive (loss) income before reclassifications (net of tax of $5.8, $5.3, and ($4.0)) | (17.2 | ) | | (12.8 | ) | | 7.5 |
|
Reclassification from accumulated other comprehensive income - Other, net | (0.8 | ) | | 0.5 |
| | 0.3 |
|
Net reclassifications | (0.8 | ) | | 0.5 |
| | 0.3 |
|
Net current period other comprehensive (loss) income | (18.0 | ) | | (12.3 | ) | | 7.8 |
|
Balance at end of period | (18.9 | ) | | (0.9 | ) | | 9.9 |
|
| | | | | |
Unrealized holding gains on securities at beginning of period | — |
| | 0.1 |
| | 0.1 |
|
Cumulative effect of accounting change | — |
| | (0.1 | ) | | — |
|
Other comprehensive income before reclassifications | 0.1 |
| | — |
| | — |
|
Balance at end of period | 0.1 |
| | — |
| | 0.1 |
|
| | | | | |
Total Accumulated other comprehensive loss | $ | (134.0 | ) | | $ | (94.2 | ) | | $ | (61.3 | ) |
|
| | | | | | | | | | | |
| Year Ended |
(In millions) | June 1, 2019 | | June 2, 2018 | | June 3, 2017 |
Cumulative translation adjustments at beginning of period | $ | (34.1 | ) | | $ | (36.8 | ) | | $ | (29.6 | ) |
Other comprehensive (loss) income before reclassifications | (14.2 | ) | | 2.7 |
| | (7.2 | ) |
Balance at end of period | (48.3 | ) | | (34.1 | ) | | (36.8 | ) |
| | | | | |
Pension and other post-retirement benefit plans at beginning of period | (37.2 | ) | | (47.6 | ) | | (34.9 | ) |
Other comprehensive (loss) income before reclassifications (net of tax of $2.0, ($2.9), and $3.7) | (10.0 | ) | | 5.3 |
| | (14.5 | ) |
Reclassification from accumulated other comprehensive income - Other, net | 2.6 |
| | 4.2 |
| | 2.2 |
|
Tax (expense) benefit | (0.4 | ) | | 0.9 |
| | (0.4 | ) |
Net reclassifications | 2.2 |
| | 5.1 |
| | 1.8 |
|
Net current period other comprehensive (loss) income | (7.8 | ) | | 10.4 |
| | (12.7 | ) |
Balance at end of period | (45.0 | ) | | (37.2 | ) | | (47.6 | ) |
| | | | | |
Interest rate swap agreement at beginning of period | 9.9 |
| | 2.1 |
| | — |
|
Cumulative effect of accounting change | 1.5 |
| | — |
| | — |
|
Other comprehensive (loss) income before reclassifications (net of tax of $5.3, ($4.0), and ($1.2)) | (12.8 | ) | | 7.5 |
| | 2.1 |
|
Reclassification from accumulated other comprehensive income - Other, net | 0.5 |
| | 0.3 |
| | — |
|
Net reclassifications | 0.5 |
| | 0.3 |
| | — |
|
Net current period other comprehensive (loss) income | (12.3 | ) | | 7.8 |
| | 2.1 |
|
Balance at end of period | (0.9 | ) | | 9.9 |
| | 2.1 |
|
| | | | | |
Unrealized Gains on Available-for-sale Securities at beginning of period | 0.1 |
| | 0.1 |
| | — |
|
Cumulative effect of accounting change | (0.1 | ) | | — |
| | — |
|
Other comprehensive income before reclassifications | — |
| | — |
| | 0.1 |
|
Balance at end of period | — |
| | 0.1 |
| | 0.1 |
|
| | | | | |
Total Accumulated other comprehensive loss | $ | (94.2 | ) | | $ | (61.3 | ) | | $ | (82.2 | ) |
16. Redeemable Noncontrolling Interests
Redeemable noncontrolling interests are reported on the Consolidated Balance Sheets in mezzanine equity within the caption Redeemable noncontrolling interests. The Company recognizes changes to the redemption value of redeemable noncontrolling interests as they occur and adjusts the carrying value to equal the redemption value at the end of each reporting period subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The redemption amounts have been estimated based on the fair value of the subsidiary, determined based on a weighting of the discounted cash flow and market methods. This represents a level 3 fair value measurement.
Changes in the Company’s Redeemable noncontrolling interests for the years ended June 1, 2019 and June 2, 2018 are as follows:
|
| | | | | | | |
| Year Ended |
(In millions) | June 1, 2019 | | June 2, 2018 |
Balance at beginning of period | $ | 30.5 |
| | $ | 24.6 |
|
Purchase of redeemable noncontrolling interests | (10.1 | ) | | (1.0 | ) |
Net income attributable to redeemable noncontrolling interests | — |
| | 0.6 |
|
Exercised options | 0.2 |
| | 0.1 |
|
Redemption value adjustment | — |
| | 6.2 |
|
Other adjustments | — |
| | — |
|
Balance at end of period | $ | 20.6 |
| | $ | 30.5 |
|
The Company is the controlling owner of a subsidiary in which there are redeemable noncontrolling equity interests outstanding. Certain minority shareholders in this subsidiary have the right, at certain times, to require the subsidiary to acquire a portion of their ownership interest in those entities at fair value. During fiscal 2019, these minority shareholders exercised certain of these options to require the Company's subsidiary to purchase $10.1 million of the outstanding redeemable noncontrolling interests. By comparison, options exercised by the minority shareholders in fiscal 2018 resulted in purchases totaling $1.0 million. The subsidiary also has an option to acquire a portion of the redeemable noncontrolling interests at fair market value. On July 23, 2019, the subsidiary exercised an option that allowed it to acquire approximately $12.6 million of the remaining $20.6 million of the redeemable noncontrolling equity interests.
17.16. Restructuring and Impairment Activities
North America Contract segment
2019 Restructuring Expense
During the fourth quarter of fiscal 2019, the Company announced restructuring activities associated with our profit improvement initiatives, including costs associated with an early retirement program. The Company also engaged in the consolidation of facilities related to its Nemschoff business. These actions resulted in pre-tax restructuring expenses totaling $7.7 million relating to employee severance related actions of $6.7 million and lease termination and disposal activities of $1.0 million in the fourth quarter. Future estimated restructuring expenses relate to the early retirement program and are estimated at a cost of $1.8 million. The project is expected to generate cost savings of approximately $10 million and is expected to conclude in the second quarter of fiscal 2020.
The table below shows provides an analysis of the North America Contract Segment restructuring cost reserve for the year ended June 1, 2019:
|
| | | | | | | | | |
| June 1, 2019 |
(In millions) | Severance and Employee-Related | Exit or Disposal Activities | Total |
Beginning Balance | $ | — |
| $ | — |
| $ | — |
|
Restructuring Costs | 6.7 |
| 1.0 |
| $ | 7.7 |
|
Ending Balance | $ | 6.7 |
| $ | 1.0 |
| $ | 7.7 |
|
2018 Restructuring Expense
During the first quarter of fiscal 2018, the Company announced restructuring actions involving targeted workforce reductions primarily within the North America Contract segment. These actions related to the Company's cost savings initiatives and resulted in the recognition of restructuring expenses of $1.4 million in the first quarter of fiscal 2018. The restructuring actions were completed, and final payments made in fiscal 2018.
During the second quarter of fiscal 2018, the Company announced further restructuring actions involving targeted workforce reductions primarily within the North America Contract segment. These actions related to the Company's previously announced cost savings initiatives and resulted in the recognition of restructuring expenses of $0.4 million in the second quarter of fiscal 2018. The restructuring actions were completed, and final payments made in fiscal 2018.
International Contract segment
Expenses
During the fourth quarter of fiscal 2018, the Company announced a facilities consolidation plan related to its International Contract segment. This impacted certain office and manufacturing facilities in the United Kingdom and China. ItThe plan is currently contemplated that this plan willexpected to generate cost savings of approximately $3 million in annual cost reductions as part of the Company's three-year cost savings initiatives.
During fiscal 2018 the Company recognized restructuring expenses of $3.9 million of which $2.4 million related to workforce reductions and $1.5 million related to the exit and disposal activities as a result of consolidating the United Kingdom office and China manufacturing facilities.
In the fourth quarter of fiscal 2019, the Company recognized restructuring expenses of $0.8 million related to the consolidation of the facilities mentioned above. In fiscal 2019,million. To date, the Company recognized restructuring and impairment expenses of $2.5$7.8 million, with $1.4 million recognized in fiscal 2020 and the remainder in fiscal 2019 and 2018. These expenses related to the facilities consolidation plan, comprised primarily of $0.8 million related to an asset impairment recorded against thean office building in the United Kingdom that is beingwas vacated and $1.4 million from the consolidation of the Company's manufacturing facilities in China. AsNo material future restructuring costs related to the plan are expected as the plan is substantially complete.
The office buildings and related assets of United Kingdom office building and related assetsChina have a carrying value of approximately $7.8 million and meet the criteria to be designated as assets held for sale, the carrying value ofsale. Therefore these assets have been classified as current assets and included within "Other""Other current assets" in the Consolidated Balance Sheets forat May 30, 2020.
During the periodfourth quarter of fiscal 2019, the Company announced restructuring activities associated with profit improvement initiatives, including costs associated with an early retirement plan. The plan is expected to generate annual cost savings of approximately $10 million. To date, the Company has recognized $11.1 million of restructuring
Herman Miller, Inc. and Subsidiaries86
expense related to the plan. During the year ended June 1, 2019.May 30, 2020, the Company recognized $1.7 million related to the plan. The carrying amountearly retirement plan is complete and no future costs related to this plan are expected.
In the second quarter of fiscal 2020, the assets held for sale wasNorth America Contract segment initiated restructuring discussions with labor unions related to its Nemschoff operation in Wisconsin. The discussions were concluded in the third quarter of fiscal 2020 and as a result, the Company anticipates the total estimated costs related to the actions will be approximately $4.2$5 million. These restructuring costs relate to potential partial outsourcing and in-sourcing strategies, long-lived asset impairments and employee-related costs. In conjunction with these discussions, during the year ended May 30, 2020, the Company has recorded $3.2 million as of June 1, 2019.
The Company expects the International Contract facilities consolidationsin pre-tax restructuring expense related to this plan which is expected to be completed byin fiscal 2021.
In the firstsecond quarter of fiscal 2020. It2020, the Company initiated a reorganization of the Global Sales and Product teams. The reorganization activities occurred primarily in the North America business with additional costs incurred Internationally. In the year ended May 30, 2020, the Company has recorded a total of $2.6 million in pre-tax restructuring expense related to this plan. The reorganization is currently contemplated thatcomplete and no future costs related to this plan will incur an additional estimated $2are expected.
In the third quarter of fiscal 2020, the Company announced a reorganization of the Retail segment's leadership team. The Company recognized pre-tax severance and employee related restructuring expense of $2.2 million ofrelated to the plan. No material future restructuring andcosts related special charges.to the plan are expected as the plan is substantially complete.
The following table provides an analysis of the changes in the International Contract segment restructuring costs reserve for the above plans for the fiscal yearyears ended June 2, 20181, 2019 and May 30, 2020:
|
| | | | | | | | | |
(In millions) | Severance and Employee-Related | Exit or Disposal Activities | Total |
June 2, 2018 | $ | — |
| $ | — |
| $ | — |
|
Restructuring Costs | 7.0 |
| 3.2 |
| $ | 10.2 |
|
Amounts Paid | (0.2 | ) | (2.1 | ) | $ | (2.3 | ) |
June 1, 2019 | $ | 6.8 |
| $ | 1.1 |
| $ | 7.9 |
|
Restructuring Costs | 9.9 |
| 1.2 |
| $ | 11.1 |
|
Amounts Paid | (10.8 | ) | (1.5 | ) | $ | (12.3 | ) |
May 30, 2020 | $ | 5.9 |
| $ | 0.8 |
| $ | 6.7 |
|
In the fourth quarter of fiscal 2020, the Company announced a restructuring plan (“May 2020 restructuring plan") to substantially reduce expenses in response to the impact of the COVID-19 pandemic and related restrictions. These activities included voluntary and involuntary reductions in its North American and international workforces. Combined, these actions resulted in the elimination of approximately 400 full-time positions throughout the Company in various businesses and functions. As the result of these actions, the Company projects an annualized expense reduction of approximately $40 million. The Company incurred severance and related charges of $15.3 million in fiscal 2020, consisting solely of cash expenditures for employee termination and severance costs to be paid in fiscal 2021.
The following table provides an analysis of the changes in the restructuring cost reserve for the May 2020 restructuring plan for the fiscal year ended June 1, 2019 :May 30, 2020:
|
| | | |
(In millions) | Severance and Employee-Related |
Beginning Balance | $ | — |
|
Restructuring Costs | 15.3 |
|
Ending Balance | $ | 15.3 |
|
|
| | | | | | | | | | | | |
(In millions) | Severance and Employee-Related | Impairment of Property and Equipment | Exit or Disposal Activities | Total |
June 3, 2017 | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Restructuring Costs | 2.4 |
| — |
| 1.5 |
| $ | 3.9 |
|
Amounts Paid | (2.4 | ) | — |
| (1.5 | ) | $ | (3.9 | ) |
June 2, 2018 | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Restructuring Costs | 0.3 |
| 0.8 |
| 1.4 |
| $ | 2.5 |
|
Amounts Paid | (0.2 | ) | — |
| (1.3 | ) | $ | (1.5 | ) |
Charges Against Assets | — |
| (0.8 | ) | — |
| $ | (0.8 | ) |
June 1, 2019 | $ | 0.1 |
| $ | — |
| $ | 0.1 |
| $ | 0.2 |
|
The following is a summary of restructuring expenses by segment for the fiscal years indicated:
|
| | | | | | | | | | | |
| Year Ended |
(In millions) | May 30, 2020 | | June 1, 2019 | | June 2, 2018 |
North America Contract | $ | 18.7 |
| | $ | 7.7 |
| | $ | 1.8 |
|
International Contract | 4.8 |
| | 2.5 |
| | 3.9 |
|
Retail | 2.9 |
| | — |
| | — |
|
Total | $ | 26.4 |
| | $ | 10.2 |
| | $ | 5.7 |
|
18.17. Variable Interest Entities
The Company has long-term notes receivable with certain of itsa third-party owned dealersdealer that are deemed to be variable interests in variable interest entities.entity. The carrying value of these long-term notes receivable was $1.6$1.5 million and $2.5$1.6 million as of May 30, 2020 and June 1, 2019, and June 2, 2018, respectively, and represents the Company’s maximum exposure to loss. The Company is not deemed to be the primary beneficiary for any of thesethe variable interest entitiesentity as eachthe entity controls the activities that most significantly impact the entity’s economic performance, including sales, marketing, and operations.
19.18. Quarterly Financial Data (Unaudited)
Set forth below is a summary of the quarterly operating results on a consolidated basis for the years ended May 30, 2020, June 1, 2019,, and June 2, 2018,2018.
|
| | | | | | | | | | | | | | | | |
(In millions, except per share data) | First Quarter (1) | | Second Quarter (1) | | Third Quarter (1) | | Fourth Quarter (1) |
2020 | Net sales | $ | 670.9 |
| | $ | 674.2 |
| | $ | 665.7 |
| | $ | 475.7 |
|
| Gross margin | 246.1 |
| | 255.5 |
| | 243.3 |
| | 165.8 |
|
| Net earnings attributable to Herman Miller, Inc. | 48.2 |
| | 78.6 |
| | 37.7 |
| | (173.7 | ) |
| Earnings per share-basic | 0.82 |
| | 1.33 |
| | 0.64 |
| | (2.95 | ) |
| Earnings per share-diluted | 0.81 |
| | 1.32 |
| | 0.64 |
| | (2.95 | ) |
| | | | | | | | |
2019 | Net Sales | $ | 624.6 |
| | $ | 652.6 |
| | $ | 619.0 |
| | $ | 671.0 |
|
| Gross margin | 225.1 |
| | 235.6 |
| | 221.0 |
| | 248.2 |
|
| Net earnings attributable to Herman Miller, Inc. | 35.8 |
| | 39.3 |
| | 39.2 |
| | 46.2 |
|
| Earnings per share-basic | 0.60 |
| | 0.66 |
| | 0.67 |
| | 0.78 |
|
| Earnings per share-diluted | 0.60 |
| | 0.66 |
| | 0.66 |
| | 0.78 |
|
| | | | | | | | |
2018 | Net sales | $ | 580.3 |
| | $ | 604.6 |
| | $ | 578.4 |
| | $ | 618.0 |
|
| Gross margin | 216.9 |
| | 222.1 |
| | 205.8 |
| | 228.3 |
|
| Net earnings attributable to Herman Miller, Inc. | 33.1 |
| | 33.5 |
| | 29.8 |
| | 31.8 |
|
| Earnings per share-basic | 0.55 |
| | 0.56 |
| | 0.50 |
| | 0.53 |
|
| Earnings per share-diluted | 0.55 |
| | 0.55 |
| | 0.49 |
| | 0.53 |
|
(1) For some line items, the sum of the quarters does not equal the annual balance reflected in the Consolidated Statements of Comprehensive Income due to rounding associated with the calculations on an individual quarter basis. |
Herman Miller, Inc. and June 3, 2017.Subsidiaries88
|
| | | | | | | | | | | | | | | | |
(In millions, except per share data) | First Quarter (1) | | Second Quarter (1) | | Third Quarter (1) | | Fourth Quarter (1) |
2019 | Net sales | $ | 624.6 |
| | $ | 652.6 |
| | $ | 619.0 |
| | $ | 671.0 |
|
| Gross margin | 225.1 |
| | 235.6 |
| | 221.0 |
| | 248.2 |
|
| Net earnings attributable to Herman Miller, Inc. | 35.8 |
| | 39.3 |
| | 39.2 |
| | 46.2 |
|
| Earnings per share-basic | 0.60 |
| | 0.66 |
| | 0.67 |
| | 0.78 |
|
| Earnings per share-diluted | 0.60 |
| | 0.66 |
| | 0.66 |
| | 0.78 |
|
| | | | | | | | |
2018 | Net Sales | $ | 580.3 |
| | $ | 604.6 |
| | $ | 578.4 |
| | $ | 618.0 |
|
| Gross margin | 216.9 |
| | 222.1 |
| | 205.8 |
| | 228.3 |
|
| Net earnings attributable to Herman Miller, Inc. | 33.1 |
| | 33.5 |
| | 29.8 |
| | 31.8 |
|
| Earnings per share-basic | 0.55 |
| | 0.56 |
| | 0.50 |
| | 0.53 |
|
| Earnings per share-diluted | 0.55 |
| | 0.55 |
| | 0.49 |
| | 0.53 |
|
| | | | | | | | |
2017 | Net sales | $ | 598.6 |
| | $ | 577.5 |
| | $ | 524.9 |
| | $ | 577.2 |
|
| Gross margin | 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 | 0.61 |
| | 0.53 |
| | 0.38 |
| | 0.56 |
|
| Earnings per share-diluted | 0.60 |
| | 0.53 |
| | 0.37 |
| | 0.55 |
|
(1) For some line items, the sum of the quarters does not equal the annual balance reflected in the Consolidated Statements of Comprehensive Income due to rounding associated with the calculations on an individual quarter basis.
Management's Report on Internal Control over Financial Reporting
To the Board of Directors and Stockholders of Herman Miller, 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, Inc., is designed to provide reasonable assurance to our stakeholders that the financial statements of the Company 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 1, 2019,May 30, 2020, 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's internal control over financial reporting was effective as of June 1, 2019.May 30, 2020.
Ernst & YoungManagement's assessment of internal control over financial reporting as of May 30, 2020 excludes naughtone’s and Hay’s internal control over financial reporting associated with total assets of approximately $95 million and $228 million, respectively, and net sales of approximately $16 million and $76 million, respectively, included in the consolidated financial statements of the Company as of and for the year ended May 30, 2020. Both of these companies were acquired in fiscal 2020.
KPMG LLP has issued an attestation report on the effectiveness of our internal control over financial reporting, which is included herein.
/s/ Andrea R. Owen
Andrea R. Owen
Chief Executive Officer
/s/ Jeffrey M. Stutz
Jeffrey M. Stutz
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and the Board of Directors
Herman Miller, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheet of Herman Miller, Inc.
Opinion on Internal Control over Financial Reporting
and subsidiaries (the Company) as of May 30, 2020, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year ended May 30, 2020, and the related notes and financial statement schedule II - Valuation and Qualifying Accounts and Reserves (collectively, the consolidated financial statements). We also have audited Herman Miller, Inc. and subsidiaries’the Company’s internal control over financial reporting as of June 1, 2019,May 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Commission.
In our opinion, Herman Miller, Inc.the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 30, 2020, and subsidiaries (the Company)the results of its operations and its cash flows for the year ended May 30, 2020, 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 1, 2019,May 30, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO criteria.
We also have audited, in accordance with the standardsCommittee of Sponsoring Organizations of the PublicTreadway Commission.
The Company Accounting Oversight Board (United States) (PCAOB)acquired the remaining 47.5% interest in naughtone (Holdings) Limited and naughtone Manufacturing Ltd. (together, naughtone), and an additional 34% interest in HAY ApS (HAY) during the year ended May 30, 2020. Management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of May 30, 2020, naughtone’s and HAY’s internal control over financial reporting associated with total assets of $95 million and $228, respectively, and net sales of $16 million and $76 million, respectively, included in the consolidated balance sheetsfinancial statements of Herman Miller, Inc.the Company as of and subsidiariesfor the year ended May 30, 2020. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal controls over financial reporting of naughtone and HAY.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of June 1,2, 2019 and June 2, 2018, anddue to the related consolidated statementsadoption of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended June 1, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) of the Company and our report dated July 30, 2019 expressed an unqualified opinion thereon.Accounting Standards Update No. 2016-02, Leases (Topic 842).
Basis for OpinionOpinions
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’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’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 PCAOBPublic 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 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
Herman Miller, Inc. and Subsidiaries90
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 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.
Critical Audit Matters
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 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.
Valuation of acquired intangible assets - HAY acquisition
As discussed in Note 3 to the consolidated financial statements, the Company purchased an additional 34% equity voting interest of HAY on December 2, 2019, for net consideration of $79.0 million. The transaction increased the Company’s ownership to 67%, resulting in a controlling financial interest and was accounted for as a business combination. Accordingly, the purchase price, inclusive of the remeasurement of the previously held equity interest and non-controlling interest, was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of $118.9 million. To value the identified intangible assets, which included a tradename, product development and technology, and customer relationships, the Company used the income approach. The process required management to make significant judgments around the estimates and assumptions that would be used by a market participant, which included forecasted revenue growth rates, operating margins, royalty rates, and discount rates.
We identified the evaluation of the fair value of acquired intangible assets in the HAY acquisition as a critical audit matter because of the significant judgments made by management to estimate the fair values of the tradename, product development and technology, and customer relationship intangibles. Specifically, subjective and challenging auditor judgment was required to evaluate the selection of forecasted revenue growth rates, operating margins, royalty rates, and discount rates used to estimate the fair values of the intangibles. Additionally, the audit effort associated with the evaluation of the fair value of acquired intangible assets in the HAY acquisition required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We tested the design and evaluated the effectiveness of certain internal controls over the Company’s acquisition-date valuation process, including controls over the selection of forecasted revenue growth rates, operating margins, royalty rates and discount rates used to estimate the fair value of the HAY tradename, product development and technology, and customer relationship intangibles. 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. We performed sensitivity analyses to assess the impact of reasonably possible changes to the key estimates and assumptions on the fair value of the acquired intangibles. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
evaluating the Company’s discount rates by comparing the Company’s inputs to the discount rates to publicly available data for comparable entities and assessing the resulting discount rates,
evaluating the Company’s royalty rates by comparing the selected royalty rates to the forecasted operating margins of HAY and publicly available data for comparable licensing agreements and assessing the resulting royalty rates, and
testing the estimate of the fair values of the HAY tradename, product development and technology, and customer relationship intangibles using the Company’s cash flow estimates and discount rates, and comparing the results to the Company’s fair value estimates.
Goodwill impairment assessment
As discussed in Note 1 to the consolidated financial statements, the Company’s consolidated goodwill balance was $346.0 million as of May 30, 2020, of which $163.7 million, $0.0 million, and $0.0 million was related to the International, Maharam, and Retail reporting units, respectively. During the fourth quarter of the year ended May 30, 2020, the Company recorded a goodwill impairment loss of $36.7 million, and $88.8 million related to the Maharam and Retail reporting units, respectively. 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 its reporting units, the Company utilized an income approach and a market approach that used observable comparable company information.
We identified the evaluation of goodwill for impairment for the International, Maharam, and Retail reporting units as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate the selection of forecasted revenue growth rates, operating margins, and discount rates used in the income approach. Additionally, the audit effort associated with the evaluation of goodwill for impairment for the International, Maharam, and Retail reporting units required 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 goodwill impairment evaluation, including controls over the selection of forecasted revenue growth rates, operating margins, and discount rates to estimate the fair value of the International, Maharam, and Retail reporting units. 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 reporting unit fair values. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
evaluating the Company’s discount rates by comparing the Company’s inputs to the discount rates to publicly available data for comparable entities and assessing the resulting discount rates, and
testing the estimate of fair value for the International, Maharam, and Retail reporting units using the Company’s cash flow assumptions and discount rates and comparing the results to the Company’s fair value estimates.
Herman Miller, Inc. and Subsidiaries92
Tradename impairment assessment
As discussed in Note 1 to the consolidated financial statements, the indefinite-lived intangible asset balance as of May 30, 2020 was $31.5 million, $39.3 million and $16.5 million related to the DWR (Design Within Reach), HAY, and Maharam tradenames, respectively. During the fourth quarter of the year ended May 30, 2020, the Company recorded an impairment loss of $23.6 million, $20.7 million and $6.5 million related to the DWR, HAY, and Maharam tradenames, respectively. Indefinite-lived intangible assets are 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 an indefinite-lived intangible asset has declined below its carrying value. To estimate the fair value of the indefinite-lived intangible assets, the Company utilizes the relief from royalty method.
We identified the evaluation of the DWR, HAY, and Maharam tradenames for impairment as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate the selection of forecasted revenue growth rates, discount rates, and royalty rates used to estimate the fair values of the DWR, HAY and Maharam tradenames. Additionally, the audit effort associated with the evaluation of the DWR, HAY, and Maharam tradenames for impairment required 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 impairment evaluation for tradenames, including controls over the selection of forecasted revenue growth rates, discount rates, and royalty rates used to estimate the fair value of the DWR, HAY, and Maharam tradenames. We evaluated the reasonableness of management’s forecasted revenue growth rates by comparing the forecasts to historical revenue growth rates, considering industry conditions and growth plans. We performed sensitivity analyses to assess the impact of reasonably possible changes to the forecasted revenue growth rates, discount rate, and royalty rate assumptions on the fair values of the tradenames. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
evaluating the Company’s discount rates by comparing the Company’s inputs to the discount rates to publicly available data for comparable entities and assessing the resulting discount rates;
evaluating the Company’s royalty rates by comparing the selected royalty rates to the forecasted operating margins of the sales associated with the tradenames and publicly available data for comparable licensing agreements and assessing the resulting royalty rates, and
testing the estimate of fair value of the DWR, HAY, and Maharam indefinite-lived tradenames using the Company’s estimated future revenue growth assumptions, royalty rates, and discount rates, and comparing the results to the Company’s fair value estimates.
Long-lived asset impairment assessment
As discussed in Note 1 to the consolidated financial statements, the DWR asset group, including right-of-use assets, was $122.7 million as of May 30, 2020. During the fourth quarter of the year ended May 30, 2020, the Company recorded long-lived asset impairment charges of $26.6 million related to right-of-use assets, customer relationships, and other long-lived assets within the DWR asset group. The Company performs an impairment assessment when circumstances indicate that the carrying amount of the long-lived assets may not be recoverable. If a triggering event is identified, the Company compares the carrying amount of the asset group to the estimated undiscounted future cash flows expected to result from the use of the asset group. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset group to its estimated fair value. To estimate the fair value of the asset group, the Company utilized an income approach for customer relationships, a market approach for right-of-use assets and a cost approach for other long-lived assets.
We identified the evaluation of the fair value of the right-of-use assets within the DWR asset group as a critical audit matter because of the significant judgments made by management to estimate fair value. Specifically, subjective and challenging auditor judgment was required to assess 1) relevant market-based rental comparatives adjusted for industry data trends, and 2) consideration of the remaining lease term, which were used to estimate the fair values of the right-of-use assets. Additionally, the audit effort associated with the evaluation of the fair value of the right-of-use assets within the DWR asset group required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We tested the design and evaluated the effectiveness of certain internal controls over the Company’s long-lived asset impairment assessment process, including controls over the determination of market-based rental comparatives, industry data trends, and consideration of the remaining lease term used to estimate the fair value of the right-of-use assets. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the significant assumptions used to estimate the fair value of the right-of-use assets by comparing the assumptions to 1) available market-based rental comparatives adjusted for industry data trends, and 2) considerations of the remaining lease term.
/s/ Ernst & YoungKPMG LLP
Grand Rapids, Michigan We have served as the Company’s auditor since 2019.
Chicago, Illinois
July 30, 201928, 2020
Herman Miller, Inc. and Subsidiaries94
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Herman Miller, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Herman Miller, Inc. and subsidiaries (the Company)as of June 1, 2019, and June 2, 2018, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the threetwo years in the period ended June 1, 2019, and the related notes and financial statement schedule for each of the two years in the period ended June 1, 2019 listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 1, 2019, and June 2, 2018, and the results of its operations and its cash flows for each of the threetwo years in the period ended June 1, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 1, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated July 30, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company'sCompany’s auditor sincefrom 2002 to 2019.
Grand Rapids, Michigan
July 30, 2019
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None
Item 9A Controls and Procedures
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(a) | Disclosure Controls and Procedures. Under the supervision and with the participation of management, the Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 1, 2019May 30, 2020 and have concluded that as of that date, the Company's disclosure controls and procedures were effective. |
(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 Company's internal control over financial reporting has been audited by Ernst and YoungKPMG LLP, an independent registered accounting firm, as stated in its report included in Item 8. |
(c) | Changes in Internal Control Over Financial Reporting. There were no changes in the Company's internal control over financial reporting during the fourth quarter ended June 1, 2019,May 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
Item 9B Other Information
None
Herman Miller, Inc. and Subsidiaries96
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Directors, Executive Officers, Promoters and Control Persons
Information relating to directors and director nominees of the Company is contained under the caption “Director and Executive Officer Information” in the Company's definitive Proxy Statement, relating to the Company's 20192020 Annual Meeting of Stockholders, and the information within that section is incorporated by reference. Information relating to Executive Officers of the Company is included in Part I hereof entitled “Executive Officers of the Registrant.”
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 16(a) Beneficial Ownership Reporting Compliance” in the Company's definitive Proxy Statement, relating to the Company's 20192020 Annual Meeting of Stockholders, and the information within that section is incorporated by reference.
Code of Ethics
The Company has adopted a Code of Conduct 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. This code is made available free of charge through the “Investors”“Legal” section of the Company's internet website at www.hermanmiller.com.www.hermanmiller.com. Any amendments to, or waivers from, a provision of this code also will be posted to the Company's internet website.
Corporate Governance
Information relating to the identification of the audit committee, audit committee financial experts, and director nomination procedures of the Company is contained under the captions “Board Committees” and “Corporate Governance and Board Matters — Director Nominations” in the Company's definitive Proxy Statement, relating to the Company's 20192020 Annual Meeting of Stockholders, and the information within these sections is incorporated by reference.
Item 11 Executive Compensation
Information relating to executive compensation is contained under the captions “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “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,” and “Compensation Committee Interlocks and Insider Participation” in the Company's definitive Proxy Statement, relating to the Company's 20192020 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.
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The sections entitled “Voting Securities and Principal Stockholders,” “Director and Executive Officer Information,” and “Equity Compensation Plan Information” in the Company's definitive Proxy Statement, relating to the Company's 20192020 Annual Meeting of Stockholders, and the information within these sections is incorporated by reference.
Item 13 Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related transactions contained under the captions “Related Party Transactions,” and “Corporate Governance and Board Matters — Determination of Independence of Board Members” in the Company's definitive Proxy Statement, relating to the Company's 20192020 Annual Meeting of Stockholders and the information within these sections is incorporated by reference.
Item 14 Principal Accountant Fees and Services
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 captions "Ratification of the Audit Committee's selection of Independent Registered Accounting Firm" and “Disclosure of Fees Paid to Independent Auditors” in the Company's definitive Proxy Statement, relating to the Company's 20192020 Annual Meeting of Stockholders, and the information within that section is incorporated by reference.
Herman Miller, Inc. and Subsidiaries98
PART IV
Item 15 Exhibits and Financial Statement Schedule
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(a) | The following documents are filed as a part of this report: | |
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| 1. | Financial Statements | |
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| The following Consolidated Financial Statements of the Company are included in this Annual Report on Form 10-K on the pages noted: |
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| | | | 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 | |
| ReportReports of Independent Registered Public Accounting Firm on Internal Control Over Financial ReportingFirms | |
| Report of Independent Registered Public Accounting Firm on Financial Statements | |
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| 2. | Financial Statement Schedule | |
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| The following financial statement schedule is included in this Annual Report on Form 10-K on the pages noted: |
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| | | | Page Number in this Form 10-K |
| Schedule II- | Valuation and Qualifying Accounts and Reserves for the Years Ended May 30, 2020, June 1, 2019, and June 2, 2018 and and June 3, 20172018. | |
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| 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. |
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| 3. | Exhibits | |
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| Reference is madeRefer to the Exhibit Index which is included on pages 97-99.below. | |
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Exhibit Index
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| (3) | Articles of Incorporation and Bylaws |
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| (4) | Instruments Defining the Rights of Security Holders |
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| | (a) | 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 Commission copies of such agreements upon request. |
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| (10) | Material Contracts |
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Herman Miller, Inc. and Subsidiaries100
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| | (s) | Fifth Amended and Restated Credit Agreement dated as of August 28, 2019 among Herman Miller, Inc., certain subsidiary borrowers, Wells Fargo Bank, National Agent, as Administrative Agent, and JPMorgan Chase Bank N.A., as Syndication Agent, is incorporated by reference to Exhibit 10.1 of the Registrant's Report on Form 8-K dated August 28, 2019 (Commission File No. 001-15141). |
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| 101.INS | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
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| 101.SCH | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101). |
(1) Denotes compensatory plan or arrangement.
Schedule II - Valuation and Qualifying Accounts
(In millions)
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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 May 31, 2020: | | | | | | | |
Accounts receivable allowances — uncollectible accounts(1) | $ | 2.9 |
| | $ | 2.3 |
| | $ | (0.9 | ) | | $ | 4.3 |
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Accounts receivable allowances — credit memo(2) | $ | 0.6 |
| | $ | — |
| | $ | (0.5 | ) | | $ | 0.1 |
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Allowance for possible losses on notes receivable | $ | 0.3 |
| | $ | — |
| | $ | — |
| | $ | 0.3 |
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Valuation allowance for deferred tax asset | $ | 10.4 |
| | $ | 0.4 |
| | $ | (0.2 | ) | | $ | 10.6 |
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Year ended June 1, 2019: | | | | | | | |
Accounts receivable allowances — uncollectible accounts(1) | $ | 2.4 |
| | $ | 0.6 |
| | $ | (0.1 | ) | | $ | 2.9 |
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Accounts receivable allowances — credit memo(2) | $ | 0.5 |
| | $ | — |
| | $ | 0.1 |
| | $ | 0.6 |
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Allowance for possible losses on notes receivable | $ | 0.4 |
| | $ | (0.1 | ) | | $ | — |
| | $ | 0.3 |
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Valuation allowance for deferred tax asset | $ | 10.3 |
| | $ | 0.4 |
| | $ | (0.3 | ) | | $ | 10.4 |
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Year ended June 2, 2018: | | | | | | | |
Accounts receivable allowances — uncollectible accounts(1) | $ | 2.3 |
| | $ | 0.6 |
| | $ | (0.5 | ) | | $ | 2.4 |
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Accounts receivable allowances — credit memo (2) | $ | 0.4 |
| | $ | 0.1 |
| | $ | — |
| | $ | 0.5 |
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Allowance for possible losses on notes receivable | $ | 0.9 |
| | $ | (0.5 | ) | | $ | — |
| | $ | 0.4 |
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Valuation allowance for deferred tax asset | $ | 10.0 |
| | $ | 0.5 |
| | $ | (0.2 | ) | | $ | 10.3 |
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(1) Activity under the “Charges to expense 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.
Item 16 Form 10-K Summary
None
EXHIBIT INDEX
Herman Miller, Inc. and Subsidiaries102
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| (4) | Instruments Defining the Rights of Security Holders |
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| | (a) | Specimen copy of Herman Miller, Inc., common stock is incorporated by reference to Exhibit 4(a) of Registrant's 1981 Form 10-K Annual Report (Commission File No. 001-15141). |
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| | (b) | 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 Commission copies of such agreements upon request. |
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| (10) | Material Contracts |
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(1) Denotes compensatory plan or arrangement.
SIGNATURES
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.
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HERMAN MILLER, INC.
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| /s/ Jeffrey M. Stutz | | | | | |
By | Jeffrey M. Stutz
Chief Financial Officer (Principal Accounting Officer and Duly Authorized Signatory for Registrant) | | | | | |
Date: July 30, 201928, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on July 30, 201928, 2020 by the following persons on behalf of the Registrant in the capacities indicated.
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| /s/ Michael A. Volkema | | /s/ Lisa Kro | |
| Michael A. Volkema (Chairman of the Board) | | Lisa Kro (Director) | |
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| /s/ David A. Brandon | | /s/ Mary Vermeer Andringa | |
| David A. Brandon
(Director) | | Mary Vermeer Andringa (Director) | |
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| /s/ Douglas D. French | | /s/ John R. Hoke III | |
| Douglas D. French
(Director) | | John R. Hoke III (Director) | |
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| /s/ Heidi Manheimer | | /s/ J. Barry GriswellAndrea R. Owen | |
| Heidi Manheimer
(Director) | | J. Barry Griswell
(Director) Andrea R. Owen (President, Chief Executive Officer, and Director) | |
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| /s/ Mike Smith | | /s/ Andrea R. OwenJeffrey M. Stutz | |
| Mike Smith (Director) | | Andrea R. Owen
Jeffrey M. Stutz (President, Chief ExecutiveFinancial Officer and Director) Principal Accounting Officer) | |
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| | | /s/ Jeffrey M. Stutz | |
| | | Jeffrey M. Stutz
(Chief Financial Officer and Principal Accounting Officer)
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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(In millions)
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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 1, 2019: | | | | | | | |
Accounts receivable allowances — uncollectible accounts(1) | $ | 2.4 |
| | $ | 0.6 |
| | $ | (0.1 | ) | | $ | 2.9 |
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Accounts receivable allowances — credit memo(2) | $ | 0.5 |
| | $ | — |
| | $ | 0.1 |
| | $ | 0.6 |
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Allowance for possible losses on notes receivable | $ | 0.4 |
| | $ | (0.1 | ) | | $ | — |
| | $ | 0.3 |
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Valuation allowance for deferred tax asset | $ | 10.3 |
| | $ | 0.4 |
| | $ | (0.3 | ) | | $ | 10.4 |
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Year ended June 2, 2018: | | | | | | | |
Accounts receivable allowances — uncollectible accounts(1) | $ | 2.3 |
| | $ | 0.6 |
| | $ | (0.5 | ) | | $ | 2.4 |
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Accounts receivable allowances — credit memo(2) | $ | 0.4 |
| | $ | 0.1 |
| | $ | — |
| | $ | 0.5 |
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Allowance for possible losses on notes receivable | $ | 0.9 |
| | $ | (0.5 | ) | | $ | — |
| | $ | 0.4 |
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Valuation allowance for deferred tax asset | $ | 10.0 |
| | $ | 0.5 |
| | $ | (0.2 | ) | | $ | 10.3 |
|
| | | | | | | |
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 |
|
(1) Activity under the “Charges to expense 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.
Herman Miller, Inc. and Subsidiaries 101