| Significant Accounting and Reporting Policies | 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. Foreign Currency Translation The functional currency for most of the foreign subsidiaries is their local currency. The cumulative effects of translating the balance sheet accounts from the functional currency into the United States dollar using fiscal year-end exchange rates and translating revenue and expense accounts using average exchange rates for the period are reflected as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets. The financial statement impact of gains and losses resulting from remeasuring foreign currency transactions into the appropriate functional currency resulted in a net loss of $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. These amounts are included in “ 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 an d $102.8 million as of May 30, 2020 and June 1, 2019 , 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 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 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 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: (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. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. The Company may also elect to bypass the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value. Each of the reporting units 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 analysis that uses a number of inputs, including: • actual and forecasted revenue growth rates and operating margins, and • discount rates based on the reporting unit's weighted average cost of capital. The Company corroborates the reasonableness of the inputs and outcomes of our discounted cash flow analysis through a market capitalization reconciliation to determine whether the implied control premium is reasonable. The Company completed its annual goodwill impairment test in the fourth quarter of each year, as of March 31 st . In fiscal 2020, the Company elected to perform quantitative impairment tests for all goodwill reporting units and other indefinite-lived intangible assets. 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, these reporting units were not impaired. 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 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 fair value of the Company's International reporting unit, which includes $163.7 million of goodwill as of May 30, 2020, exceeds its carrying value by 17% . Due to the level that the reporting unit fair value exceeded the carrying amount and the results of the sensitivity analysis, the Company may need to record an impairment charge if the operating results of its International 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 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. In fiscal 2020, the Company performed quantitative assessments in testing indefinite-lived intangible assets for impairment, which resulted in the carrying values of the DWR, Maharam, HAY and naughtone trade names exceeding their fair values by $53.3 million , and impairment charges of this amount were recognized. If the residual cash flows related to these trade names were to decline in future periods, the Company may need to record an additional impairment charge. In completing our annual indefinite-lived trade name impairment 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 as of and for the fiscal year ended May 30, 2020 , for each of the Company’s indefinite-lived trade names: (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 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: (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 2020 , outstanding commitments for future capital purchases approximated $39.8 million . Other Long-Lived Assets The Company reviews the carrying value of long–lived assets for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. If such indicators are present, the future undiscounted cash flows attributable to the asset or asset group are compared to the carrying value of the asset or asset group. Given the substantial reduction in forecasted revenue growth rates and cash flows due to the COVID-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 groups to 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 and 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 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. 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 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 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 7 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 May 30, 2020 , for each of the succeeding five fiscal years, is as follows: (In millions) 2021 $ 14.9 2022 $ 14.9 2023 $ 14.4 2024 $ 14.2 2025 $ 13.3 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 May 30, 2020 , ar e as follows: (In millions) Retention Level (per occurrence) General liability $ 1.00 Auto liability $ 1.00 Workers' compensation $ 0.75 Health benefit $ 0.50 The Company accrues for its self-insurance arrangements, as well as reserves for health, prescription drugs, and dental benefit exposures based on 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 was $13.1 million and $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. Research, Development and Other Related Costs Research, development, pre-production and start-up costs are expensed as incurred. Research and development ("R&D") costs consist of expenditures incurred during the course of planned research and investigation aimed at discovery of new knowledge useful in developing new products or processes. R&D costs also include the enhancement of existing products or production processes and the implementation of such through design, testing of product alternatives or construction of prototypes. R&D costs included in “ Design and research ” expense in the accompanying Consolidated Statements of Comprehensive Income are $54.3 million , $58.8 million and $57.1 million , in fiscal 2020 , 2019 , and 2018 , respectively. Royalty payments made to designers of the Company's products as the products are sold are variable costs based on product sales. These expenses totaled $19.7 million , $18.1 million and $16.0 million in fiscal years 2020 , 2019 and 2018 respectively. They are included in Design and research expense in the accompanying Consolidated Statements of Comprehensive Income . Customer Payments and Incentives We offer various sales incentive programs to our customers, such as rebates and discounts. Programs such as rebates and discounts are adjustments to the selling price and are therefore characterized as a reduction to net sales. Revenue Recognition The Company recognizes revenue when performance obligations, based on the terms of customer contracts, are satisfied. This happens when control of goods and services based on the contract have been conveyed to the customer. Revenue for the sale of products is 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" 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 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-averag e 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. Refe r 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 Consolid ated Financial Statements fo r 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 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 treatment. Gains and losses on derivatives that are designated and qualify as cash flow hedging instruments are recorded in Accumulated Other Comprehensive Loss, to the extent the hedges are effective, until the underlying transactions are recognized in the Consolidated Statements of Comprehensive Income. Derivatives not designated as hedging instruments are marked-to-market at the end of each period with the results included in Consolidated Statements of Comprehensive Income. See Note 12 of the Consolidated Financial Statements for further information regarding derivatives. 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 lessee'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 following relevant standards issued by the FASB: Standard Description Effective Date 2016-13 Financial Instruments - Credit Losses (Topic 326): 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 2018-13 Fair Value Measurement (Topic 820): 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. 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 post-retirement plans. Early adoption is permitted. May 30, 2021 2019-12 Income 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 a consolidated group. Early adoption is permitted. May 30, 2021 All other issued and not yet effective accounting standards are not relevant to the Company. |
