Notes to Financial Statements
Years Ended December 31, 2019 and 2018
1. Summary of Significant Accounting and Reporting Policies
Basis of Accounting
The financial statements of the Herman Miller, Inc. Profit Sharing and 401(k) Plan ("the Plan") are presented on the accrual basis of accounting. Comparative information shall be disclosed in respect of the preceding period for all amounts reported in the financial statements.
Payment of Benefits
Benefits are recorded when paid.
Notes Receivable from Participants
Notes receivable from participants represent participant loans that are recorded at their unpaid principal balance plus any accrued but unpaid interest. Interest income on notes receivable from participants is recorded when it is earned. Related fees are recorded as administrative expenses and are expensed when they are incurred. No allowance for credit losses has been recorded as of December 31, 2019 or 2018. If a participant ceases to make loan repayments and the Plan deems the participant loan to be a distribution, the participant loan balance is reduced and a benefit payment is recorded.
Investment Valuation and Income Recognition
The Plan's investments are reported at fair value. The fair value of common stocks and mutual funds is based on quoted market prices on the last day of the plan year. The fair value of participation units in collective trust funds is based on quoted redemption values on the last day of the plan year.
Mutual funds: The fair values of mutual fund investments are determined by obtaining quoted prices on nationally recognized securities exchanges (level 1 inputs).
Company common stock: The fair value of Herman Miller, Inc. common stock is determined by obtaining quoted prices from a nationally recognized exchange (level 1 inputs).
Collective trusts: The fair value of participation units held in the collective trust funds are based on their net asset values, as reported by the managers of the collective trust funds and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date. Underlying investments of the S&P 500 Index Fund and S&P MidCap 400 Index Fund consist primarily of common stocks. Underlying investments of the Aggregate Bond Index Fund consist primarily of bonds. The Putnam Stable Value Fund invests primarily in guaranteed and security-backed investment contracts with life insurance companies, banks, and other financial institutions. The collective trust funds provide for daily redemptions by the Plan at reported net asset values ("NAV") per share, with no advance notice requirement.
Purchases and sales of investment securities are recorded on a trade date basis. Dividends are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Net appreciation (depreciation) includes the Plan's gains and losses on investments bought and sold as well as held during the year.
Risks and Uncertainties
Investment securities, in general, are exposed to various risks, such as interest rate, credit, liquidity, and overall market volatility risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term. Such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits.
Concentration of Credit Risk
At December 31, 2019 and 2018, approximately 10% of the Plan’s assets were invested in Herman Miller, Inc. common stock. A significant decline in the market value of the common stock would significantly affect the net assets available for benefits.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the Plan’s financial statements. The most significant estimates relate to the value of investments. Actual results may differ from those estimates. Adjustments related to changes in estimates are reflected in the Plan's Statement of Changes in Net Assets Available for Benefits in the period in which those estimates changed.
2. Plan Description
The Plan is a defined-contribution plan and subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), as amended. The following description of the major provisions of the Plan is provided for general information purposes only. Reference should be made to the Plan document or Summary Plan Description for more complete information.
Plan Sponsor
Herman Miller, Inc. and its participating affiliates ("the Company" or "employer") sponsor and administer the Plan for the benefit of any or all of its employees.
Trustee
Under a trust agreement with the Plan administrator, Vanguard Fiduciary Trust Company ("Vanguard") is Trustee of the Plan. In accordance with the responsibilities of the Trustee, as designated in the Trust Agreement, the Trustee administers and invests the Plan’s assets and income for the benefit of the Plan’s participants.
Participation Requirements
All eligible employees of participating affiliates qualify to participate on their first day of employment after the employee has attained age 18.
Vesting
Participants as of December 31, 2019 are fully vested at all times. They have a nonforfeitable right to their salary deferral and employer matching contributions, and employer discretionary contributions, plus the earnings thereon. Effective January 1, 2020, the Plan was amended to revise the vesting schedules for discretionary employer contributions to become 50% vested after one year of service, and 100% vested after two years of service.
Salary Deferral Contributions
A participant may make salary deferral contributions to the Plan. Such deferral is limited to a maximum amount or percentage of the participant’s compensation as determined by the Plan. The Plan provides participants with the option to make pre-tax contributions and Roth post-tax contributions.
New employees are automatically enrolled to the Plan after 30 days of employment to contribute 3 percent. In addition, participant's contributions automatically increase by 1 percent each plan year. The automatic increase will stop when the participant's contributions reach 8 percent.
Employer Matching Contributions
The Company will contribute to the Plan as matching contributions a certain percentage of the participant’s salary deferral, subject to certain limitations defined in the Plan document. The Company has different matching formulas for the various subsidiaries in the Plan and the matching contribution formula for each employee group is determined on a year-by-year basis.
Employer Core Contributions
All participants who are employed during the contribution period are eligible for the core contribution, if any is made. The core contribution is a percentage of eligible compensation received during the contribution period. The employer may make the core contributions from time to time during or after the plan year, as determined by the employer, or may elect not to make the contribution for a contribution period.
Employer Profit-Sharing Contributions
Effective June 4, 2017, the Company discontinued the Employer Profit Sharing Contribution and instead, began allocating those funds to other components of pay and retirement. Refer to the Employer Matching Contributions and Employer Core Contributions disclosures above for further information.
Investment Options
Participants have the ability to direct the investment of their salary deferral and employer matching and core contributions into any or all of the investment options offered by the Plan, which currently include the Company’s common stock, various mutual funds and collective trusts.
Participant Accounts
Individual accounts are maintained for each participant to reflect the participant’s contributions, employer contributions and net investment earnings or loss. Investment earnings or losses are allocated daily based on each participant’s relative account balance within the respective fund.
Voting Rights
Each participant is entitled to exercise voting rights attributable to the Company’s common stock allocated to his or her account and is notified by the Trustee prior to the time that such rights are to be exercised. If a participant fails to provide direction as to voting their shares on any issue, the Trustee will vote the shares as directed by the Plan administrator.
Benefit Payments
Benefit payments are recorded when paid. Upon retirement, termination, death or disability, a participant or beneficiary may elect to receive their benefit payment in the form of installments or a single lump-sum payment of a participant’s entire account balance via distribution of the Company’s common stock, cash, or a combination of both as directed by the participant and defined in the Plan document. Participants may also elect to receive withdrawals from the Plan during their employment with the Company, subject to certain restrictions defined in the Plan document.
Notes Receivable From Participants
Upon approval, a participant may receive a loan from their salary deferral account. The loan amount shall not exceed the lesser of 50 percent of the sum of all of the participant’s account balances on the date the loan is approved or $50,000. The period of the loan will not exceed 5 years unless the proceeds are used to acquire the participant’s principal dwelling unit for which the period of the loan will not exceed 10 years. Each loan is secured by the assignment of 50 percent of the interest in and to the participant’s account. The loans bear interest at a rate representative of rates charged by commercial lending institutions for comparable loans. All loans must be repaid in bi-weekly installments of principal and interest through payroll deduction arrangements with the Company or repaid directly to the Trustee. Participant loans are measured at their unpaid principal balance plus any accrued but unpaid interest.
Administrative Expenses
Plan fees are shared by plan participants and the Company. Record keeping fees for the Plan are paid by plan participants. Participants are charged an investment management fee as a percentage of their balance in each fund held in their account. This percentage does not cover the full cost of administration. Therefore, the Company pays the balance of the expenses not paid by the participants. Investment management fees are charged to the Plan as the reduction of investment return and are included in the investment income reported by the Plan.
Plan Termination
The Plan may be discontinued at any time by the Company, but only upon the condition that such action shall render it impossible for any part of the trust to be used for purposes other than the exclusive benefit of participants. Upon complete or partial termination of the Plan, including complete discontinuance of contributions, the trust will continue to be administered as provided in the Trust Agreement. The Company currently has no intention to terminate the Plan.
Plan Merger
Effective July 31, 2018, the net assets of approximately $18.7 million of the Nemschoff Woodworkers Retirement and Savings Plan and the Nemschoff Upholsterers Retirement and Savings Plan were merged into the Plan. Each covered employee who was eligible to participate in these plans immediately prior to the merger date is eligible to participate in the Plan.
3. Fair Value Measurements
The Company follows ASC Topic 820, Fair Value Measurements and Disclosures, which provides a consistent definition of fair value, focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs for measuring fair value and establishes a three-tier hierarchy for fair value measurements. This topic requires fair value measurements to be classified and disclosed in one of the following three categories:
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•
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Level 1: Unadjusted quoted prices from active markets that are accessible at the measurement date for identical asset.
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•
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Level 2: Inputs other than quoted prices in active markets for identical assets that are observable, either directly or indirectly, for substantially the full-term of the asset.
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•
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Level 3: Unobservable inputs for the asset. Level 3 inputs include managements’ own assumption about the assumptions that market participants would use in pricing the asset (including assumptions about risk).
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In some cases, a valuation technique used to measure fair value may include inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.
The methods described above and in Note 1 may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Investments are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The following table sets forth by level, within the fair value hierarchy, a summary of the Plan’s investments measured at fair value on a recurring basis as of December 31, 2019:
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Level 1
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Level 2
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Level 3
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Total
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Herman Miller, Inc. common stock
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$
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93,468,060
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$
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—
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$
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—
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$
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93,468,060
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Mutual funds
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682,927,569
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—
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—
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682,927,569
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Other investments measured at NAV(a)
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181,064,333
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Total investments at fair value
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$
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776,395,629
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$
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—
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$
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—
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$
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957,459,962
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The following table sets forth by level, within the fair value hierarchy, a summary of the Plan’s investments measured at fair value on a recurring basis as of December 31, 2018:
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Level 1
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Level 2
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Level 3
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Total
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Herman Miller, Inc. common stock
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$
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82,717,172
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$
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—
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$
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—
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$
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82,717,172
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Mutual funds
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556,331,006
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—
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—
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556,331,006
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Other investments measured at NAV(a)
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158,093,506
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Total investments at fair value
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$
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639,048,178
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$
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—
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$
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—
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$
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797,141,684
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(a) In accordance with subtopic 820-10, certain investments that are measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Statement of Net Assets Available for Benefits.
4. Party-in-Interest Transactions
Parties-in-interest are defined under Department of Labor regulations as any fiduciary of the Plan, any party rendering service to the Plan, the employer, and certain others. The Company pays certain professional fees for the consultation and audit of the Plan.
The Plan investments include shares of mutual funds managed by the Trustee and shares of common stock of the Company. These transactions qualify as party-in-interest transactions. During the years ended December 31, 2019 and 2018, the Plan recorded income related to dividends from shares of Company common stock of $1,964,986 and $2,079,311, respectively. As of December 31, 2019 and 2018, the Plan owned 2,244,131 and 2,734,452 shares of Company common stock, respectively. Notes receivable from participants are also considered party-in interest transactions.
5. Income Tax Status
The Plan has received a determination letter from the Internal Revenue Service dated March 30, 2017, stating that the Plan is qualified under Section 401(a) of the Internal Revenue Code ("the Code") and the related trust is exempt from taxation. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan has been amended since receiving the determination letter. The Plan Administrator believes the Plan is being operated in compliance with the applicable requirements of the Code and believes that the Plan is qualified and the related trust is tax exempt.
Accounting principles generally accepted in the United States of America require Plan management to evaluate tax positions taken by the Plan. The Plan Administrator has analyzed the tax positions taken by the Plan and has concluded that as of December 31, 2019 and 2018, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing authorities; however, there are currently no audits for any tax periods in progress.
6. 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. 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.
In response to these developments, the Company announced a number of temporary cost reduction actions in April 2020 including immediately suspending the employer matching contributions and employer core contributions included in this Plan until further notice. However, participants may continue to make salary deferral contributions to the Plan.
This pandemic has adversely affected global economic activity and greatly contributed to significant deterioration and instability in financial markets. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the fair values of investment securities will occur in the near term and that such changes could materially affect participants' account balances and the amounts reported in the statements of net assets available for benefits and the statements of changes in net assets available for benefits. Because the values of the Plan's individual investments have and will fluctuate in response to changing market conditions, the amount of losses that will be recognized in subsequent periods, if any, and related impact on the Plan's liquidity cannot be determined at this time.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was signed into law by President Donald J. Trump. The CARES Act contains several provisions that temporarily impact 401(k) plans, such as the waiver of required minimum distributions, a new hardship withdrawal option, increased loan limits, and a loan payment pause option. The Company has incorporated these provisions into the Plan.