Notes to Condensed Consolidated Financial Statements
(Dollars in millions, except share data)
(unaudited)
1. Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared by Herman Miller, Inc. (“the Company”) in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Management believes the disclosures made in this document are adequate with respect to interim reporting requirements. Unless otherwise noted or indicated by the context, all references to "Herman Miller," "we," "our," "Company" and similar references are to Herman Miller, Inc., its predecessors, and controlled subsidiaries.
The accompanying unaudited Condensed Consolidated Financial Statements, taken as a whole, contain all adjustments that are of a normal recurring nature necessary to present fairly the financial position of the Company as of February 29, 2020. Operating results for the three and nine months ended February 29, 2020 are not necessarily indicative of the results that may be expected for the year ending May 30, 2020. It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 1, 2019. All intercompany transactions have been eliminated in the Condensed Consolidated Financial Statements. The financial statements of equity method investments are not consolidated.
2. Recently Issued Accounting Standards
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 4 to the Condensed 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 Condensed Consolidated Financial Statements 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:
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Standard
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Description
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Effective Date
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2016-13
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Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
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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.
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May 31, 2020
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2018-13
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Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
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This update eliminates, adds and modifies certain disclosure requirements for fair value measurements. Early adoption is permitted.
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May 31, 2020
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2018-14
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Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
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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.
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May 30, 2021
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All other issued and not yet effective accounting standards are not relevant to the Company.
3. Revenue from Contracts with Customers
Disaggregated Revenue
Revenue disaggregated by contract type has been provided in the table below:
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|
|
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|
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|
|
|
|
|
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Three Months Ended
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Nine Months Ended
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(In millions)
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February 29, 2020
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|
March 2, 2019
|
|
February 29, 2020
|
|
March 2, 2019
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Net Sales:
|
|
|
|
|
|
|
|
Single performance obligation
|
|
|
|
|
|
|
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Product revenue
|
$
|
561.1
|
|
|
$
|
524.5
|
|
|
$
|
1,699.9
|
|
|
$
|
1,599.0
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Multiple performance obligations
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|
|
|
|
|
|
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Product revenue
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98.9
|
|
|
89.0
|
|
|
294.5
|
|
|
281.7
|
|
Service revenue
|
2.5
|
|
|
2.8
|
|
|
7.8
|
|
|
8.7
|
|
Other
|
3.2
|
|
|
2.7
|
|
|
8.6
|
|
|
6.8
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Total
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$
|
665.7
|
|
|
$
|
619.0
|
|
|
$
|
2,010.8
|
|
|
$
|
1,896.2
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|
Revenue disaggregated by product type and reportable segment has been provided in the table below:
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Three Months Ended
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Nine Months Ended
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(In millions)
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February 29, 2020
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March 2, 2019
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February 29, 2020
|
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March 2, 2019
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North America Contract:
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|
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|
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Systems
|
$
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132.3
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|
|
$
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128.7
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|
|
$
|
424.6
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|
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$
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420.2
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Seating
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120.4
|
|
|
122.7
|
|
|
380.3
|
|
|
375.2
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Freestanding and storage
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96.8
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|
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91.4
|
|
|
317.7
|
|
|
282.3
|
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Textiles
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27.2
|
|
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26.5
|
|
|
86.8
|
|
|
84.8
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Other
|
36.7
|
|
|
27.7
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|
|
113.1
|
|
|
90.3
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Total North America Contract
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$
|
413.4
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|
|
$
|
397.0
|
|
|
$
|
1,322.5
|
|
|
$
|
1,252.8
|
|
|
|
|
|
|
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International Contract:
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|
|
|
|
|
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Systems
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$
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21.5
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|
|
$
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26.8
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|
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$
|
66.2
|
|
|
$
|
78.0
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Seating
|
107.1
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|
|
71.8
|
|
|
235.4
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|
|
202.7
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Freestanding and storage
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14.0
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|
|
14.5
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|
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42.5
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|
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38.7
|
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Other
|
13.5
|
|
|
12.9
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|
|
44.0
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|
|
40.5
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Total International Contract
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$
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156.1
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|
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$
|
126.0
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|
|
$
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388.1
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|
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$
|
359.9
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|
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Retail:
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Seating
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$
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68.7
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|
|
$
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59.2
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|
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$
|
197.9
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$
|
171.0
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Freestanding and storage
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16.9
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|
|
15.2
|
|
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50.6
|
|
|
49.2
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Other
|
10.6
|
|
|
21.6
|
|
|
51.7
|
|
|
63.3
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Total Retail
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$
|
96.2
|
|
|
$
|
96.0
|
|
|
$
|
300.2
|
|
|
$
|
283.5
|
|
|
|
|
|
|
|
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Total
|
$
|
665.7
|
|
|
$
|
619.0
|
|
|
$
|
2,010.8
|
|
|
$
|
1,896.2
|
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Refer to Note 16 of the Condensed 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 receivable, net” in the Condensed Consolidated Balance Sheets.
Contract assets also include amounts that are conditional because certain performance obligations in the contract with the customer are incomplete as of the balance sheet date. These contract assets generally arise due to contracts with the customer that include multiple performance obligations, e.g., both the product that is shipped to the customer by the Company, as well as installation services provided by independent third-party dealers. For these contracts, the Company recognizes revenue upon satisfaction of the product performance obligation. These contract assets are included in the caption "Unbilled accounts receivable" in the Condensed Consolidated Balance Sheets until all performance obligations in the contract with the customer have been satisfied.
Contract liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer deposit is relieved and revenue is recognized. These customer deposits are included within the caption “Customer deposits” in the Condensed Consolidated Balance Sheets. During the three and nine months ended February 29, 2020, the Company recognized Net sales of $22.1 million and $26.9 million related to customer deposits that were included in the balance sheet as of November 30, 2019 and June 1, 2019, respectively.
4. Leases
Impact of Adoption
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.
As part of the implementation process the Company made the following elections:
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•
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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.
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•
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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.
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•
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The Company elected to not separate lease and non-lease components, for all leases.
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•
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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.
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•
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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.
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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 no related cumulative adjustment to retained earnings.
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 Condensed Consolidated Statement 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 Condensed 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 lease payments. Relevant information used in determining the Company’s incremental borrowing rate includes the duration of the lease, location of the lease, and the Company’s credit risk relative to risk-free market rates.
Leases
During the three and nine months ended February 29, 2020, lease expense was $15.9 million and $46.9 million, respectively. The components of lease expense were as follows:
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Three Months Ended
|
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Nine Months Ended
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(In millions)
|
February 29, 2020
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|
February 29, 2020
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Operating lease costs
|
$
|
13.1
|
|
|
$
|
38.5
|
|
Short-term lease costs
|
0.7
|
|
|
1.9
|
|
Variable lease costs*
|
2.1
|
|
|
6.5
|
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Total
|
$
|
15.9
|
|
|
$
|
46.9
|
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*Not included in the table above for the three and nine months ended February 29, 2020 are variable lease costs of $18.6 million and $64.3 million for raw material purchases under certain supply arrangements that the Company has determined to meet the definition of a lease.
At February 29, 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:
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(In millions)
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2020
|
$
|
12.3
|
|
2021
|
47.7
|
|
2022
|
44.1
|
|
2023
|
39.7
|
|
2024
|
33.9
|
|
Thereafter
|
102.0
|
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Total lease payments*
|
$
|
279.7
|
|
Less interest
|
28.1
|
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Present value of lease liabilities
|
$
|
251.6
|
|
*Lease payments exclude $29.0 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.
The long-term portion of the lease liabilities included in the amounts above is $188.5 million and the remainder of the lease liabilities are included in "Other accrued liabilities" in the Condensed Consolidated Balance Sheets.
The following table summarizes future minimum rental payments required under operating leases that have non-cancelable lease terms as of June 1, 2019, prior to the adoption of ASC 842:
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|
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(In millions)
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2020
|
$
|
51.7
|
|
2021
|
46.8
|
|
2022
|
42.9
|
|
2023
|
39.0
|
|
2024
|
33.5
|
|
Thereafter
|
101.9
|
|
Total
|
$
|
315.8
|
|
At February 29, 2020, the weighted average remaining lease term and weighted average discount rate for operating leases were 7 years and 3.1%, respectively.
During the three and nine months ended February 29, 2020, the cash paid for leases included in the measurement of the liabilities and the operating cash flows was $12.5 million and $38.4 million, respectively, and the right of use assets obtained in exchange for new liabilities were $0.3 million and $9.1 million, respectively.
5. Acquisitions
Maars Holding B.V.
On August 31, 2018, 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 August 31, 2018, and the valuation analysis was completed in the fourth quarter of fiscal 2019.
Nine United Denmark A/S
On June 7, 2018, the Company acquired 33% of the outstanding equity of Nine United Denmark A/S, d/b/a HAY and subsequently renamed to HAY ApS ("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 was accounted for using the equity method of accounting until the purchase of the additional 34% equity on December 2, 2019. The Company also acquired the rights to the HAY brand in North America under a long-term license agreement for approximately $4.8 million in cash. This licensing agreement is recorded as a definite-lived intangible asset and is being amortized over its 15-year useful life. This asset is recorded within "Other amortizable intangibles, net" within the Condensed Consolidated Balance Sheets.
On December 2, 2019 (“Acquisition Date”), the Company purchased an additional 34% of equity voting interest in HAY, increasing its ownership interest to 67%, resulting in a controlling financial interest. As of the acquisition date, the Company has consolidated HAY, which was previously accounted for as an equity method investment through the second quarter of fiscal 2020. Total consideration paid for the additional ownership in 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.
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 outside ownership of HAY is classified outside permanent equity in the Consolidated Balance Sheets and is carried at the current estimated redemption amounts. Refer to Note 12 to the Condensed Consolidated Financial Statements for further information.
Purchase Price Allocations
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. The related depreciation and amortization expense from the acquired assets is also subject to such revisions on a prospective basis.
The following table presents the preliminary allocation of purchase price related to acquired tangible assets:
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|
|
|
|
(In millions)
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|
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 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 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 an immaterial non-taxable gain on the remeasurement of the previously held equity method investment, which prior to the acquisition had a carrying value of $65.5 million. The net gain has been recognized in “Gain on consolidation of equity method investments" within the Condensed 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:
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|
|
|
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(In millions)
|
Valuation Method
|
|
Useful Life (years)
|
|
Fair Value
|
Inventory Step-up
|
Comparative Sales Approach
|
|
0.3
|
|
$
|
3.4
|
|
Backlog
|
Multi-Period Excess Earnings
|
|
0.3
|
|
3.4
|
|
Deferred Revenue
|
Adjusted Fulfillment Cost Method
|
|
0.1
|
|
(2.0
|
)
|
Tradename
|
Relief from Royalty
|
|
Indefinite
|
|
56.0
|
|
Product Development/Technology
|
Relief from Royalty
|
|
11.0
|
|
21.0
|
|
Customer Relationships
|
Multi-Period Excess Earnings
|
|
14.0
|
|
33.0
|
|
Total
|
|
|
|
|
$
|
114.8
|
|
Goodwill related to the acquisition was recorded within the International Contract segment for $104.8 million and included deferred tax liabilities of $25.3 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 controlling financial interest and consolidated the operations 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.
Purchase Price Allocations
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 naughtone 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. The related depreciation and amortization expense from the acquired assets is also subject to such revisions on a prospective basis.
The following table presents the preliminary allocation of purchase price related to acquired tangible assets:
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|
|
|
|
(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 million on the remeasurement of the previously held equity method investment, which prior to the acquisition had a carrying of $20.5 million. The net gain has been recognized in “Gain on consolidation of equity method investments" within the Condensed 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:
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|
|
|
|
|
|
|
|
(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
|
|
10.0
|
|
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.
During the three months ended February 29, 2020, the Company recorded measurement period adjustments of $4.1 million related to an increase in the fair value of the tradename, and $1.6 million related to a decrease in the fair value of customer relationships. In addition, the Company revised the useful life of the customer relationships from 12 to 10 years. These adjustments reduced goodwill by $2.5 million, and all amounts referenced above are inclusive of these measurement period adjustments.
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 nine months ended February 29, 2020 and the year ended 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 or other effects of the planned integration of these acquisitions. Accordingly, such amounts are not necessarily indicative of the results that would have occurred if the acquisitions had occurred on the dates indicated or that may result in the future.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Year Ended
|
(In millions)
|
February 29, 2020
|
|
June 1, 2019
|
Net sales
|
$
|
2,104.8
|
|
|
$
|
2,757.3
|
|
Net earnings attributable to Herman Miller, Inc.
|
$
|
139.9
|
|
|
$
|
160.8
|
|
6. Inventories, net
|
|
|
|
|
|
|
|
|
(In millions)
|
February 29, 2020
|
|
June 1, 2019
|
Finished goods
|
$
|
155.3
|
|
|
$
|
139.1
|
|
Raw materials
|
45.2
|
|
|
45.1
|
|
Total
|
$
|
200.5
|
|
|
$
|
184.2
|
|
Inventories are valued at the lower of cost or market and include material, labor, and overhead. Certain inventories within our North America Contract manufacturing operations are valued using the last-in, first-out (LIFO) method, whereas inventories of other operations are valued using the first-in, first-out (FIFO) method.
7. Goodwill and Indefinite-Lived Intangibles
Goodwill and other indefinite-lived intangible assets included in the Condensed Consolidated Balance Sheets consisted of the following as of February 29, 2020 and June 1, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Goodwill
|
|
Indefinite-lived Intangible Assets
|
|
Total Goodwill and Indefinite-lived Intangible Assets
|
June 1, 2019
|
$
|
303.8
|
|
|
$
|
78.1
|
|
|
$
|
381.9
|
|
Foreign currency translation adjustments
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Acquisition of HAY
|
104.8
|
|
|
56.0
|
|
|
160.8
|
|
Acquisition of naughtone
|
57.5
|
|
|
8.5
|
|
|
66.0
|
|
February 29, 2020
|
$
|
466.1
|
|
|
$
|
142.3
|
|
|
$
|
608.4
|
|
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. The Company completed the required annual goodwill impairment test in the fourth quarter of fiscal 2019, as of March 31, 2019, performing a quantitative and qualitative impairment test for all goodwill reporting units and other indefinite-lived intangible assets. The carrying value of the Company's Retail reporting unit was $249.9 million as of June 1, 2019. The calculated fair value of the reporting unit was $282.6 million, which represents an excess fair value of $32.7 million or 13.0%. Due to the level that the reporting unit fair values exceeded the carrying amounts and the results of the sensitivity analysis, the Company may need to record an impairment charge if the operating results of its Retail reporting unit were to decline in future periods.
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 carrying value of the Company's Design Within Reach ("DWR") trade name indefinite-lived intangible asset was $55.1 million as of June 1, 2019. The calculated fair value of the DWR trade name was $63.2 million which represents an excess fair value of $8.1 million or 14.7%. If the residual cash flows related to the Company's DWR trade name were to decline in future periods, the Company may need to record an impairment charge.
During the nine months ended February 29, 2020, there were no identified indicators of impairment that required the Company to complete an interim quantitative impairment assessment related to any of the Company's reporting units or indefinitely-lived intangible assets.
8. Employee Benefit Plans
The following table summarizes the components of net periodic benefit cost for the Company's International defined benefit pension plan for the three and nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
February 29, 2020
|
|
March 2, 2019
|
|
February 29, 2020
|
|
March 2, 2019
|
Interest cost
|
$
|
0.6
|
|
|
$
|
0.7
|
|
|
$
|
1.8
|
|
|
$
|
2.0
|
|
Expected return on plan assets
|
(1.1
|
)
|
|
(1.1
|
)
|
|
(3.3
|
)
|
|
(3.3
|
)
|
Net amortization loss
|
0.9
|
|
|
0.7
|
|
|
2.5
|
|
|
2.0
|
|
Net periodic benefit cost
|
$
|
0.4
|
|
|
$
|
0.3
|
|
|
$
|
1.0
|
|
|
$
|
0.7
|
|
9. Earnings Per Share
The following table reconciles the numerators and denominators used in the calculations of basic and diluted earnings per share (EPS) for the three and nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
February 29, 2020
|
|
March 2, 2019
|
|
February 29, 2020
|
|
March 2, 2019
|
Numerators:
|
|
|
|
|
|
|
|
Numerator for both basic and diluted EPS, Net earnings attributable to Herman Miller, Inc. - in millions
|
$
|
37.7
|
|
|
$
|
39.2
|
|
|
$
|
164.5
|
|
|
$
|
114.5
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
Denominator for basic EPS, weighted-average common shares outstanding
|
58,940,060
|
|
|
58,838,958
|
|
|
58,970,264
|
|
|
59,087,899
|
|
Potentially dilutive shares resulting from stock plans
|
278,041
|
|
|
288,300
|
|
|
296,665
|
|
|
360,395
|
|
Denominator for diluted EPS
|
59,218,101
|
|
|
59,127,258
|
|
|
59,266,929
|
|
|
59,448,294
|
|
Antidilutive equity awards not included in weighted-average common shares - diluted
|
164,443
|
|
|
401,811
|
|
|
74,932
|
|
|
211,097
|
|
10. Stock-Based Compensation
The following table summarizes the stock-based compensation expense and related income tax effect for the three and nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
February 29, 2020
|
|
March 2, 2019
|
|
February 29, 2020
|
|
March 2, 2019
|
Stock-based compensation expense
|
$
|
2.5
|
|
|
$
|
2.2
|
|
|
$
|
7.9
|
|
|
$
|
7.2
|
|
Related income tax effect
|
0.6
|
|
|
0.5
|
|
|
1.8
|
|
|
1.6
|
|
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.
11. Income Taxes
The Company recognizes interest and penalties related to uncertain tax benefits through income tax expense in its Condensed Consolidated Statements of Comprehensive Income. Interest and penalties recognized in the Company's Condensed Consolidated Statements of Comprehensive Income were negligible for the three and nine months ended February 29, 2020 and March 2, 2019.
The Company's recorded liability for potential interest and penalties related to uncertain tax benefits was:
|
|
|
|
|
|
|
|
|
(In millions)
|
February 29, 2020
|
|
June 1, 2019
|
Liability for interest and penalties
|
$
|
0.9
|
|
|
$
|
0.7
|
|
Liability for uncertain tax positions, current
|
$
|
2.2
|
|
|
$
|
1.9
|
|
The Company's process for determining the provision for income taxes for the three and nine months ended February 29, 2020 involved using an estimated annual effective tax rate which was based on expected annual income and statutory tax rates across the various jurisdictions in which it operates. The effective tax rates were 22.4% and 16.0%, respectively, for the three month periods ended February 29, 2020 and March 2, 2019. For the three months ended February 29, 2020, the effective tax rate is higher than the United States federal statutory rate due to United States state income taxes and the mix of earnings in tax jurisdictions that had rates that were higher than the United States federal statutory rate. For the three months ended March 2, 2019, the effective tax rate was lower than the United States federal statutory rate mainly due to the impact of SAB 118 resulting from United States tax reform.
The effective tax rates were 18.3% and 19.6%, respectively, for the nine month periods ended February 29, 2020 and March 2, 2019. The year over year decrease in the effective tax rate for the nine months ended February 29, 2020 was mainly the result of a non-taxable gain recorded in the current year related to the recent acquisition of naughtone shares. For the nine months ended February 29, 2020, the effective tax rate was lower than the United States federal statutory rate mainly due to the non-taxed nature of the naughtone gain. For the nine months ended March 2, 2019, the effective tax rate was lower than the United States federal statutory rate mainly due to the impact of SAB 118 resulting from United States tax reform.
The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the Company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months because of the audits. Tax payments related to these audits, if any, are not expected to be material to the Company's Condensed Consolidated Statements of Comprehensive Income.
For the majority of tax jurisdictions, the Company is no longer subject to state, local, or non-United States income tax examinations by tax authorities for fiscal years before 2016.
12. Fair Value Measurements
The Company's financial instruments consist of cash equivalents, marketable securities, accounts and notes receivable, deferred compensation plan, accounts payable, debt, interest rate swaps and foreign currency exchange contracts. The Company's financial instruments, other than long-term debt, are recorded at fair value. The carrying value and fair value of the Company's long-term debt, including current maturities, is as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
(In millions)
|
February 29, 2020
|
|
June 1, 2019
|
Carrying value
|
$
|
277.5
|
|
|
$
|
285.0
|
|
Fair value
|
$
|
279.8
|
|
|
$
|
287.8
|
|
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 ("NAV").
Mutual 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.
Deferred compensation plan — The Company's deferred compensation plan primarily includes various domestic and international mutual funds that are recorded at fair value using quoted prices for similar securities.
Foreign currency exchange contracts — The Company's foreign currency exchange contracts are valued using an approach based on foreign currency exchange rates obtained from active markets. The estimated fair value of forward currency exchange contracts is based on month-end spot rates as adjusted by market-based current activity. These forward contracts are not designated as hedging instruments.
The following table sets forth financial assets and liabilities measured at fair value and recorded in net earnings and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of February 29, 2020 and June 1, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
February 29, 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
|
$
|
14.7
|
|
|
$
|
—
|
|
|
$
|
69.5
|
|
|
$
|
—
|
|
Mutual funds - equity
|
—
|
|
|
0.9
|
|
|
—
|
|
|
0.9
|
|
Deferred compensation plan
|
—
|
|
|
12.6
|
|
|
—
|
|
|
12.5
|
|
Total
|
$
|
14.7
|
|
|
$
|
13.5
|
|
|
$
|
69.5
|
|
|
$
|
13.4
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
Total
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
The following describes the methods the Company uses to estimate the fair value of financial assets and liabilities recorded in other comprehensive income, which have not significantly changed in the current period:
Mutual funds-fixed income — The Company's available-for-sale marketable securities primarily include fixed income mutual funds and government obligations. These investments are recorded at fair value using quoted prices for similar securities.
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 and recorded in other comprehensive income and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of February 29, 2020 and June 1, 2019.
|
|
|
|
|
|
|
|
|
(In millions)
|
February 29, 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
|
$
|
8.0
|
|
|
$
|
7.9
|
|
Interest rate swap agreement
|
—
|
|
|
1.0
|
|
Total
|
$
|
8.0
|
|
|
$
|
8.9
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
Interest rate swap agreement
|
$
|
17.3
|
|
|
$
|
2.2
|
|
Total
|
$
|
17.3
|
|
|
$
|
2.2
|
|
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 respective dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 29, 2020
|
|
June 1, 2019
|
(In millions)
|
Cost
|
|
Unrealized
Gain/(Loss)
|
|
Market
Value
|
|
Cost
|
|
Unrealized
Gain/(Loss)
|
|
Market
Value
|
Mutual funds - fixed income
|
$
|
8.0
|
|
|
$
|
—
|
|
|
$
|
8.0
|
|
|
$
|
7.9
|
|
|
$
|
—
|
|
|
$
|
7.9
|
|
Mutual funds - equity
|
0.7
|
|
|
0.2
|
|
|
0.9
|
|
|
0.8
|
|
|
0.1
|
|
|
0.9
|
|
Total
|
$
|
8.7
|
|
|
$
|
0.2
|
|
|
$
|
8.9
|
|
|
$
|
8.7
|
|
|
$
|
0.1
|
|
|
$
|
8.8
|
|
The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in the Condensed Consolidated Statements of Comprehensive Income within "Other 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 Condensed Consolidated Balance Sheets.
Derivative Instruments and Hedging Activities
Foreign Currency Forward Contracts
The Company transacts business in various foreign currencies and has established a program that primarily utilizes foreign currency forward contracts to reduce the risks associated with the effects of certain foreign currency exposures. Under this program, the Company's strategy is to have increases or decreases in our foreign currency exposures offset by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility associated with foreign currency transaction gains or losses. Foreign currency exposures typically arise from net liability or asset exposures in non-functional currencies on the balance sheets of our foreign subsidiaries. Foreign currency forward contracts generally settle within 30 days and are not used for trading purposes. These forward contracts are not designated as hedging instruments. Accordingly, we record the fair value of these contracts as of the end of the reporting period in the Consolidated Balance Sheets with changes in fair value recorded within the Consolidated Statements of Comprehensive Income. The balance sheet classification for the fair values of these forward contracts is to Other current assets for unrealized gains and to Other accrued liabilities for unrealized losses. The Consolidated Statements of Comprehensive Income classification for the fair values of these forward contracts is to Other (income) expense, net, for both realized and unrealized gains and losses.
Interest Rate Swaps
The Company enters into interest rate swap agreements to manage its exposure to interest rate changes and its overall cost of borrowing. The Company's interest rate swap agreements were entered into to exchange variable rate interest payments for fixed rate payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amount of the interest rate swap agreements is used to measure interest to be paid or received. 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 February 29, 2020. Since a designated derivative meets hedge accounting criteria, the fair value of the hedge is recorded in the Consolidated Statements 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% fixed interest rate plus applicable margin under the agreement as of the forward start date.
On June 12, 2017, the Company entered into an interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $75.0 million with a forward start date of January 3, 2018 and a termination date of January 3, 2028. As a result of the transaction, the Company effectively converted the Company’s revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 2.387% fixed interest rate plus applicable margin under the agreement as of the forward start date.
As of February 29, 2020, the fair value of the Company’s two outstanding interest rate swap agreements, which are designated cash flow hedges, was a liability of $17.3 million. The liability fair value was recorded within "Other liabilities" within the Condensed 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 $6.6 million and $4.4 million, for the three months ended February 29, 2020 and March 2, 2019, respectively. 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 $11.9 million and a net unrealized gain of $4.2 million for the nine months ended February 29, 2020 and March 2, 2019, respectively.
There were no gains or losses recognized in earnings for hedge ineffectiveness for the three and nine month periods ended February 29, 2020 and March 2, 2019, respectively. The losses reclassified from Accumulated other comprehensive loss into earnings were $0.1 million and $0.2 million for the three month periods ended February 29, 2020 and March 2, 2019, respectively. The losses reclassified from Accumulated other comprehensive loss into earnings were $0.1 million and $0.3 million for the nine month periods ended February 29, 2020 and March 2, 2019, respectively. Losses expected to be reclassified from Accumulated other comprehensive loss into earnings during the next twelve months are $2.4 million. The amount of loss, net of tax, expected to be reclassified out of Accumulated other comprehensive loss into earnings during the next twelve months is $1.8 million.
Redeemable Noncontrolling Interests
Redeemable noncontrolling interests are reported on the Condensed Consolidated Balance Sheets in mezzanine equity in “Redeemable noncontrolling interests.” As of June 1, 2019, the outstanding redeemable noncontrolling interests were $20.6 million, and represented an approximate 5% minority ownership in the Company's subsidiary, Herman Miller Consumer Holdings, Inc. ("HMCH"). During August 2019, the Company acquired all of the remaining redeemable noncontrolling equity interests. HMCH redeemed certain HMCH stock for cash and then, on August 23, 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 nine month period ended March 2, 2019.
Changes in the Company's redeemable noncontrolling interest in HMCH for the nine months ended February 29, 2020 and March 2, 2019 are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
February 29, 2020
|
|
March 2, 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
|
|
Net income attributable to redeemable noncontrolling interests
|
—
|
|
|
0.1
|
|
Ending Balance
|
$
|
—
|
|
|
$
|
20.7
|
|
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.
Changes in the Company's redeemable noncontrolling interest in HAY for the nine months ended February 29, 2020 are as follows:
|
|
|
|
|
(In millions)
|
February 29, 2020
|
Beginning Balance
|
$
|
—
|
|
Increase due to HAY acquisition
|
72.1
|
|
Net income attributable to redeemable noncontrolling interests
|
(0.4
|
)
|
Ending Balance
|
$
|
71.7
|
|
13. Commitments and Contingencies
Product Warranties
The Company provides coverage to the end-user for parts and labor on products sold under its warranty policy and for other product-related matters. The standard length of warranty is 12 years for the majority of products sold; however, this varies depending on the product classification. The Company does not sell or otherwise issue warranties or warranty extensions as stand-alone products. Reserves have been established for 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
February 29, 2020
|
|
March 2, 2019
|
|
February 29, 2020
|
|
March 2, 2019
|
Accrual Balance — beginning
|
$
|
54.6
|
|
|
$
|
52.4
|
|
|
$
|
53.1
|
|
|
$
|
51.5
|
|
Accrual for warranty matters
|
7.5
|
|
|
4.6
|
|
|
19.1
|
|
|
15.3
|
|
Settlements and adjustments
|
(4.7
|
)
|
|
(4.5
|
)
|
|
(14.8
|
)
|
|
(14.3
|
)
|
Accrual Balance — ending
|
$
|
57.4
|
|
|
$
|
52.5
|
|
|
$
|
57.4
|
|
|
$
|
52.5
|
|
Guarantees
The Company is periodically required to provide performance bonds to do business with certain customers. These arrangements are common in the industry and generally have terms ranging between one year and three years. The bonds are required to provide assurance to customers that the products and services they have purchased will be installed and/or provided properly and without damage to their facilities. The bonds are provided by various bonding agencies. However, the Company is ultimately liable for claims that may occur against them. As of February 29, 2020, the Company had a maximum financial exposure related to performance bonds totaling approximately $4.6 million. The Company has no history of claims, nor is it aware of circumstances that would require it to pay, under any of these arrangements. The Company also believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the Company's Consolidated Financial Statements. Accordingly, no liability has been recorded in respect to these bonds as of either February 29, 2020 or June 1, 2019.
The Company has entered into standby letter of credit arrangements for purposes of protecting various insurance companies and lessors against default on insurance premium and lease payments. As of February 29, 2020, the Company had a maximum financial exposure from these standby letters of credit totaling approximately $9.5 million, all of which is considered usage against the Company's revolving line of credit. The Company has no history of claims, nor is it aware of circumstances that would require it to perform under any of these arrangements and believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the Company's Consolidated Financial Statements. Accordingly, no liability has been recorded in respect to these arrangements as of February 29, 2020 and June 1, 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 have a material adverse effect, if any, on the Company's Consolidated Financial Statements.
14. Debt
Long-term debt as of February 29, 2020 and June 1, 2019 consisted of the following obligations:
|
|
|
|
|
|
|
|
|
(In millions)
|
February 29, 2020
|
|
June 1, 2019
|
Debt securities, due March 1, 2021
|
$
|
50.0
|
|
|
$
|
50.0
|
|
Syndicated revolving line of credit, due August 2024
|
225.0
|
|
|
225.0
|
|
Construction-type lease
|
—
|
|
|
6.9
|
|
Supplier financing program
|
2.5
|
|
|
3.1
|
|
Total debt
|
$
|
277.5
|
|
|
$
|
285.0
|
|
Less: Current debt
|
(2.5
|
)
|
|
(3.1
|
)
|
Long-term debt
|
$
|
275.0
|
|
|
$
|
281.9
|
|
As 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 unsecured credit facility (the "Agreement"). The Agreement, which expires on August 28, 2024, provides the Company with up to $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 up to $250 million. Outstanding 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.
As of February 29, 2020, the total debt outstanding related to borrowings under the syndicated revolving line of credit was $225.0 million. Available borrowings against this facility were $265.5 million due to $9.5 million related to outstanding letters of credit. As of June 1, 2019, total debt outstanding related to borrowings under the syndicated revolving line of credit was $225.0 million and available borrowings were $165.0 million due to $10.0 million of outstanding letters of credit.
Supplier Financing Program
The Company has an agreement with a third-party financial institution that allows certain participating suppliers the ability to finance payment obligations from the Company. Under this program, participating suppliers may finance payment obligations of the Company, prior to their scheduled due dates, at a discounted price to the third-party financial institution.
The Company has lengthened the payment terms for certain suppliers that have chosen to participate in the program. As a result, certain amounts due to suppliers have payment terms that are longer than standard industry practice and as such, these amounts have been excluded from the caption “Accounts payable” in the Condensed Consolidated Balance Sheets as the amounts have been accounted for by the Company as a current debt obligation. Accordingly, $2.5 million and $3.1 million have been recorded within the caption “Other accrued liabilities” as of February 29, 2020 and June 1, 2019, 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 was therefore accounted for as a financing lease and the building and related financing liability were initially recorded at fair value in the Consolidated Balance Sheets within Construction in progress and Other accrued liabilities. 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. The carrying value of the building and the related financing liability were both $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 no related cumulative adjustment to retained earnings.
15. Accumulated Other Comprehensive Loss
The following table provides an analysis of the changes in accumulated other comprehensive loss for the nine months ended February 29, 2020 and March 2, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cumulative Translation Adjustments
|
|
Pension and Other Post-retirement Benefit Plans
|
|
Unrealized
Gains on Available-for-sale Securities
|
|
Interest Rate Swap Agreement
|
|
Accumulated Other Comprehensive Loss
|
Balance at June 1, 2019
|
$
|
(48.3
|
)
|
|
$
|
(45.0
|
)
|
|
$
|
—
|
|
|
$
|
(0.9
|
)
|
|
$
|
(94.2
|
)
|
Other comprehensive income (loss), net of tax before reclassifications
|
2.5
|
|
|
—
|
|
|
—
|
|
|
(12.0
|
)
|
|
(9.5
|
)
|
Reclassification from accumulated other comprehensive loss - Other, net
|
—
|
|
|
2.5
|
|
|
—
|
|
|
0.1
|
|
|
2.6
|
|
Tax benefit
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
Net reclassifications
|
—
|
|
|
2.1
|
|
|
—
|
|
|
0.1
|
|
|
2.2
|
|
Net current period other comprehensive income (loss)
|
2.5
|
|
|
2.1
|
|
|
—
|
|
|
(11.9
|
)
|
|
(7.3
|
)
|
Balance at February 29, 2020
|
$
|
(45.8
|
)
|
|
$
|
(42.9
|
)
|
|
$
|
—
|
|
|
$
|
(12.8
|
)
|
|
$
|
(101.5
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at June 2, 2018
|
$
|
(34.1
|
)
|
|
$
|
(37.2
|
)
|
|
$
|
0.1
|
|
|
$
|
9.9
|
|
|
$
|
(61.3
|
)
|
Cumulative effect of accounting change
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
1.5
|
|
|
1.4
|
|
Other comprehensive loss, net of tax before reclassifications
|
(4.4
|
)
|
|
—
|
|
|
—
|
|
|
(4.2
|
)
|
|
(8.6
|
)
|
Reclassification from accumulated other comprehensive loss - Other, net
|
—
|
|
|
2.0
|
|
|
—
|
|
|
0.3
|
|
|
2.3
|
|
Tax benefit
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
Net reclassifications
|
—
|
|
|
1.7
|
|
|
—
|
|
|
0.3
|
|
|
2.0
|
|
Net current period other comprehensive (loss) income
|
(4.4
|
)
|
|
1.7
|
|
|
—
|
|
|
(3.9
|
)
|
|
(6.6
|
)
|
Balance at March 2, 2019
|
$
|
(38.5
|
)
|
|
(35.5
|
)
|
|
$
|
—
|
|
|
$
|
7.5
|
|
|
$
|
(66.5
|
)
|
16. Operating Segments
The Company's reportable segments consist of North America Contract, International Contract, and Retail.
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 the operations associated with the design, manufacture, and sale of furniture products, primarily for work-related settings in EMEA, Latin America, and Asia-Pacific.
The Retail segment includes operations associated with the sale of modern design furnishings and accessories to third party retailers, as well as direct to consumer sales through eCommerce, direct mailing catalogs and DWR 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 following is a summary of certain key financial measures for the respective fiscal periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
February 29, 2020
|
|
March 2, 2019
|
|
February 29, 2020
|
|
March 2, 2019
|
Net Sales:
|
|
|
|
|
|
|
|
North America Contract
|
$
|
413.4
|
|
|
$
|
397.0
|
|
|
$
|
1,322.5
|
|
|
$
|
1,252.8
|
|
International Contract
|
156.1
|
|
|
126.0
|
|
|
388.1
|
|
|
359.9
|
|
Retail
|
96.2
|
|
|
96.0
|
|
|
300.2
|
|
|
283.5
|
|
Total
|
$
|
665.7
|
|
|
$
|
619.0
|
|
|
$
|
2,010.8
|
|
|
$
|
1,896.2
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss):
|
|
|
|
|
|
|
|
North America Contract
|
$
|
51.2
|
|
|
$
|
40.2
|
|
|
$
|
176.4
|
|
|
$
|
139.5
|
|
International Contract
|
11.3
|
|
|
16.3
|
|
|
37.3
|
|
|
40.7
|
|
Retail
|
(1.6
|
)
|
|
2.3
|
|
|
(6.4
|
)
|
|
6.3
|
|
Corporate
|
(10.5
|
)
|
|
(11.0
|
)
|
|
(34.3
|
)
|
|
(39.6
|
)
|
Total
|
$
|
50.4
|
|
|
$
|
47.8
|
|
|
$
|
173.0
|
|
|
$
|
146.9
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
February 29, 2020
|
|
June 1, 2019
|
Total Assets:
|
|
|
|
North America Contract
|
$
|
832.4
|
|
|
$
|
733.6
|
|
International Contract
|
557.6
|
|
|
356.8
|
|
Retail
|
476.3
|
|
|
310.0
|
|
Corporate
|
119.5
|
|
|
168.9
|
|
Total
|
$
|
1,985.8
|
|
|
$
|
1,569.3
|
|
17. Restructuring Expense
North America Contract Segment
During the fourth 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.
During the nine months ended February 29, 2020, the Company recognized $1.7 million related to the plan. To date, the Company has recognized $9.4 million of restructuring expense related to the plan. The early retirement plan is complete and no future restructuring costs related to this plan are expected.
The following table provides an analysis of the changes in the restructuring costs reserve for the above plan for the nine months ended February 29, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Severance and Employee-Related
|
|
Exit or Disposal Activities
|
|
Total
|
Beginning Balance
|
$
|
6.7
|
|
|
$
|
1.0
|
|
|
$
|
7.7
|
|
Restructuring Costs
|
1.7
|
|
|
—
|
|
|
1.7
|
|
Amounts Paid
|
(7.9
|
)
|
|
(0.3
|
)
|
|
$
|
(8.2
|
)
|
Ending Balance
|
$
|
0.5
|
|
|
$
|
0.7
|
|
|
$
|
1.2
|
|
In the second quarter of fiscal 2020, the Company 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 $5 million of which $3 million is anticipated to be recorded in fiscal 2020. 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 nine months ended February 29, 2020, the Company has recorded $3.0 million in pre-tax restructuring expense related to this plan.
The following table provides an analysis of the changes in the restructuring costs reserve for the above plan for the nine months ended February 29, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Severance and Employee-Related
|
|
Exit or Disposal Activities
|
|
Total
|
Beginning Balance
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restructuring Costs
|
2.7
|
|
|
0.3
|
|
|
3.0
|
|
Amounts Paid
|
(0.1
|
)
|
|
—
|
|
|
$
|
(0.1
|
)
|
Ending Balance
|
$
|
2.6
|
|
|
$
|
0.3
|
|
|
$
|
2.9
|
|
In the second quarter of fiscal 2020, the Company initiated a reorganization of the Global Sales and Product teams. The reorganization activities occurred primarily in North America with minor costs incurred internationally. In the nine months ended February 29, 2020, the Company has recorded a total of $2.6 million, of which $0.4 million has been paid. The reorganization will be completed during fiscal 2020 and the remaining charges are expected to be immaterial.
International Contract Segment
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. The plan is expected to generate cost savings of approximately $3 million.
In fiscal 2019, the Company recognized restructuring and impairment expenses of $2.5 million related to the facilities consolidation plan, comprised primarily of $0.8 million related to an asset impairment recorded against an office building in the United Kingdom that was vacated and $1.4 million from the consolidation of the Company's manufacturing facilities in China.
During the nine months ended February 29, 2020, the Company recognized pre-tax restructuring expense of $0.6 million, related to the plan. To date, the Company has recognized $7.0 million of restructuring costs related to the plan. No future restructuring costs related to the plan are expected. The plan is expected to be complete by the end of fiscal 2020.
As the United Kingdom office building and related assets meet the criteria to be designated as assets held for sale, the carrying value of these assets have been classified as current assets and included within "Other current assets" in the Condensed Consolidated Balance Sheets at February 29, 2020. The carrying amount of the assets held for sale was approximately $4.4 million as of February 29, 2020.
The following table provides an analysis of the changes in the International Contract segment restructuring costs reserve for the nine months ended February 29, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Severance and Employee-Related
|
|
Exit or Disposal Activities
|
|
Total
|
Beginning Balance
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Restructuring Costs
|
—
|
|
|
0.6
|
|
|
0.6
|
|
Amounts Paid
|
(0.1
|
)
|
|
(0.7
|
)
|
|
(0.8
|
)
|
Ending Balance
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Retail Segment
During 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 $1.7 million related to the plan. The reorganization is complete and the remaining charges are expected to be immaterial.
18. Variable Interest Entities
The Company has long-term notes receivable with a third-party owned dealer that are deemed to be variable interests in a variable interest entity. The carrying value of these long-term notes receivable was $1.4 million and $1.6 million as of February 29, 2020 and June 1, 2019, respectively, and represents the Company’s maximum exposure to loss. The Company is not deemed to be the primary beneficiary of the variable interest entity as the entity controls the activities that most significantly impact the entity’s economic performance, including sales, marketing, and operations.
19. Subsequent Event
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. The pandemic has significantly impacted the economic conditions in the U.S., accelerating during the first half of March, as federal, state and local governments react to the public health crisis, creating significant uncertainties in the economy. As of the date of this filing, the Company has been impacted by temporary facility closures and reduced hours of operations.
In Michigan, Governor Gretchen Whitmer’s “Stay Home, Stay Safe” executive order required all non-essential businesses to close for three weeks until April 13. As a result, this order has reduced operations in the Company’s West Michigan manufacturing facilities. Internationally, the Company’s manufacturing facility located near Bangalore, India is temporarily closed under a government order. In the United Kingdom, manufacturing and distribution operations are suspended until further notice. In Brazil and Mexico, the Company’s manufacturing and warehouse facilities, which serve the Latin America region, are temporarily closed under a government order. Additionally, DWR and HAY retail studios and stores across the U.S. are currently closed to the public.
The Company cannot reasonably estimate the length or severity of this pandemic, however, as a result of these developments the Company expects a material adverse impact on its sales, results of operations, and cash flows in the remainder of fiscal 2020 and in fiscal 2021, including the potential impairment of certain intangible and other long-lived assets.
In response to these developments, the Company announced a number of temporary cost reduction actions in April 2020 including a reduction in cash compensation for the majority of the Company's salaried workforce and suspension of certain employer 401(k) paid retirement contributions along with other measures.
In addition to these cost reductions, the Company has taken actions to safeguard its capital position. In March 2020, the Company borrowed $265 million from its syndicated revolving line of credit as a precautionary measure to provide additional near-term liquidity. In addition, the Board of Directors has authorized the postponement of the Company's upcoming quarterly cash dividend, which was declared on January 16, 2020, and was to be paid on April 15, 2020, to shareholders of record on February 29, 2020. The Company intends for this dividend to be paid to the original shareholders of record at a future date to be determined by the Board of Directors. The Board also determined to temporarily suspend future dividends.