Actuarial Assumptions
The weighted-average actuarial assumptions used to determine the benefit obligation amounts and the net periodic benefit cost for the Company's pension plan are as follows:
|
|
|
|
|
|
|
Weighted-average assumptions used in the determination of net periodic benefit cost:
|
(Percentages)
|
2020
|
|
2019
|
|
2018
|
Discount rate
|
2.39
|
|
2.87
|
|
2.49
|
Compensation increase rate
|
3.20
|
|
3.10
|
|
3.25
|
Expected return on plan assets
|
4.80
|
|
4.80
|
|
6.10
|
|
|
|
|
|
|
Weighted-average assumptions used in the determination of the projected benefit obligations:
|
Discount rate
|
1.66
|
|
2.39
|
|
2.87
|
Compensation increase rate
|
2.75
|
|
3.20
|
|
3.10
|
The Company uses a full yield curve approach to estimate the interest component of net periodic benefit cost for pension benefits. This method applies the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
Plan Assets and Investment Strategies
The Company's employee benefit plan assets consist mainly of listed fixed income obligations and common/collective trusts. The Company's primary objective for invested pension plan assets is to provide for sufficient long-term growth and liquidity to satisfy all of its benefit obligations over time. Accordingly, the Company has developed an investment strategy that it believes maximizes the probability of meeting this overall objective. This strategy includes the development of a target investment allocation by asset category in order to provide guidelines for making investment decisions. This target allocation emphasizes the long-term characteristics of individual asset classes as well as the diversification among multiple asset classes. In developing its strategy, the Company considered the need to balance the varying risks associated with each asset class with the long-term nature of its benefit obligations. The Company's strategy moving forward will be to increase the level of fixed income investments as the funding status improves, thereby more closely matching the return on assets with the liabilities of the plans.
The Company utilizes independent investment managers to assist with investment decisions within the overall guidelines of the investment strategy. The target asset allocation at the end of fiscal 2020 and asset categories for the Company's pension plan for fiscal 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Targeted Asset Allocation Percentage
|
|
Percentage of Plan Assets at Year End
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Fixed income
|
35%
|
|
35%
|
|
37%
|
|
33%
|
Common collective trusts
|
65%
|
|
65%
|
|
63%
|
|
67%
|
Total
|
|
|
|
|
100%
|
|
100%
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
May 30, 2020
|
Asset Category
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Foreign government obligations
|
|
|
—
|
|
|
31.4
|
|
|
31.4
|
|
Common collective trusts-balanced
|
|
|
—
|
|
|
56.7
|
|
|
56.7
|
|
Total
|
|
|
$
|
—
|
|
|
$
|
88.1
|
|
|
$
|
88.1
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
June 1, 2019
|
Asset Category
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Foreign government obligations
|
|
|
—
|
|
|
29.3
|
|
|
29.3
|
|
Common collective trusts-balanced
|
|
|
—
|
|
|
58.9
|
|
|
58.9
|
|
Total
|
|
|
$
|
—
|
|
|
$
|
88.2
|
|
|
$
|
88.2
|
|
Herman Miller, Inc. and Subsidiaries 68
Cash Flows
The Company reviews pension funding requirements to determine the contribution to be made in the next year. Actual contributions will be dependent upon investment returns, changes in pension obligations and other economic and regulatory factors. During fiscal 2020 and fiscal 2019, the Company made total cash contributions of $0.9 million to its benefit plans.
The following represents a summary of the benefits expected to be paid by the plan in future fiscal years. These expected benefits were estimated based on the same actuarial valuation assumptions used to determine benefit obligations at May 30, 2020.
|
|
|
|
|
(In millions)
|
Pension Benefits
|
2021
|
$
|
2.4
|
|
2022
|
$
|
2.4
|
|
2023
|
$
|
2.5
|
|
2024
|
$
|
2.5
|
|
2025
|
$
|
2.6
|
|
2026-2030
|
$
|
13.9
|
|
Profit Sharing, 401(k) Plan, and Core Contribution
Substantially all of the Company’s domestic employees are eligible to participate in a defined contribution retirement plan, primarily the Herman Miller, Inc. profit sharing and 401(k) plan (the "plan"). Employees under the plan are eligible to begin participating on their date of hire. Effective June 2017, the Company matches 100 percent of employee contributions to their 401(k) accounts up to 3 percent of their pay which was subsequently increased to 4 percent in September 2017 for all eligible employees. A core contribution of 4 percent is also included for most participants of the plan. There was an additional 1 percent contribution added to the quarterly Core Contribution for the quarter prior to the increased Employer Matching Contribution effective September 3, 2017. During the fourth quarter of fiscal 2020, the Company elected to temporarily suspend the Company's Core Contribution and 401(k) matches in order to reduce costs and preserve liquidity.
There were no Herman Miller, Inc. profit sharing contributions made in fiscal 2020, fiscal 2019 or fiscal 2018. The expense recorded for the Company's 401(k) matching and core contributions was $22.2 million, $25.4 million and $24.9 million in fiscal years 2020, 2019 and 2018, respectively.
9. Common Stock and Per Share Information
The following table reconciles the numerators and denominators used in the calculations of basic and diluted EPS for each of the last three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except shares)
|
2020
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
Numerator for both basic and diluted EPS, Net (loss) earnings attributable to Herman Miller, Inc.
|
$
|
(9.1
|
)
|
|
$
|
160.5
|
|
|
$
|
128.1
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator for basic EPS, weighted-average common shares outstanding
|
58,920,653
|
|
|
59,011,945
|
|
|
59,681,268
|
|
Potentially dilutive shares resulting from stock plans
|
—
|
|
|
369,846
|
|
|
630,037
|
|
Denominator for diluted EPS
|
58,920,653
|
|
|
59,381,791
|
|
|
60,311,305
|
|
Equity awards of 142,224 shares, 218,037 shares and 348,089 shares of common stock were excluded from the denominator for the computation of diluted earnings per share for the fiscal years ended May 30, 2020, June 1, 2019 and June 2, 2018, respectively, because they were anti-dilutive.
Common Stock
The Company has a share repurchase plan authorized by the Board of Directors on January 16, 2019, which provides a share repurchase authorization of $250.0 million with no specified expiration date. The approximate dollar value of shares available for purchase under the plan at May 30, 2020 was $237.6 million. During fiscal year 2020, 2019, and 2018, shares repurchased and retired under the current and past repurchase plans totaled 641,192, 1,326,023, and 1,356,156 shares respectively.
10. Stock-Based Compensation
The Company utilizes equity-based compensation incentives as a component of its employee and non-employee director and officer compensation philosophy. Currently, these incentives consist principally of stock options, restricted stock, restricted stock units and performance share units. The Company also offers a stock purchase plan for its domestic and certain international employees. The Company issues shares in connection with its share-based compensation plans from authorized, but unissued, shares. At May 30, 2020 there were 5,991,307 shares authorized under the various stock-based compensation plans.
Valuation and Expense Information
The Company measures the cost of employee services received in exchange for an award of equity instruments based on their grant-date fair market value. This cost is recognized over the requisite service period.
Certain of the Company's equity-based compensation awards contain provisions that allow for continued vesting into retirement. Stock-based awards are considered fully vested for expense attribution purposes when the employee's retention of the award is no longer contingent on providing subsequent service.
The Company classifies pre-tax stock-based compensation expense primarily within Operating expenses in the Consolidated Statements of Comprehensive Income. Pre-tax compensation expense and the related income tax benefit for all types of stock-based programs were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
Employee stock purchase program
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Stock option plans
|
0.6
|
|
|
(0.4
|
)
|
|
2.6
|
|
Restricted stock units
|
3.9
|
|
|
4.6
|
|
|
3.9
|
|
Performance share units
|
(2.1
|
)
|
|
2.8
|
|
|
0.9
|
|
Total
|
$
|
2.7
|
|
|
$
|
7.3
|
|
|
$
|
7.7
|
|
Tax benefit
|
$
|
0.5
|
|
|
$
|
1.6
|
|
|
$
|
2.3
|
|
As of May 30, 2020, total pre-tax stock-based compensation cost not yet recognized related to non-vested awards was approximately $3.2 million. The weighted-average period over which this amount is expected to be recognized is 1.2 years.
Employee Stock Purchase Program
Under the terms of the Company's Employee Stock Purchase Plan, 4 million shares of authorized common stock were reserved for purchase by plan participants at 85 percent of the market price. Shares of common stock purchased under the employee stock purchase plan were 70,145, 62,957, and 67,335 for the fiscal years ended 2020, 2019 and 2018 respectively.
Stock Options
The Company grants options to purchase the Company's stock to certain key employees and non-employee directors under its Long-Term Incentive Plan, as amended (the "LTIP") at a price not less than the market price of the Company's common stock on the date of grant. Under the current award program, all options become exercisable between one year and three years from date of grant and expire ten years from date of grant. Most options are subject to graded vesting with the related compensation expense recognized on a straight-line basis over the requisite service period.
Herman Miller, Inc. and Subsidiaries 70
In fiscal 2020 there were no stock option grants awarded to employees or non-employee directors. In fiscal 2019 there were two separate stock option valuation dates. Therefore the table below has been presented with the assumptions relevant to each valuation date. The Company estimated the fair value of employee stock options on the date of grant using the Black-Scholes model. In determining these values, the following weighted-average assumptions were used for the options granted during the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Risk-free interest rates (1)
|
N/A
|
|
2.65-2.70%
|
|
|
1.79
|
%
|
Expected term of options (2)
|
N/A
|
|
4.4 years
|
|
|
4.6 years
|
|
Expected volatility (3)
|
N/A
|
|
27
|
%
|
|
26
|
%
|
Dividend yield (4)
|
N/A
|
|
2.18-2.33%
|
|
|
2.23
|
%
|
Weighted-average grant-date fair value of stock options:
|
|
|
|
|
|
Granted with exercise prices equal to the fair market value of the stock on the date of grant
|
N/A
|
|
$
|
8.05
|
|
|
$
|
6.39
|
|
(1) Represents term-matched, zero-coupon risk-free rate from the Treasury Constant Maturity yield curve, continuously compounded.
(2) Represents historical settlement data, using midpoint scenario with 1-year grant date filter assumption for outstanding options.
(3) The blended volatility approach was used. 90% term-matched historical volatility from daily stock prices and 10% percent weighted average implied volatility from the 90 days preceding the grant date.
(4) Represents the quarterly dividend divided by the three-month average stock price as of the grant date, annualized and continuously compounded.
The following is a summary of the transactions under the Company's stock option plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Under Option
|
|
Weighted-Average Exercise Prices
|
|
Aggregate Intrinsic Value
(in millions)
|
|
Weighted-Average Remaining Contractual Term (Years)
|
Outstanding at June 1, 2019
|
790,059
|
|
|
$
|
32.17
|
|
|
$
|
3.0
|
|
|
5.8
|
Exercised
|
(423,815
|
)
|
|
$
|
31.63
|
|
|
|
|
|
Forfeited or expired
|
(4,828
|
)
|
|
$
|
33.38
|
|
|
|
|
|
Outstanding at May 30, 2020
|
361,416
|
|
|
$
|
32.80
|
|
|
$
|
0.2
|
|
|
5.8
|
Ending vested + expected to vest
|
361,416
|
|
|
$
|
32.80
|
|
|
$
|
0.2
|
|
|
5.8
|
Exercisable at end of period
|
186,952
|
|
|
$
|
29.80
|
|
|
$
|
0.2
|
|
|
5.2
|
The weighted-average remaining recognition period of the outstanding stock options at May 30, 2020 was 1.0 years. The total pre-tax intrinsic value of options exercised during fiscal 2020, 2019 and 2018 was $5.5 million, $3.3 million and $5.0 million, respectively. The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company's closing stock price as of the end of the period presented, which would have been received by the option holders had all option holders exercised in-the-money options as of that date. Total cash received during fiscal 2020 from the exercise of stock options was approximately $12 million.
Restricted Stock Units
The Company grants restricted stock units to certain key employees under its LTIP. This program provides that the actual number of restricted stock units awarded is based on the value of a portion of the participant's long-term incentive compensation divided by the fair value of the Company's stock on the date of grant. The awards generally cliff-vest after a three-year service period, with prorated vesting under certain circumstances and full or partial accelerated vesting upon retirement. Each restricted stock unit represents one equivalent share of the Company's common stock to be awarded, free of restrictions, after the vesting period. Compensation expense related to these awards is recognized over the requisite service period, which includes any applicable performance period. Dividend equivalent awards are credited quarterly. The units do not entitle participants to the rights of stockholders of common stock, such as voting rights, until shares are issued after vesting.
The following is a summary of restricted stock unit transactions for the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
Units
|
|
Weighted Average
Grant-Date
Fair Value
|
|
Aggregate Intrinsic Value (in millions)
|
|
Weighted-Average
Remaining Contractual
Term (Years)
|
Outstanding at June 1, 2019
|
311,281
|
|
|
$
|
33.93
|
|
|
$
|
11.0
|
|
|
1.1
|
Granted
|
90,551
|
|
|
$
|
44.70
|
|
|
|
|
|
Forfeited
|
(14,378
|
)
|
|
$
|
40.07
|
|
|
|
|
|
Released
|
(143,680
|
)
|
|
$
|
34.79
|
|
|
|
|
|
Outstanding at May 30, 2020
|
243,774
|
|
|
$
|
37.02
|
|
|
$
|
5.6
|
|
|
1.3
|
Ending vested + expected to vest
|
240,824
|
|
|
$
|
37.00
|
|
|
$
|
5.5
|
|
|
1.3
|
The weighted-average remaining recognition period of the outstanding restricted stock units at May 30, 2020, was 1.2 years. The fair value of the share units that vested during the twelve months ended May 30, 2020, was $5.9 million. The weighted average grant-date fair value of restricted stock units granted during 2020, 2019, and 2018 was $44.70, $37.81 and $35.28 respectively.
Performance Share Units
The Company grants performance share units to certain key employees under its LTIP. The number of units initially awarded was based on the value of a portion of the participant's long-term incentive compensation, divided by the fair value of the Company's common stock on the date of grant. Each unit represents one equivalent share of the Company's common stock. The number of common shares ultimately issued in connection with these performance share units is determined based on the Company's financial performance over the related three-year service period or the Company's financial performance based on certain total shareholder return results as compared to a selected group of peer companies. Compensation expense is determined based on the grant-date fair value and the number of common shares projected to be issued and is recognized over the requisite service period.
The following is a summary of performance share unit transactions for the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
Units
|
|
Weighted Average Grant-Date Fair Value
|
|
Aggregate Intrinsic Value (in millions)
|
|
Weighted-Average Remaining Contractual Term (Years)
|
Outstanding at June 1, 2019
|
323,356
|
|
|
$
|
33.48
|
|
|
$
|
11.5
|
|
|
1.1
|
Granted
|
188,719
|
|
|
$
|
45.71
|
|
|
|
|
|
Forfeited
|
(127,538
|
)
|
|
$
|
31.79
|
|
|
|
|
|
Outstanding at May 30, 2020
|
384,537
|
|
|
$
|
37.95
|
|
|
$
|
8.9
|
|
|
1.3
|
Ending vested + expected to vest
|
384,537
|
|
|
$
|
37.95
|
|
|
$
|
8.9
|
|
|
1.3
|
The weighted-average remaining recognition period of the outstanding performance share units at May 30, 2020, was 1.3 years. The fair value for shares that vested during the twelve months ended May 30, 2020, was zero. The weighted average grant-date fair value of performance share units granted during 2020, 2019, and 2018 was $45.71, $36.37, and $31.28 respectively.
Deferred Compensation Plan
The Herman Miller, Inc. Executive Equalization Retirement Plan is a supplemental deferred compensation plan and was made available for salary deferrals and Company contributions beginning in January 2008. The plan is available to a select group of management or highly compensated employees who are selected for participation by the Executive Compensation Committee of the Board of Directors. The plan allows participants to defer up to 50 percent of their base salary and up to 100 percent of their incentive cash bonus. Company contributions to the plan “mirror” the amounts the Company would have contributed to the various qualified retirement plans had the employee's compensation not been above the IRS statutory ceiling ($285,000 in 2020). The Company does not guarantee a rate of return for these funds. Instead, participants make investment elections for their deferrals and Company contributions. Investment options are closely aligned to those available under the Herman Miller Profit Sharing and 401(k) Plan.
Herman Miller, Inc. and Subsidiaries 72
The Nonemployee Officer and Director Deferred Compensation Plan allows the Board of Directors of the Company to defer a portion of their annual director fee. Investment options are the same as those available under the Herman Miller Profit Sharing and 401(k) Plan, including Company stock.
In accordance with the terms of the Executive Equalization Plan and Nonemployee Officer and Director Deferred Compensation Plan, the salary and bonus deferrals, Company contributions and director fee deferrals have been placed in a Rabbi trust. The assets in the Rabbi trust remain subject to the claims of creditors of the Company and are not the property of the participant. Investments in securities other than the Company's common stock are included within the Other assets line item, while investments in the Company's stock are included in the line item Deferred compensation plan in the Company's Consolidated Balance Sheets. A liability of the same amount is recorded on the Consolidated Balance Sheets within the Other liabilities line item. Investment asset realized and unrealized gains and losses are recognized within the Company's Consolidated Statements of Comprehensive Income in the Interest and other investment income line item. The associated changes to the liability are recorded as compensation expense within the Selling, general and administrative line item within the Company's Consolidated Statements of Comprehensive Income. The net effect of any change to the asset and corresponding liability is offset and has no impact on Net earnings in the Consolidated Statements of Comprehensive Income.
Director Fees
Company directors may elect to receive their director fees in one or more of the following forms: cash, deferred compensation in the form of shares or other selected investment funds, unrestricted Company stock at the market value at the date of election or stock options that vest in one year and expire in ten years. The exercise price of the stock options granted may not be less than the market price of the Company's common stock on the date of grant. Under the plan, the Board members received the following shares or options in the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Shares of common stock
|
7,769
|
|
|
10,185
|
|
|
8,828
|
|
Shares through the deferred compensation program
|
1,045
|
|
|
7,619
|
|
|
2,207
|
|
11. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law in the United States. The effects of the Act included the reduction of the federal corporate income tax rate from 35 percent to 21 percent and a new participation exemption system of taxation on foreign earnings, among other provisions.
In accordance with Staff Accounting Bulletin 118, for the year ended June 2, 2018, the Company recorded a provisional tax benefit of $3.1 million from the impact of the Act, primarily related to the one-time U.S. tax liability on certain undistributed foreign earnings and the remeasurement of current and deferred tax liabilities. Subsequently, as the U.S. Treasury Department issued additional guidance, the Company recorded adjustments to the provisional tax benefit. During the year ended June 1, 2019, the Company completed its accounting for all the effects of the Act and recorded adjustments to the provisional amounts primarily for the one-time U.S. tax liability on certain undistributed foreign earnings and also an adjustment related to foreign tax credits to increase the income tax benefit from the Act by $1.0 million.
For tax years beginning after December 31, 2017, the Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The Company elected to account for tax expense related to GILTI in the year the tax is incurred.
The components of (loss) earnings before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Domestic
|
$
|
(75.6
|
)
|
|
$
|
136.2
|
|
|
$
|
121.6
|
|
Foreign
|
62.2
|
|
|
58.9
|
|
|
46.5
|
|
Total
|
$
|
(13.4
|
)
|
|
$
|
195.1
|
|
|
$
|
168.1
|
|
The provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Current: Domestic - Federal
|
$
|
12.0
|
|
|
$
|
19.0
|
|
|
$
|
30.2
|
|
Domestic - State
|
5.7
|
|
|
6.4
|
|
|
4.3
|
|
Foreign
|
13.3
|
|
|
12.9
|
|
|
10.7
|
|
|
31.0
|
|
|
38.3
|
|
|
45.2
|
|
Deferred: Domestic - Federal
|
(16.8
|
)
|
|
1.0
|
|
|
(4.1
|
)
|
Domestic - State
|
(3.9
|
)
|
|
(0.2
|
)
|
|
0.1
|
|
Foreign
|
(4.3
|
)
|
|
0.5
|
|
|
1.2
|
|
|
(25.0
|
)
|
|
1.3
|
|
|
(2.8
|
)
|
Total income tax provision
|
$
|
6.0
|
|
|
$
|
39.6
|
|
|
$
|
42.4
|
|
The following table represents a reconciliation of income taxes at the United States statutory rate of 21% for 2020 and 2019, and 29.1% for 2018 with the effective tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Income taxes computed at the United States Statutory rate
|
$
|
(2.8
|
)
|
|
$
|
41.0
|
|
|
$
|
49.0
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
State and local income taxes, net of federal income tax benefit
|
1.4
|
|
|
4.9
|
|
|
3.3
|
|
Non-deductible goodwill impairment
|
17.1
|
|
|
—
|
|
|
—
|
|
Gain on consolidation of equity method investments
|
(5.5
|
)
|
|
—
|
|
|
—
|
|
Remeasurement of U.S. deferred tax assets and liabilities due to the Tax Act
|
—
|
|
|
(0.2
|
)
|
|
(8.9
|
)
|
U.S. tax liability on undistributed foreign earnings due to the Tax Act
|
—
|
|
|
(2.6
|
)
|
|
9.0
|
|
Foreign-derived intangible income
|
(1.4
|
)
|
|
(3.1
|
)
|
|
—
|
|
Global intangible low-taxed income
|
5.9
|
|
|
6.9
|
|
|
—
|
|
Foreign statutory rate differences
|
0.7
|
|
|
1.9
|
|
|
(4.0
|
)
|
Manufacturing deduction under the American Jobs Creation Act of 2004
|
—
|
|
|
—
|
|
|
(2.7
|
)
|
Research and development credit
|
(4.4
|
)
|
|
(5.3
|
)
|
|
(4.2
|
)
|
Foreign offshore income claim
|
(1.7
|
)
|
|
(0.7
|
)
|
|
—
|
|
Foreign tax credit
|
(5.8
|
)
|
|
(5.7
|
)
|
|
(2.4
|
)
|
Foreign withholding taxes and other miscellaneous foreign taxes
|
2.7
|
|
|
0.8
|
|
|
1.9
|
|
Other, net
|
(0.2
|
)
|
|
1.7
|
|
|
1.4
|
|
Income tax expense
|
$
|
6.0
|
|
|
$
|
39.6
|
|
|
$
|
42.4
|
|
Effective tax rate
|
(44.9
|
)%
|
|
20.3
|
%
|
|
25.2
|
%
|
Herman Miller, Inc. and Subsidiaries 74
The tax effects and types of temporary differences that give rise to significant components of the deferred tax assets and liabilities at May 30, 2020 and June 1, 2019, are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Compensation-related accruals
|
$
|
14.2
|
|
|
$
|
13.1
|
|
Accrued pension and post-retirement benefit obligations
|
9.6
|
|
|
7.2
|
|
Deferred revenue
|
3.7
|
|
|
6.1
|
|
Inventory related
|
3.9
|
|
|
1.2
|
|
Other reserves and accruals
|
7.9
|
|
|
8.1
|
|
Warranty
|
14.0
|
|
|
12.3
|
|
State and local tax net operating loss carryforwards and credits
|
2.5
|
|
|
2.5
|
|
Federal net operating loss carryforward
|
1.2
|
|
|
1.4
|
|
Foreign tax net operating loss carryforwards and credits
|
8.4
|
|
|
9.1
|
|
Accrued step rent and tenant reimbursements
|
0.7
|
|
|
4.2
|
|
Interest rate swap
|
6.1
|
|
|
0.3
|
|
Lease liability
|
52.5
|
|
|
—
|
|
Other
|
6.9
|
|
|
4.7
|
|
Subtotal
|
131.6
|
|
|
70.2
|
|
Valuation allowance
|
(10.6
|
)
|
|
(10.4
|
)
|
Total
|
$
|
121.0
|
|
|
$
|
59.8
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Book basis in property in excess of tax basis
|
$
|
32.0
|
|
|
$
|
26.6
|
|
Intangible assets
|
43.6
|
|
|
34.6
|
|
Right of use lease assets
|
44.7
|
|
|
—
|
|
Other
|
3.4
|
|
|
2.4
|
|
Total
|
$
|
123.7
|
|
|
$
|
63.6
|
|
The future tax benefits of net operating loss (NOL) carry-forwards and foreign tax credits are recognized to the extent that realization of these benefits is considered more likely than not. The Company bases this determination on the expectation that related operations will be sufficiently profitable or various tax planning strategies will enable the Company to utilize the NOL carry-forwards and/or foreign tax credits. To the extent that available evidence about the future raises doubt about the realization of these tax benefits, a valuation allowance is established.
At May 30, 2020, the Company had state and local tax NOL carry-forwards of $22.0 million, the state tax benefit of which is $1.2 million, which have various expiration periods from 1 to 21 years. The Company also had state credits with a state tax benefit of $1.3 million, which expire in 2 to 6 years. For financial statement purposes, the NOL carry-forwards and state tax credits have been recognized as deferred tax assets, subject to a valuation allowance of $1.6 million.
At May 30, 2020, the Company had federal NOL carry-forwards of $5.9 million, the tax benefit of which is $1.2 million, which expire in 9 years. For financial statement purposes, the NOL carry-forwards have been recognized as deferred tax assets.
At May 30, 2020, the Company had federal deferred assets of $2.3 million, the tax benefit of which is $0.5 million, which is related to investments in various foreign joint ventures. For financial statement purposes, the assets have been recognized as deferred tax assets, subject to a valuation allowance of $0.5 million.
At May 30, 2020, the Company had foreign net operating loss carry-forwards of $37.7 million, the tax benefit of which is $8.4 million, which have expiration periods from 8 years to an unlimited term. For financial statement purposes, the NOL carry-forwards have been recognized as deferred tax assets, subject to a valuation allowance of $7.7 million.
At May 30, 2020, the Company had foreign deferred assets of $4.2 million, the tax benefit of which is $0.8 million, which is related to various deferred taxes in Hong Kong and Brazil as well as buildings in the United Kingdom. For financial statement purposes, the assets have been recognized as deferred tax assets, subject to a valuation allowance of $0.8 million.
The Company intends to repatriate $29.1 million in cash held in certain foreign jurisdictions and as such has recorded a deferred tax liability related to foreign withholding taxes on these future dividends received in the U.S. from foreign subsidiaries of $1.8 million. A significant portion of this cash was previously taxed under the U.S. Tax Cut and Jobs Act (TCJA) one-time U.S. tax liability on undistributed foreign earnings. The Company intends to remain indefinitely reinvested in the remaining undistributed earnings outside the U.S, which was $221.5 million on May 30, 2020. Determination of the total amount of unrecognized deferred income tax on the remaining undistributed earnings of foreign subsidiaries is not practicable.
The components of the Company's unrecognized tax benefits are as follows:
|
|
|
|
|
(In millions)
|
|
Balance at June 2, 2018
|
$
|
3.2
|
|
Increases related to current year income tax positions
|
0.4
|
|
Increases related to prior year income tax positions
|
0.1
|
|
Decreases related to prior year income tax positions
|
(0.4
|
)
|
Decreases related to lapse of applicable statute of limitations
|
(0.3
|
)
|
Decreases related to settlements
|
(1.1
|
)
|
Balance at June 1, 2019
|
$
|
1.9
|
|
Increases related to current year income tax positions
|
0.3
|
|
Decreases related to prior year income tax positions
|
(0.1
|
)
|
Decreases related to lapse of applicable statute of limitations
|
(0.2
|
)
|
Balance at May 30, 2020
|
$
|
1.9
|
|
The Company's effective tax rate would have been affected by the total amount of unrecognized tax benefits had this amount been recognized as a reduction to income tax expense.
The Company recognizes interest and penalties related to unrecognized tax benefits through Income tax expense in its Consolidated Statements of Comprehensive Income. Interest and penalties and the related liability, which are excluded from the table above, were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
Interest and penalty expense (income)
|
$
|
0.1
|
|
|
$
|
(0.3
|
)
|
|
$
|
0.1
|
|
Liability for interest and penalties
|
$
|
0.8
|
|
|
$
|
0.7
|
|
|
|
The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the Company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 months as a result of new positions that may be taken on income tax returns, settlement of tax positions and the closing of statutes of limitation. It is not expected that any of the changes will be material to the Company's Consolidated Statements of Comprehensive Income.
During the year, the Company has partially closed the audit of fiscal 2019 with the Internal Revenue Service under the Compliance Assurance Process (CAP). The audit of fiscal 2018 also remains partially closed. For the majority of the remaining tax jurisdictions, the Company is no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for fiscal years before 2017.
Herman Miller, Inc. and Subsidiaries 76
12. Fair Value
The Company's financial instruments consist of cash equivalents, marketable securities, accounts and notes receivable, deferred compensation plan, accounts payable, debt, interest rate swaps, foreign currency exchange contracts, redeemable noncontrolling interests, indefinite-lived intangible assets and right of use assets. 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)
|
|
May 30, 2020
|
|
June 1, 2019
|
Carrying value
|
|
$
|
591.3
|
|
|
$
|
285.0
|
|
Fair value
|
|
$
|
594.0
|
|
|
$
|
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 through net income and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of May 30, 2020 and June 1, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
Financial Assets
|
NAV
|
|
Quoted Prices With Other Observable Inputs (Level 2)
|
|
NAV
|
|
Quoted Prices With Other Observable Inputs (Level 2)
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
283.7
|
|
|
$
|
—
|
|
|
$
|
69.5
|
|
|
$
|
—
|
|
Mutual funds - equity
|
—
|
|
|
0.7
|
|
|
—
|
|
|
0.9
|
|
Foreign currency forward contracts
|
—
|
|
|
1.1
|
|
|
—
|
|
|
—
|
|
Deferred compensation plan
|
—
|
|
|
13.2
|
|
|
—
|
|
|
12.5
|
|
Total
|
$
|
283.7
|
|
|
$
|
15.0
|
|
|
$
|
69.5
|
|
|
$
|
13.4
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
Total
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
The following describes the methods the Company uses to estimate the fair value of financial assets and liabilities recorded in other comprehensive income, which have not significantly changed in the current period:
Mutual funds-fixed income — The Company's fixed-income securities primarily include fixed income mutual funds and government obligations. These investments are recorded at fair value using quoted prices for similar securities.
Interest rate swap agreements — The value of the Company's interest rate swap agreements is determined using a market approach based on rates obtained from active markets. The interest rate swap agreements are designated as cash flow hedging instruments.
The following table sets forth financial assets and liabilities measured at fair value through other comprehensive income and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of May 30, 2020 and June 1, 2019.
|
|
|
|
|
|
|
|
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
Financial Assets
|
Quoted Prices with Other Observable Inputs (Level 2)
|
|
Quoted Prices with Other Observable Inputs (Level 2)
|
Mutual funds - fixed income
|
$
|
6.3
|
|
|
$
|
7.9
|
|
Interest rate swap agreement
|
—
|
|
|
1.0
|
|
Total
|
$
|
6.3
|
|
|
$
|
8.9
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
Interest rate swap agreement
|
$
|
25.0
|
|
|
$
|
2.2
|
|
Total
|
$
|
25.0
|
|
|
$
|
2.2
|
|
The following is a summary of the carrying and market values of the Company's fixed income mutual funds and equity mutual funds as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 30, 2020
|
|
June 1, 2019
|
(In millions)
|
Cost
|
|
Unrealized Gain/(Loss)
|
|
Market Value
|
|
Cost
|
|
Unrealized Gain/(Loss)
|
|
Market Value
|
Mutual funds - fixed income
|
$
|
6.2
|
|
|
$
|
0.1
|
|
|
$
|
6.3
|
|
|
$
|
7.9
|
|
|
$
|
—
|
|
|
$
|
7.9
|
|
Mutual funds - equity
|
0.6
|
|
|
0.1
|
|
|
0.7
|
|
|
0.8
|
|
|
0.1
|
|
|
0.9
|
|
Total
|
$
|
6.8
|
|
|
$
|
0.2
|
|
|
$
|
7.0
|
|
|
$
|
8.7
|
|
|
$
|
0.1
|
|
|
$
|
8.8
|
|
The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in the Consolidated Statements of Comprehensive Income within "Other expense (income), net".
The Company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requires the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the Company's intent to hold the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of the cost basis. The Company also considers the type of security, related industry and sector performance, and published investment ratings. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments, or macro-economic environments deteriorate, the Company could incur future impairments.
The Company views its equity and fixed income mutual funds as available for use in its current operations. Accordingly, the investments are recorded within Current Assets within the Consolidated Balance Sheets.
Derivative Instruments and Hedging Activities
Foreign Currency Forward Contracts
The Company transacts business in various foreign currencies and has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Under this program, the Company's strategy is to have increases or decreases in our foreign currency exposures offset by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility associated with foreign currency transaction gains or losses. These foreign currency exposures typically arise from net liability or asset exposures in non-functional currencies on the balance sheets of our foreign subsidiaries. These foreign currency forward contracts generally settle within 30 days and are not used for trading purposes. These forward contracts are not designated as hedging instruments. Accordingly, we record the fair value of these contracts as of the end of the
Herman Miller, Inc. and Subsidiaries 78
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 expense (income), net", for both realized and unrealized gains and losses.
The notional amounts of the forward contracts held to purchase and sell U.S. dollars in exchange for other major international currencies were $52.6 million and $38.1 million as of May 30, 2020 and June 1, 2019, respectively. The notional amounts of the foreign currency forward contracts held to purchase and sell British pound sterling in exchange for other major international currencies were £27.5 million and £19.2 million as of May 30, 2020 and June 1, 2019, respectively. The Company also has other forward contracts related to other currency pairs at varying notional amounts.
Interest Rate Swaps
The Company enters into interest rate swap agreements to manage its exposure to interest rate changes and its overall cost of borrowing. The Company's interest rate swap agreements were entered into to exchange variable rate interest payments for fixed rate payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amount of the interest rate swap agreements is used to measure interest to be paid or received. 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 May 30, 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 percent fixed interest rate plus applicable margin under the agreement as of the forward start date.
In June 2017, the Company entered into an interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $75.0 million with a forward start date of January 3, 2018 and a termination date of January 3, 2028. As a result of the transaction, the Company effectively converted the Company’s revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 2.387 percent fixed interest rate plus applicable margin under the agreement as of the forward start date.
The fair value of the Company’s two outstanding interest rate swap agreements was a net liability of $25.0 million and $1.2 million as of May 30, 2020 and June 1, 2019, respectively. The liability and asset fair value were recorded within "Other liabilities" and "Other noncurrent assets" within the Consolidated Balance Sheets. Recorded within Other comprehensive loss, net of tax, for the effective portion of the Company's designated cash flow hedges was a net unrealized loss of $17.2 million and $12.8 million for the fiscal years ended May 30, 2020 and June 1, 2019, respectively.
For fiscal 2020, 2019 and 2018, there were no gains or losses recognized against earnings for hedge ineffectiveness.
Effects of Derivatives on the Financial Statements
The effects of derivatives on the consolidated financial statements were as follows for the fiscal years ended 2020 and 2019 (amounts presented exclude any income tax effects):
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Balance Sheet Location
|
|
May 30, 2020
|
|
June 1, 2019
|
Designated derivatives:
|
|
|
|
|
|
Interest rate swap
|
Long-term assets: Other noncurrent assets
|
|
$
|
—
|
|
|
$
|
1.0
|
|
Interest rate swap
|
Long-term liabilities: Other liabilities
|
|
$
|
25.0
|
|
|
$
|
2.2
|
|
Non-designated derivatives:
|
|
|
|
|
|
Foreign currency forward contracts
|
Current assets: Other current assets
|
|
$
|
1.1
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
Current liabilities: Other accrued liabilities
|
|
$
|
0.8
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(In millions)
|
Statement of Comprehensive Income Location
|
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
(Loss) gain recognized on foreign currency forward contracts
|
Other expense (income), net
|
|
$
|
(1.1
|
)
|
|
$
|
0.3
|
|
|
$
|
0.4
|
|
The gain/(loss) recorded, net of income taxes, in Other comprehensive loss for the effective portion of designated derivatives was as follows for the periods presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
Interest rate swap
|
$
|
(17.2
|
)
|
|
$
|
(12.8
|
)
|
|
$
|
7.5
|
|
Reclassified from Accumulated other comprehensive loss into earnings within "Interest expense" for the fiscal years ended 2020, 2019, and 2018 were gains of $0.8 million and losses of $0.5 million, and $0.3 million, respectively. Pre-tax gains expected to be reclassified from Accumulated other comprehensive loss into earnings during the next twelve months are $4.3 million. The amount of gain, net of tax, expected to be reclassified out of Accumulated other comprehensive loss into earnings during the next twelve months is $3.2 million.
Investments in Equity Securities Without a Readily Determinable Fair Value
In the fourth quarter of fiscal 2019, the Company recorded a gain from a $2.1 million fair value adjustment in an investment in a technology partner, which increased the total carrying value of the investment to $3.6 million as of June 1, 2020. The gain was the result of an observable price change for a similar investment in the same entity. There were no similar gains in fiscal 2020.
Redeemable Noncontrolling Interests
Redeemable noncontrolling interests are reported on the Condensed Consolidated Balance Sheets in mezzanine equity in “Redeemable noncontrolling interests.” These financial instruments represent a level 3 fair value measurement.
As of June 1, 2019, the outstanding redeemable noncontrolling interests in the Company's subsidiary, Herman Miller Consumer Holdings, Inc. ("HMCH") were $20.6 million, and represented an approximate 5% minority ownership. During August 2019, the Company acquired all of the remaining redeemable noncontrolling equity interests. HMCH redeemed certain HMCH stock for cash and then, in August 2019, HMCH merged with and into the Company, with the remaining minority HMCH shareholders receiving a cash payment. Total cash paid of $20.4 million for the redemptions and for merger consideration was at fair market value based on an independent appraisal. This compares to purchases of $10.1 million during the twelve month period ended June 1, 2019.
Herman Miller, Inc. and Subsidiaries 80
Changes in the Company's redeemable noncontrolling interest in HMCH for the years ended May 30, 2020 and June 1, 2019 are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
Beginning Balance
|
$
|
20.6
|
|
|
$
|
30.5
|
|
Purchase of HMCH redeemable noncontrolling interests
|
(20.4
|
)
|
|
(10.1
|
)
|
Redemption value adjustment
|
(0.2
|
)
|
|
—
|
|
Exercised options
|
—
|
|
|
0.2
|
|
Ending Balance
|
$
|
—
|
|
|
$
|
20.6
|
|
On December 2, 2019, the Company purchased an additional 34% equity voting interest in HAY. Upon increasing its ownership to 67%, the Company obtained a controlling financial interest and consolidated the financial results of HAY. Additionally, the Company is a party to options, that if exercised, would require it to purchase the remaining 33% of the equity in HAY, at fair market value. This remaining redeemable noncontrolling interest in HAY is classified outside permanent equity in the Consolidated Balance Sheets and is carried at the current estimated redemption amount. The Company recognizes changes to the redemption value of redeemable noncontrolling interests as they occur and adjusts the carrying value to equal the redemption value at the end of each reporting period. The redemption amounts have been estimated based on the fair value of the subsidiary, determined using discounted cash flow methods. This represents a level 3 fair value measurement.
Changes in the Company's redeemable noncontrolling interest in HAY for the year ended May 30, 2020 are as follows:
|
|
|
|
|
(In millions)
|
May 30, 2020
|
Beginning Balance
|
$
|
—
|
|
Increase due to HAY acquisition
|
72.4
|
|
Redemption value adjustment
|
(17.6
|
)
|
Net income attributable to redeemable noncontrolling interests
|
(5.1
|
)
|
Foreign currency translation adjustments
|
$
|
0.7
|
|
Ending Balance
|
$
|
50.4
|
|
Other
The following table summarizes the valuation of our assets measured at fair value on a non-recurring basis as of May 30, 2020:
|
|
|
|
|
(In millions)
|
May 30, 2020
|
Assets:
|
Level 3
|
Indefinite-lived intangible assets
|
$
|
92.8
|
|
DWR right of use assets
|
110.9
|
|
Not included in the above is goodwill related to the Retail and Maharam reporting units, as these were fully written down with a resulting impairment charge of $125.5 million in the fourth quarter of fiscal 2020.
The relief-from-royalty method for the quantitative impairment assessment for indefinite-lived intangible assets utilized discount rates ranging from 12.75% to 17.25% and royalty rates ranging from 1.00% to 3.00%. Based on the quantitative impairment assessment performed, the carrying value these assets exceeded their fair value, resulting in an impairment charge of $53.3 million in fiscal 2020.
See Note 1 and Note 7 to the Consolidated Financial Statements for additional information.
13. 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; however, this varies depending on the product classification. The Company does not sell or otherwise issue warranties or warranty extensions as stand-alone products. Reserves have been established for various costs associated with the Company's warranty program. General warranty reserves are based on historical claims experience and other currently available information and are periodically adjusted for business levels and other factors. Specific reserves are established once an issue is identified with the amounts for such reserves based on the estimated cost of correction. The Company provides an assurance-type warranty that ensures that products will function as intended. As such, the Company's estimated warranty obligation is accounted for as a liability. Changes in the warranty reserve for the stated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
Accrual Balance — beginning
|
$
|
53.1
|
|
|
$
|
51.5
|
|
|
$
|
47.7
|
|
Accrual for warranty matters
|
23.7
|
|
|
20.7
|
|
|
22.1
|
|
Settlements and adjustments
|
(17.6
|
)
|
|
(19.1
|
)
|
|
(18.3
|
)
|
Accrual Balance — ending
|
$
|
59.2
|
|
|
$
|
53.1
|
|
|
$
|
51.5
|
|
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 May 30, 2020, the Company had a maximum financial exposure related to performance bonds of approximately $4.4 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 May 30, 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 May 30, 2020, the Company had a maximum financial exposure from these standby letters of credit totaling approximately $9.4 million, all of which is considered usage against the Company's revolving line of credit. The Company has no history of claims, nor is it aware of circumstances that would require it to perform under any of these arrangements and believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the Company's Consolidated Financial Statements. Accordingly, no liability has been recorded as of May 30, 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.
As of the end of fiscal 2020, outstanding commitments for future purchase obligations approximated $79.8 million.
Herman Miller, Inc. and Subsidiaries 82
14. Operating Segments
The Company's segments consist of North America Contract, International Contract and Retail.
In fiscal 2018, the Company's segments consisted of North American Furniture Solutions, ELA ("EMEA, Latin America, and Asia Pacific") Furniture Solutions, Specialty and Consumer. Effective in the fourth quarter of fiscal 2019, the Company has revised its reportable segments to combine the Specialty reportable segment with the North American Furniture Solutions reportable segment. The newly combined segment is called "North America Contract". There were no changes to the Company's ELA Furniture Solutions ("ELA") and Consumer segments, but each has been renamed. Effective in the fourth quarter of fiscal 2019, ELA is now named "International Contract" and Consumer is named "Retail". The Specialty segment (Maharam, Geiger, Nemschoff and the Herman Miller Collection) has been combined with the North America Contract segment under a common segment manager as of the fourth quarter fiscal 2019. The change in operating segments reflect the basis of how the Company internally reports and evaluates financial information used to make operating decisions. Prior year results disclosed in the table below have been revised to reflect these changes.
The North America Contract segment includes the operations associated with the design, manufacture and sale of furniture and textile products for work-related settings, including office, education, and healthcare environments, throughout the United States and Canada. The business associated with the Company's owned contract furniture dealers is also included in the North America Contract segment. In addition to the Herman Miller brand, this segment includes the operations associated with the design, manufacture and sale of high-craft furniture products and textiles including Geiger wood products, Maharam textiles, Nemschoff, naughtone and Herman Miller Collection products.
The International Contract segment includes 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 e-commerce, 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 operating segments are the same as those of the Company.
The performance of the operating segments is evaluated by the Company's management using various financial measures. The following is a summary of certain key financial measures for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
Net Sales:
|
|
|
|
|
|
North America Contract
|
$
|
1,598.2
|
|
|
$
|
1,686.5
|
|
|
$
|
1,589.8
|
|
International Contract
|
502.8
|
|
|
492.2
|
|
|
434.5
|
|
Retail
|
385.6
|
|
|
388.5
|
|
|
356.9
|
|
Total
|
$
|
2,486.6
|
|
|
$
|
2,567.2
|
|
|
$
|
2,381.2
|
|
Depreciation and Amortization:
|
|
|
|
|
|
North America Contract
|
$
|
46.7
|
|
|
$
|
46.8
|
|
|
$
|
43.9
|
|
International Contract
|
17.4
|
|
|
10.5
|
|
|
10.2
|
|
Retail
|
14.7
|
|
|
14.1
|
|
|
12.1
|
|
Corporate
|
0.7
|
|
|
0.7
|
|
|
0.7
|
|
Total
|
$
|
79.5
|
|
|
$
|
72.1
|
|
|
$
|
66.9
|
|
Operating Earnings (Loss):
|
|
|
|
|
|
North America Contract
|
$
|
130.9
|
|
|
$
|
189.7
|
|
|
$
|
175.2
|
|
International Contract
|
18.2
|
|
|
57.8
|
|
|
36.9
|
|
Retail
|
(148.3
|
)
|
|
5.3
|
|
|
13.9
|
|
Corporate
|
(39.2
|
)
|
|
(49.3
|
)
|
|
(47.1
|
)
|
Total
|
$
|
(38.4
|
)
|
|
$
|
203.5
|
|
|
$
|
178.9
|
|
Capital Expenditures:
|
|
|
|
|
|
North America Contract
|
$
|
53.7
|
|
|
$
|
52.7
|
|
|
$
|
46.0
|
|
International Contract
|
10.4
|
|
|
16.6
|
|
|
11.4
|
|
Retail
|
4.9
|
|
|
16.5
|
|
|
13.2
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
69.0
|
|
|
$
|
85.8
|
|
|
$
|
70.6
|
|
Total Assets:
|
|
|
|
|
|
North America Contract
|
$
|
769.5
|
|
|
$
|
733.6
|
|
|
$
|
677.4
|
|
International Contract
|
512.5
|
|
|
356.8
|
|
|
283.4
|
|
Retail
|
310.9
|
|
|
310.0
|
|
|
291.2
|
|
Corporate
|
461.0
|
|
|
168.9
|
|
|
227.5
|
|
Total
|
$
|
2,053.9
|
|
|
$
|
1,569.3
|
|
|
$
|
1,479.5
|
|
Goodwill:
|
|
|
|
|
|
North America Contract
|
$
|
182.3
|
|
|
$
|
185.3
|
|
|
$
|
185.3
|
|
International Contract
|
163.7
|
|
|
39.7
|
|
|
40.0
|
|
Retail
|
—
|
|
|
78.8
|
|
|
78.8
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
346.0
|
|
|
$
|
303.8
|
|
|
$
|
304.1
|
|
The accounting policies of the operating segments are the same as those of the Company. Additionally, the Company employs a methodology for allocating corporate costs and assets with the underlying objective of this methodology being to allocate corporate costs according to the relative usage of the underlying resources and to allocate corporate assets according to the relative expected benefit. The majority of the allocations for corporate expenses are based on relative net sales. However, certain corporate costs, generally considered the result of isolated business decisions, are not subject to allocation and are evaluated separately from the rest of the regular ongoing business operations.
Herman Miller, Inc. and Subsidiaries 84
The Company's product offerings consist primarily of office furniture systems, seating, freestanding furniture, storage and casegoods. These product offerings are marketed, distributed and managed primarily as a group of similar products on an overall portfolio basis. The following is a summary of net sales estimated by product category for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
Net Sales:
|
|
|
|
|
|
Systems
|
$
|
589.3
|
|
|
$
|
668.0
|
|
|
$
|
601.5
|
|
Seating
|
1,041.6
|
|
|
1,013.5
|
|
|
965.9
|
|
Freestanding and storage
|
496.9
|
|
|
505.4
|
|
|
465.1
|
|
Textiles
|
138.8
|
|
|
113.8
|
|
|
94.3
|
|
Other (1)
|
220.0
|
|
|
266.5
|
|
|
254.4
|
|
Total
|
$
|
2,486.6
|
|
|
$
|
2,567.2
|
|
|
$
|
2,381.2
|
|
(1) “Other” primarily consists of uncategorized product sales and service sales.
|
|
|
|
|
|
Sales by geographic area are based on the location of the customer. Long-lived assets consist of long-term assets of the Company, excluding financial instruments, deferred tax assets and long-term intangibles. The following is a summary of geographic information for the years indicated. Individual foreign country information is not provided as none of the individual foreign countries in which the Company operates are considered material for separate disclosure based on quantitative and qualitative considerations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
Net Sales:
|
|
|
|
|
|
United States
|
$
|
1,795.8
|
|
|
$
|
1,865.8
|
|
|
$
|
1,737.9
|
|
International
|
690.8
|
|
|
701.4
|
|
|
643.3
|
|
Total
|
$
|
2,486.6
|
|
|
$
|
2,567.2
|
|
|
$
|
2,381.2
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
United States
|
$
|
306.7
|
|
|
$
|
422.1
|
|
|
$
|
349.3
|
|
International
|
59.6
|
|
|
52.2
|
|
|
50.5
|
|
Total
|
$
|
366.3
|
|
|
$
|
474.3
|
|
|
$
|
399.8
|
|
The Company estimates that no single dealer accounted for more than 4 percent of the Company's net sales in the fiscal year ended May 30, 2020. The Company estimates that its largest single end-user customer accounted for $122.9 million, $129.6 million and $109.8 million of the Company's net sales in fiscal 2020, 2019 and 2018, respectively. This represents approximately 5 percent, 5 percent and 5 percent of the Company's net sales in fiscal 2020, 2019 and 2018, respectively.
Approximately 3 percent of the Company's employees are covered by collective bargaining agreements, most of whom are employees of its Nemschoff and Herman Miller Holdings Limited subsidiaries.
15. Accumulated Other Comprehensive Loss
The following table provides an analysis of the changes in accumulated other comprehensive loss for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
Cumulative translation adjustments at beginning of period
|
$
|
(48.3
|
)
|
|
$
|
(34.1
|
)
|
|
$
|
(36.8
|
)
|
Other comprehensive (loss) income
|
(7.7
|
)
|
|
(14.2
|
)
|
|
2.7
|
|
Balance at end of period
|
(56.0
|
)
|
|
(48.3
|
)
|
|
(34.1
|
)
|
|
|
|
|
|
|
Pension and other post-retirement benefit plans at beginning of period
|
(45.0
|
)
|
|
(37.2
|
)
|
|
(47.6
|
)
|
Other comprehensive (loss) income before reclassifications (net of tax of $3.5, $2.0, and($2.9))
|
(16.9
|
)
|
|
(10.0
|
)
|
|
5.3
|
|
Reclassification from accumulated other comprehensive income - Other, net
|
3.3
|
|
|
2.6
|
|
|
4.2
|
|
Tax (expense) benefit
|
(0.6
|
)
|
|
(0.4
|
)
|
|
0.9
|
|
Net reclassifications
|
2.7
|
|
|
2.2
|
|
|
5.1
|
|
Net current period other comprehensive (loss) income
|
(14.2
|
)
|
|
(7.8
|
)
|
|
10.4
|
|
Balance at end of period
|
(59.2
|
)
|
|
(45.0
|
)
|
|
(37.2
|
)
|
|
|
|
|
|
|
Interest rate swap agreement at beginning of period
|
(0.9
|
)
|
|
9.9
|
|
|
2.1
|
|
Cumulative effect of accounting change
|
—
|
|
|
1.5
|
|
|
—
|
|
Other comprehensive (loss) income before reclassifications (net of tax of $5.8, $5.3, and ($4.0))
|
(17.2
|
)
|
|
(12.8
|
)
|
|
7.5
|
|
Reclassification from accumulated other comprehensive income - Other, net
|
(0.8
|
)
|
|
0.5
|
|
|
0.3
|
|
Net reclassifications
|
(0.8
|
)
|
|
0.5
|
|
|
0.3
|
|
Net current period other comprehensive (loss) income
|
(18.0
|
)
|
|
(12.3
|
)
|
|
7.8
|
|
Balance at end of period
|
(18.9
|
)
|
|
(0.9
|
)
|
|
9.9
|
|
|
|
|
|
|
|
Unrealized holding gains on securities at beginning of period
|
—
|
|
|
0.1
|
|
|
0.1
|
|
Cumulative effect of accounting change
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
Other comprehensive income before reclassifications
|
0.1
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
|
|
|
|
|
Total Accumulated other comprehensive loss
|
$
|
(134.0
|
)
|
|
$
|
(94.2
|
)
|
|
$
|
(61.3
|
)
|
16. Restructuring Expenses
During the fourth quarter of fiscal 2018, the Company announced a facilities consolidation plan related to its International Contract segment. This impacted certain office and manufacturing facilities in the United Kingdom and China. The plan is expected to generate cost savings of approximately $3 million. To date, the Company recognized restructuring and impairment expenses of $7.8 million, with $1.4 million recognized in fiscal 2020 and the remainder in fiscal 2019 and 2018. These expenses related to the facilities consolidation plan, comprised primarily of an asset impairment recorded against an office building in the United Kingdom that was vacated and the consolidation of the Company's manufacturing facilities in China. No material future restructuring costs related to the plan are expected as the plan is substantially complete.
The office buildings and related assets of United Kingdom and China have a carrying value of approximately $7.8 million and meet the criteria to be designated as assets held for sale. Therefore these assets have been classified as current assets and included within "Other current assets" in the Consolidated Balance Sheets at May 30, 2020.
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. To date, the Company has recognized $11.1 million of restructuring
Herman Miller, Inc. and Subsidiaries 86
expense related to the plan. During the year ended May 30, 2020, the Company recognized $1.7 million related to the plan. The early retirement plan is complete and no future costs related to this plan are expected.
In the second quarter of fiscal 2020, the North America Contract segment initiated restructuring discussions with labor unions related to its Nemschoff operation in Wisconsin. The discussions were concluded in the third quarter of fiscal 2020 and as a result, the Company anticipates the total estimated costs related to the actions will be approximately $5 million. These restructuring costs relate to potential partial outsourcing and in-sourcing strategies, long-lived asset impairments and employee-related costs. In conjunction with these discussions, during the year ended May 30, 2020, the Company has recorded $3.2 million in pre-tax restructuring expense related to this plan which is expected to be completed in fiscal 2021.
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 the North America business with additional costs incurred Internationally. In the year ended May 30, 2020, the Company has recorded a total of $2.6 million in pre-tax restructuring expense related to this plan. The reorganization is complete and no future costs related to this plan are expected.
In the third quarter of fiscal 2020, the Company announced a reorganization of the Retail segment's leadership team. The Company recognized pre-tax severance and employee related restructuring expense of $2.2 million related to the plan. No material future restructuring costs related to the plan are expected as the plan is substantially complete.
The following table provides an analysis of the changes in the restructuring costs reserve for the above plans for the fiscal years ended June 1, 2019 and May 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Severance and Employee-Related
|
Exit or Disposal Activities
|
Total
|
June 2, 2018
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Restructuring Costs
|
7.0
|
|
3.2
|
|
$
|
10.2
|
|
Amounts Paid
|
(0.2
|
)
|
(2.1
|
)
|
$
|
(2.3
|
)
|
June 1, 2019
|
$
|
6.8
|
|
$
|
1.1
|
|
$
|
7.9
|
|
Restructuring Costs
|
9.9
|
|
1.2
|
|
$
|
11.1
|
|
Amounts Paid
|
(10.8
|
)
|
(1.5
|
)
|
$
|
(12.3
|
)
|
May 30, 2020
|
$
|
5.9
|
|
$
|
0.8
|
|
$
|
6.7
|
|
In the fourth quarter of fiscal 2020, the Company announced a restructuring plan (“May 2020 restructuring plan") to substantially reduce expenses in response to the impact of the COVID-19 pandemic and related restrictions. These activities included voluntary and involuntary reductions in its North American and international workforces. Combined, these actions resulted in the elimination of approximately 400 full-time positions throughout the Company in various businesses and functions. As the result of these actions, the Company projects an annualized expense reduction of approximately $40 million. The Company incurred severance and related charges of $15.3 million in fiscal 2020, consisting solely of cash expenditures for employee termination and severance costs to be paid in fiscal 2021.
The following table provides an analysis of the changes in the restructuring cost reserve for the May 2020 restructuring plan for the fiscal year ended May 30, 2020:
|
|
|
|
|
(In millions)
|
Severance and Employee-Related
|
Beginning Balance
|
$
|
—
|
|
Restructuring Costs
|
15.3
|
|
Ending Balance
|
$
|
15.3
|
|
The following is a summary of restructuring expenses by segment for the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
(In millions)
|
May 30, 2020
|
|
June 1, 2019
|
|
June 2, 2018
|
North America Contract
|
$
|
18.7
|
|
|
$
|
7.7
|
|
|
$
|
1.8
|
|
International Contract
|
4.8
|
|
|
2.5
|
|
|
3.9
|
|
Retail
|
2.9
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
26.4
|
|
|
$
|
10.2
|
|
|
$
|
5.7
|
|
17. Variable Interest Entities
The Company has long-term notes receivable with a third-party owned dealer that are deemed to be variable interests in variable interest entity. The carrying value of these long-term notes receivable was $1.5 million and $1.6 million as of May 30, 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.
18. Quarterly Financial Data (Unaudited)
Set forth below is a summary of the quarterly operating results on a consolidated basis for the years ended May 30, 2020, June 1, 2019, and June 2, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
First
Quarter (1)
|
|
Second
Quarter (1)
|
|
Third
Quarter (1)
|
|
Fourth
Quarter (1)
|
2020
|
Net sales
|
$
|
670.9
|
|
|
$
|
674.2
|
|
|
$
|
665.7
|
|
|
$
|
475.7
|
|
|
Gross margin
|
246.1
|
|
|
255.5
|
|
|
243.3
|
|
|
165.8
|
|
|
Net earnings attributable to Herman Miller, Inc.
|
48.2
|
|
|
78.6
|
|
|
37.7
|
|
|
(173.7
|
)
|
|
Earnings per share-basic
|
0.82
|
|
|
1.33
|
|
|
0.64
|
|
|
(2.95
|
)
|
|
Earnings per share-diluted
|
0.81
|
|
|
1.32
|
|
|
0.64
|
|
|
(2.95
|
)
|
|
|
|
|
|
|
|
|
|
2019
|
Net Sales
|
$
|
624.6
|
|
|
$
|
652.6
|
|
|
$
|
619.0
|
|
|
$
|
671.0
|
|
|
Gross margin
|
225.1
|
|
|
235.6
|
|
|
221.0
|
|
|
248.2
|
|
|
Net earnings attributable to Herman Miller, Inc.
|
35.8
|
|
|
39.3
|
|
|
39.2
|
|
|
46.2
|
|
|
Earnings per share-basic
|
0.60
|
|
|
0.66
|
|
|
0.67
|
|
|
0.78
|
|
|
Earnings per share-diluted
|
0.60
|
|
|
0.66
|
|
|
0.66
|
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
2018
|
Net sales
|
$
|
580.3
|
|
|
$
|
604.6
|
|
|
$
|
578.4
|
|
|
$
|
618.0
|
|
|
Gross margin
|
216.9
|
|
|
222.1
|
|
|
205.8
|
|
|
228.3
|
|
|
Net earnings attributable to Herman Miller, Inc.
|
33.1
|
|
|
33.5
|
|
|
29.8
|
|
|
31.8
|
|
|
Earnings per share-basic
|
0.55
|
|
|
0.56
|
|
|
0.50
|
|
|
0.53
|
|
|
Earnings per share-diluted
|
0.55
|
|
|
0.55
|
|
|
0.49
|
|
|
0.53
|
|
(1) For some line items, the sum of the quarters does not equal the annual balance reflected in the Consolidated Statements of Comprehensive Income due to rounding associated with the calculations on an individual quarter basis.
|
Herman Miller, Inc. and Subsidiaries 88
Management's Report on Internal Control over Financial Reporting
To the Board of Directors and Stockholders of Herman Miller, Inc.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f). The internal control over financial reporting at Herman Miller, Inc. is designed to provide reasonable assurance to our stakeholders that the financial statements of the Company fairly represent its financial condition and results of operations.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect all misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of May 30, 2020, based on the original framework in Internal Control — Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management believes the Company's internal control over financial reporting was effective as of May 30, 2020.
Management's assessment of internal control over financial reporting as of May 30, 2020 excludes naughtone’s and Hay’s internal control over financial reporting associated with total assets of approximately $95 million and $228 million, respectively, and net sales of approximately $16 million and $76 million, respectively, included in the consolidated financial statements of the Company as of and for the year ended May 30, 2020. Both of these companies were acquired in fiscal 2020.
KPMG LLP has issued an attestation report on the effectiveness of our internal control over financial reporting, which is included herein.
/s/ Andrea R. Owen
Andrea R. Owen
Chief Executive Officer
/s/ Jeffrey M. Stutz
Jeffrey M. Stutz
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Herman Miller, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheet of Herman Miller, Inc. and subsidiaries (the Company) as of May 30, 2020, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year ended May 30, 2020, and the related notes and financial statement schedule II - Valuation and Qualifying Accounts and Reserves (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of May 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 30, 2020, and the results of its operations and its cash flows for the year ended May 30, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 30, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired the remaining 47.5% interest in naughtone (Holdings) Limited and naughtone Manufacturing Ltd. (together, naughtone), and an additional 34% interest in HAY ApS (HAY) during the year ended May 30, 2020. Management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of May 30, 2020, naughtone’s and HAY’s internal control over financial reporting associated with total assets of $95 million and $228, respectively, and net sales of $16 million and $76 million, respectively, included in the consolidated financial statements of the Company as of and for the year ended May 30, 2020. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal controls over financial reporting of naughtone and HAY.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of June 2, 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842).
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
Herman Miller, Inc. and Subsidiaries 90
consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of acquired intangible assets - HAY acquisition
As discussed in Note 3 to the consolidated financial statements, the Company purchased an additional 34% equity voting interest of HAY on December 2, 2019, for net consideration of $79.0 million. The transaction increased the Company’s ownership to 67%, resulting in a controlling financial interest and was accounted for as a business combination. Accordingly, the purchase price, inclusive of the remeasurement of the previously held equity interest and non-controlling interest, was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of $118.9 million. To value the identified intangible assets, which included a tradename, product development and technology, and customer relationships, the Company used the income approach. The process required management to make significant judgments around the estimates and assumptions that would be used by a market participant, which included forecasted revenue growth rates, operating margins, royalty rates, and discount rates.
We identified the evaluation of the fair value of acquired intangible assets in the HAY acquisition as a critical audit matter because of the significant judgments made by management to estimate the fair values of the tradename, product development and technology, and customer relationship intangibles. Specifically, subjective and challenging auditor judgment was required to evaluate the selection of forecasted revenue growth rates, operating margins, royalty rates, and discount rates used to estimate the fair values of the intangibles. Additionally, the audit effort associated with the evaluation of the fair value of acquired intangible assets in the HAY acquisition required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We tested the design and evaluated the effectiveness of certain internal controls over the Company’s acquisition-date valuation process, including controls over the selection of forecasted revenue growth rates, operating margins, royalty rates and discount rates used to estimate the fair value of the HAY tradename, product development and technology, and customer relationship intangibles. We evaluated the reasonableness of management’s forecasted revenue growth rates and operating margins by comparing the forecasts to historical revenue growth rates and operating margins. We performed sensitivity analyses to assess the impact of reasonably possible changes to the key estimates and assumptions on the fair value of the acquired intangibles. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
|
|
•
|
evaluating the Company’s discount rates by comparing the Company’s inputs to the discount rates to publicly available data for comparable entities and assessing the resulting discount rates,
|
|
|
•
|
evaluating the Company’s royalty rates by comparing the selected royalty rates to the forecasted operating margins of HAY and publicly available data for comparable licensing agreements and assessing the resulting royalty rates, and
|
|
|
•
|
testing the estimate of the fair values of the HAY tradename, product development and technology, and customer relationship intangibles using the Company’s cash flow estimates and discount rates, and comparing the results to the Company’s fair value estimates.
|
Goodwill impairment assessment
As discussed in Note 1 to the consolidated financial statements, the Company’s consolidated goodwill balance was $346.0 million as of May 30, 2020, of which $163.7 million, $0.0 million, and $0.0 million was related to the International, Maharam, and Retail reporting units, respectively. During the fourth quarter of the year ended May 30, 2020, the Company recorded a goodwill impairment loss of $36.7 million, and $88.8 million related to the Maharam and Retail reporting units, respectively. Goodwill is tested for impairment annually in the fourth quarter of each fiscal year, or more frequently, when events or changes in circumstances indicate that the fair value of a reporting unit has declined below its carrying value. To estimate the fair value of its reporting units, the Company utilized an income approach and a market approach that used observable comparable company information.
We identified the evaluation of goodwill for impairment for the International, Maharam, and Retail reporting units as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate the selection of forecasted revenue growth rates, operating margins, and discount rates used in the income approach. Additionally, the audit effort associated with the evaluation of goodwill for impairment for the International, Maharam, and Retail reporting units required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s goodwill impairment evaluation, including controls over the selection of forecasted revenue growth rates, operating margins, and discount rates to estimate the fair value of the International, Maharam, and Retail reporting units. We evaluated the reasonableness of management’s forecasted revenue growth rates and operating margins by comparing the forecasts to historical revenue growth rates and operating margins, considering industry conditions and growth plans. We performed sensitivity analyses to assess the impact of reasonably possible changes to the forecasted revenue growth rates, operating margins, and discount rate assumptions on the reporting unit fair values. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
|
|
•
|
evaluating the Company’s discount rates by comparing the Company’s inputs to the discount rates to publicly available data for comparable entities and assessing the resulting discount rates, and
|
|
|
•
|
testing the estimate of fair value for the International, Maharam, and Retail reporting units using the Company’s cash flow assumptions and discount rates and comparing the results to the Company’s fair value estimates.
|
Herman Miller, Inc. and Subsidiaries 92
Tradename impairment assessment
As discussed in Note 1 to the consolidated financial statements, the indefinite-lived intangible asset balance as of May 30, 2020 was $31.5 million, $39.3 million and $16.5 million related to the DWR (Design Within Reach), HAY, and Maharam tradenames, respectively. During the fourth quarter of the year ended May 30, 2020, the Company recorded an impairment loss of $23.6 million, $20.7 million and $6.5 million related to the DWR, HAY, and Maharam tradenames, respectively. Indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of each fiscal year, or more frequently, when events or changes in circumstances indicate that the fair value of an indefinite-lived intangible asset has declined below its carrying value. To estimate the fair value of the indefinite-lived intangible assets, the Company utilizes the relief from royalty method.
We identified the evaluation of the DWR, HAY, and Maharam tradenames for impairment as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate the selection of forecasted revenue growth rates, discount rates, and royalty rates used to estimate the fair values of the DWR, HAY and Maharam tradenames. Additionally, the audit effort associated with the evaluation of the DWR, HAY, and Maharam tradenames for impairment required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s impairment evaluation for tradenames, including controls over the selection of forecasted revenue growth rates, discount rates, and royalty rates used to estimate the fair value of the DWR, HAY, and Maharam tradenames. We evaluated the reasonableness of management’s forecasted revenue growth rates by comparing the forecasts to historical revenue growth rates, considering industry conditions and growth plans. We performed sensitivity analyses to assess the impact of reasonably possible changes to the forecasted revenue growth rates, discount rate, and royalty rate assumptions on the fair values of the tradenames. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
|
|
•
|
evaluating the Company’s discount rates by comparing the Company’s inputs to the discount rates to publicly available data for comparable entities and assessing the resulting discount rates;
|
|
|
•
|
evaluating the Company’s royalty rates by comparing the selected royalty rates to the forecasted operating margins of the sales associated with the tradenames and publicly available data for comparable licensing agreements and assessing the resulting royalty rates, and
|
|
|
•
|
testing the estimate of fair value of the DWR, HAY, and Maharam indefinite-lived tradenames using the Company’s estimated future revenue growth assumptions, royalty rates, and discount rates, and comparing the results to the Company’s fair value estimates.
|
Long-lived asset impairment assessment
As discussed in Note 1 to the consolidated financial statements, the DWR asset group, including right-of-use assets, was $122.7 million as of May 30, 2020. During the fourth quarter of the year ended May 30, 2020, the Company recorded long-lived asset impairment charges of $26.6 million related to right-of-use assets, customer relationships, and other long-lived assets within the DWR asset group. The Company performs an impairment assessment when circumstances indicate that the carrying amount of the long-lived assets may not be recoverable. If a triggering event is identified, the Company compares the carrying amount of the asset group to the estimated undiscounted future cash flows expected to result from the use of the asset group. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset group to its estimated fair value. To estimate the fair value of the asset group, the Company utilized an income approach for customer relationships, a market approach for right-of-use assets and a cost approach for other long-lived assets.
We identified the evaluation of the fair value of the right-of-use assets within the DWR asset group as a critical audit matter because of the significant judgments made by management to estimate fair value. Specifically, subjective and challenging auditor judgment was required to assess 1) relevant market-based rental comparatives adjusted for industry data trends, and 2) consideration of the remaining lease term, which were used to estimate the fair values of the right-of-use assets. Additionally, the audit effort associated with the evaluation of the fair value of the right-of-use assets within the DWR asset group required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We tested the design and evaluated the effectiveness of certain internal controls over the Company’s long-lived asset impairment assessment process, including controls over the determination of market-based rental comparatives, industry data trends, and consideration of the remaining lease term used to estimate the fair value of the right-of-use assets. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the significant assumptions used to estimate the fair value of the right-of-use assets by comparing the assumptions to 1) available market-based rental comparatives adjusted for industry data trends, and 2) considerations of the remaining lease term.
/s/ KPMG LLP
We have served as the Company’s auditor since 2019.
Chicago, Illinois
July 28, 2020
Herman Miller, Inc. and Subsidiaries 94
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Herman Miller, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Herman Miller, Inc. and subsidiaries (the Company) as of June 1, 2019, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the two years in the period ended June 1, 2019, and the related notes and financial statement schedule for each of the two years in the period ended June 1, 2019 listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 1, 2019, and the results of its operations and its cash flows for each of the two years in the period ended June 1, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We served as the Company’s auditor from 2002 to 2019.
Grand Rapids, Michigan
July 30, 2019